IntelGenx Technologies Corp. - Quarter Report: 2018 March (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018

or

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to ________

Commission File Number 000-31187

INTELGENX TECHNOLOGIES CORP.
(Exact name of small business issuer as specified in its charter)

6420 Abrams, Ville Saint Laurent, Quebec H4S 1Y2, Canada
(Address of principal executive offices)

(514) 331-7440
(Issuer's telephone number)
(Former Name, former Address, if changed since last report)

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]     No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, “non-accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDS DURING THE PRECEDING FIVE YEARS

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

Yes [  ]     No [  ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

APPLICABLE TO CORPORATE ISSUERS:

70,026,128 shares of the issuer’s common stock, par value $.00001 per share, were issued and outstanding as of May 9, 2018.

IntelGenx Technologies Corp.
Form 10-Q

TABLE OF CONTENTS

IntelGenx Technologies Corp.

Consolidated Interim Financial Statements
March 31, 2018
(Expressed in U.S. Funds)
(Unaudited)

1

IntelGenx Technologies Corp.

Consolidated Balance Sheet
(Expressed in Thousands of U.S. Dollars ($000’s) Except Share and Per Share Data)
(Unaudited)

See accompanying notes

Approved on Behalf of the Board:

2

IntelGenx Technologies Corp.

Consolidated Statement of Shareholders' Equity
For the Period Ended March 31, 2018
(Expressed in Thousands of U.S. Dollars ($000’s) Except Share and Per Share Data)
(Unaudited)

See accompanying notes

3

IntelGenx Technologies Corp.

Consolidated Statement of Comprehensive Loss
(Expressed in Thousands of U.S. Dollars ($000’s) Except Share and Per Share Data)
(Unaudited)

See accompanying notes

4

IntelGenx Technologies Corp.

Consolidated Statement of Cash Flows
(Expressed in thousands of U.S. Dollars ($000’s) Except Share and Per Share Data)
(Unaudited)

See accompanying notes

5

IntelGenx Technologies Corp.

Notes to Consolidated Interim Financial Statements
March 31, 2018
(Expressed in U.S. Funds)
(Unaudited)

6

IntelGenx Technologies Corp.

Notes to Consolidated Interim Financial Statements
March 31, 2018
(Expressed in U.S. Funds)
(Unaudited)

7

IntelGenx Technologies Corp.

Notes to Consolidated Interim Financial Statements
March 31, 2018
(Expressed in U.S. Funds)
(Unaudited)

8

IntelGenx Technologies Corp.

Notes to Consolidated Interim Financial Statements
March 31, 2018
(Expressed in U.S. Funds)
(Unaudited)

9

IntelGenx Technologies Corp.

Notes to Consolidated Interim Financial Statements
March 31, 2018
(Expressed in U.S. Funds)
(Unaudited)

10

IntelGenx Technologies Corp.

Notes to Consolidated Interim Financial Statements
March 31, 2018
(Expressed in U.S. Funds)
(Unaudited)

Upon retirement or disposal, the cost of the asset disposed of and the related accumulated depreciation are removed from the accounts and any gain or loss is reflected in income. Expenditures for repair and maintenance are expensed as incurred.

ASU 2018-02 – Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

The FASB issued ASU 2018-02 which provides financial statement preparers with an option to reclassify stranded tax effects within AOCI to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. These amendments are effective for fiscal years beginning after December 15, 2018. The Company is currently evaluating the impact of the 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.

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.

11

IntelGenx Technologies Corp.

Notes to Consolidated Interim Financial Statements
March 31, 2018
(Expressed in U.S. Funds)
(Unaudited)

12

IntelGenx Technologies Corp.

Notes to Consolidated Interim Financial Statements
March 31, 2018
(Expressed in U.S. Funds)
(Unaudited)

13

IntelGenx Technologies Corp.

Notes to Consolidated Interim Financial Statements
March 31, 2018
(Expressed in U.S. Funds)
(Unaudited)

IntelGenx Technologies Corp.

Notes to Consolidated Interim Financial Statements
March 31, 2018
(Expressed in U.S. Funds)
(Unaudited)

15

IntelGenx Technologies Corp.

Notes to Consolidated Interim Financial Statements
March 31, 2018
(Expressed in U.S. Funds)
(Unaudited)

The following table presents our revenues disaggregated by timing of recognition:

The following table presents our revenues disaggregated by geography, based on the billing addresses of our customers:

Remaining performance obligations

As at March 31, 2018, the aggregate amount of the transaction price allocated to the remaining performance obligation is $562 representing research and development agreements, the majority of which is expected to be recognized in the next twelve months. The Company is also eligible to receive up to $4,051 in research and development milestone payments; up to $28,751 in commercial sales milestone payments. In addition, the Company is entitled to receive royalties on potential sales.

16

IntelGenx Technologies Corp.

Notes to Consolidated Interim Financial Statements
March 31, 2018
(Expressed in U.S. Funds)
(Unaudited)

17

IntelGenx Technologies Corp.

Notes to Consolidated Interim Financial Statements
March 31, 2018
(Expressed in U.S. Funds)
(Unaudited)

18

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 periods ended March 31, 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 Company’s 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 May 10, 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 “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 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 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.

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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. 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:

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.

With our current manufacturing equipment, we are only able to manufacture products that do not contain flammable organic solvents. Since several of our film products are solvent-based, we are in the process of acquiring manufacturing equipment that is capable of handling organic solvents, and we are expanding our manufacturing facility in order to create the space required for this new manufacturing equipment.

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.

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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 second half of 2018.

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.

21

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 signed agreements in the amount of Euro1,911 thousand with three suppliers with respect to equipment for solvent film manufacturing. As at March 31, 2018 an amount of Euro988 thousand has been paid.

Most recent key developments

On January 09, 2018 the Company and its President and Chief Executive Officer, Dr. Horst Zerbe presented an overview of the Company’s business at the 10 ^th Annual Biotech Showcase conference at the Hilton San Francisco Union Square Hotel. Andre Godin, Executive Vice President and Chief Financial Officer, and Dr. Dana Matzen, Vice President Business and Corporate Development, from the Company were also attending one-on-one meetings in San Francisco from January 8 through 10.

On January 24, 2018 the Company announced that it had initiated the Phase 2a proof of concept Montelukast VersaFilm clinical trial in Alzheimer’s patients, following clearance of the Clinical Trial Application by Health Canada. IntelGenx retained the services of Cogstate and JSS Medical Research as the Contract Research Organizations to support the Montelukast VersaFilm ^TM study. Cogstate is currently preparing cognitive testing materials and training for clinical staff and physicians to ensure proper administration of the cognitive testing. Once completed, it will also proceed with data analysis. JSS will monitor clinical trial sites to ensure protocol adherence. Patient screening is expected to begin in Q3 2018. The Phase 2a Montelukast Versafilm clinical trial is a randomized, double-blind, placebo controlled POC study that will enroll approximately 70 subjects with mild to moderate Alzheimer’s Disease across eight Canadian research sites. The primary study objectives will be to evaluate the safety, feasibility, tolerability, and efficacy of Montelukast buccal film following daily dosing for 26 weeks. IntelGenx is working to repurpose Montelukast as a therapeutic to treat neurodegenerative diseases by reformulating the drug into an oral film-based product. Montelukast has been approved by the U.S. Food and Drug Administration in 1997 for the treatment of asthma and seasonal allergic rhinitis. IntelGenx ' proprietary VersaFilm technology is especially suited for special needs patient populations, and the Montelukast VersaFilm product therefore offers many distinct advantages over tablets for Alzheimer’s Disease patients, including the avoidance and minimization of first-pass-effects, ease of administration, improved API bioavailability, lower dosing and toxicity, better acceptability and improved compliance. In a recent Phase 1 study, IntelGenx demonstrated that an oral film formulation of Montelukast is safe and tolerable in healthy subjects, reduces the first-pass-effect and has a 52% higher bioavailability compared to the regular Montelukast tablet, demonstrating a clear advantage of delivering Montelukast via film. IntelGenx ' oral film also crossed the blood-brain barrier, an essential feature for treating degenerative brain diseases.

On March 19, 2018 the Company announced that IntelGenx Corp., the Company’s operating subsidiary, had entered into an agreement to acquire pharmaceutical consulting firm Laboval for total cash consideration of up to CA$5 million, subject to the acquired business achieving certain revenue milestones over the two years following closing. The Company intended to finance the Acquisition and related fees and costs by way of private placement equity financing. IntelGenx Corp.’s obligation to close the Acquisition was conditional upon the Company raising at least US$10 million under the Offering. Proceeds raised in addition to those required for the Acquisition would have been used to finance the Company’s Montelukast Phase 2b clinical trial as well as working capital. Laboval, based in Montreal, Quebec, is engaged in the business of pharmaceutical product testing, offering a comprehensive range of quality control testing for finished products and raw materials, as well as in-process testing, stability studies, forced degradation and regulatory services to the pharmaceutical, nutraceutical, natural health, cosmetics and healthcare sectors. Laboval holds all necessary licenses and approvals of the U.S. Food and Drug Administration and Health Canada to carry on its business. Under the purchase agreement, approximately 40% of the purchase price would have been paid by the Company as of the closing date. Additional consideration in the form of an earn-out of up to 60% of the purchase price would have been payable over the two-year post-closing period, based on the achievement of certain revenue objectives for the acquired business. The closing of the Acquisition was expected to occur on or about March 30, 2018 and was subject to the Company raising at least US$10 million under the Offering and certain other customary closing conditions, including the approval of the TSX Venture Exchange.

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On March 27, 2018 the Company announced that, due to market conditions, it will not be proceeding with the private placement previously announced on March 20, 2018. As a result, IntelGenx Corp., the Company’s operating subsidiary, will not be proceeding with the previously announced proposed acquisition of LaboVal Inc., which was subject to the Company obtaining satisfactory financing.

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, 2018 report an accumulated other comprehensive loss due mainly to foreign currency translation adjustments of $714 due to the fluctuations in the rates used to prepare our financial statements, $72 of which negatively impacted our comprehensive loss for the three-month period ended March 31, 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 Company’s 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 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.

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Reconciliation of Non-U.S.-GAAP Financial Information

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

Adjusted EBITDA decreased by $1,671 for the three-month period ended March 31, 2018 to ($1,788) compared to ($117) for the three-month period ended March 31, 2017. The decrease in Adjusted EBITDA of $1,671 for the three–month period ended March 31, 2018 is mainly attributable to a decrease in revenues of $1,114, an increase in SG&A expenses of $497 before consideration of stock-based compensation and an increase in R&D expenses of $152 before consideration of stock-based compensation.

Results of operations for the three-month period ended March 31, 2018 compared with the three-month period ended March 31, 2017.

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Revenue

Total revenues for the three-month period ended March 31, 2018 amounted to $239, representing an decrease of $1,114 or 82% compared to $1,353 for the three-month period ended March 31, 2017. The decrease for the three-month period ended March 31, 2018 compared to the last year’s corresponding period is mainly attributable to the decrease in upfront revenues of $408 and deferred revenues on monetization of $922 offset by an increase in R&D revenues of $218.

Cost of royalty and license revenue

We recorded $Nil for the cost of royalty and license revenue in the three-month period ended March 31, 2018 compared with $92 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 quarter of 2018.

Research and development (“R&D”) expenses

R&D expenses for the three-month period ended March 31, 2018 amounted to $797, representing an increase of $153 or 24%, compared to $644 for the three-month period ended March 31, 2017.

The increase in R&D expenses for the three-month period ended March 31, 2018 is mainly attributable to increases in study costs of $160.

In the three-month period ended March 31, 2018 we recorded estimated Research and Development Tax Credits and refunds of $79, compared with $30 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, 2018 amounted to $1,280, representing an increase of $376 or 41%, compared to $904 for the three-month period ended March 31, 2017.

The increase in SG&A expenses for the three-month period ended March 31, 2018 is mainly attributable to an increase in professional fees of $288 and an increase in manufacturing expenses of $103. The increase in professional fees were mainly related to costs attributable to the aborted capital raise as well as the Laboval acquisition. These expenses are deemed to be non-recurring in nature.

Depreciation of tangible assets

In the three-month period ended March 31, 2018 we recorded an expense of $183 for the depreciation of tangible assets, compared with an expense of $170 thousand for the same period of the previous year.

25

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, 2018 amounted to $50 compared to $170 for the three-month period ended March 31, 2017.

We expensed approximately $45 in the three-month period ended March 31, 2018 for options granted to our employees in 2016, 2017 and 2018 under the 2016 Stock Option Plans, approximately $3 for options granted to non-employee directors in 2016 and 2017, and $2 for options granted to a consultant in 2016 compared with $49, $119 and $2 respectively that was expensed in the same period of the previous year.

There remains approximately $181 in stock based compensation to be expensed in fiscal 2018 and 2019, of which $178 relates to the issuance of options to our employees and directors during 2015 to 2017 and $3 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

Going Concern

The Company has financed its operations to date primarily through public offerings of its common stock, 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 March 31, 2018, the Company had cash and short-term investments totaling approximately $2,383. 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 Company’s ability to continue as a going concern.

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Management’s 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 Company’s control:

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 $3,796 as at March 31, 2018 compared with $6,044 at December 31, 2017. The decrease of $2,248 is mainly attributable to a decrease in cash of approximately $973 and a decrease in short-term investments of approximately $1,548, offset by an increase in prepaid expenses of approximately $172.

Cash

Cash totaled $618 as at March 31, 2018 representing a decrease of $973 compared with the balance of $1,591 as at December 31, 2017. The decrease in cash on hand relates to net cash used by operating activities of $2,191 offset by net cash provided by investing activities of $1,077 and net cash provided by financing activities of $208.

Accounts receivable

Accounts receivable totaled $655 as at March 31, 2018 representing an increase of $32 compared with the balance of $623 as at December 31, 2017.

Prepaid expenses

As at March 31, 2018 prepaid expenses totaled $375 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), offset by the advance payments in December 2017 of certain expenses that relate to services to be provided in the remainder of the year.

Investment tax credits receivable

R&D investment tax credits receivable totaled approximately $383 as at March 31, 2018 compared with $314 as at December 31, 2017. The increase is attributable to the accrual estimated and recorded for the first quarter of 2018.

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Leasehold improvements and equipment

As at March 31, 2018, the net book value of leasehold improvements and equipment amounted to $6,433, compared to $6,346 at December 31, 2017. In the three-month period ended March 31, 2018 additions to assets totaled $438 and mainly comprised of $428 for manufacturing equipment, $5 for computer equipment, and $5 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, 2018

Accounts payable and accrued liabilities

Accounts payable and accrued liabilities totaled $1,345 as at March 31, 2018 compared with $1,305 as at December 31, 2017.

Long-term debt

Long-term debt totaled $2,507 as at March 31, 2018 (December 31, 2017 - $2,764). An amount of $2,029 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 $478 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.

Convertible debentures

Convertible debentures totaled $5,131 as at March 31, 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 three-month period ended March 31, 2018 amounts to CAD$93,000 ($Nil in 2017). The accrued interest on the convertible debentures as at March 31, 2018 amounts to CAD$150,000 ($Nil in 2017) and is recorded in Financing and interest expense.

Shareholders’ equity

As at March 31, 2018 we had accumulated a deficit of $23,052 compared with an accumulated deficit of $20,788 as at December 31, 2017. Total assets amounted to $10,966 and shareholders’ equity totaled $1,933 as at March 31, 2018, compared with total assets and shareholders’ equity of $13,147 and $3,829 respectively, as at December 31, 2017.

Capital stock

As at March 31, 2018 capital stock amounted to $0.677 (December 31, 2017: $0.670) . Capital stock is disclosed at its par value with the excess of proceeds shown in Additional Paid-in-Capital.

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Additional paid-in-capital

Additional paid-in capital totaled $25,698 as at March 31, 2018, as compared to $25,253 as at December 31, 2017. Additional paid in capital increased by $445 from which $395 came from proceeds from exercise of warrants and $50 from stock based compensation attributable to the amortization of stock options granted to employees and directors.

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.

Key items from the statement of cash flows

Statement of cash flows

Net cash used in operating activities was $2,191 for the three-month period ended March 31, 2018, compared to $523 for the three-month period ended March 31, 2017. For the three-month period ended March 31, 2018, net cash used by operating activities consisted of a net loss of $2,264 (2017: $512) before depreciation, stock-based compensation and accretion expense in the amount of $306 (2017: $340) and a decrease in non-cash operating elements of working capital of $233 (2017: $351).

The net cash provided by financing activities was $208 for the three-month period ended March 31, 2018, compared to $234 provided in the same period of the previous year. An amount of $395 (2017: $337) derives from proceeds from exercise of warrants and stock options offset by repayment of term loans for an amount of $187 (2017: $103).

Net cash provided by investing activities amounted to $1,077 for the three-month period ended March 31, 2018 compared to $78 in the same period of 2017. The net cash provided by investing activities for the three-month period ended March 31, 2018 relates to the redemption of short term investments of $1,515 (2017: $300), offset by the purchase of fixed assets of $438 (2017: $222).

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The balance of cash as at March 31, 2018 amounted to $618, compared to $300 at March 31, 2017.

Subsequent event

On April 10, 2018, the Company granted 275,000 options to purchase common stock to 5 employees. The stock options are exercisable at $0.66 per share and vest over 2 years at 25% every six months.

On May 8, 2018, the Company announced the closing of the previously announced offering by way of private placement (the “Offering”). In connection with the Offering, the Company issued 320 units (the “Units”) at a subscription price of U.S.$10,000 per Unit for gross proceeds of U.S.$3,200,000. A related party of the Company participated in the Offering and subscribed for an aggregate of two Units. 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 (“Common Shares”), (ii) a U.S.$5,000 convertible 6% note (a “Note”), and (iii) 7,690 warrants to purchase common shares of the Corporation (“Warrants”). 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 U.S.$0.80 per Common Share. Each Warrant entitles its holder to purchase one Common Share at a price of U.S.$0.80 per Common Share until June 1, 2021.

In connection with the Offering, the Company paid to the Agents a cash commission of approximately U.S.$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 U.S.$0.80 per share until June 1, 2021.

Off-balance sheet arrangements

We have no off-balance sheet arrangements.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of management, including our chief executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Based upon that evaluation, our chief executive officer and principal financial officer concluded that our disclosure controls and procedures are effective to cause the material information required to be disclosed by us in the reports that we file or submit under the Exchange Act to be recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. There have been no significant changes in our internal controls or in other factors which could significantly affect internal controls subsequent to the date we carried out our evaluation.

PART II

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SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

INTELGENX TECHNOLOGIES CORP.

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