IGXT IntelGenx Technologies Corporation (QB)

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction to Management’s Discussion and Analysis

This Management’s 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 and nine-month periods ended September 30, 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 the Company’s 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 November 9, 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 “2016 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 management’s 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 forward looking 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.

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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.

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.

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Most recent key developments

On June 29, 2017, the Company announced that it had filed a final short form prospectus in connection with an offering of a minimum of CAD$5,000,000 and a maximum of CAD$10,000,000 aggregate principal amount of 8% convertible unsecured subordinated debentures due June 30, 2020. The Corporation had also filed an amended 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. On April 4, 2017, the Company had filed a preliminary short form prospectus with respect to the offering as well as a registration statement on Form S-1 with the United States Securities and Exchange Commission.

On July 12, 2017, the Company announced that it had closed its previously announced prospectus offering of convertible unsecured subordinated debentures of the Corporation for gross aggregate proceeds of CAD$6,838,000. Pursuant to the Offering, the Corporation issued an aggregate principal amount of CAD$6,838,000 of Debentures at a price of CAD$1,000 per Debenture. The Debentures will mature on June 30, 2020 and bear interest at annual rate of 8% payable semi-annually on the last day of June and December of each year, commencing on December 31, 2017. The Debentures will be convertible at the option of the holders at any time prior to the close of business on the earlier of June 30, 2020 and the business day immediately preceding the date specified by the Corporation for redemption of Debentures. The conversion price will be CAD$1.35 per common share of the Corporation, being a conversion rate of approximately 740 Shares per CAD$1,000 principal amount of Debentures, subject to adjustment in certain events.

On August 8, 2017, the Company announced that it had closed a second tranche of its prospectus Offering of convertible unsecured subordinated debentures of the Corporation for which a first closing took place on July 12, 2017, pursuant to which it had raised additional gross proceeds of CAD$762,000.

Together with the principal amount of CAD$6,838,000 of Debentures issued on July 12, 2017, the Corporation issued a total aggregate principal amount of CAD$7,600,000 of Debentures at a price of CAD$1,000 per Debenture.

The Offering was conducted on a commercially reasonable best efforts basis by a syndicate of agents led by Desjardins Capital Markets and including Laurentian Bank Securities Inc. and Echelon Wealth Partners Inc.

The net proceeds from the Offering will be used for investments in leasehold improvements and equipment, clinical studies, product development and general working capital requirements.

On July 12, 2017, the Company announced that Dr. Rodolphe Obeid, its Director of Research and Development, Process Development and Manufacturing Scale-Up, discussed the Company's oral films based on its proprietary VersaFilm™ technology platform during a presentation today at BIT's 7th Annual Symposium of Drug Delivery Systems being held in Prague, Czech Republic. Entitled "Oral Film Technology Evolution, Challenges and Therapeutic Benefits," Dr. Obeid's presentation reviewed the Company's development of VersaFilm™ and the technology platform's potential to enhance active pharmaceutical ingredient bioavailability, accelerate onset of action, reduce side effects and ease administration, thereby improving patient's compliance and satisfaction. Dr. Obeid is an expert in drug delivery systems and polymeric assemblies. In his current role, Dr. Obeid is responsible for overseeing all of IntelGenx' product development activities. Based on IntelGenx' current pipeline, there are eight different film projects in various development stages, five of which are under co-development with a commercial partner. Here, Dr. Obeid is in charge of overseeing the technology transfer, as well as the process development and manufacturing scale-up of all internal and external pharmaceutical film projects. Prior to joining IntelGenx, Dr. Obeid was a postdoctoral industrial R&D Fellow at the Faculty of Veterinary Medicine of University of Montreal, working on vaccine encapsulation using biodegradable microspheres. Before that, he was a National Institutes of Health Postdoctoral Scholar at the University of Alabama in collaboration with the Massachusetts Institute of Technology, focusing on the development of novel poly-based polymers for surface modification of biomedical implants as a part of the Boston Retinal Implant Project. Dr. Obeid holds a Ph.D in polymer chemistry from the University of Montreal, Canada and two Masters in polymer science and chemical engineering from the University of Strasbourg, France. Dr. Obeid is the co-inventor of multiple pending patent applications, and has published numerous scientific articles on recognized international journals and conferences.

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On September 11, 2017, Dr. Horst Zerbe, IntelGenx Chief Executive Officer presented at the Rodman & Renshaw 19th Annual Global Investment Conference at the Lotte New York Palace Hotel. Dr. Zerbe provided an overview of IntelGenx' business during the presentation along with Andre Godin, Executive Vice-President and Chief Financial Officer. Both of them also participated in one-on-one meetings with investors registered at the conference.

On August 31, 2017, the Company announced that the Company's board of directors had granted options to acquire a total of 359,818 common shares under the 2016 Stock Option Plan. Of the total stock options granted, 179,908 were granted to the Horst G. Zerbe, Chief Executive Officer and President and 59,970 were granted to Andre Godin, Executive Vice President and Chief Financial Officer. Furthermore, 59,970 stock options were granted to each of two officers of IntelGenx Corp., Nadine Paiement, Vice President Research and Development and Dana Matzen, Vice President of Business and Corporate Development. The options have an exercise price of US$0.77 (CAD$0.96), vest over a period of two years at the rate of 25% every six months and expire on August 27, 2027.

On August 31, 2017, the U.S. District Court for the District of Delaware rendered a decision which determined that the process used to manufacture IntelGenx' and Par Pharmaceutical Inc.'s buprenorphine/naloxone sublingual film product for the treatment of opiate addiction does not infringe MonoSol Rx U.S. Patent No. 8,900,497. Also on August 31, 2017, the Delaware Court rendered a decision in a separate case, which previously resulted in a finding infringement of the MonoSol Rx U.S. Patent No 8,603,514, denying IntelGenx' and Par's motion to reopen the case. IntelGenx and Par are presently working on the appeal process.

Corporate related developments

Expansion to the existing Manufacturing Facility

The Company has initiated a project to expand the existing manufacturing facility, the timing of which will be dictated in part by the completion of agreements with our commercial partners. 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 and provide better protection of our Intellectual Property.

The Company has entered into a lease agreement for an additional 11,000 square feet of expansion space and the preparation for a facility expansion is 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 nine-month period ended September 30, 2017 report an accumulated other comprehensive loss due to foreign currency translation adjustments of $663 due to the fluctuations in the rates used to prepare our financial statements, $356 of which positively impacted our comprehensive loss for the nine-month period ended September 30, 2017. The following Management Discussion and Analysis takes this into consideration whenever material.

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Reconciliation of Comprehensive Income (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 Company’s financial condition and operating results.

IntelGenx obtains its Adjusted EBITDA measurement by adding to comprehensive income (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 consultant’s remuneration and can vary significantly with changes in the market price of the Company’s 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 Company’s operating results over a period of time. Our method for calculating Adjusted EBITDA may differ from that used by other corporations.

Adjusted Earnings before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA)

Adjusted EBITDA decreased to ($340) for the three-month period ended September 30, 2017 compared to $311 for the three-month period ended September 30, 2016. Adjusted EBITDA improved to ($847) for the nine-month period ended September 30, 2017 compared to ($910) for the nine-month period ended September 30, 2017. The decrease in Adjusted EBITDA of $651 for the three-month period ended September 30, 2017 is mainly attributable to a decrease in revenues of $565 and an increase in R&D expenses of $185 before consideration of stock-based compensation, partially offset by a decrease in SG&A expenses of $99 before consideration of stock-based compensation. The improvement in Adjusted EBITDA of $63 for the nine-month period ended September 30, 2017 is mainly attributable to an increase in revenues of $424 and a decrease in SG&A expenses of $251 before consideration of stock-based compensation partially offset by an increase in R&D expenses of $562 before consideration of stock-based compensation.

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Results of operations for the three-month and nine-month periods ended September 30, 2017 compared with the three-month and nine-month periods ended September 30, 2016.

Revenue

Total revenues for the three-month period ended September 30, 2017 amounted to $1,254, representing a decrease of $565 or 31% compared to $1,819 for the three-month period ended September 30, 2016. Total revenues for the Nine-month period ended September 30, 2017 amounted to $3,733, representing an increase of $424 or 13% compared to $3,309 for the nine-month period ended September 30, 2016. The decrease for the three-month period ended September 30, 2017 compared to the last year’s corresponding period is mainly attributable to a decrease in license and other revenues $565. The increase for the nine-month period ended September 30, 2017 compared to the last year’s corresponding period is mainly attributable to an increase in license and other revenues of $1,475 offset by a decrease in royalties of $1,051.

Cost of royalty and license revenue

We recorded $97 for the cost of royalty and license revenue in the three-month period ended September 30, 2017 compared with $97 in the same period of 2016. We recorded $278 for the cost of royalty and license revenue in the nine-month period ended September 30, 2017 compared with $228 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 $278 for the nine-month period ended September 30, 2017.

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Research and development (“R&D”) expenses

R&D expenses for the three-month period ended September 30, 2017 amounted to $578, representing an increase of $190 or 49%, compared to $388 for the three-month period ended September 30, 2016. R&D expenses for the nine-month period ended September 30, 2017 amounted to $1,876, representing an increase of $581 or 45%, compared to $1,295 for the nine-month period ended September 30, 2016.

The increase in R&D expenses for the three-month period ended September 30, 2017 is mainly attributable to increases in R&D salaries of $119 related to new hires, study costs of $91 and analytical costs of $62. The increase was partially offset by a reduction in patent costs of $77. The increase in R&D expenses for the nine-month period ended September 30, 2017 is mainly attributable to increases in lab supplies of $204, R&D salaries of $318 related to new hires, study costs of $241, analytical costs of $114 and license fees of $40. The increase was partially offset by a reduction in patent costs of $350.

In the three-month period ended September 30, 2017 we recorded estimated Research and Development Tax Credits and refunds of $31, compared with $22 that was recorded in the same period of the previous year. In the nine-month period ended September 30, 2017 we recorded estimated Research and Development Tax Credits and refunds of $92, compared with $68 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 September 30, 2017 amounted to $963, representing a decrease of $109 or 10%, compared to $1,072 for the three-month period ended September 30, 2016. SG&A expenses for the nine-month period ended September 30, 2017 amounted to $2,693, representing a decrease of $144 or 5%, compared to $2,837 for the nine-month period ended September 30, 2016.

The decrease in SG&A expenses for the three-month period ended September 30, 2017 is mainly attributable to a decrease in business development expenses of $108 and professional fees of $207 partially offset by an increase in salaries of $48 and a variation of the foreign exchange expense of $136 due to the appreciation of the CAD dollar vs the US currency. The decrease in SG&A expenses for the nine-month period ended September 30, 2017 is mainly attributable to a decrease in professional fees of $196 and business development expenses of $203 partially offset by an increase in manufacturing expenses of $111 and management and administrative salaries of $133, part of which is non-recurrent.

Depreciation of tangible assets

In the three-month period ended September 30, 2017 we recorded an expense of $185 for the depreciation of tangible assets, compared with an expense of $174 for the same period of the previous year. In the nine-month period ended September 30, 2017 we recorded an expense of $525 for the depreciation of tangible assets, compared with an expense of $361 for the same period of the previous year. The increases in the depreciation of tangible assets are mainly attributable to the commencement of the depreciation of the plant equipment.

Share-based compensation expense, warrants and stock based payments

Share-based compensation warrants and share-based payments expense for the three-month period ended September 30, 2017 amounted to $44 compared to $49 for the three-month period ended September 30, 2016. Share-based compensation warrants and share-based payments expense for the nine-month period ended September 30, 2017 amounted to $267 compared to $141 for the nine-month period ended September 30, 2016.

We expensed approximately $38 in the three-month period ended September 30, 2017 for options granted to our employees in 2015, 2016 and 2017 under the 2006/2016 Stock Option Plan, approximately $4 for options granted to non-employee directors in 2015 and 2016, and approximately $2 for options granted to a consultant in 2016, compared with $45, $4, and $nil respectively that was expensed in the same period of the previous year.

We expensed approximately $134 in the nine-month period ended September 30, 2017 for options granted to our employees in 2015, 2016 and 2017 under the 2006/2016 Stock Option Plan, approximately $128 for options granted to non-employee directors in 2015, 2016 and 2017, and approximately $5 for options granted to a consultant in 2016, compared with $96, $45, and $nil respectively that was expensed in the same period of the previous year.

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There remains approximately $243 in stock based compensation to be expensed in fiscal 2017 and 2018, of which $237 relates to the issuance of options to our employees and directors during 2015 to 2017 and $6 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.