Notes to Consolidated Interim Financial Statements
March
31, 2017
(Expressed in U.S. Funds)
(Unaudited)
2.
|
Adoption of New Accounting Standards
(Cont'd)
|
The FASB issued Update 2015-11,
Inventory: Simplifying the Measurement of Inventory, aligning the measurement of
inventory in GAAP with the measurement of inventory in International Financial
Reporting Standards (IFRS). The amendments in this Update state that an entity
should measure inventory within the scope of this update at the lower of cost
and net realizable value. Net realizable value is the estimated selling prices
in the ordinary course of business, less reasonably predictable costs of
completion, disposal, and transportation. For public business entities, the
amendments in this Update are effective for fiscal years beginning after
December 15, 2016, including interim periods within those fiscal years. The
adoption of this statement did not have a material effect on the Companys
financial position or results.
The FASB issued 2015-017, Income Taxes:
Balance Sheet Classification of Deferred Taxes, which requires that deferred tax
liabilities be classified as noncurrent in a classified statement of financial
position. For public business entities, the amendments in this Update are
effective for fiscal years beginning after December 15, 2016, including interim
periods within those fiscal years. The adoption of this statement did not have a
material effect on the Companys financial position or results.
3.
|
Significant Accounting
Policies
|
ASU 2016-18 Statement of Cash
Flows (Topic 230) Restricted Cash
In November 2016, the FASB issued ASU
2016-18 which requires that the statement of cash flows explain the change
during the period in the total cash, cash equivalents, and amounts generally
described as restricted or restricted cash equivalents. The statement is
effective for annual periods beginning after December 15, 2017, and interim
periods within those annual periods. Early adoption is permitted in any interim
or annual period and should be applied on a retrospective basis. The Company is
currently evaluating the impact of this Statement on its consolidated financial
statements.
ASU 2016-15 Statement of Cash
Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments
In August 2016, the FASB issued ASU
2016-15 which clarifies how certain cash receipts and payments are to be
presented in the Statement of cash flows. The statement is effective for annual
periods beginning after December 15, 2017, and interim periods within those
annual periods. Early adoption is permitted in any interim or annual period,
with any adjustments reflected as of the beginning of the fiscal year of
adoption. The Company is currently evaluating the impact of this Statement on
its consolidated financial statements.
F-7
IntelGenx Technologies Corp.
Notes to Consolidated Interim Financial Statements
March
31, 2017
(Expressed in U.S. Funds)
(Unaudited)
3.
|
Significant Accounting Policies
(Contd)
|
ASU 2016-01 Financial Instruments
Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and
Financial Liabilities
In January 2016, the FASB issued ASU
2016-01, which will significantly change practice for all entities. The targeted
amendments to existing guidance are expected to include:
|
1.
|
Equity investments that do not result in consolidation
and are not accounted for under the equity method would be measured at
fair value through net income, unless they qualify for the proposed
practicability exception for investments that do not have readily
determinable fair values.
|
|
|
|
|
2.
|
Changes in instrument-specific credit risk for financial
liabilities that are measured under the fair value option would be
recognized in other comprehensive income.
|
|
|
|
|
3.
|
Entities would make the assessment of the realizability
of a deferred tax asset (DTA) related to an available- for-sale (AFS) debt
security in combination with the entitys other DTAs. The guidance would
eliminate one method that is currently acceptable for assessing the
realizability of DTAs related to AFS debt securities. That is, an entity
would no longer be able to consider its intent and ability to hold debt
securities with unrealized losses until recovery.
|
|
|
|
|
4.
|
Disclosure of the fair value of financial instruments
measured at amortized cost would no longer be required for entities that
not public business entities.
|
For public business entities, the
amendments in this Update are effective for fiscal years beginning after
December 15, 2017, including interim periods within those fiscal years. The
Company is currently evaluating the impact of this Statement on its consolidated
financial statements.
ASU 2017-04 Intangibles Goodwill
and Other (Topic 350) Simplifying the Test for Goodwill Impairment
The FASB issued ASU 2017-04 which
eliminates Step 2 from the goodwill impairment test and eliminates the
requirements for any reporting unit with a zero or negative carrying amount to
perform a qualitative assessment. These amendments are effective for a public
business entity for fiscal years beginning after December 15, 2019. Early
adoption is permitted in any interim or annual period and should be applied on a
retrospective basis. The Company is currently evaluating the impact of this
Statement on its consolidated financial statements.
F-8
IntelGenx Technologies Corp.
Notes to Consolidated Interim Financial Statements
March
31, 2017
(Expressed in U.S. Funds)
(Unaudited)
3.
|
Significant Accounting Policies
(Contd)
|
ASU 2017-01 - Business Combinations
(Topic 805) Clarifying the Definition of a Business
The FASB issued ASU 2017-01 clarifies
the definition of a business and is intended to help companies evaluate whether
transactions should be accounted for as acquisitions (or disposals) of assets or
businesses.These amendments are effective for a public business entity for
fiscal years beginning after December 15, 2017, including interim periods within
those fiscal years. Early adoption is permitted under certain circumstances and
should be applied on a prospective. The Company is currently evaluating the
impact of this Statement on its consolidated financial statements.
ASU 2016-16 Income Taxes (Topic
740) Intra-Entity Transfers of Assets Other Than Inventory
The FASB issued ASU 2016-16 and
requires an entity to recognize the income tax consequences of an intra-entity
transfer of an asset other than inventory when the transfer occurs. These
amendments are effective for a public business entity for fiscal years beginning
after December 15, 2017, including interim periods within those fiscal years.
The amendments should be applied on a modified retrospective basis through a
cumulative-effect adjustment directly to retained earnings as of the beginning
of the period of adoption. The Company is currently evaluating the impact of
this Statement on its consolidated financial statements.
ASU 2016-02: Leases (Topic 842)
Section A
The FASB issued ASU 2016-02 to increase
the transparency and comparability among organizations by recognizing lease
assets and lease liabilities on the balance sheet and disclosing key information
about leasing arrangements.
These amendments are effective for a
public business entity for fiscal years beginning after December 15, 2018,
including interim periods within those fiscal years.
The Company is currently evaluating the
impact of this Statement on its consolidated financial statements.
F-9
IntelGenx Technologies Corp.
Notes to Consolidated Interim Financial Statements
March
31, 2017
(Expressed in U.S. Funds)
(Unaudited)
3.
|
Significant Accounting Policies
(Contd)
|
Revenue from Contracts with
Customers (Topic 606)
The FASB and IASB (the Boards) have
issued converged standards on revenue recognition. ASU No. 2014-09 which affects
any entity using U.S. GAAP that either enters into contracts with customers to
transfer goods or services or enters into contracts for the transfer of
nonfinancial assets unless those contracts are within the scope of other
standards. This ASU will supersede the revenue recognition requirements in Topic
605, Revenue Recognition and most industry-specific guidance. The core principle
of the guidance is that an entity should recognize revenue to depict the
transfer of promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for
those goods or services. To achieve that core principle, an entity should apply
the following steps:
|
|
Step 1: Identify the contract(s) with a
customer.
|
|
|
Step 2: Identify the performance obligations in
the contract.
|
|
|
Step 3: Determine the transaction price.
|
|
|
Step 4: Allocate the transaction price to the
performance obligations in the contract.
|
|
|
Step 5: Recognize revenue when (or as) the
entity satisfies a performance obligation.
|
In the year ended December 31, 2016,
the FASB issued three new amendments related to Topic 606:
|
1.
|
ASU 2016-08: Revenue from Contracts with Customers (Topic
606): Principal versus Agent Considerations (Reporting Revenue Gross
versus Net) which was issued to add clarification to the implementation
guidance on principle versus agent considerations. This amendment does not
provide any changes to the previously issued ASU No. 2014-09 and is
effective for the same reporting period which was deferred by one year in
ASU 2015-14: Revenue From Contracts With Customers (Topic 606), Deferral
of the Effective Date.
|
|
|
|
|
2.
|
ASU 2016-10: Revenue from Contracts with Customers (Topic
606): Identifying Performance Obligations and Licensing which was issued
to clarifying the following two aspects of topic 606; identifying
performance obligations and the licensing implementation guidance. This
amendment does not provide any changes to the previously issued ASU No.
2014-09 and is effective for the same reporting period which was deferred
by one year in ASU 2015-14: Revenue From Contracts With Customers (Topic
606), Deferral of the Effective Date.
|
|
|
|
|
3.
|
ASU 2016-11 Revenue Recognition (Topic 605) and
Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of
Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff
Announcements at the March 3, 2016 EITF Meeting. With this amendment, the
SEC Staff is rescinding the following SEC Staff Observer comments that are
codified in Topic 605, Revenue Recognition, and Topic 932, Extractive
ActivitiesOil and Gas, effective upon adoption of Topic 606. This
amendment is effective immediately.
|
F-10
IntelGenx Technologies Corp.
Notes to Consolidated Interim Financial Statements
March
31, 2017
(Expressed in U.S. Funds)
(Unaudited)
3.
|
Significant Accounting Policies
(Contd)
|
Public business entities, certain
not-for-profit entities, and certain employee benefit plans should apply the
guidance in Update 2014-09 to annual reporting periods beginning after December
15, 2017, including interim reporting periods within that reporting period.
Earlier application is permitted only as of annual reporting periods beginning
after December 15, 2016, including interim reporting periods within that
reporting period.
This ASU is to be applied
retrospectively, with certain practical expedients allowed. The Company is
currently evaluating the impact of this Statement on its consolidated financial
statements
4.
|
Leasehold Improvements and
Equipment
|
As at March 31, 2017 no depreciation
has been recorded on manufacturing equipment in the amount of $339 as the
equipment is not ready for use.
The Company's credit facility is
subject to review annually and consists of an operating demand line of credit of
up to CAD$250 thousand and corporate credits cards of up to CAD$75 thousand.
Borrowings under the operating demand line of credit bear interest at the Banks
prime lending rate plus 2%. The credit facility and term loan (see note 7) are
secured by a first ranking movable hypothec on all present and future movable
property of the Company and a 50% guarantee by Export Development Canada, a
Canadian Crown corporation export credit agency. The terms of the banking
agreement require the Company to comply with certain debt service coverage and
debt to net worth financial covenants on an annual basis at the end of the
Companys fiscal year. As at March 31, 2017, the Company has not drawn on its
credit facility.
On August 5, 2016, the Company sold its
U.S. royalty on future sales of Forfivo XL
®
to SWK Holdings
Corporation for $6 million. Under the terms of the agreement, SWK paid IntelGenx
$6 million at closing. In return for, (i) 100% of any and all royalties or
similar royalty amounts received on or after April 1, 2016, (ii) 100% of the $2
million milestone payment upon Edgemont reaching annual net sales of $15
million, and (iii) 35% of all potential future milestone payments.
The deferred revenue represents the
remaining, unrecognized portin of the payment received for the royalty on future
sales in the amount of $6 milliion less the Q2 royalties recognized in the
second quarter of 2016 in the amount of $352 thousand. The deferred revenue will
be recognized as other revenue on a straight-line basis until December 31,
2017.
F-11
IntelGenx Technologies Corp.
Notes to Consolidated Interim Financial Statements
March
31, 2017
(Expressed in U.S. Funds)
(Unaudited)
6.
|
Deferred Revenue (contd)
|
10% of the proceeds were paid to our
former development partner, Cary Pharmaceuticals Inc. This amount is included in
prepaid expenses and will be recognized as cost of royalty, license and other
revenue on a straight-line basis until December 31, 2017.
The components of the Companys debt
are as follows:
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
|
|
$
|
|
|
$
|
|
|
(in U.S. $ thousands)
|
|
|
|
|
|
|
|
Term loan facility
|
|
2,519
|
|
|
2,636
|
|
|
Secured loan
|
|
601
|
|
|
633
|
|
|
Total debt
|
|
3,120
|
|
|
3,269
|
|
|
Less: current
portion
|
|
710
|
|
|
704
|
|
|
Total long-term debt
|
|
2,410
|
|
|
2,565
|
|
The Companys term loan facility
consists of a total of CAD$4 million bearing interest at the Banks prime
lending rate plus 2.50% . The term loan is subject to the same security and
financial covenants as the bank indebtedness (see note 5).
The secured loan has a principal
balance authorized of CAD$1 million bearing interest at prime plus 7.3%,
reimbursable in monthly principal payments of CAD$17 thousand from January 2017
to March 2021. The loan is secured by a second ranking on all present and future
property of the Company. The terms of the banking agreement require the Company
to comply with certain debt service coverage and debt to net worth financial
covenants on an annual basis at the end of the Companys fiscal year.
Principal repayments due in each of the
next five years are as follows:
|
2017
|
$
|
532 (CAD 709)
|
|
|
2018
|
|
710 (CAD 945)
|
|
|
2019
|
|
710 (CAD 945)
|
|
|
2020
|
|
710 (CAD 945)
|
|
|
2021
|
|
458 (CAD 610)
|
|
F-12
IntelGenx Technologies Corp.
Notes to Consolidated Interim Financial Statements
March
31, 2017
(Expressed in U.S. Funds)
(Unaudited)
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Authorized -
|
|
|
|
|
|
|
|
100,000,000 common shares of $0.00001 par value
|
|
|
|
|
|
|
|
20,000,000 preferred shares of $0.00001 par value
|
|
|
|
|
|
|
|
Issued -
|
|
|
|
|
|
|
|
65,422,020 (December 31, 2016 - 64,812,020) common
shares
|
$
|
1
|
|
$
|
1
|
|
9.
|
Additional Paid-In Capital
|
Stock options
During the three-month period ended
March 31, 2017, on January 18, 2017, 300,000 options to purchase common stock
were granted to non-employee directors under the 2016 Stock Option Plan. The
options have an exercise price of $0.89. The options vest immediately and expire
10 years after the grant date. The stock options were accounted for at their
fair value, as determined by the Black-Scholes valuation model, of approximately
$114 thousand.
During the three-month period ended
March 31, 2017 a total of 50,000 stock options were exercised for 50,000 common
shares having a par value of $0 thousand in aggregate, for cash consideration of
$21 thousand, resulting in an increase in additional paid-in capital of $21
thousand. No stock options were exercised during the three-month period ended
March 31, 2016.
Compensation expenses for stock-based
compensation of $170 thousand and $63 thousand were recorded during the
three-month periods ended March 31, 2017 and March 31, 2016 respectively. An
amount of $168 thousand expensed in the first quarter of 2017 relates to stock
options granted to employees and directors and an amount of $2 thousand relates
to stock options granted to a consultant. The entire amount expensed in the
first quarter of 2016 relates to stock options granted to employees and
directors. As at March 31, 2017 the Company has $238 thousand (2016 - $159
thousand) of unrecognized stock-based compensation.
Warrants
During the three-month period ended
March 31, 2017 a total of 560,000 warrants were exercised for 560,000 common
shares having a par value of $Nil in aggregate, for cash consideration of
approximately $316 thousand, resulting in an increase in additional paid-in
capital of approximately $316 thousand. No warrants were exercised during the
three-month period ended March 31, 2016.
F-13
IntelGenx Technologies Corp.
Notes to Consolidated Interim Financial Statements
March
31, 2017
(Expressed in U.S. Funds)
(Unaudited)
10.
|
Related Party Transactions
|
Included in management salaries are
$Nil (2016 - $1 thousand) for options granted to the Chief Executive Officer,
$15 thousand (2016 - $15 thousand) for options granted to the Chief Financial
Officer, $3 thousand (2016 - $3 thousand) for options granted to the Vice
President, Operations, $1 thousand (2016 - $1 thousand) for options granted to
the Vice-President, Research and Development, $8 thousand (2016 $Nil) for
options granted to Vice-President, Business and Corporate Development and $Nil
(2016 - $2 thousand) for options granted to the Vice President, Corporate
Development under the 2016 Stock Option Plan and $119 thousand (2016 - $35
thousand) for options granted to non-employee directors.
Also included in management salaries
are director fees of $68 thousand (2016 - $44 thousand).
The above related party transactions
have been measured at the exchange amount which is the amount of the
consideration established and agreed to by the related parties.
11.
|
Basic and Diluted Loss Per Common
Share
|
Basic and diluted loss per common share
is calculated based on the weighted average number of shares outstanding during
the period. Common share equivalents from stock options and warrants are also
included in the diluted per share calculations unless the effect of the
inclusion would be antidilutive.
Subsequent to the quarter end, on April
5, 2017, the Company filed a preliminary short form prospectus with respect to
an offering of a minimum of Cdn$7,000,000 and a maximum of Cdn$10,000,000
aggregate principal amount of 8% convertible unsecured subordinated debentures
due June 30, 2020 at a price of Cdn$1,000 per Debenture. Concurrently with the
filing of the Prospectus, the Corporation has filed a registration statement on
Form S-1 with the United States Securities and Exchange Commission to register
the Debentures and the shares of common stock underlying the Debentures.
The Debentures will bear interest at an
annual rate of 8%, payable semi-annually on the last day of June and December of
each year, commencing on June 30, 2017. The size of the Offering and the
conversion price will be determined in the context of the market prior to filing
of a (final) short form prospectus. Total issue costs related to this
transaction will amount to approximately Cdn$350,000 and a commission of 6% of
the gross proceeds will be paid.
F-14
Item 2: Managements Discussion and Analysis of Financial
Condition and Results of Operations
Introduction to Managements
Discussion and Analysis
This Managements Discussion and Analysis of Financial
Condition and Results of Operations (MD&A) comments on our business
operations, performance, financial position and other matters for the
three-month periods ended March 31, 2017 and 2016.
Unless otherwise indicated, all financial and statistical
information included herein relates to continuing operations of the Company.
Unless otherwise indicated or the context otherwise requires, the words,
IntelGenx, Company, we, us, and our refer to IntelGenx Technologies
Corp. and its subsidiaries, including IntelGenx Corp.
This MD&A should be read in conjunction with the
accompanying unaudited Consolidated Financial Statements and Notes thereto. We
also encourage you to refer to Companys MD&A for the year ended December
31, 2016. In preparing this MD&A, we have taken into account information
available to us up to May 11, 2017, the date of this MD&A, unless otherwise
indicated.
Additional information relating to the Company, including our
Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (the
2015 Form 10-K), is available on SEDAR at www.sedar.com and on the U.S.
Securities and Exchange Commission (the SEC) website at www.sec.gov.
All dollar amounts are expressed in U.S. dollars, unless
otherwise noted.
Cautionary Statement Concerning Forward-Looking Statements
Certain statements included or incorporated by reference in
this MD&A constitute forward-looking statements within the meaning of
applicable securities laws. All statements contained in this MD&A that are
not clearly historical in nature are forward-looking, and the words
anticipate, believe, continue, expect, estimate, intend, may,
plan, will, shall and other similar expressions are generally intended to
identify forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
All forward-looking statements are based on our beliefs and assumptions based on
information available at the time the assumption was made. These forward-looking
statements are not based on historical facts but on managements expectations
regarding future growth, results of operations, performance, future capital and
other expenditures (including the amount, nature and sources of funding
thereof), competitive advantages, business prospects and opportunities.
Forward-looking statements involve significant known and unknown risks,
uncertainties, assumptions and other factors that may cause our actual results,
levels of activity, performance or achievements to differ materially from those
implied by forward-looking statements. These factors should be considered
carefully and you should not place undue reliance on the forward-looking
statements. Although the forward-looking statements contained in this MD&A
or incorporated by reference herein are based upon what management believes to
be reasonable assumptions, there is no assurance that actual results will be
consistent with these forward-looking statements. These forward-looking
statements are made as of the date of this MD&A or as of the date specified
in the documents incorporated by reference herein, as the case may be.
We
undertake no obligation to update any forwardlooking statements to reflect
events or circumstances after the date on which such statements were made or to
reflect the occurrence of unanticipated events, except as may be required by
applicable securities laws.
The factors set forth in Item 1A., "Risk
Factors" of the 2016 Form 10-K, as well as any cautionary language in this
MD&A, provide examples of risks, uncertainties and events that may cause our
actual results to differ materially from the expectations we describe in our
forward-looking statements. Before you invest in the common stock, you should be
aware that the occurrence of the events described as risk factors and elsewhere
in this report could have a material adverse effect on our business, operating
results and financial condition.
3
Company Background
We are a drug delivery company established in 2003 and
headquartered in Montreal, Quebec, Canada. Our focus is on the development of
novel oral immediate-release and controlled-release products for the
pharmaceutical market. Our business strategy is to develop pharmaceutical
products based on our proprietary drug delivery technologies and, once the
viability of a product has been demonstrated, to license the commercial rights
to partners in the pharmaceutical industry. In certain cases, we rely upon
partners in the pharmaceutical industry to fund development of the licensed
products, complete the regulatory approval process with the U.S. Food and Drug
Administration (FDA) or other regulatory agencies relating to the licensed
products, and assume responsibility for marketing and distributing such
products.
In addition, we may choose to pursue the development of certain
products until the project reaches the marketing and distribution stage. We will
assess the potential for successful development of a product and associated
costs, and then determine at which stage it is most prudent to seek a partner,
balancing such costs against the potential for additional returns earned by
partnering later in the development process.
Our primary growth strategies include: (1) identifying
lifecycle management opportunities for existing market leading pharmaceutical
products, (2) repurposing existing drugs for new indications, (3) developing
generic drugs where high technology barriers to entry exist in reproducing
branded films, (4) manufacturing our VersaFilm products for commercial sale and
(5) development of new drug delivery technologies.
Lifecycle Management Opportunities
We are seeking to position our delivery technologies as an
opportunity for lifecycle management of products for which patent protection of
the active ingredient is nearing expiration. While the patent for the underlying
substance cannot be extended, patent protection can be obtained for a new and
improved formulation by filing an application with the FDA under Section
505(b)(2) of the U.S. Federal Food, Drug and Cosmetic Act. Such applications,
known as a 505(b)(2) NDA, are permitted for new drug products that incorporate
previously approved active ingredients, even if the proposed new drug
incorporates an approved active ingredient in a novel formulation or for a new
indication. A 505(b)(2) NDA may include information regarding safety and
efficacy of a proposed drug that comes from studies not conducted by or for the
applicant. The first formulation for a respective active ingredient filed with
the FDA under a 505(b)(2) application may qualify for up to three years of
market exclusivity upon approval. Based upon a review of past partnerships
between third party drug delivery companies and pharmaceutical companies,
management believes that drug delivery companies which possess innovative
technologies to develop these special dosage formulations present an attractive
opportunity to pharmaceutical companies. Accordingly, we believe 505(b)(2)
products represent a viable business opportunity for us.
Repurposing Existing Drugs
We are working on the repurposing of already approved drugs for
new indications using our VersaFilm film technology. This program represents a
viable growth strategy for us as it will allow for reduced development costs,
improved success rates and shorter approval times. We believe that through our
repurposing program we will be able minimize the risk of developmental failure
and create value for us and potential partners.
Generic Drugs with High Barriers to Entry
We plan to pursue the development of generic drugs that have
certain barriers to entry, e.g., where product development and manufacturing is
complex and can limit the number of potential entrants into the generic market.
We plan to pursue such projects only if the number of potential competitors is
deemed relatively insignificant.
4
VersaFilm Manufacturing
We have establishing a state-of-the-art manufacturing facility
with the intent to manufacture all our VersaFilm products in house as we
believe that this (1) represents a profitable business opportunity, (2) will
reduce our dependency upon third-party contract manufacturers, thereby
protecting our manufacturing process know-how and intellectual property, and (3)
allows us to offer our development partners a full service from product
conception through to supply of the finished product.
Most recent key developments
On January 4, 2017, the Company announced the signing of a
definitive agreement with Chemo Group for the co-development and
commercialization of a generic tablet in the area of CNS (central nervous
system) on a worldwide basis. According to Global Data, worldwide sales in 2015
of the CNS related product exceeded $4 billion. This definitive agreement signed
December 30, 2016 follows the binding term sheet announced on December 1, 2016.
Under the agreement, IntelGenx is entitled to an upfront payment, development
costs of the product and future milestone payments. Chemo and IntelGenx will
also share the profits of commercialization.
On January 19, 2017, the Company announced the grant of 300,000
options to the Company's board of directors to acquire a total of 300,000 common
shares under the 2016 Stock Option Plan. Of the total stock options granted,
50,000 were granted to each of the following non-employee directors: Bernard
Boudreau, John Marinucci, Ian Troup, Bernd Melchers, Clemens Mayr and Mark
Nawacki. The options were granted as part of the annual compensation for
non-employee directors. The options have an exercise price of US$0.89
(CAD$1.16), vest immediately, and expire on January 17, 2027.
On March 13, 2017, the Company announced that it had retained
Kilmer Lucas Inc. to provide the Company with select Canadian and U.S. investor
relations and strategic advisory services. Kilmer Lucas is an arm's length third
party to IntelGenx, and it does not have any interest, directly or indirectly,
in IntelGenx, or any right or intent to acquire such an interest. The agreement
between IntelGenx and Kilmer Lucas had an initial term of 90 days, following
which the agreement can be terminated for any reason by either party. Kilmer
Lucas will be paid out of IntelGenx' immediately available funds. Effective
March 13, 2017, Kilmer Lucas replaced IntelGenx' previous in-house Director of
IR.
Kilmer Lucas is a healthcare-only investor relations and
capital markets advisory company with offices in New York, San Francisco and
Toronto. It takes a holistic approach to building a customized investor
relations strategy that begins with a deep understanding of a company's
corporate and financial goals. Kilmer Lucas seeks to leverage its longstanding
relationships and strong track record to positively influence investor
perceptions, maximize stock valuations and lower the cost of capital needed to
fund its clients' growth. Kilmer Lucas also publishes its own popular healthcare
investor news blog,
BioTuesdays
. To-date,
BioTuesdays
has profiled
more than 350 life sciences companies, providing invaluable exposure for
innovative technologies and compelling investment stories that may have
otherwise gone unnoticed.
On March 28, 2017, the Company announced that Eli Lilly and
Company granted IntelGenx' VersaFilm an exclusive license for tadalafil film
product under erectile dysfunction (ED) dosing patent, United States Patent No.
6,943,166 (the '166 dosing patent). Any exclusivity associated with the
tadalafil compound patent expiring is not affected by this agreement.
Subject to U.S. Food and Drug Administration (FDA) approval,
this exclusive license allows IntelGenx to commercialize its Tadalafil ED
VersaFilm product in the U.S. prior to the expiration of the '166 dosing
patent. With this license, IntelGenx is the only company that has a free and
clear pathway to launch a tadalafil film product for the treatment of ED in the
U.S. The exclusivity provides an outstanding competitive advantage to IntelGenx'
Tadalafil ED VersaFilm product and IntelGenx will continue its efforts to
securing a strategic partnership for the commercialization of Tadalafil
VersaFilm.
5
IntelGenx has developed a proprietary process and formulation
for manufacturing the Tadalafil ED VersaFilm product and plans to supply the
product to multiple markets around the world.
On April 3, 2017, the Company and Tetra Bio-Pharma Inc.
announced the signing of a definitive agreement for the development and
commercialization of a drug product containing the cannabinoid Dronabinol for
the management of anorexia and cancer chemotherapy-related pain. This definitive
agreement effective March 31, 2017 follows the binding term sheet between the
two companies that was announced on February 9, 2017.
Pursuant to the definitive agreement, Tetra has exclusive
rights to sell the Product in North America, with a right of first negotiation
for territories outside of the United States and Canada. Tetra will make an
upfront payment to IntelGenx, in addition to set future milestone and royalty
payments, based on the completion of an efficacy study, approvals from the U.S.
Food and Drug Association and Health Canada, and the commercial launch of the
Product. IntelGenx will be responsible for the research and development of the
Product, including clinical studies, and will develop the product as an oral
mucoadhesive tablet based on its proprietary AdVersa
®
controlled-release technology. Tetra will be responsible for funding the product
development, and will own and control all regulatory approvals, including the
related applications, and any other marketing authorizations. Tetra will also be
responsible for all aspects of commercializing the Product.
Subsequent to the quarter end, on April 5, 2017, the Company
filed a preliminary short form prospectus with respect to an offering of a
minimum of Cdn$7,000,000 and a maximum of Cdn$10,000,000 aggregate principal
amount of 8% convertible unsecured subordinated debentures due June 30, 2020 at
a price of Cdn$1,000 per Debenture. Concurrently with the filing of the
Prospectus, the Corporation has filed a registration statement on Form S-1 with
the United States Securities and Exchange Commission to register the Debentures
and the shares of common stock underlying the Debentures.
The Offering is being conducted on a commercially reasonable
best efforts basis by a syndicate of agents led by Desjardins Capital Markets
and including Laurentian Bank Securities Inc. The Offering will be conducted in
the provinces of British Columbia, Alberta, Manitoba, Ontario and Québec.
The Debentures will bear interest at an annual rate of 8%,
payable semi-annually on the last day of June and December of each year,
commencing on June 30, 2017. The size of the Offering and the conversion price
will be determined in the context of the market prior to filing of a (final)
short form prospectus.
The net proceeds from the Offering will be used for capital
expansion, clinical studies, product development and general working capital
requirements.
The Corporation will apply to list the Debentures and the
shares of common stock issuable on the conversion of the Debentures or pursuant
to other terms of the Debentures on the TSX Venture Exchange (the
"
TSXV
"). A copy of the Prospectus is available under the
Corporation's profile at www.sedar.com and a copy of the Registration Statement
can be obtained from the SEC's website at www.sec.gov or by request to
Desjardins Capital Markets at ecm@vmd.desjardins.com. The Offering is subject to
certain customary conditions including, but not limited to, the receipt of all
necessary approvals, including the approval of the TSXV and the SEC declaring
the Registration Statement effective.
A registration statement relating to these securities has been
filed with the SEC but has not yet become effective. These securities may not be
sold nor may offers to buy be accepted prior to the time the registration
statement becomes effective. No offer to buy the securities can be
accepted and no part of the purchase price can be received until the
registration statement has become effective, and any such offer may be withdrawn
or revoked, without obligation or commitment of any kind, at any time prior to
notice of its acceptance given after the effective date.
6
Corporate related developments
Expansion to the existing Manufacturing Facility
The Company has initiated an expansion project to the existing
manufacturing facility. This expansion became necessary following requests by
commercial partners to increase manufacturing capacity and provide solvent film
manufacturing capabilities. The new facility should create a fivefold increase
of our production capacity in addition to offering a one-stop shopping
opportunity to our partners. It should also significantly lower the acquisition
cost for our partners and provide better protection of our Intellectual
Property.
The Company has already entered into a lease agreement for an
additional 11,000 square feet of expansion space and the preparation for a
facility expansion is already ongoing.
All amounts are expressed in thousands of U.S. dollars
unless otherwise stated.
Currency rate fluctuations
Our operating currency is Canadian dollars, while our reporting
currency is U.S. dollars. Accordingly, our results of operations and balance
sheet position have been affected by currency rate fluctuations. In summary, our
financial statements for the three-month period ended March 31, 2017 report an
accumulated other comprehensive loss due to foreign currency translation
adjustments of $975 due to the fluctuations in the rates used to prepare our
financial statements, $44 of which positively impacted our comprehensive loss
for the three-month period ended March 31, 2017. The following Management
Discussion and Analysis takes this into consideration whenever material.
Reconciliation of Comprehensive Loss to Adjusted Earnings
before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA)
Adjusted EBITDA is a non-US GAAP financial measure. A
reconciliation of the Adjusted EBITDA is presented in the table below. The
Company uses adjusted financial measures to assess its operating performance.
Securities regulations require that companies caution readers that earnings and
other measures adjusted to a basis other than US-GAAP do not have standardized
meanings and are unlikely to be comparable to similar measures used by other
companies. Accordingly, they should not be considered in isolation. The Company
uses Adjusted EBITDA to measure its performance from one period to the next
without the variation caused by certain adjustments that could potentially
distort the analysis of trends in our operating performance, and because the
Company believes it provides meaningful information on the Companys financial
condition and operating results.
IntelGenx obtains its Adjusted EBITDA measurement by adding to
comprehensive loss, finance income and costs, depreciation and amortization,
income taxes and foreign currency translation adjustment incurred during the
period. IntelGenx also excludes the effects of certain non-monetary transactions
recorded, such as share-based compensation, for its Adjusted EBITDA calculation.
The Company believes it is useful to exclude these items as they are either
non-cash expenses, items that cannot be influenced by management in the short
term, or items that do not impact core operating performance. Excluding these
items does not imply they are necessarily nonrecurring. Share-based compensation
costs are a component of employee and consultants remuneration and can vary
significantly with changes in the market price of the Companys shares. Foreign
currency translation adjustments are a component of other comprehensive income
and can vary significantly with currency fluctuations from one period to
another. In addition, other items that do not impact core operating performance
of the Company may vary significantly from one period to another. As such,
Adjusted EBITDA provides improved continuity with respect to the comparison of the Companys operating results over a period of
time. Our method for calculating Adjusted EBITDA may differ from that used by
other corporations.
7
Reconciliation of Non-U.S.-GAAP Financial Information
|
|
Three-month period
|
|
|
|
|
|
|
ended March 31,
|
|
In U.S.$ thousands
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Comprehensive Loss
|
$
|
(468
|
)
|
$
|
(707
|
)
|
Add (deduct):
|
|
|
|
|
|
|
Depreciation
|
|
170
|
|
|
87
|
|
Finance costs
|
|
57
|
|
|
40
|
|
Finance income
|
|
(2
|
)
|
|
-
|
|
Share-based compensation
|
|
170
|
|
|
63
|
|
Foreign currency translation adjustment
|
|
(44
|
)
|
|
(39
|
)
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
(117
|
)
|
|
(556
|
)
|
Adjusted Earnings before Interest, Taxes, Depreciation and
Amortization (Adjusted EBITDA)
Adjusted EBITDA increased by $439 for the three-month period
ended March 31, 2017 to ($117) compared to ($556) for the three-month period
ended March 31, 2016. The increase in Adjusted EBITDA of $439 for the
threemonth period ended March 31, 2017 is mainly attributable to an increase in
revenues of $535 partially offset by an increase in R&D expenses of $157
before consideration of stock-based compensation.
Results of operations for the three-month period ended March
31, 2017 compared with the three-month period ended March 31, 2016.
|
|
Three-month period
|
|
|
|
ended March 31,
|
|
In U.S.$ thousands
|
|
2017
|
|
|
2016
|
|
Revenue
|
$
|
1,353
|
|
$
|
818
|
|
|
|
|
|
|
|
|
Cost of Royalty and License
Revenue
|
|
92
|
|
|
65
|
|
Research and Development
Expenses
|
|
644
|
|
|
481
|
|
Selling, General and
Administrative Expenses
|
|
904
|
|
|
891
|
|
Depreciation of tangible
assets
|
|
170
|
|
|
87
|
|
Operating Loss
|
|
(457
|
)
|
|
(706
|
)
|
Net Loss
|
|
(512
|
)
|
|
(746
|
)
|
Comprehensive Loss
|
|
(468
|
)
|
|
(707
|
)
|
Revenue
Total revenues for the three-month period ended March 31, 2017
amounted to $1,353, representing an increase of $535 or 65% compared to $818 for
the three-month period ended March 31, 2016. The increase for the three-month
period ended March 31, 2017 compared to the last years corresponding period is
mainly attributable to the increase in upfront and deferred revenues on monetization of $914 offset
by a decrease in royalties of $379.
8
Cost of royalty and license revenue
We recorded $92 for the cost of royalty and license revenue in
the three-month period ended March 31, 2017 compared with $65 in the same period
of 2016. This expense relates to a Project Transfer Agreement that was executed
in May 2010 with one of our former development partners whereby we acquired full
rights to, and ownership of, Forfivo XL
®
, our novel, high strength
formulation of Bupropion hydrochloride, the active ingredient in Wellbutrin
XL
®
. Pursuant to the Project Transfer Agreement, and following
commercial launch of Forfivo XL
®
in October 2012, we are required,
after recovering an aggregate $200 for management fees previously paid, to pay
our former development partner 10% of net product sales received from the sale
of Forfivo XL
®
. We recovered the final portion of the management fees
in December 2014, thereby invoking payments to our former development partner.
Following the monetization of Forfivo XL
®
s royalties, we are
required to record 10% of the deferred revenues from the monetization as cost of
royalty and license revenue until December 31, 2017 which represented $92 for
the first quarter of 2017.
Research and development (R&D) expenses
R&D expenses for the three-month period ended March 31,
2017 amounted to $644, representing an increase of $163 or 34%, compared to $481
for the three-month period ended March 31, 2016.
The increase in R&D expenses for the three-month period
ended March 31, 2017 is mainly attributable to increases in manufacturing scale
up activities of $49, study costs of $111, license fees of $42, lab supplies of
$47 and R&D salaries of $85. The increase was partially offset by a
reduction in patent costs of $171.
In the three-month period ended March 31, 2017 we recorded
estimated Research and Development Tax Credits and refunds of $30, compared with
$22 that was recorded in the same period of the previous year.
Selling, general and administrative (SG&A) expenses
SG&A expenses for the three-month period ended March 31,
2017 amounted to $904, representing an increase of $13 or 1%, compared to $891
for the three-month period ended March 31, 2016.
The increase in SG&A expenses for the three-month period
ended March 31, 2017 is mainly attributable to an increase in investor relation
expenses $41, partially offset by a decrease in office and general expenses of
$23.
Depreciation of tangible assets
In the three-month period ended March 31, 2017 we recorded an
expense of $170 for the depreciation of tangible assets, compared with an
expense of $87 thousand for the same period of the previous year.
Share-based compensation expense, warrants and stock based
payments
Share-based compensation warrants and share-based payments
expense for the three-month period ended March 31, 2017 amounted to $170
compared to $63 for the three-month period ended March 31, 2016.
We expensed approximately $49 in the three-month period ended
March 31, 2017 for options granted to our employees in 2015 and 2016 under the
2006/2016 Stock Option Plan, approximately $119 for options granted to
non-employee directors in 2015, 2016 and 2017, and approximately $2 for options
granted to a consultant in 2016, compared with $28, $35, and $nil respectively
that was expensed in the same period of the previous year.
9
There remains approximately $238 in stock based compensation to
be expensed in fiscal 2017 and 2018, of which $229 relates to the issuance of
options to our employees and directors during 2015 to 2017 and $9 relates to the
issuance of options to a consultant in 2016. We anticipate the issuance of
additional options and warrants in the future, which will continue to result in
stock-based compensation expense.
Key items from the balance sheet
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
March 31,
|
|
|
December
|
|
|
Increase/
|
|
|
Increase/
|
|
In U.S.$ thousands
|
|
2017
|
|
|
31, 2016
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
Current Assets
|
$
|
4,966
|
|
$
|
6,352
|
|
$
|
-1,386
|
|
|
-22%
|
|
Leasehold improvements and Equipment
|
|
5,833
|
|
|
5,730
|
|
|
103
|
|
|
2%
|
|
Security Deposits
|
|
714
|
|
|
708
|
|
|
6
|
|
|
1%
|
|
Current Liabilities
|
|
4,073
|
|
|
5,235
|
|
|
-1,162
|
|
|
-22%
|
|
Long-term debt
|
|
2,410
|
|
|
2,565
|
|
|
-155
|
|
|
-6%
|
|
Capital Stock
|
|
1
|
|
|
1
|
|
|
0
|
|
|
0%
|
|
Additional Paid-in-Capital
|
|
24,207
|
|
|
23,700
|
|
|
507
|
|
|
2%
|
|
Current assets
Current assets totaled $4,966 as at March 31, 2017 compared
with $6,352 at December 31, 2016. The decrease of $1,386 is mainly attributable
to a decrease in cash and cash equivalents of approximately $312 and a decrease
in short term investments of $252 as well as a decrease in accounts receivable
of approximately $616.
Cash and cash equivalents
Cash and cash equivalents totaled $300 as at March 31, 2017
representing a decrease of $312 compared with the balance of $612 as at December
31, 2016. The decrease in cash on hand relates to net cash used by operating
activities of $523 and unrealized foreign exchange loss of $101, offset by net
cash provided by financing activities of $234 and net cash provided by investing
activities of $78.
Accounts receivable
Accounts receivable totaled $428 as at March 31, 2017
representing a decrease of $616 compared with the balance of $1,044 as at
December 31, 2016. The main reason for the decrease is related to the collection
in Q1 2017 of upfront payments accounted for as at December 31, 2016.
Prepaid expenses
As at March 31, 2017 prepaid expenses totaled $428 compared
with $566 as of December 31, 2016. The decrease in prepaid expenses is
attributable to the advance payments in December 2016 of certain expenses that
relate to services to be provided in the remainder of the year.
10
Investment tax credits receivable
R&D investment tax credits receivable totaled approximately
$178 as at March 31, 2017 compared with $246 as at December 31, 2016. The
decrease is attributable to the collection of the 2015 tax credits offset by the
accrual estimated and recorded for the first quarter of 2017.
Leasehold improvements and equipment
As at March 31, 2017, the net book value of leasehold
improvements and equipment amounted to $5,833, compared to $5,730 at December
31, 2016. In the three-month period ended March 31, 2017 additions to assets
totaled $222 and mainly comprised of $210 for manufacturing equipment, $7 for
computer equipment, $3 for leasehold improvements, and $2 for office
furniture.
Security deposit
A security deposit in the amount of CAD$300 in respect of an
agreement to lease approximately 17,000 square feet in a property located at
6420 Abrams, St-Laurent, Quebec, Canada was recorded as at March 31, 2017.
Security deposits in the amount of CAD$650 for the term loans were also recorded
as at March 31, 2017.
Accounts payable and accrued liabilities
Accounts payable and accrued liabilities totaled $613 as at
March 31, 2017 compared with $897 as at December 31, 2016. The decrease is
mainly attributable to the December 31, 2016 bonus accruals paid out in Q1 2017.
Long-term debt
Long-term debt totaled $3,120 as at March 31, 2017 (December
31, 2016 - $3,269). An amount of $2,519 is attributable to term loan from the
lender secured by a first ranking movable hypothec on all present and future
movable property of the Company and a 50% guarantee by Export Development
Canada, a Canadian Crown corporation export credit agency. The reimbursement of
the term loan started in September 2015 and should be fully reimbursed by
October 2021.
An amount of $601 is attributable to a second loan secured by a
second ranking on all present and future property of the Company. The
reimbursement of the loan started in January 2017 and should be fully reimbursed
by March 2021.
Shareholders equity
As at March 31, 2017 we had accumulated a deficit of $18,249
compared with an accumulated deficit of $17,737 as at December 31, 2016. Total
assets amounted to $11,513 and shareholders equity totaled $4,984 as at March
31, 2017, compared with total assets and shareholders equity of $12,790 and
$4,945 respectively, as at December 31, 2016.
Capital stock
As at March 31, 2017 capital stock amounted to $0.654 (December
31, 2016: $0.648) . Capital stock is disclosed at its par value with the excess
of proceeds shown in Additional Paid-in-Capital.
Additional paid-in-capital
Additional paid-in capital totaled $24,207 as at March 31,
2017, as compared to $23,700 as at December 31, 2016. Additional paid in capital
increased by $507 from which $337 came from proceeds from exercise of warrants
and stock options and $170 from stock based compensation
attributable to the amortization of stock options granted to employees and
directors.
11
Taxation
As at December 31, 2016, the date of our latest annual tax
return, we had Canadian and provincial net operating losses of approximately
$7,585 (December 31, 2015: $6,462) and $7,763 (December 31, 2015: $6,725)
respectively, which may be applied against earnings of future years. Utilization
of the net operating losses is subject to significant limitations imposed by the
change in control provisions. Canadian and provincial losses will be expiring
between 2027 and 2036. A portion of the net operating losses may expire before
they can be utilized.
As at December 31, 2016, we had non-refundable tax credits of
$1,190 thousand (2015: $1,022 thousand) of which $8 thousand is expiring in
2026, $10 thousand is expiring in 2027, $168 thousand is expiring in 2028, $147
thousand is expiring in 2029, $126 thousand is expiring in 2030, $133 thousand
is expiring in 2031, $167 thousand is expiring in 2032 and $111 thousand is
expiring in 2033, $84 thousand expiring in 2034 and $99 thousand is expiring in
2035 and $137 thousand expiring in 2036. We also had undeducted research and
development expenses of $5,438 thousand (2015: $4,563 thousand) with no
expiration date.
The deferred tax benefit of these items was not recognized in
the accounts as it has been fully provided for.
Key items from the statement of cash flows
|
|
March 31,
|
|
|
March 31,
|
|
|
Increase/
|
|
|
Percentage
|
|
In U.S.$ thousands
|
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
|
2017
|
|
|
2016
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
Operating Activities
|
$
|
(523
|
)
|
$
|
(1,056
|
)
|
$
|
533
|
|
|
50 %
|
|
Financing Activities
|
|
234
|
|
|
375
|
|
|
(141
|
)
|
|
(38%
|
)
|
Investing Activities
|
|
78
|
|
|
(290
|
)
|
|
368
|
|
|
127 %
|
|
Cash and cash equivalents - end of period
|
|
300
|
|
|
2,067
|
|
|
(1,767
|
)
|
|
(85%
|
)
|
Statement of cash flows
Net cash used in operating activities was $523 for the
three-month period ended March 31, 2017, compared to $1,056 for the three-month
period ended March 31, 2016. For the three-month period ended March 31, 2017,
net cash used by operating activities consisted of a net loss of $512 (2016:
$746) and a decrease in non-cash operating elements of working capital of $351
(2016: $460).
The net cash provided by financing activities was $234 for the
three-month period ended March 31, 2017, compared to $375 provided in the same
period of the previous year. An amount of $337 derives from proceeds from
exercise of warrants and stock options offset by repayment of term loans for an
amount of $103.
Net cash provided by investing activities amounted to $78 for
the three-month period ended March 31, 2017 compared to a negative $290 in the
same period of 2016. The net cash provided by investing activities for the
three-month period ended March 31, 2017 relates to the redemption of short term
investments of $300 (2016: $Nil), offset by the purchase of fixed assets of $222
(2016: $290).
The balance of cash and cash equivalents as at March 31, 2017
amounted to $300, compared to $2,067 at March 31, 2016.
12
Off-balance sheet arrangements
We have no off-balance
sheet arrangements