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 and six-month periods ended June 30, 2018 and 2017.
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 Companys MD&A for the year ended
December 31, 2017. In preparing this MD&A, we have taken into account
information available to us up to August 9, 2018, 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, 2017 (the
2017 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 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.
22
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.
More recently, we have made the strategic decision to enter the
oral film market and have implemented commercial oral film manufacturing
capability. This enables us to offer our partners a comprehensive portfolio of
pharmaceutical services, including pharmaceutical R&D, clinical monitoring,
regulatory support, tech transfer and manufacturing scale-up, and commercial
manufacturing.
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, license the commercial rights to partners in the
pharmaceutical industry. In certain cases, we rely upon partners in the
pharmaceutical industry to fund the development of the licensed products,
complete the regulatory approval process with the 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 are based on three pillars: (1) out licensing commercial rights of
our existing pipeline products, (2) partnering on contract development and
manufacturing projects leveraging our VersaFilm technology, (3) expanding our
current pipeline through:
|
|
identifying lifecycle management opportunities for
existing market leading pharmaceutical products,
|
|
|
|
|
|
develop oral film products that provide tangible patient
benefits,
|
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|
|
|
|
development of new drug delivery technologies,
|
|
|
|
|
|
repurposing existing drugs for new indications, and
|
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|
|
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developing generic drugs where high technology barriers
to entry exist in reproducing branded films.
|
Contract Development and Manufacturing based on VersaFilm
technology
We have established a state-of-the-art manufacturing facility
for the future manufacture of our VersaFilm products. 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.
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.
23
Product Opportunities that provide Tangible Patient Benefits
Our focus will be on developing oral film products leveraging
our VersaFilm technology that provide tangible patient benefits versus existing
drug delivery forms. Patients with difficulties swallowing medication,
pediatrics or geriatrics may benefit from oral films due to the ease of use.
Similarly, we are working on oral films to improve bio-availability and/or
response time versus existing drugs and thereby reducing side effects.
Development of New Drug Delivery Technologies
The rapidly disintegrating film technology contained in our
VersaFilm, and our AdVersa® mucosal adhesive tablet, are two examples of our
efforts to develop alternate technology platforms. As we work with various
partners on different products, we seek opportunities to develop new proprietary
technologies.
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.
Corporate
Manufacturing facility
We currently manufacture products only for clinical and testing
purposes in our own facility and we do not yet manufacture products for
commercial use. In order to establish ourselves as a full-service partner for
our thin film products, we invested approximately $6.5 million to establish a
state-of-the-art manufacturing facility for the commercial manufacture of
products developed using our VersaFilm drug delivery technology. Since we
recently received our cGMP-compliant rating from Health Canada for manufacturing
and packaging activities, we anticipate the manufacturing of our products to
commence on the first half of 2019.
Expansion to the existing Manufacturing Facility
On March 6, 2017 IntelGenx executed an agreement to lease
approximately an additional 11,000 square feet in a property located at 6410 Abrams, St-Laurent, Quebec.
The Lease has an 8 year and 5-month term commencing on October 1, 2017 and
IntelGenx has retained two options to extend the Lease, with each option being
for an additional five years. Under the terms of the Lease IntelGenx will be
required to pay base rent of approximately CA$74 thousand (approximately $59
thousand) per year, which will increase at a rate of CA$0.25 ($0.20) per square
foot every two years. IntelGenx plans to use the newly leased space to expand
its manufacture of oral film VersaFilm TM.
24
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 as well as obtaining the
necessary funding. 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 signed agreements in the amount of Euro1,911 thousand
with three suppliers with respect to equipment for solvent film manufacturing.
As at June 30, 2018 an amount of Euro988 thousand has been paid.
Most recent key developments
On May 8, 2018, IntelGenx announced the closing of an offering
by way of private placement. In connection with the Offering, the Company issued
320 units at a subscription price of $10,000 per Unit for gross proceeds of
$3,200,000. The Corporation intends to use the proceeds for its Montelukast
phase 2a clinical trial and for general working capital purposes. Each Unit is
comprised of (i) 7,940 common shares of the Corporation, (ii) a $5,000
convertible 6% note, and (iii) 7,690 warrants to purchase common shares of the
Corporation. Each Note bears interest at a rate of 6% (payable quarterly, in
arrears, with the first payment being due on September 1, 2018), matures on June
1, 2021 and is convertible into Common Shares at a conversion price of $0.80 per
Common Share. Each Warrant entitles its holder to purchase one Common Share at a
price of $0.80 per Common Share until June 1, 2021.
Cantone Research, Inc. acted as placement agent in respect of
certain sales under the U.S. portion of the Offering and Leede Jones Gable Inc.
acted as placement agent in respect of the Canadian portion of the Offering. In
connection with the Offering, the Company paid to the Agents a cash commission
of approximately $157,800 in the aggregate and issued non-transferable agents
warrants to the Agents, entitling the Agents to purchase 243,275 common shares
at a price of $0.80 per share until June 1, 2021. The Common Shares, Notes and
Warrants issued to Canadian residents and the agents warrants issued to Leede
Jones Gable Inc. are subject to a four-month statutory hold period until
September 9, 2018.
A related party of the Company participated in the Offering and
subscribed for an aggregate of two Units.
On May 14, 2018, IntelGenx announced that all patent litigation
between the Company, Par Pharmaceutical, Inc., Indivior, Inc., Indivior UK
Limited, and Aquestive Therapeutics, Inc. (formerly MonoSol Rx, LLC) related to
Suboxone® film had been settled. The settlement agreement permits Par to begin
selling a generic version of Suboxone® film on January 1, 2023, or earlier under
certain circumstances. Par is IntelGenxs commercial and development partner for
a generic version of Suboxone® sublingual film product, which is indicated for
the treatment of opioid dependence.
On June 11, 2018, IntelGenx announced that the Companys board
of directors granted options to acquire a total of 800,000 common shares under
the 2016 Stock Option Plan. Of the total stock options granted, 200,000 were
granted to each of Horst G. Zerbe, Chief Executive Officer and President and
Andre Godin, Executive Vice President and Chief Financial Officer. Furthermore,
100,000 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. Also included in the total number of options granted are 200,000
granted to two employees of IntelGenx Corp. The options have an exercise price
of $0.76 (CAD$0.99), vest over a period of two years at the rate of 25% every
six months and expire on June 10, 2028.
25
On June 19, 2018, IntelGenx announced that the European Patent
Office had issued a Notice of Intention to Grant for the Companys European
Patent Application Number 14832172.2 entitled, Instantly Wettable Oral Film
Dosage Form Without Surfactant or Polyalcohol." This is the first key patent
allowed in Europe for the Companys VersaFilm technology. Once the
administrative process is complete, the patent that issues from this application
will provide intellectual property protection for the formulation of the
Companys VersaFilm technology used in its Rizaport
®
product, an
oral thin film formulation of rizatriptan benzoate for the treatment of acute
migraines, in Europe through 2034. IntelGenx received a similar formulation
patent covering its Rizaport
®
VersaFilm technology from the United
States Patent and Trademark Office in 2016 and has additional applications
pending in other countries.
On July 3, 2018, IntelGenx issued 307,069 common shares of the
Corporation at a deemed price of CAD$0.99 per Common Share in payment of an
aggregate of $304,000 in interest owing on the Corporations 8.00% convertible
unsecured subordinated debentures due June 30, 2020. Under the terms of the
trust indenture governing the Debentures, the Corporation has the option to pay
the semi-annual interest on the Debentures in either cash or Common Shares,
subject to customary conditions set forth in the Indenture.
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 six-month period ended June 30, 2018 report an
accumulated other comprehensive loss due to foreign currency translation
adjustments of $745 primarily due to the fluctuations in the rates used to
prepare our financial statements, $107 of which negatively impacted our
comprehensive loss for the six-month period ended June 30, 2018. 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.
26
Reconciliation of Non-US-GAAP Financial Information
|
|
Three-month period
|
|
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Six-month period
|
|
|
|
ended June 30,
|
|
|
ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Comprehensive loss
|
|
(2,432
|
)
|
|
(550
|
)
|
|
(4,773
|
)
|
|
1,018
|
)
|
Add (deduct):
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
179
|
|
|
170
|
|
|
362
|
|
|
340
|
|
Finance costs
|
|
277
|
|
|
54
|
|
|
520
|
|
|
111
|
|
Finance income
|
|
-
|
|
|
(1
|
)
|
|
-
|
|
|
(3
|
)
|
Share-based compensation
|
|
73
|
|
|
53
|
|
|
123
|
|
|
223
|
|
Other
comprehensive loss (income)
|
|
31
|
|
|
(116
|
)
|
|
108
|
|
|
(160
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
(1,872
|
)
|
|
(390
|
)
|
|
(3,660
|
)
|
|
(507
|
)
|
Adjusted Earnings before Interest, Taxes, Depreciation and
Amortization (Adjusted EBITDA)
Adjusted EBITDA decreased by $1,482 for the three-month period
ended June 30, 2018 to ($1,872) compared to ($390) for the three-month period
ended June 30, 2017. The decrease in Adjusted EBITDA of $1,482 for the
three-month period ended June 30, 2018 is mainly attributable to a decrease in
revenues of $892, an increase in SG&A expenses of $480 before consideration
of stock-based compensation and an increase in R&D expenses of $199 before
consideration of stock-based compensation. Adjusted EBITDA decreased by $3,153
for the six-month period ended June 30, 2018 to ($3,660) compared to ($507) for
the six-month period ended June 30, 2018. The decrease in Adjusted EBITDA of
$3,153 for the six-month period ended June 30, 2018 is mainly attributable to a
decrease in revenues of $2,006, an increase in SG&A expenses of $977 before
consideration of stock-based compensation and an increase in R&D expenses of
$351 before consideration of stock-based compensation.
27
Results of operations for the three-month and six-month
periods ended June 30, 2018 compared with the three-month and six-month periods
ended June 30, 2017.
|
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Three-month
period
|
|
|
Six-month
period
|
|
|
|
ended June
30,
|
|
|
ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Revenue
|
$
|
234
|
|
$
|
1,126
|
|
$
|
473
|
|
|
2,479
|
|
Cost of Royalty and License Revenue
|
|
-
|
|
|
89
|
|
|
-
|
|
|
181
|
|
Research and Development
Expenses
|
|
857
|
|
|
654
|
|
|
1,654
|
|
|
1,298
|
|
Selling, General and Administrative Expenses
|
|
1,322
|
|
|
826
|
|
|
2,602
|
|
|
1,730
|
|
Depreciation of tangible
assets
|
|
179
|
|
|
170
|
|
|
362
|
|
|
340
|
|
Operating loss
|
|
(2,124
|
)
|
|
(613
|
)
|
|
(4,145
|
)
|
|
(1,070
|
)
|
Net loss
|
|
(2,401
|
)
|
|
(666
|
)
|
|
(4,665
|
)
|
|
(1,178
|
)
|
Comprehensive loss
|
|
(2,432
|
)
|
|
(550
|
)
|
|
(4,773
|
)
|
|
(1,018
|
)
|
Revenue
Total revenues for the three-month period ended June 30, 2018
amounted to $234, representing a decrease of $892 or 79% compared to $1,126 for
the three-month period ended June 30, 2017. Total revenues for the six-month
period ended June 30, 2018 amounted to $473, representing a decrease of $2,006
or 81% compared to $2,479 for the six-month period ended June 30, 2017. The
decrease for the three-month period ended June 30, 2018 compared to the last
years corresponding period is mainly attributable to a decrease in deferred
revenues on monetization of $915. The decrease for the six-month period ended
June 30, 2018 compared to the last years corresponding period is mainly
attributable to a decrease in upfronts of $405, deferred revenues on
monetization of $1,829 offset by an increase in R&D revenues of $228.
Cost of royalty and license revenue
We recorded $Nil for the cost of royalty and license revenue in
the three-month period ended June 30, 2018 compared with $89 in the same period
of 2017. We recorded $Nil for the cost of royalty and license revenue in the
six-month period ended June 30, 2018 compared with $181 in the same period of
2017. 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 $Nil for
the first half of 2018.
Research and development (R&D) expenses
R&D expenses for the three-month period ended June 30, 2018
amounted to $857, representing an increase of $203 or 31%, compared to $654 for
the three-month period ended June 30, 2017. R&D expenses for the six-month period ended June 30, 2018 amounted
to $1,654, representing an increase of $356 or 27%, compared to $1,298 for the
six-month period ended June 30, 2017.
28
The increase in R&D expenses for the three-month period
ended June 30, 2018 is mainly attributable to an increase in study costs of
$207, an increase in R&D salaries due to hiring of additional employees of
$117 as well as an increase in analytical costs of $97, offset by a decrease in
lab supplies of $165. The increase in R&D expenses for the six-month period
ended June 30, 2018 is mainly attributable to an increase in study costs of
$364, an increase in R&D salaries due to hiring of additional employees of
$228 as well as an increase in analytical costs of $135, offset by a decrease in
lab supplies of $214.
In the three-month period ended June 30, 2018 we recorded
estimated Research and Development Tax Credits and refunds of $78, compared with
$30 that was recorded in the same period of the previous year. In the six-month
period ended June 30, 2018 we recorded estimated Research and Development Tax
Credits and refunds of $157, compared with $60 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 June 30,
2018 amounted to $1,322, representing an increase of $496 or 60%, compared to
$826 for the three-month period ended June 30, 2017. SG&A expenses for the
six-month period ended June 30, 2018 amounted to $2,602 representing an increase
of $872 or 50%, compared to $1,730 for the six-month period ended June 30,
2017.
The increase in SG&A expenses for the three-month period
ended June 30, 2018 is mainly attributable to an increase in salaries and
compensation expenses of $338, rent and utilities expenses of $56, manufacturing
expense of $73 and general office expenses of $28. The increase in SG&A
expenses for the six-month period ended June 30, 2018 is mainly attributable to
an increase in salaries and compensation expenses of $325, professional fees of
$312, manufacturing expense of $114, rent and utilities expenses of $92 and
office and general expenses of $87. The increase in professional fees were
mainly related to costs attributable to the aborted capital raise as well as the
Laboval acquisition which is currently on hold. These expenses are deemed to be
non-recurring in nature.
Depreciation of tangible assets
In the three-month period ended June 30, 2018 we recorded an
expense of $179 for the depreciation of tangible assets, compared with an
expense of $170 for the same period of the previous year. In the six-month
period ended June 30, 2018 we recorded an expense of $362 for the depreciation
of tangible assets, compared with an expense of $340 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 June 30, 2018 amounted to $73 compared
to $53 for the three-month period ended June 30, 2017. Share-based compensation
warrants and share-based payments expense for the six-month period ended June
30, 2018 amounted to $123 compared to $223 for the six-month period ended June
30, 2017.
We expensed approximately $68 in the three-month period ended
June 30, 2018 for options granted to our employees in 2016, 2017 and 2018 under
the 2016 Stock Option Plan, approximately $3 for options granted to non-employee
directors in 2016 and 2017, and approximately $2 for options granted to a
consultant in 2016, compared with $47, $5, and $1, respectively that was
expensed in the same period of the previous year.
29
We expensed approximately $113 in the six-month period ended
June 30, 2018 for options granted to our employees in 2016, 2017 and 2018 under
the 2016 Stock Option Plan, approximately $6 for options granted to non-employee
directors in 2016 and 2017, and approximately $4 for options granted to a
consultant in 2016, compared with $96, $124, and $3, respectively that was
expensed in the same period of the previous year.
There remains approximately $550 in stock-based compensation to
be expensed in fiscal 2018 and 2019, of which $549 relates to the issuance of
options to our employees and directors during 2016 to 2018 and $1 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
|
|
|
|
June 30,
|
|
|
December
|
|
|
Increase/
|
|
|
Increase/
|
|
|
|
2018
|
|
|
31, 2017
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
Current Assets
|
$
|
5,209
|
|
$
|
6,044
|
|
$
|
(835
|
)
|
|
(14%
|
)
|
Leasehold improvements and Equipment, net
|
|
6,149
|
|
|
6,346
|
|
|
(197
|
)
|
|
(3%
|
)
|
Security Deposits
|
|
733
|
|
|
757
|
|
|
(24
|
)
|
|
(3%
|
)
|
Current Liabilities
|
|
2,736
|
|
|
2,077
|
|
|
659
|
|
|
32%
|
|
Deferred lease obligation
|
|
50
|
|
|
50
|
|
|
0
|
|
|
0%
|
|
Long-term debt
|
|
1,539
|
|
|
1,992
|
|
|
(453
|
)
|
|
(23%
|
)
|
Convertible debentures
|
|
5,094
|
|
|
5,199
|
|
|
(105
|
)
|
|
(2%
|
)
|
Convertible notes
|
|
997
|
|
|
-
|
|
|
997
|
|
|
100%
|
|
Capital Stock
|
|
1
|
|
|
1
|
|
|
0
|
|
|
0%
|
|
Additional Paid-in-Capital
|
|
27,872
|
|
|
25,253
|
|
|
2,619
|
|
|
10%
|
|
Going Concern
The Company has financed its operations to date primarily
through public offerings of its common stock, convertible debentures,
convertible notes, bank loans, royalty, up-front and milestone payments, license
fees, proceeds from exercise of warrants and options, research and development
revenues and the sale of U.S. royalty on future sales of Forfivo XL®. The
Company has devoted substantially all of its resources to its drug development
efforts, conducting clinical trials to further advance the product pipeline, the
expansion of its facilities, protecting its intellectual property and general
and administrative functions relating to these operations. The future success of
the Company is dependent on its ability to develop its product pipeline and
ultimately upon its ability to attain profitable operations. As of June 30,
2018, the Company had cash and short-term investments totaling approximately
$3,683. The Company does not have sufficient existing cash and short-term
investments to support operations for the next year following the issuance of
these financial statements. These conditions raise substantial doubt about the
Companys ability to continue as a going concern. Managements plans to
alleviate these conditions include pursuing one or more of the following steps
to raise additional funding, none of which can be guaranteed or are entirely
within the Companys control:
30
|
|
Raise funding through the possible sale of the Companys
common stock, including public or private equity financings.
|
|
|
Raise funding through debt financing.
|
|
|
Continue to seek partners to advance product pipeline.
|
|
|
Initiate oral film manufacturing activities.
|
|
|
Initiate contract oral film manufacturing activities.
|
As of June 30, 2018, there are also 3,120,902 warrants
outstanding at an exercise price of $0.5646 which expire on December 15,
2018.
If the Company is unable to raise capital when needed or on
attractive terms, or if it is unable to procure partnership arrangements to
advance its programs, the Company would be forced to delay, reduce or eliminate
its research and development programs.
The accompanying financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the ordinary course of business. The accompanying
financial statements do not include any adjustments or classifications that may
result from the possible inability of the Company to continue as a going
concern. Should the Company be unable to continue as a going concern, it may be
unable to realize the carrying value of its assets and to meet its liabilities
as they become due.
Current assets
Current assets totaled $5,209 as at June 30, 2018 compared with
$6,044 at December 31, 2017. The decrease of $835 is mainly attributable to
decreases in short-term investments of $1,951 and accounts receivable of $138,
offset by increases in cash of $730, prepaids of $387 and investment tax credits
receivable of $137.
Cash
Cash totaled $2,321 as at June 30, 2018 representing an
increase of $730 compared with the balance of $1,591 as at December 31, 2017.
The increase in cash on hand relates to net cash used by operating activities of
$3,715, offset by net cash provided by financing activities of $3,099 and net
cash provided by investing activities of $1,454.
Accounts receivable
Accounts receivable totaled $485 as at June 30, 2018
representing a decrease of $138 compared with the balance of $623 as at December
31, 2017. The main reason for the decrease is related to the collection in 2018
of revenues accounted for as at December 31, 2017.
Prepaid expenses
As at June 30, 2018 prepaid expenses totaled $590 compared with
$203 as of December 31, 2017. The increase in prepaid expenses is attributable
to a payment of CAD$275 with respect to the Laboval acquisition (from which
CAD$200 is refundable if the acquisition does not take place), and an advance
payment for R&D materials in the amount of $250.
Investment tax credits receivable
R&D investment tax credits receivable totaled approximately
$451 as at June 30, 2018 compared with $314 as at December 31, 2017. The
increase is attributable to the accrual estimated and recorded for the first half of 2018.
31
Leasehold improvements and equipment
As at June 30, 2018, the net book value of leasehold
improvements and equipment amounted to $6,149, compared to $6,346 at December
31, 2017. In the six-month period ended June 30, 2018 additions to assets
totaled $454 and mainly comprised of $444 for manufacturing equipment, $5 for
office equipment and $5 for computer equipment.
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 June 30, 2018.
Security deposits in the amount of CAD$650 for the term loans and CAD$15 for
utilities were also recorded as at June 30, 2018.
Accounts payable and accrued liabilities
Accounts payable and accrued liabilities totaled $2,000 as at
June 30, 2018 compared with $1,305 as at December 31, 2017. The increase is
mainly attributable to the convertible debenture interest accrual in the amount
of $231, the accrual for DSUs to independent board of Director members in the
amount of $224 and payables related to R&D expenses incurred in the
six-month period ended June 30, 2018.
Long-term debt
Long-term debt totaled $2,275 as at June 30, 2018 (December 31,
2017 - $2,764). An amount of $1,845 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 $430 is attributable to a second loan secured by a
second ranking on all present and future property of the Company reimbursable in
monthly principal payments starting January 2017 to December 2021.
Convertible debentures
Convertible debentures totaled $5,094 as at June 30, 2018 as
compared to $5,199 as at December 31, 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 in July 2017 and August 2017. The convertible debentures
have been recorded as a liability. Total transactions costs in the amount of
CAD$1,237,000 were recorded against the liability. The accretion expense for the
six-month period ended June 30, 2018 amounts to CAD$185,000 ($Nil in 2017). The
interest on the convertible debentures as at June 30, 2018 amounts to
CAD$304,000 ($Nil in 2017) and is recorded in Financing and interest expense and
accrued liabilities. In July 2018, the accrued interest was paid in shares.
Convertible notes
Convertible notes totaled $997 as at June 30, 2018 as compared
to $Nil as at December 31, 2017. The convertible notes have been recorded as a
liability. Total transactions costs in the amount of $111 thousand were recorded
against the liability. The accretion expense for the period ended June 30, 2018
amounts to $22. The interest in the convertible notes as at June 30, 2018
amounts to $14 ($Nil in 2017) and is recorded in Financing and interest
expense.
32
Shareholders equity
As at June 30, 2018 we had accumulated a deficit of $25,453
compared with an accumulated deficit of $20,788 as at December 31, 2017. Total
assets amounted to $12,091 and shareholders equity totaled $1,675 as at June
30, 2018, compared with total assets and shareholders equity of $13,147 and
$3,829 respectively, as at December 31, 2017.
Capital stock
As at June 30, 2018 capital stock amounted to $0.705 (December
31, 2017: $0.670) . 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 $27,872 as at June 30, 2018,
as compared to $25,253 as at December 31, 2017. Additional paid in capital
increased by $2,619 from which $1,460 was the value of the common stock issued
in the May 2018 private placement offering, $549 came from proceeds from
exercise of warrants and stock options, $437 was the value of the warrants
issued in the May 2018 private placement, $123 from stock based compensation
attributable to the amortization of stock options granted to employees and
directors, and $50 was the value attributed to the Agents warrants in the May
2018 private placement transaction.
As of June 30, 2018, there are also 3,120,902 warrants
outstanding at an exercise price of $0.5646 which expire on December 15,
2018.
Taxation
As at December 31, 2017, the date of our latest annual tax
return, we had Canadian and provincial net operating losses of approximately
$9,560 (December 31, 2016: $7,585) and $10,052 (December 31, 2016: $7,763)
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 2037. A portion of the net operating losses may expire before
they can be utilized.
As at December 31, 2017, we had non-refundable tax credits of
$1,553 thousand (2016: $1,190 thousand) of which $8 thousand is expiring in
2026, $10 thousand is expiring in 2027, $180 thousand is expiring in 2028, $158
thousand is expiring in 2029, $134 thousand is expiring in 2030, $143 thousand
is expiring in 2031, $179 thousand is expiring in 2032 and $119 thousand is
expiring in 2033, $90 thousand expiring in 2034, $106 thousand is expiring in
2035, $146 thousand expiring in 2036 and $280 thousand expiring in 2037. We also
had undeducted research and development expenses of $7,532 thousand (2016:
$5,438 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.
33
Key items from the statement of cash flows
|
|
|
|
|
|
|
|
|
|
|
Percentag
e
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
Increase/
|
|
|
Increase/
|
|
|
|
2018
|
|
|
2017
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Activities
|
$
|
(3,701
|
)
|
$
|
(1,963
|
)
|
$
|
(1,738
|
)
|
|
(89%
|
)
|
Financing Activities
|
|
3,099
|
|
|
662
|
|
|
2,437
|
|
|
368%
|
|
Investing Activities
|
|
1,454
|
|
|
1,870
|
|
|
(416
|
)
|
|
(22%
|
)
|
Cash - end of period
|
|
2,321
|
|
|
1,175
|
|
|
1,146
|
|
|
98%
|
|
Statement of cash flows
Net cash used in operating activities was $3,701 for the
six-month period ended June 30, 2018, compared to $1,963 for the six-month
period ended June 30, 2017. For the six-month period ended June 30, 2018, net
cash used by operating activities consisted of a net loss of $4,665 (2017:
$1,178) before depreciation, accretion expense, stock-based compensation, DSU
expense and interest payable by issuance of common shares in the amount of
$1,122 (2017: $563) and a decrease in non-cash operating elements of working
capital of $158 (2017: $1,348).
The net cash provided by financing activities was $3,099 for
the six-month period ended June 30, 2018, compared to $662 provided in the same
period of the previous year. An amount of $3,004 derives from the proceeds of a
private placement (2017: $nil) and an amount of $549 derives from proceeds from
exercise of warrants and stock options (2017: $1,016) offset by repayment of
term loans for an amount of $372 (2017: $354) and the transaction costs related
to the private placement of $82 (2017: $nil).
Net cash provided by investing activities amounted to $1,454
for the six-month period ended June 30, 2018 compared to $1,870 in the same
period of 2017. The net cash provided by investing activities for the six-month
period ended June 30, 2018 relates to the redemption of short term investments
of $1,908 (2017: $2,325), offset by the purchase of fixed assets of $454 (2017:
$455).
The balance of cash as at June 30, 2018 amounted to $2,321,
compared to $1,175 as at June 30, 2017.
Subsequent Event
On July 3, 2018, the Company granted 100,000 options to
purchase common stock to a consultant. The stock options are exercisable at
$0.78 per share and vest over 2 years at 25% every six months.
Off-balance sheet arrangements
We have no off-balance sheet arrangements.