IntelGenx Technologies Corp. - Quarter Report: 2020 September (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 September 30, 2020

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:

110,259,653 shares of the issuer's common stock, par value $.00001 per share, were issued and outstanding as of November 12, 2020.

IntelGenx Technologies Corp.

Form 10-Q

TABLE OF CONTENTS

Consolidated Interim Financial Statements

September 30, 2020

(Expressed in U.S. Funds)

(Unaudited)

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:

IntelGenx Technologies Corp.

Consolidated Statement of Shareholders' Deficit

For the Period Ended September 30, 2020

(Expressed in Thousands of U.S. Dollars ($000's) Except Share and Per Share Data)

(Unaudited)

See accompanying notes

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

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

IntelGenx Technologies Corp.

Notes to Consolidated Interim Financial Statements
September 30, 2020
(Expressed in U.S. Funds)
(Unaudited)

1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal and recurring nature.

These financial statements should be read in conjunction with the audited consolidated financial statements at December 31, 2019. Operating results for the nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). This basis of accounting involves the application of accrual accounting and consequently, revenues and gains are recognized when earned, and expenses and losses are recognized when incurred. 

The consolidated financial statements include the accounts of the Company and its subsidiary companies. On consolidation, all inter-entity transactions and balances have been eliminated.

The financial statements are expressed in U.S. funds.

Management has performed an evaluation of the Company's activities through the date and time these financial statements were issued and concluded that there are no additional significant events requiring recognition or disclosure.

2. 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 monetization of future revenues.  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 September 30, 2020, the Company had cash and short-term investments totaling approximately $1,531.  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. 

On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus ("COVID-19") as a global pandemic, which continues to spread throughout Canada and around the world. On March 23, 2020, the government of Quebec ordered the closure of all non-essential businesses effective March 25, 2020. Because of the nature of its operations, the Company is only partially affected by this order. The Company is aware of the impact on its business as a result of COVID-19 but uncertain as to the extent of this impact on its consolidated financial statements. This partial disruption, even temporary, may impact our operations and overall business by delaying the progress of our research and development programs and production activities. The Company has received the Canada Emergency Wage Subsidy and has benefited from the Canada Emergency Commercial Rent Assistance program from its landlord. There is uncertainty as to the duration and hence the potential impact. As a result, we are unable to estimate the potential impact on our business as of the date of this filing.

2. Going Concern (Cont'd)

These conditions raise substantial doubt about the Company's ability to continue as a going concern.  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:

• Raise funding through the possible sale of the Company's 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.

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 discontinue some of its operations. The current COVID-19 pandemic could continue to have a negative impact on the stock market, including trading prices of the Company's shares and its ability to raise new capital.

The accompanying consolidated interim 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 consolidated interim 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.

3. Significant Accounting Policies

Revenue Recognition

The Company may enter into licensing and collaboration agreements for product development, licensing, supply and manufacturing for its product pipeline.  The terms of the agreements may include non-refundable signing and licensing fees, milestone payments and royalties on any product sales derived from collaborations. These contracts are analyzed to identify all performance obligations forming part of these contracts.  The transaction price of the contract is then determined. The transaction price is allocated between all performance obligations on a residual standalone selling price basis. The stand-alone selling price is estimated based on the comparable market prices, expected cost plus margin and the Company's historical experience.

3. Significant Accounting Policies (Cont'd)

Revenue is measured based on a consideration specified in a contract with a customer, and excludes any sales incentives and amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer.

Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue.

The following is a description of principal activities - separated by nature - from which the Company generates its revenue.

Research and Development Revenue

Revenues with corporate collaborators are recognized as the performance obligations are satisfied over time, and the related expenditures are incurred pursuant to the terms of the agreement. 

Licensing and Collaboration Arrangements

Licenses are considered to be right-to-use licenses. As such, the Company recognizes the licenses revenues at a point in time, upon granting the licenses.

Milestone payments are considered variable consideration. As such, the Company estimates variable consideration at the most likely amount to which we expect to be entitled. The estimated amounts are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved.  At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of such development milestones and any related constraint, and if necessary, adjusts its estimate of the overall transaction price.  Any such adjustments are recorded on a cumulative catch-up basis, which would affect license, research and other revenues in the period during which the adjustment is recognized.  The process of successfully achieving the criteria for the milestone payments is highly uncertain.  Consequently, there is significant risk that the Company may not earn all of the milestone payments for each of its contracts.

Royalties are typically calculated as a percentage of net sales realized by the Company's licensees of its products (including their sub-licensees), as specifically defined in each agreement.  The licensees' sales generally consist of revenues from product sales of the Company's product pipeline and net sales are determined by deducting the following: estimates for chargebacks, rebates, sales incentives and allowances, returns and losses and other customary deductions in each region where the Company has licensees.  Revenues arising from royalties are considered variable consideration. As such, the Company estimates variable consideration at the most likely amount to which we expect to be entitled. The estimated amounts are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved.

3. Significant Accounting Policies (Cont'd)

Leasehold Improvements and Equipment

Leasehold improvements and equipment are recorded at cost.  Provisions for depreciation are based on their estimated useful lives using the methods as follows:

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.

Leases

Leases are classified as either finance leases or operating leases.  A lease is classified as a finance lease if any one of the following criteria are met: the lease transfers ownership of the asset by the end of the lease term, the lease contains an option to purchase the asset that is reasonably certain to be exercised, the lease term is for a major part of the remaining useful life of the asset or the present value of the lease payments equals or exceeds substantially all of the fair value of the asset.  A lease is classified as an operating lease if it does not meet any one of these criteria.

Substantially all of the Company's operating leases are comprised of office space and property leases and the Company does not hold any finance leases.

For all leases at the lease commencement date, a right-of-use asset and a lease liability are recognized.  The right-of-use asset represents the right to use the leased asset for the lease term.  The lease liability represents the present value of the lease payments under the lease.

The right-of-use asset is initially measured at cost, which primarily comprises the initial amount of the lease liability, plus any initial costs incurred, consisting mainly of brokerage commissions, less any lease incentives received.  All right-of-use assets are reviewed for impairment.  The lease liability is initially measured the present value of the lease payments, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company's secured incremental borrowing rate for the same term as the underlying lease.

3. Significant Accounting Policies (Cont'd)

Leases (Cont'd)

In April 2020, the FASB issued a Staff Question-and-Answer ("Q&A") to clarify whether lease concessions related to the effects of COVID-19 require the  application  of  the  lease  modification  guidance  under  the  new  lease  standard,  which  the Company  adopted  on  January  1,  2019.  Under  the  new  leasing standard, an entity would have to determine, on a lease by lease basis, if a lease concession was the result of a new arrangement reached with the tenant, which would be accounted for under the lease modification framework, or if the lease concession was under the enforceable rights and  obligations  that  existed  in  the  original  lease,  which  would  be  accounted  for  outside  the  lease  modification  framework.  The Q&A provides entities with the option to elect to account for lease concessions as though the enforceable rights and obligations existed in the original lease as long as the total cash flows from the modified lease are substantially similar to the cash flows in the original lease. The Company has elected to use this option and, to  the  extent  that  a  rent  concession  is  granted  as  a  deferral  of  payments  but  total  payments  are  substantially  the  same,  the Company  will  account  for  the  concession as if no change has been made to the original lease

Lease payments included in the measurement of the lease liability comprise the following: the fixed noncancelable lease payments, payments for optional renewal periods where it is reasonably certain the renewal period will be exercised, and payments for early termination options unless it is reasonably certain the lease will not be terminated early.

Lease modifications result in remeasurement of the lease liability.

Lease expense for operating leases consists of the lease payments plus any initial direct costs, primarily brokerage commissions, and is recognized on a straight-line basis over the lease term.  Included in lease expense are any variable lease payments incurred in the period that were not included in the initial lease liability.

The Company has elected not to recognize right-of-use assets and lease liabilities for short-tern leases that have a term of 12 months or less.  The effect of short-term leases on our right-of-use asset and lease liability was not material.

Recent Accounting Pronouncements

ASU 2020-06-Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity

The FASB issued ASU 2020-06,1 which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity's own equity.

These amendments are effective for fiscal years beginning after December 15, 2021. The Company is currently evaluating the impact of this Statement on its consolidated financial statements.

3. Significant Accounting Policies (Cont'd)

ASU 2019-12 Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes

The FASB issued ASU 2019-12 which removes specific exceptions to the general principles in Topic 740 in Generally Accepted Accounting Principles (GAAP). It eliminates the need for an organization to analyze whether the following apply in a given period:

-Exception to the incremental approach for intraperiod tax allocation;

-Exceptions to accounting for basis differences when there are ownership changes in foreign investments; and

-Exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses.

The ASU also improves financial statement preparers' application of income tax-related guidance and simplifies GAAP for:

-Franchise taxes that are partially based on income;

-Transactions with a government that result in a step up in the tax basis of goodwill;

-Separate financial statements of legal entities that are not subject to tax; and

-Enacted changes in tax laws in interim periods.

These amendments are effective for fiscal years beginning after December 15, 2020. The Company is currently evaluating the impact of this Statement on its consolidated financial statements.

4. Inventory

Inventory as at September 30, 2020 consisted of raw materials in the amount of $273 (2019: $382) and finished goods in the mount of $6 (2019: $Nil).  An amount of $99 was recognized in Research and development expenses.

5. Leasehold Improvements and Equipment

From the balance of manufacturing equipment, an amount of $1,741 thousand (2019: $1,788 thousand) represents assets which are still under construction as at September 30, 2020 and are consequently not depreciated.

6. Bank Indebtedness

The Company's credit facility is subject to review annually and consists of an operating demand line of credit of up to CAD$250 thousand ($187 thousand) and corporate credits cards of up to CAD$75 thousand ($56 thousand) and $60 thousand, and foreign exchange contracts limited to CAD$425 thousand ($319 thousand). Borrowings under the operating demand line of credit bear interest at the Bank's prime lending rate plus 2%. The credit facility and term loan (see note 7) are secured by a first ranking movable hypothec on all present and future movable property of the Company for an amount of CAD$4,250,000 ($3,186,000) plus 20%, and a 50% guarantee by Export Development Canada, a Canadian Crown corporation export credit agency. The terms of the banking agreement require the Company to comply with certain debt service coverage and debt to net worth financial covenants on an annual basis at the end of the Company's fiscal year.  As at September 30, 2020, the Company has not drawn on its credit facility.

7.  Long-term Debt

The components of the Company's debt are as follows

The Company's term loan facility consists of a total of CAD$4 million ($3.00 million) bearing interest at the Bank's prime lending rate plus 2.50%, with monthly principal repayments of CAD$62 thousand ($46 thousand).  In April 2020, as a result of the global pandemic, the lender granted the Company an automatic six-month moratorium of capital repayments. The loan is secured by a second ranking on all present and future property of the Company. The term loan is subject to the same security and financial covenants as the bank indebtedness (see note 6).

The secured loan has a principal balance authorized of CAD$1 million ($750 thousand) bearing interest at prime plus 7.3%, reimbursable in monthly principal payments of CAD$17 thousand ($13 thousand) from January 2017 to March 2021.  In March 2020, as a result of the global pandemic, the lender granted the Company an automatic six-month moratorium of capital repayments. The loan is secured by a second ranking on all present and future property of the Company.  The terms of the banking agreement require the Company to comply with certain debt service coverage and debt to net worth financial covenants on an annual basis at the end of the Company's fiscal year. 

Principal repayments due in each of the next three years are as follows:

8.  Convertible Debentures

On July 12, 2017, the Company closed its previously announced prospectus offering (the "Offering") of convertible unsecured subordinated debentures of the Corporation (the "Debentures") for gross aggregate proceeds of CAD$6,838,000 ($5,126,000). Pursuant to the Offering, the Corporation issued an aggregate principal amount of CAD$6,838,000 ($5,126,000) of Debentures at a price of CAD$1,000 ($750) 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 interest may be paid in common shares at the option of the Corporation.  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 ($1.01) (the "Conversion Price") per common share of the Corporation ("Share"), being a conversion rate of approximately 740 Shares per CAD$1,000 ($750) principal amount of Debentures, subject to adjustment in certain events.

On August 8, 2017, the Company 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, pursuant to which it had raised additional gross proceeds of CAD$762,000 ($571,000).

Together with the principal amount of CAD$6,838,000 ($5,126,000) of Debentures issued on July 12, 2017, the Company issued a total aggregate principal amount of CAD$7,600,000 ($5,697,000) of Debentures at a price of CAD$1,000 ($750) per Debenture.

On June 25, 2020, the debentureholders approved the extension of the maturity date of the convertible debentures from June 30, 2020 to June 30, 2022 and the conversion price was reduced from CAD$1.35 ($1.01) to CAD$0.50 ($0.38).  This extension was accounted for as an extinguishment and the debenture were re-measured at fair value on June 30, 2020.  This re-measurement resulted in a gain on extinguishment in the amount of CAD$547,000 ($401,000) recognized in finance and interest income. 

The components of the convertible debentures subsequent to the extension are as follows:

8.  Convertible Debentures (Cont'd)

The convertible debentures have been recorded as a liability. The accretion expense for the nine-month period ended September 30, 2020 amounts to CAD$320,000 ($236,000), compared to CAD$326,000 ($245,000) for the comparative period in 2019.

The interest accrued on the convertible debentures for the nine-month period ended September 30, 2020 amounts to CAD$455 thousand ($336 thousand) and is recorded in financing and interest expense.  The interest on the convertible debentures for the nine-month period ended September 30, 2019 amounted to CAD$455 thousand ($342 thousand).

9.  Convertible Notes

On May 8, 2018, the Company closed its 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 $10,000 per Unit for gross proceeds of $3,200,000. A related party of the Company participated in the Offering and subscribed for an aggregate of two Units.

Each Unit is comprised of (i) 7,940 common shares of the Corporation ("Common Shares"), (ii) a $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 $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.

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.  Management has determined the value of the agents' warrants to be $50,000.

The proceeds of the Units are attributed to liability and equity components based on the fair value of each component as follows:

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 nine-month period ended September 30, 2020 amounts to $171 thousand (2019: $132 thousand). 

9.  Convertible Notes (Cont'd)

The components of the convertible notes are as follows:

The interest on the convertible notes for the nine-month period ended September 30, 2020 amounts to $72 thousand and is recorded in financing and interest expense (2019: $72 thousand).

10. Capital Stock

11. Additional Paid-In Capital

Public Offering

On February 11, 2020, IntelGenx announced the closing of 16,317,000 units (the "Units") at a price of CAD$0.50 ($0.37) for gross proceeds of CAD$8,158,500 ($6,116,000).

Each Unit consists of one share of common stock of the Company and one warrant entitling the holder to purchase one share of common stock of the Company at an exercise price of CAD$0.75 ($0.56) per share. The Warrants are exercisable immediately and will expire on the third anniversary of the date of their issuance.  Management has determined the value attributed to common stock is $3,912 thousand and $1,207 thousand for the warrants issued, resulting in an increase in additional paid-in-capital of $5,119 thousand. 

In connection with the Offering, the Company paid to the Agents a cash commission of approximately CAD$763,000 ($572,000) in the aggregate and issued non-transferable agents' warrants to the Agents, entitling the Agents to purchase 1,142,190 common shares at a price of CAD$0.75 ($0.56) per share until February 11, 2023.  Management has determined the value of the agents' warrants to be $125,000, resulting in an increase in additional paid-in-capital of $125,000.

11. Additional Paid-In Capital (Cont'd)

The proceeds of the Units are attributed to equity components based on the fair value of each component as follows:

Stock options

No options were granted during the nine-month period ended September 30, 2020.

In August 2020, the Board of directors amended the expiration time of 600,000 stock options granted to the President and CFO under the 2006 Stock Option Plan on July 20, 2020.  The new expiration date is July 19, 2025, the original exercise price of $0.58 and all other terms remain unchanged.  This extension resulted in the recognition of additional stock-based compensation expense of $31 thousand during the nine-month period ended September 30, 2020. 

No stock options were exercised during the nine-month period ended September 30, 2020.

On March 27, 2019, 100,000 options to purchase common stock were granted to an employee under the 2016 Stock Option Plan. The options have an exercise price of $0.69.  The options granted vest over a period of 2 years at a rate of 25% every six months and expire 10 years after the grant date.  The stock options were accounted for at their fair value, as determined by the Black-Scholes valuation model, of approximately $40 thousand.

During the nine-month period ended September 30, 2019 a total of 50,000 stock options were exercised for 50,000 common shares having a par value of $0 thousand in aggregate, for cash consideration of $21 thousand, resulting in an increase in additional paid-in capital of $21 thousand.

Compensation expenses for stock-based compensation of $172 thousand and $261 thousand were recorded during the nine-month periods ended September 30, 2020 and 2019, respectively. An amount of $140 thousand expensed in the nine-month period ended September 30, 2020 relates to stock options granted to employees and an amount of $32 thousand relates to stock options granted to consultants.  An amount of $225 thousand expensed in the nine-month period ended September 30, 2019 relates to stock options granted to employees and directors and an amount of $36 thousand relates to stock options granted to a consultant.  As at September 30, 2020, the Company has $17 thousand (2019 - $157 thousand) of unrecognized stock-based compensation.

Warrants

No warrants were exercised during the nine-month periods ended September 30, 2020 and 2019.

Deferred Share Units ("DSUs")

On March 27, 2019, 271,740 DSUs have been granted under the DSU Plan. 

No DSUs were granted in 2020. 

Performance and Restricted Share Units ("PRSUs")

No PRSUs were granted during the nine-month periods ended September 30, 2020 and 2019.

12. Revenues

The following table presents our revenues disaggregated by revenue source.  Sales and usage-based taxes are excluded from revenues:

 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 September 30, 2020, the aggregate amount of the transaction price allocated to the remaining performance obligation is $1,443 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 $4,128 in research and development milestone payments, approximately 60% of which is expected to be recognized in the next three years, with the remaining 40% expected in the two years following; up to $28,376 in commercial sales milestone payments which are wholly dependent on the marketing efforts of our development partners. In addition, the Company is entitled to receive royalties on potential sales.

13. Leases

Substantially all our operating lease right-of-use assets and operating lease liability represents leases for office space and property to conduct our business.

The operating lease expense for the nine-month period ended September 30, 2020 included in general and administrative expenses is $58 thousand. The cash outflows from operating leases for the nine-month period ended September 30, 2020 was $60 thousand. 

During the nine-month period ended September 30, 2020, the Company was granted a rent concession by the landlord due to the COVID-19 pandemic that resulted in a negative variable lease expense in the amount of $54 thousand. 

The weighted average remaining lease term and the weighted average discount rate for operating leases at    September 30, 2020 were 5.4 years and 10%, respectively.

The following table reconciles the undiscounted cash flows for the operating leases as at September 30, 2020 to the operating lease liabilities recorded on the balance sheet:

14.  Related Party Transactions

Included in management salaries for the nine-month period ended September 30, 2020 are $19 thousand (2019 - $56) for options granted to the Chief Executive Officer, $50 thousand (2019 - $40 thousand) for options granted to the President and Chief Financial Officer, $24 (2019 - $25) for options granted to the Vice President, Operations, $9 thousand (2019 - $24 thousand) for options granted to the Vice-President, Research and Development, $9 thousand (2019 - $24 thousand) for options granted to Vice-President, Business and Corporate Development under the 2016 Stock Option Plan.

Also included general and administrative expense for the nine-month period ended September 30, 2020 are director fees of $175 thousand (2019 - $174 thousand) and DSU recovery of $182 thousand (2019: expense of $214).

The above related party transactions have been measured at the exchange amount which is the amount of the consideration established and agreed to by the related parties.

15.  Basic and Diluted Loss Per Common Share

Basic and diluted loss per common share is calculated based on the weighted average number of shares outstanding during the period. The warrants, share-based compensation and convertible debenture and notes have been excluded from the calculation of diluted loss per share since they are anti-dilutive.

16.  Subsequent event

On October 15, 2020, the Company announced the closing of an offering by way of private placement to certain investors in the United States of $1.2 million principal amount of 8% convertible notes due October 15, 2024. The Notes will bear interest at a rate of 8% per annum, payable quarterly, and will be convertible into shares of common stock of the Company beginning 6 months after their issuance at a price of $0.18 per Share. The Company intends to use the proceeds of the Offering for working capital purposes. In connection with the Offering, the Company paid to an agent a cash commission of approximately $85,000 in the aggregate and issued non-transferable warrants to the agent, entitling the holder to purchase 482,000 common shares at a price of $0.18 per Share until October 15, 2022.

On October 23, 2020, the Company announced the closing of a second tranche of the Notes to certain investors in the United States of $557 thousand principal amount of 8% convertible notes due Oct 15, 2024. The Notes will bear interest at a rate of 8% per annum, payable quarterly, and will be convertible into shares of common stock of the Company beginning 6 months after their issuance at a price of $0.18 per Share. In connection with the Offering, the Company paid to an agent a cash commission of approximately $39,000 in the aggregate and issued non-transferable warrants to the agent, entitling the holder to purchase 222,800 common shares at a price of $0.18 per Share until October 15, 2022.

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 nine-month period ended September 30, 2020 and 2019.

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 Interim Financial Statements and Notes thereto. We also encourage you to refer to the Company's MD&A for the year ended December 31, 2019. In preparing this MD&A, we have taken into account information available to us up to November 12, 2020, 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, 2019 (the "2019 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 2019 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.

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 Canadian cannabis market with a non-prescription cannabis infused oral film expected to be launched in 2020.  In addition we are offering 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 leverage our proprietary drug delivery technologies and develop pharmaceutical products with tangible benefits for patients, 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 is based on three pillars: (1) out licensing commercial rights of our existing pipeline products, (2) partnering on contract development and manufacturing projects leveraging our various technology platforms, and (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,

• development of new drug delivery technologies

• entering the veterinary market with VetaFilm™

• repurposing existing drugs for new indications, and

• developing generic drugs where high technology barriers to entry exist in reproducing branded films.

We have established a state-of-the-art manufacturing facility for the future manufacture of our VersaFilm™ and VetaFilm™ 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.  We 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. 

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.

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.

Most recent key developments

On July 07, 2020, the Company announced that it had entered into a feasibility agreement with Cybin Corp., Canada's premier mushroom life sciences company focused on advancing psychedelic and nutraceutical-based products derived from fungi, for the development of an orally-dissolving film for the delivery of pharmaceutical-grade psilocybin.

On July 20, 2020, the Company announced that it and Tilray, Inc. had amended the exclusivity terms of their November 2018 license, development and supply agreement to allow for IntelGenx's co-development and commercialization of CBD products with additional partners. In consideration, IntelGenx shall pay a royalty to Tilray on all CBD products sold pursuant to this amendment. All other terms of the Agreement, including those pertaining to Tilray's exclusive, worldwide marketing and distribution rights for non-CBD cannabis-infused VersaFilm^®, remain unchanged.

On August 20, 2020, the Company announced that it had entered into a feasibility agreement with ATAI Life Sciences AG, a global biotech developing psychedelic and non-psychedelic compounds for a variety of mental health indications, for the development of novel formulations of pharmaceutical-grade psychedelics based on IntelGenx's polymeric film technologies.  Under the terms of the Agreement, IntelGenx will conduct pre-development and formulation development work to provide a Product prototype to ATAI for further clinical investigation. The agreement also contemplates a term sheet upon which the parties will enter into an exclusive, royalty-bearing license to commercialize the Product worldwide.

On August 27, 2020, the Company announced that it had granted Exeltis Healthcare, S.L. an exclusive license to manufacture and commercialize RIZAPORT®, a unique oral thin film for the treatment of acute migraines, in the European Union.  In July 2016, IntelGenx and Grupo Juste S.A.Q.F. (now Exeltis) entered into an exclusive license agreement for the commercialization of RIZAPORT® in Spain. Under the terms of the current agreement, IntelGenx will grant Exeltis an exclusive license to manufacture and commercialize RIZAPORT® in the EU. Exeltis will pay IntelGenx prespecified royalties on net RIZAPORT® sales in the EU. In addition, IntelGenx has a right of first refusal to manufacture the Product for the EU market.

Following the end of the quarter, more specifically on October 15, 2020, the Company closed the first tranche of an offering by way of private placement to certain investors in the United States of $1.2 million principal amount of 8% convertible notes due October 15, 2024. The Notes bears interest at a rate of 8% per annum, payable quarterly, and will be convertible into shares of common stock of the Company beginning 6 months after their issuance at a price of $0.18 per Share.  The Company intends to use the proceeds of the Offering for working capital purposes.  In connection with the Offering, the Company paid to an agent a cash commission of approximately $85,000 in the aggregate and issued non-transferable warrants to the agent, entitling the holder to purchase 482,000 common shares at a price of $0.18 per Share until October 15, 2022.

On October 23, 2020, the Company announced the closing of a second tranche of the Notes to certain investors in the United States of $557,000 principal amount of 8% convertible notes due Oct 15, 2024. The Notes will bear interest at a rate of 8% per annum, payable quarterly, and will be convertible into shares of common stock of the Company beginning 6 months after their issuance at a price of $0.18 per Share. In connection with the Offering, the Company paid to an agent a cash commission of approximately $39,000 in the aggregate and issued non-transferable warrants to the agent, entitling the holder to purchase 222,800 common shares at a price of $0.18 per Share until October 15, 2022.

Also following the end of the quarter, more specifically on October 21, 2020, the Company announced that it had entered into an amended and restated license agreement granting Tetra Bio-Pharma, a leader in cannabinoid-derived drug discovery and development, additional exclusive worldwide rights, including the right to manufacture, IntelGenx's Adversa® mucoadhesive delivery technology.  The Adversa® technology is designed to limit first-pass metabolism, improve bioavailability, enhance product stability and reduce gastro-intestinal exposure and side-effects. Tetra will use the Adversa® technology to develop a THC-based mucoadhesive film containing its PPP-002 (Dronabinol) drug candidate for the treatment of chemotherapy-induced nausea and vomiting.  Under the terms of the Agreement, Tetra is purchasing the worldwide Adversa® technology rights as it relates to its PPP-002 (Dronabinol) drug product candidate for three undisclosed milestone payments: 45% to be paid on November 15, 2020; 45% to be paid on March 1, 2021, and a final payment of 10% upon successful technology transfer. In addition, Tetra will pay IntelGenx a low single digit royalty on future net sales of Dronabinol mucoadhesive tablets.

Finally, on October 29, 2020, the Company announced that it had executed a binding letter of intent with Heritage Cannabis Holdings Corp., an international medical cannabis licensed producer based in Toronto, Canada, for the supply of filmstrip products containing CBD for the Canadian and Australian markets.  Pursuant to the LOI and subject to entering into a Definitive Supply Agreement and the satisfaction of customary closing conditions, IntelGenx will manufacture filmstrips containing 10 mg of CBD using its VersaFilm® technology, for distribution and sale in Canada and Australia. In addition to receiving a manufacturing margin, IntelGenx will also receive a double-digit royalty on the gross margin based on product sales. Heritage will supply CBD material for IntelGenx's filmstrip manufacture and supply in Canada and Australia on a non- and semi-exclusive basis, respectively. The LOI contemplates an option on future co-development of CBD and THC filmstrips using proprietary technology from both companies, under certain conditions.  The CBD Filmstrips will be produced at IntelGenx's manufacturing facility under Canadian GPP conditions and registered as a product for sale with Health Canada as a cannabis product governed by the Cannabis Act and with the Australian Department of Health's Therapeutic Goods Administration as a medicinal cannabis product governed by the Narcotic Drugs Act.

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, 2020 report an accumulated other comprehensive loss due to foreign currency translation adjustments of $865 primarily due to the fluctuations in the rates used to prepare our financial statements, $108 of which negatively impacted our comprehensive loss for the nine-month period ended September 30, 2020. The following Management Discussion and Analysis takes this into consideration whenever material.

Reconciliation of Comprehensive Loss to Adjusted Earnings (Loss) before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA (Loss))

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 / (deducting) 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.

Reconciliation of Non-US GAAP Financial Information

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

Adjusted EBITDA (Loss) improved by $1,102 for the three-month period ended September 30, 2020 to ($1,159) compared to ($2,261) for the three-month period ended September 30, 2019. The improvement in Adjusted EBITDA (Loss) of $1,102 for the three-month period ended September 30, 2020 is mainly attributable to an increase in revenues of $449 and a decrease in SG&A expenses of $672 before consideration of stock-based compensation, offset by an increase in R&D expenses of $19 before consideration of stock-based compensation. 

Adjusted EBITDA (Loss) improved by $1,811 for the nine-month period ended September 30, 2020 to ($4,583) compared to ($6,394) for the nine-month period ended September 30, 2019. The improvement in Adjusted EBITDA (Loss) of $1,811 for the nine-month period ended September 30, 2020 is mainly attributable to a decrease in R&D expenses of $561 before consideration of stock-based compensation, a decrease in SG&A expenses of $1,170 before consideration of stock-based compensation, and an increase in revenues of $80.

Results of operations for the three-month and nine-month periods ended September 30, 2020 compared with the three-month and nine-month periods ended September 30, 2019.

Revenue

Total revenues for the three-month period ended September 30, 2020 amounted to $510, representing an increase of $449 or 736% compared to $61 for the three-month period ended September 30, 2019.  Total revenues for the nine-month period ended September 30, 2020 amounted to $754, representing an increase of $80 or 12% compared to $674 for the nine-month period ended September 30, 2019.  The increase for the three-month period ended September 30, 2020 compared to the last year's corresponding period is mainly attributable to increases in Revenues from Licensing agreements of $308 and R&D revenues of $141. The increase for the nine-month period ended September 30, 2020 compared to the last year's corresponding period is mainly attributable to  increases in Revenues from Licensing agreements of $308 and R&D revenues of $144, offset by a decrease in R&D milestones revenues of $372.

Research and development ("R&D") expenses

R&D expenses for the three-month period ended September 30, 2020 amounted to $848, representing an increase of $6 or 1%, compared to $842 for the three-month period ended September 30, 2019. R&D expenses for the nine-month period ended September 30, 2020 amounted to $2,300, representing a decrease of $584 or 20%, compared to $2,884 for the nine-month period ended September 30, 2019.

The increase in R&D expenses for the three-month period ended September 30, 2020 is mainly attributable to an increase in lab supplies of $383 and a decrease in R&D investment tax credits of $57, offset by a decrease in study costs of $283, salary expenses of $109 (due to the Canada Emergency Wage Subsidy), patent costs of $23 and analytical costs of $17.  The decrease in R&D expenses for the nine-month period ended September 30, 2020 is mainly attributable decrease in study costs of $623, salary expenses of $162 (due to the Canada Emergency Wage Subsidy), analytical costs of $132, patent costs of $67, and consulting fees of $29, offset by an increase in Lab supplies of $301 and a decrease in R&D investment tax credits of $134. 

In the three-month period ended September 30, 2020 we recorded estimated Research and Development Tax Credits of $37, compared with $94 that was recorded in the same period of the previous year. In the nine-month period ended September 30, 2020 we recorded estimated Research and Development Tax Credits of $148, compared with $282 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, 2020 amounted to $869, representing a decrease of $691 or 44%, compared to $1,560 for the three-month period ended September 30, 2019. SG&A expenses for the nine-month period ended September 30, 2020 amounted to $3,209 representing a decrease of $1,236 or 28%, compared to $4,445 for the nine-month period ended September 30, 2019.

The decrease in SG&A expenses for the three-month period ended September 30, 2020 is mainly attributable to decreases in salaries and compensation expenses of $367 (mainly attributable to the revaluation of DSUs, the fact that there were no new DSUs granted in 2020 and due to the Canada Emergency Wage Subsidy), Laboval deposit write-off of $207 (in 2019), investor related expenses of $119, rent expense of $41 due to the Canadian government rent relief program related to the COVID-19 pandemic, and professional fees of $40, offset by an increase in insurance expense of $78.

The decrease in SG&A expenses for the nine-month period ended September 30, 2020 is mainly attributable to decreases in salaries and compensation expenses of $609 (mainly attributable to the revaluation of DSUs, the fact that there were no new DSUs granted in 2020 and due to the Canada Emergency Wage Subsidy), investor related expenses of $307, Laboval deposit write-off of $207 (in 2019), the variation of the foreign exchange expense due to the depreciation of the CA dollar vs the US currency of $122, rent expense of $73 due to the Canadian government rent relief program related to the COVID-19 pandemic, and professional fees of $48, offset by an increase in insurance expense of $213.

Depreciation of tangible assets

In the three-month period ended September 30, 2020 we recorded an expense of $182 for the depreciation of tangible assets, compared with an expense of $180 for the same period of the previous year.  In the nine-month period ended September 30, 2020 we recorded an expense of $536 for the depreciation of tangible assets, compared with an expense of $523 for the same period of the previous year. 

Share-based compensation expense, warrants and stock-based payments

In August 2020, the Board of directors amended the expiration time of 600,000 stock options granted to the President and CFO under the 2006 Stock Option Plan on July 20, 2020.  The new expiration date is July 19, 2025, the original exercise price of $0.58 and all other terms remain unchanged.  This extension resulted in the recognition of additional stock-based compensation expense of $31 during the nine-month period ended September 30, 2020. 

Share-based compensation warrants and share-based payments expense for the three-month period ended September 30, 2020 amounted to $48 compared to $80 for the three-month period ended September 30, 2019. Share-based compensation warrants and share-based payments expense for the nine-month period ended September 30, 2020 amounted to $172 compared to $261 for the nine-month period ended September 30, 2019.

We expensed approximately $39 in the three-month period ended September 30, 2020 for options granted to our employees in 2018 and 2019 under the 2016 Stock Option Plan and approximately $9 for options granted to a consultant in 2018, compared with $68 and $12, respectively that was expensed in the same period of the previous year.

We expensed approximately $139 in the nine-month period ended September 30, 2020 for options granted to our employees in 2018 and 2019 under the 2016 Stock Option Plan and approximately $33 for options granted to a consultant in 2018, compared with $225 and $36, respectively that was expensed in the same period of the previous year.

There remains approximately $17 in stock-based compensation to be expensed in fiscal 2020 and 2021, of which $12 relates to the issuance of options to our employees during 2018 to 2019 and $5 relates to the issuance of options to a consultant in 2018. 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, 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 monetization of future revenues.  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 September 30, 2020, the Company had cash and short-term investments totaling approximately $1,531. 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. 

On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus ("COVID-19") as a global pandemic, which continues to spread throughout Canada and around the world. On March 23, 2020, the government of Quebec ordered the closure of all non-essential businesses effective March 25, 2020. Because of the nature of its operations, the Company is only partially affected by this order. The Company is aware of the impact on its business as a result of COVID-19 but uncertain as to the extent of this impact on its consolidated financial statements. This partial disruption, even temporary, may impact our operations and overall business by delaying the progress of our research and development programs and production activities. The Company has received the Canada Emergency Wage Subsidy and has benefited from the Canada Emergency Commercial Rent Assistance program from its landlord. There is uncertainty as to the duration and hence the potential impact. As a result, we are unable to estimate the potential impact on our business as of the date of this filing.

These conditions raise substantial doubt about the Company's ability to continue as a going concern.  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:

• Raise funding through the possible sale of the Company's 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.

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 discontinue some of its operations. The current COVID-19 pandemic could continue to have a negative impact on the stock market, including trading prices of the Company's shares and its ability to raise new capital.

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 $3,501 as at September 30, 2020 compared with $3,220 at December 31, 2019. The increase of $281 is mainly attributable to increases in short-term investments of $614, accounts receivable of $598, investment tax credits receivable of $140 and prepaid expenses of $27, offset by a decrease in cash of $995 and inventory of $103.

Cash

Cash totaled $337 as at September 30, 2020 representing a decrease of $995 compared with the balance of $1,332 as at December 31, 2019. The decrease in cash on hand relates to net cash used in operating activities of $5,257 and cash used in investing activities of $731, offset by net cash provided by financing activities of $4,998.

Accounts receivable

Accounts receivable totaled $979 as at September 30, 2020 representing an increase of $598 compared with the balance of $381 as at December 31, 2019.  The increase related to the invoicing of revenues incurred in the three month period ended September 30, 2020.

Prepaid expenses

As at September 30, 2020 prepaid expenses totaled $197 compared with $170 as of December 31, 2019. The increase in prepaid expenses is attributable to advance payments made in September 2020 related to services to be provided in the remainder of the year.

Investment tax credits receivable

R&D investment tax credits receivable totaled approximately $515 as at September 30, 2020 compared with $375 as at December 31, 2019. The increase is attributable to the accrual estimated and recorded for the nine-month period ended in September 2020 and the fact that the 2019 amounts were not yet received.

Leasehold improvements and equipment

As at September 30, 2020, the net book value of leasehold improvements and equipment amounted to $5,752, compared to $6,365 at December 31, 2019. In the nine-month period ended September 30, 2020 additions to assets totaled $98 and mainly comprised of $59 for manufacturing equipment, $31 for leasehold improvements, $5 for computer equipment and $3 for lab and office equipment, offset by depreciation expense of $536 and variation of foreign exchange fluctuation.

Security deposit

A security deposit in the amount of CAD$300 ($225) 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 September 30, 2020.  Security deposits in the amount of CAD$662 ($496) for the term loans, CAD$16 ($12) for utilities and CAD$5 ($4) for Cannabis license were also recorded as at September 30, 2020.

Accounts payable and accrued liabilities

Accounts payable and accrued liabilities totaled $2,212 as at September 30, 2020 compared with $1,941 as at December 31, 2019. The increase is mainly attributable to an increase in accrued liabilities as at September 30, 2020.

Long-term debt

Long-term debt totaled $988 as at September 30, 2020 (December 31, 2019 - $1,197).  An amount of $838 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. In April 2020, as a result of the global pandemic, the lender granted the Company an automatic six-month moratorium of debt repayment.

An amount of $150 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 2018 to December 2021.  In March 2020, as a result of the global pandemic, the lender granted the Company an automatic six-month moratorium of debt repayment

Convertible debentures

Convertible debentures totaled $5,253 as at September 30, 2020 as compared to $5,642 as at December 31, 2019.  The Corporation issued a total aggregate principal amount of CAD$7,600,000 ($5,697,000) of debentures at a price of CAD$1,000 ($750) per debenture in July 2017 and August 2017. The convertible debentures have been recorded as a liability. On June 25, 2020, the debenture holders approved the extension of the maturity date of the convertible debentures from June 30, 2020 to June 30, 2022 and the conversion price was reduced from CAD$1.35 ($1.01) to CAD$0.50 ($0.38). 

Total transactions costs (including CAD$94,000 ($70,000) related to the extension) in the amount of CAD$1,331,000 ($998,000) were recorded against the liability.  The accretion expense for the nine-month period ended September 30, 2020 amounts to CAD$320,000 ($236,000) ((CAD$326,000, (245,000) in 2019)).  The interest on the convertible debentures as at September 30, 2020 amounts to CAD$455,000 ($336,000) compared to CAD$455,000 ($342,000) for the comparative period in 2019 and is recorded in Financing and interest expense.  A gain on debt extinguishment based on its present value calculation was recognized in finance and interest income in the amount of $410 in September 2020 which will be accreted until September 30, 2022.

Convertible notes

Convertible notes totaled $1,423 as at September 30, 2020 as compared to $1,255 as at December 31, 2019. 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 nine-month period ended September 30, 2020 amounts to $171 compared to $132 for the comparative period in 2019.  The interest on the convertible notes for the nine-month period ended September 30, 2020 amounts to $72 ($72 in 2019) and is recorded in Financing and interest expense. 

Shareholders' equity

As at September 30, 2020 we had accumulated a deficit of $47,274 compared with an accumulated deficit of $41,507 as at December 31, 2019. Total assets amounted to $10,593 and shareholders' equity totaled ($87) as at September 30, 2020, compared with total assets and shareholders' equity of $11,020 and $293 respectively, as at December 31, 2019.

Capital stock

As at September 30, 2020 capital stock amounted to $1.102 (December 31, 2019: $0.939). 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 $48,051 as at September 30, 2020, as compared to $42,635 as at December 31, 2019. Additional paid in capital increased by $5,368 from which $3,912 was the value of the common stock issued in the February 2020 public offering, $1,207 was the value of the warrants issued in the February 2020 public offering, $125 was the value attributed to the Agents' warrants in the February 2020 public offering transaction, and $172 from stock based compensation attributable to the amortization of stock options granted to employees and consultants.

Taxation

As at December 31, 2019, the date of our latest annual tax return, we had Canadian and provincial net operating losses of approximately $23,101 (December 31, 2018: $14,934) and $25,264 (December 31, 2018: $16,498) 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 2026 and 2039. A portion of the net operating losses may expire before they can be utilized.

As at December 31, 2019, we had non-refundable tax credits of $2,486 thousand (2018: $1,981 thousand) of which $8 thousand is expiring in 2026, $10 thousand is expiring in 2027, $174 thousand is expiring in 2028, $152 thousand is expiring in 2029, $130 thousand is expiring in 2030, $138 thousand is expiring in 2031, $173 thousand is expiring in 2032, $115 thousand is expiring in 2033, $87 thousand expiring in 2034, $102 thousand is expiring in 2035, $141 thousand expiring in 2036,  $270 thousand is expiring in 2037, $582 thousand expiring in 2038 and $404 thousand expiring in 2039 and undeducted research and development expenses of $14,282 thousand (2018: $10,663 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 $5,257 for the nine-month period ended September 30, 2020, compared to $6,108 for the nine-month period ended September 30, 2019. For the nine-month period ended September 30, 2020, net cash used by operating activities consisted of a net loss of $5,767 (2019: $7,999) before depreciation, accretion expense, stock-based compensation, DSU expense, gain on debt extinguishment and lease non-cash expense in the amount of $529 (2019: $1,382) and a decrease in non-cash operating elements of working capital of $19 (2019: $509 increase).

The net cash provided by financing activities was $4,998 for the nine-month period ended September 30, 2020, compared to net cash used in financing activities of $512 in the same period of the previous year.

An amount of $5,564 derives from the proceeds from public offering (2019: $Nil) and an amount of $Nil derives from proceeds from exercise of warrants and stock options (2019: $21) offset by repayment of term loans for an amount of $177 (2019: $533), the transaction costs related to the public offering of $320 (2019: $Nil) and the transaction costs related to the debt modification of $69 (2019: $Nil).

Net cash used investing activities amounted to $731 for the nine-month period ended September 30, 2020 compared to net cash provided from investing activities of $3,323 in the same period of 2019. The net cash used investing activities for the nine-month period ended September 30, 2020 relates to the acquisition of short-term investments of $4,532 (2019: $1,469) and the purchase of leasehold improvements and equipment of $98 (2019: $398), offset by the redemption of short-term investments of $3,899 (2019: $5,190).

The balance of cash as at September 30, 2020 amounted to $337, compared to $3,728 as at September 30, 2019. 

Subsequent event

On October 15, 2020, the Company announced the closing of an offering by way of private placement to certain investors in the United States of $1.2 million principal amount of 8% convertible notes due October 15, 2024. The Notes will bear interest at a rate of 8% per annum, payable quarterly, and will be convertible into shares of common stock of the Company beginning 6 months after their issuance at a price of $0.18 per Share. The Company intends to use the proceeds of the Offering for working capital purposes. In connection with the Offering, the Company paid to an agent a cash commission of approximately $85,000 in the aggregate and issued non-transferable warrants to the agent, entitling the holder to purchase 482,000 common shares at a price of $0.18 per Share until October 15, 2022.

On October 23, 2020, the Company announced the closing of a second tranche of the Notes to certain investors in the United States of $557,000 principal amount of 8% convertible notes due Oct 15, 2024. The Notes will bear interest at a rate of 8% per annum, payable quarterly, and will be convertible into shares of common stock of the Company beginning 6 months after their issuance at a price of $0.18 per Share. In connection with the Offering, the Company paid to an agent a cash commission of approximately $39,000 in the aggregate and issued non-transferable warrants to the agent, entitling the holder to purchase 222,800 common shares at a price of $0.18 per Share until October 15, 2022.

Off-balance sheet arrangements

We have no off-balance sheet arrangements.

Item 3.  Controls and Procedures.

     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

Item 1.  Legal Proceedings

              This Item is not applicable

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

              This Item is not applicable.

Item 3.  Defaults Upon Senior Securities

              This Item is not applicable.

Item 4.  (Reserved)

Item 5.  Other Information

              This Item is not applicable.

Item 6.  Exhibits

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.