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| 1. |
Basis of Presentation |
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IntelGenx Technologies Corp. (“IntelGenx” or the “Company”) prepares its financial statements in accordance with accounting principles generally accepted in the United States of America (“USA”). 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. |
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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. |
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The financial statements are expressed in U.S. funds. |
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| 2. |
Nature of Business |
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IntelGenx was incorporated in the State of Delaware as Big Flash Corp. on July 27, 1999. On April 28, 2006 Big Flash Corp. completed, through the Canadian holding corporation, the acquisition of IntelGenx Corp., a company incorporated in Canada on June 15, 2003. |
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IntelGenx is a pharmaceutical company focused on the development of novel oral immediate-release and controlled-release products for the pharmaceutical market. More recently, the Company has made the strategic decision to enter the oral film market and is in the process of implementing commercial oral film manufacturing capability. The Company’s product development efforts are based upon three proprietary delivery platforms, including an immediate release oral film “VersaFilm™”, a mucoadhesive tablet “AdVersa™”, and a multilayer controlled release tablet “VersaTab™”. The Company has an aggressive product development initiative that primarily focuses on addressing unmet market needs and focuses on utilization of the U.S. Food and Drug Administration’s (“FDA”) 505(b)(2) approval process to obtain more timely and efficient approval of new formulations of previously approved products. |
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The Company’s product pipeline currently consists of 14 products in various stages of development from inception through commercialization, including products for the treatment of major depressive disorder, opioid dependence, hypertension, erectile dysfunction, migraine, schizophrenia, idiopathic pulmonary fibrosis, and pain management. Of the products currently under development, 10 utilize the VersaFilm™ technology, 3 utilize the VersaTab™ technology, and one utilizes the AdVersa™ technology. |
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| 3. | Adoption of New Accounting Standards |
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The FASB issued Update 2015-16, Business Combinations, which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in this Update require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this Update require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The amendments in this Update apply to all entities that have reported provisional amounts for items in a business combination for which the accounting is incomplete by the end of the reporting period in which the combination occurs and during the measurement period have an adjustment to provisional amounts recognized. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments in this Update should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this Update with earlier application permitted for financial statements that have not yet been issued. The adoption of this Statement did not have a material effect on the Company’s financial position or results of operations. |
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The FASB issued amendments to ASU 2015-03, Interest – Imputation of Interest, which are intended to simplify the presentation of debt issuance costs. These amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The amendments are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The adoption of this Statement did not have a material effect on the Company’s financial position or results of operations. |
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The FASB issued amendments to ASU 2015-01, Income Statement – Extraordinary and Unusual Items, eliminating from U.S. GAAP the concept of extraordinary items. Subtopic 225-20, Income Statement - Extraordinary and Unusual Items, required that an entity separately classify, present and disclose extraordinary events and transactions. This ASU will also align more closely U.S. GAAP income statement presentation guidance with IAS 1, Presentation of Financial Statements, which prohibits the presentation and disclosure of extraordinary items. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The adoption of this Statement did not have a material effect on the Company’s financial position or results of operations. |
The FASB issued ASU No. 2014-12, Compensation – Stock Compensation, which requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718, Compensation – Stock Compensation, as it relates to awards with performance conditions that affect vesting to account for such awards. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. The adoption of this Statement did not have a material effect on the Company’s financial position or results of operations.
The FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. This ASU provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes. For public business entities, the amendments in this ASU are effective for fiscal years ending December 31, 2016, including interim periods within fiscal years beginning after December 15, 2016. The adoption of this Statement did not have a material effect on the Company’s financial position or results of operations.
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| 4. |
Summary of Significant Accounting Policies |
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Revenue Recognition |
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The Company recognizes revenue from research and development contracts as the contracted services are performed or when milestones are achieved, recorded as other revenue, in accordance with the terms of the specific agreements and when collection of the payment is reasonably assured. In addition, the performance criteria for the achievement of milestones are met if substantive effort was required to achieve the milestone and the amount of the milestone payment appears reasonably commensurate with the effort expended. Amounts received in advance of the recognition criteria being met, if any, are included in deferred income. |
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IntelGenx has license agreements that specify that certain royalties are earned by the Company on sales of licensed products in the licensed territories. Royalty revenue is recognized on an accrual basis in accordance with the relevant license agreement. |
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For the year ended December 31, 2016, the Company recognized royalty revenue earned under a licensing agreement totaling $1,041 thousand compared to $981 thousand in 2015. |
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For the year ended December 31, 2016, the Company recognized revenues as a result of sales milestones achieved under a licensing agreement totaling $358 thousand compared to $2,808 thousand in 2015. |
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The financial statements include estimates based on currently available information and management's judgment as to the outcome of future conditions and circumstances. Significant estimates in these financial statements include the useful lives and impairment of long-lived assets, stock-based compensation costs, and the investment tax credits receivable. Changes in the status of certain facts or circumstances could result in material changes to the estimates used in the preparation of the financial statements and actual results could differ from the estimates and assumptions.
Cash and Cash Equivalents
Cash and cash equivalents is comprised of cash on hand and term deposits with original maturity dates of less than three months that are stated at cost, which approximates fair value.
Accounts Receivable
The Company accounts for trade receivables at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a quarterly basis. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer's financial condition, credit history and current economic conditions. The Company writes off trade receivables when they are deemed uncollectible and records recoveries of trade receivables previously written-off when they receive them. Management has determined that no allowance for doubtful accounts is necessary in order to adequately cover exposure to loss in its December 31, 2016 accounts receivable (2015: $Nil).
Investment Tax Credits
Investment tax credits relating to qualifying expenditures are recognized in the accounts at the time at which the related expenditures are incurred and there is reasonable assurance of their realization. Management has made estimates and assumptions in determining the expenditures eligible for investment tax credits claimed. Investment tax credits received in the year ended December 31, 2016 totaled $Nil (2015: $108 thousand).
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:
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On the declining balance method - |
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Laboratory and office equipment |
20% | |
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Computer equipment |
30% | |
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On the straight-line method - |
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Leasehold improvements |
over the lease term | |
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Manufacturing equipment |
5 – 10 years |
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.
Security Deposits
Security deposits represent a refundable deposit paid to the landlord in accordance with the lease agreement and deposits held as guarantees by the Company’s lenders in accordance with the lending facilities.
Impairment of Long-lived Assets
Long-lived assets held and used by the Company are reviewed for possible impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the estimated undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value thereof.
Deferred Lease Obligations
Rent under operating leases is charged to expense on a straight-line basis over the lease term. Any difference between the rent expense and the rent payable is reflected as deferred lease obligations on the balance sheet.
Deferred lease obligations are amortized on a straight-line basis over the term of the related leases. Lease term includes free rent periods as well as the construction period prior to the commencement of the lease.
Foreign Currency Translation
The Company's reporting currency is the U.S. dollar. The Canadian dollar is the functional currency of the Company's Canadian operations, which is translated to the United States dollar using the current rate method. Under this method, accounts are translated as follows:
Assets and liabilities - at exchange rates in effect at the balance sheet date;
Revenue and expenses - at average exchange rates prevailing during the year;
Equity - at historical rates.
Gains and losses arising from foreign currency translation are included in other comprehensive income.
Income Taxes
The Company accounts for income taxes in accordance with FASB ASC 740 "Income Taxes". Deferred taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Unrecognized Tax Benefits
The Company accounts for unrecognized tax benefits in accordance with FASB ASC 740 “Income Taxes”. ASC 740 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. ASC 740 contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon ultimate settlement with a taxing authority, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement.
Additionally, ASC 740 requires the Company to accrue interest and related penalties, if applicable, on all tax positions for which reserves have been established consistent with jurisdictional tax laws. The Company elected to classify interest and penalties related to the unrecognized tax benefits in the income tax provision.
Share-Based Payments
The Company accounts for share-based payments to employees in accordance with the provisions of FASB ASC 718 "Compensation—Stock Compensation" and accordingly recognizes in its financial statements share-based payments at their fair value. In addition, the Company will recognize in the financial statements an expense based on the grant date fair value of stock options granted to employees. The expense will be recognized on a straight-line basis over the vesting period and the offsetting credit will be recorded in additional paid-in capital. Upon exercise of options, the consideration paid together with the amount previously recorded as additional paid-in capital will be recognized as capital stock. The Company estimates its forfeiture rate in order to determine its compensation expense arising from stock-based awards. The Company uses the Black-Scholes option pricing model to determine the fair value of the options.
The Company measures compensation expense for its non-employee stock-based compensation under ASC 505-50, “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services". The fair value of the option issued is used to measure the transaction, as this is more reliable than the fair value of the services received. The fair value is measured at the value of the Company’s common stock on the date that the commitment for performance by the counterparty has been reached or the counterparty’s performance is complete. The fair value of the equity instrument is charged directly to compensation expense and additional paid-in capital. For common stock issuances to non-employees that are fully vested and are for future periods, the Company classifies these issuances as prepaid expenses and expenses the prepaid expenses over the service period. At no time has the Company issued common stock for a period that exceeds one year.
(Loss) Earnings Per Share
Basic (loss) earnings per share is calculated based on the weighted average number of shares outstanding during the year. Any antidilutive instruments are excluded from the calculation of diluted (loss) earnings per share.
Fair Value Measurements
ASC 820 applies to all assets and liabilities that are being measured and reported on a fair value basis. ASC 820 requires disclosure that establishes a framework for measuring fair value in US GAAP, and expands disclosure about fair value measurements. This statement enables the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. The statement requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
| Level 1: | Quoted market prices in active markets for identical assets or liabilities. | |
| Level 2: | Observable market based inputs or unobservable inputs that are corroborated by market data. | |
| Level 3: | Unobservable inputs that are not corroborated by market data. |
In determining the appropriate levels, the Company performs a detailed analysis of the assets and liabilities that are subject to ASC 820. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3. Short-term investments are classified as Level 1.
Fair Value of Financial Instruments
The fair value represents management’s best estimates based on a range of methodologies and assumptions. The carrying value of receivables and payables arising in the ordinary course of business and the investment tax credits receivable approximate fair value because of the relatively short period of time between their origination and expected realization.
Recent Accounting Pronouncements
ASU 2016-18 – Statement of Cash Flows (Topic 230) Restricted Cash
In November 2016, the FASB issued ASU 2016-18 which requires that the statement of cash flows explain the change during the period in the total cash, cash equivalents, and amounts generally described as restricted or restricted cash equivalents. The statement is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted in any interim or annual period and should be applied on a retrospective basis. The Company is currently evaluating the impact of this Statement on its consolidated financial statements.
ASU 2016-15 – Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments
In August 2016, the FASB issued ASU 2016-15 which clarifies how certain cash receipts and payments are to be presented in the Statement of cash flows. The statement is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted in any interim or annual period, with any adjustments reflected as of the beginning of the fiscal year of adoption. The Company is currently evaluating the impact of this Statement on its consolidated financial statements.
ASU 2016-06 - Derivatives and Hedging (Topic 815) Contingent Put and Call Options in Debt Instruments
The amendments in this Update clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this Update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence.
For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years and should be applied on a retrospective basis.
ASU 2016-09 - Compensation—Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting
FASB issued this Update as part of its Simplification Initiative. The areas for simplification in this Update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.
For public business entities, the amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any entity in any interim or annual period, with any adjustments reflected as of the beginning of the fiscal year of adoption. The Company is currently evaluating the impact of this Statement on its consolidated financial statements.
ASU 2016-01 – Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued ASU 2016-01, which will significantly change practice for all entities. The targeted amendments to existing guidance are expected to include:
| 1. |
Equity investments that do not result in consolidation and are not accounted for under the equity method would be measured at fair value through net income, unless they qualify for the proposed practicability exception for investments that do not have readily determinable fair values. |
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| 2. |
Changes in instrument-specific credit risk for financial liabilities that are measured under the fair value option would be recognized in other comprehensive income. |
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| 3. |
Entities would make the assessment of the realizability of a deferred tax asset (DTA) related to an available- for-sale (AFS) debt security in combination with the entity’s other DTAs. The guidance would eliminate one method that is currently acceptable for assessing the realizability of DTAs related to AFS debt securities. That is, an entity would no longer be able to consider its intent and ability to hold debt securities with unrealized losses until recovery. |
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| 4. |
Disclosure of the fair value of financial instruments measured at amortized cost would no longer be required for entities that not public business entities. |
For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact of this Statement on its consolidated financial statements.
ASU 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.
Revenue from Contracts with Customers (Topic 606):
The FASB and IASB (the Boards) have issued converged standards on revenue recognition. ASU No. 2014-09 which affects any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition and most industry-specific guidance. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps:
| • | Step 1: Identify the contract(s) with a customer. | |
| • | Step 2: Identify the performance obligations in the contract. | |
| • | Step 3: Determine the transaction price. | |
| • | Step 4: Allocate the transaction price to the performance obligations in the contract. | |
| • | Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation. |
In the year ended December 31, 2016, the FASB issued three new amendments related to Topic 606:
| 1. |
ASU 2016-08: Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) which was issued to add clarification to the implementation guidance on principle versus agent considerations. This amendment does not provide any changes to the previously issued ASU No. 2014-09 and is effective for the same reporting period which was deferred by one year in ASU 2015-14: Revenue From Contracts With Customers (Topic 606), Deferral of the Effective Date. |
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| 2. |
ASU 2016-10: Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing which was issued to clarifying the following two aspects of topic 606; identifying performance obligations and the licensing implementation guidance. This amendment does not provide any changes to the previously issued ASU No. 2014-09 and is effective for the same reporting period which was deferred by one year in ASU 2015-14: Revenue From Contracts With Customers (Topic 606), Deferral of the Effective Date. |
| 3. |
ASU 2016-11 Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting. With this amendment, the SEC Staff is rescinding the following SEC Staff Observer comments that are codified in Topic 605, Revenue Recognition, and Topic 932, Extractive Activities—Oil and Gas, effective upon adoption of Topic 606. This amendment is effective immediately. |
Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in Update 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.
This ASU is to be applied retrospectively, with certain practical expedients allowed. The Company is currently evaluating the impact of this Statement on its consolidated financial statements.
ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory
The amendments in this Update more closely align the measurement of inventory in GAAP with the measurement of inventory in International Financial Reporting Standards (IFRS). An entity should measure inventory within the scope of this Update at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method.
The Board has amended some of the other guidance in Topic 330 to more clearly articulate the requirements for the measurement and disclosure of inventory. However, the Board does not intend for those clarifications to result in any changes in practice. Other than the change in the subsequent measurement guidance from the lower of cost or market to the lower of cost and net realizable value for inventory within the scope of this Update, there are no other substantive changes to the guidance on measurement of inventory.
The amendments in this Update do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost.
For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments in this Update should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The adoption of this Statement is not expected to have a material effect on the Company’s financial position or results of operations.
ASU 2015-17 – Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (“ASU 2015 - 17 ”)
In November 2015, the FASB issued ASU 2015-17, which require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position.
The amendments apply to all entities that present a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments.
For public business entities, the amendments are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company is currently evaluating the impact of this Statement on its consolidated financial statements.
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| 5. |
Short-term investments |
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As at December 31, 2016, short-term investments consisting of mutual funds (CAD$3 million) and term deposits ($1,650 million) are with a Canadian financial institution having a high credit rating. The term deposits have a maturity date of August 17, 2017, bear interest at 0.40% and are cashable at any time. |
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| 6. |
Leasehold improvements and Equipment |
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2016 | 2015 | |||||||||||
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Accumulated | Net Carrying | Net Carrying | ||||||||||
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Cost | Depreciation | Amount | Amount | |||||||||
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Manufacturing equipment |
$ | 2,550 | $ | 121 | $ | 2,429 | $ | 1,050 | |||||
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Laboratory and office equipment |
1,222 | 415 | 807 | 821 | |||||||||
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Computer equipment |
66 | 43 | 23 | 17 | |||||||||
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Leasehold improvements |
2,786 | 315 | 2,471 | 2,350 | |||||||||
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$ | 6,624 | $ | 894 | $ | 5,730 | $ | 4,238 |
From the balance of manufacturing equipment, an amount of $125 thousand represents assets which are not yet in service as at December 31, 2016.
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| 7. |
Bank Indebtedness |
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The Company's credit facility is subject to review annually and consists of an operating demand line of credit of up to CAD$250 thousand and corporate credits cards of up to CAD$75 thousand. Borrowings under the operating demand line of credit bear interest at the Bank’s prime lending rate plus 2%. The credit facility and term loan (see note 9) are secured by a first ranking movable hypothec on all present and future movable property of the Company and a 50% guarantee by Export Development Canada, a Canadian Crown corporation export credit agency. The terms of the banking agreement require the Company to comply with certain debt service coverage and debt to net worth financial covenants on an annual basis at the end of the Company’s fiscal year. As at December 31, 2016, the Company was not in compliance with its financial covenants and has not drawn on its credit facility. The Company has obtained a waiver from the lender. |
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| 8. |
Deferred Revenue |
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On August 5, 2016, the Company sold its U.S. royalty on future sales of Forfivo XL ® to SWK Holdings Corporation for $6 million. Under the terms of the agreement, SWK paid IntelGenx $6 million at closing. In return for, (i) 100% of any and all royalties or similar royalty amounts received on or after April 1, 2016, (ii) 100% of the $2 million milestone payment upon Edgemont reaching annual net sales of $15 million, and (iii) 35% of all potential future milestone payments. |
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The deferred revenue represents the payment received for the royalty on future sales in the amount of $6 milliion less the Q2 royalties recognized in the second quarter in the amount of $352 thousand, less the amount recognized in other revenue during the six-month period ended December 31, 2016. The deferred revenue will be recognized as other revenue on a straight-line basis until December 31, 2017. |
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10% of the proceeds were paid to our former development partner, Cary Pharmaceuticals Inc. This amount is included in prepaid expenses less the portion expensed during the six-month period ended December 31, 2016. This expense will be recognized as cost of royalty, license and other revenue on a straight-line basis until December 31, 2017. |
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| 9. |
Long-term debt |
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The components of the Company’s debt are as follows: |
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December 31, 2016 | December 31, 2015 | |||||
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$ | $ | |||||
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Term loan facility |
2,636 | 1,188 | |||||
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Secured loan |
633 | 542 | |||||
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Total debt |
3,269 | 1,730 | |||||
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Less: current portion |
704 | 184 | |||||
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Total long-term debt |
2,565 | 1,546 |
The Company’s term loan facility consists of a total of CAD$4 million bearing interest at the Bank’s prime lending rate plus 2.50% . The term loan is subject to the same security and financial covenants as the bank indebtedness (see note 7).
The secured loan has a principal balance authorized of CAD$1 million bearing interest at prime plus 7.3%, reimbursable in monthly principal payments of CAD$17 thousand from January 2017 to March 2021. The loan is secured by a second ranking on all present and future property of the Company. The terms of the banking agreement require the Company to comply with certain debt service coverage and debt to net worth financial covenants on an annual basis at the end of the Company’s fiscal year. As at December 31, 2016, the Company was not in compliance with its financial covenants. The Company has obtained a waiver from the lender.
Principal repayments due in each of the next five years are as follows:
| 2017 | $704 (CAD945) | ||
| 2018 | 704 (CAD945) | ||
| 2019 | 704 (CAD945) | ||
| 2020 | 704 (CAD945) | ||
| 2021 | 453 (CAD610) |
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| 10. |
Commitments |
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On April 24, 2015 the Company entered into an agreement to lease approximately 17,000 square feet in a property located at 6420 Abrams, St-Laurent, Québec. The Lease has a 10 year and 6 -month term commencing September 1, 2015. 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 is required to pay base rent of approximately CAD$110 thousand (approximately $82 thousand) per year, which will increase at a rate of CAD$0.25 ($0.19) per square foot every two years. |
The aggregate minimum rentals, exclusive of other occupancy charges, for property leases expiring in 2026, are approximately $824 thousand, as follows:
| 2017 | $83 | ||
| 2018 | 85 | ||
| 2019 | 87 | ||
| 2020 | 89 | ||
| 2021 | 90 | ||
| Thereafter | 390 |
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| 11. |
Capital Stock |
|
|
2016 | 2015 | |||||
|
|
|||||||
|
Authorized - |
|||||||
|
|
|||||||
|
100,000,000 common shares of $0.00001 par value |
|||||||
|
20,000,000 preferred shares of $0.00001 par value |
|||||||
|
|
|||||||
|
Issued - |
|||||||
|
|
|||||||
|
64,812,020 (December 31, 2015: 63,615,255) common shares |
$ | 1 | $ | 1 |
Stock options
During the year ended December 31, 2016 a total of 140,000 stock options were exercised for 140,000 common shares having a par value of $0 thousand in aggregate, for cash consideration of $63 thousand, resulting in an increase in additional paid-in capital of $63 thousand.
During the year ended December 31, 2015 a total of 150,000 stock options were exercised for 150,000 common shares having a par value of $0 thousand in aggregate, for cash consideration of $62 thousand, resulting in an increase in additional paid-in capital of $62 thousand.
Stock-based compensation of $195 thousand and $130 thousand was recorded during the year ended December 31, 2016 and 2015 respectively. An amount of $193 thousand expensed in 2016 relates to stock options granted to employees and directors and an amount of $2 thousand relates to stock options granted to a consultant. The entire amounts expensed in 2015 relate to stock options granted to employees and directors. As at December 31, 2016 the Company has $320 thousand (2015 - $158 thousand) of unrecognized stock-based compensation, of which $11 thousand (2015 – $nil) relates to options granted to a consultant.
Warrants
In the year ended December 31, 2016 a total of 1,056,765 warrants were exercised for 1,056,765 common shares having a par value of $Nil in aggregate, for cash consideration of approximately $596 thousand, resulting in an increase in additional paid-in capital of approximately $596 thousand. No warrants were exercised during the year ended December 31, 2015.
|
|||
| 12. | Additional Paid-In Capital |
| Stock Options | |
|
On May 9, 2016, the Board of Directors of the Company adopted the 2016 Stock Option Plan which amended and restated the 2006 Stock Option. As a result of the adoption of the 2016 Stock Option Plan, no additional options will be granted under the 2006 Stock Option Plan and all previously granted options will be governed by the 2016 Stock Option Plan. The 2016 Stock Option Plan permits the granting of options to officers, employees, directors and eligible consultants of the Company. A total of 6,361,525 shares of common stock were reserved for issuance under this plan, which includes stock options granted under the previous 2006 Stock Option Plan. Options may be granted under the 2016 Stock Option Plan on terms and at prices as determined by the Board except that the options cannot be granted at less than the market closing price of the common stock on the TSX- V. on the date prior to the grant. Each option will be exercisable after the period or periods specified in the option agreement, but no option may be exercised after the expiration of 10 years from the date of grant. The 2016 Stock Option Plan provides the Board with more flexibility when setting the vesting schedule for options which was otherwise fixed in the 2006 Stock Option Plan. |
|
|
On April 2, 2015 the Company granted 200,000 options to purchase common stock to four non-employee directors. The stock options are exercisable at $0.62, and vested immediately. The stock options were accounted for at their fair value, as determined by the Black-Scholes valuation model, of approximately $45 thousand, using the following assumptions: |
|
Expected volatility |
66% | |
|
Expected life |
2.5 years | |
|
Risk-free interest rate |
0.87% | |
|
Dividend yield |
nil |
On April 2, 2015 the Company granted 100,000 options to purchase common stock to an officer. The stock options are exercisable at $0.62 per share and vest over 2 years at 25% every six months. The stock options were accounted for at their fair value, as determined by the Black-Scholes valuation model, of approximately $24 thousand, using the following assumptions:
|
Expected volatility |
62% | |
|
Expected life |
3.13 years | |
|
Risk-free interest rate |
0.87% | |
|
Dividend yield |
nil |
On July 20, 2015 the Company granted 600,000 options to purchase common stock to an employee. The stock options are exercisable at $0.58 per share and vest over 2 years at 25% every six months. The stock options were accounted for at their fair value, as determined by the Black-Scholes valuation model, of approximately $120 thousand, using the following assumptions:
|
Expected volatility |
63% | |
|
Expected life |
3.13 years | |
|
Risk-free interest rate |
1.09% | |
|
Dividend yield |
nil |
On August 13, 2015 the Company granted 75,000 options to purchase common stock to a non-employee director. The stock options are exercisable at $0.58 per share and vest over 2 years at 25% every six months. The stock options were accounted for at their fair value, as determined by the Black-Scholes valuation model, of approximately $15 thousand, using the following assumptions:
|
Expected volatility |
62% | |
|
Expected life |
3.13 years | |
|
Risk-free interest rate |
1.06% | |
|
Dividend yield |
nil |
On December 14, 2015 the Company granted 150,000 options to purchase common stock to an employee. The stock options are exercisable at $0.48 per share and vest over 2 years at 25% every six months. The stock options were accounted for at their fair value, as determined by the Black-Scholes valuation model, of approximately $25 thousand, using the following assumptions:
|
Expected volatility |
63% | |
|
Expected life |
3.13 years | |
|
Risk-free interest rate |
1.25% | |
|
Dividend yield |
nil |
On January 19, 2016 the Company granted 225,000 options to purchase common stock to two officers. The stock options are exercisable at $0.41 per share and vest over 2 years at 25% every six months. The stock options were accounted for at their fair value, as determined by the Black-Scholes valuation model, of approximately $32 thousand, using the following assumptions:
|
Expected volatility |
63% | |
|
Expected life |
3.13 years | |
|
Risk-free interest rate |
1.11% | |
|
Dividend yield |
nil |
On January 19, 2016 the Company granted 250,000 options to purchase common stock to five non-employee directors. The stock options are exercisable at $0.41 per share and vested immediately. The stock options were accounted for at their fair value, as determined by the Black-Scholes valuation model, of approximately $33 thousand, using the following assumptions:
| Expected volatility | 66% | |
| Expected life | 2.5 years | |
| Risk-free interest rate | 1.11% | |
| Dividend yield | nil |
On September 15, 2016 the Company granted 200,000 options to purchase common stock to an officer, 325,000 options to purchase common stock to 7 employees and 75,000 options to purchase common stock to a non-employee director. The stock options are exercisable at $0.73 per share and vest over 2 years at 25% every six months. The stock options were accounted for at their fair value, as determined by the Black-Scholes valuation model, of approximately $202 thousand, using the following assumptions:
| Expected volatility | 65% | |
| Expected life | 5.63 years | |
| Risk-free interest rate | 1.30% | |
| Dividend yield | nil |
On September 15, 2016 the Company granted 50,000 options to purchase common stock to a consultant. The stock options are exercisable at $0.73 per share and vest over 2 years at 25% every six months. The stock options were accounted for at their fair value, as determined by the Black-Scholes valuation model, of approximately $16 thousand, using the following assumptions:
| Expected volatility | 64% | |
| Expected life | 3.13 years | |
| Risk-free interest rate | 0.87% | |
| Dividend yield | nil |
On December 27, 2016 the Company granted 225,000 options to purchase common stock to 6 employees. The stock options are exercisable at $0.76 per share and vest over 2 years at 25% every six months. The stock options were accounted for at their fair value, as determined by the Black-Scholes valuation model, of approximately $79 thousand, using the following assumptions:
|
Expected volatility |
63% | |
|
Expected life |
5.63 years | |
|
Risk-free interest rate |
2.20% | |
|
Dividend yield |
nil |
Information with respect to employees and directors stock option activity for 2015 and 2016 is as follows:
|
|
Weighted average | ||||||
|
|
Number of options | exercise price | |||||
|
|
$ | ||||||
|
|
|||||||
|
Outstanding – January 1, 2015 |
1,130,000 | 0.54 | |||||
|
|
|||||||
|
Granted |
1,125,000 | 0.58 | |||||
|
Forfeited |
(410,000 | ) | (0.59 | ) | |||
|
Expired |
(25,000 | ) | (0.45 | ) | |||
|
Exercised |
(150,000 | ) | (0.41 | ) | |||
|
|
|||||||
|
Outstanding – December 31, 2015 |
1,670,000 | 0.56 | |||||
|
|
|||||||
|
Granted |
1,300,000 | 0.62 | |||||
|
Forfeited |
(50,000 | ) | (0.53 | ) | |||
|
Expired |
(120,000 | ) | (0.53 | ) | |||
|
Exercised |
(140,000 | ) | (0.45 | ) | |||
|
|
|||||||
|
Outstanding – December 31, 2016 |
2,660,000 | 0.60 |
Information with respect to consultant’s stock option activity for 2015 and 2016 is as follows:
|
|
Weighted average | ||||||
|
|
Number of options | exercise price | |||||
|
|
$ | ||||||
|
Outstanding – January 1, 2015 |
100,000 | 0.59 | |||||
|
Expired |
(100,000 | ) | 0.59 | ||||
|
Outstanding – December 31, 2015 |
- | - | |||||
|
Granted |
50,000 | 0.73 | |||||
|
Outstanding – December 31, 2016 |
50,000 | 0.73 |
Details of stock options outstanding as at December 31, 2016 are as follows:
|
|
Outstanding options | Exercisable options | ||||||||||||||||||||
|
|
||||||||||||||||||||||
|
|
Weighted | Weighted | ||||||||||||||||||||
|
|
Weighted average | average | Aggregate | average | Aggregate | |||||||||||||||||
|
Exercise |
Number of | remaining | exercise | intrinsic | Number of | exercise | intrinsic | |||||||||||||||
|
prices |
options | contractual life | price | value | options | price | value | |||||||||||||||
|
$ |
(years) | $ | $ | $ | $ | |||||||||||||||||
|
|
||||||||||||||||||||||
|
0.41 |
375,000 | 0.57 | 0.06 | 281,250 | 0.09 | |||||||||||||||||
|
0.48 |
150,000 | 0.22 | 0.03 | 75,000 | 0.03 | |||||||||||||||||
|
0.51 |
20,000 | 0.00 | 0.00 | 20,000 | 0.01 | |||||||||||||||||
|
0.52 |
25,000 | 0.00 | 0.00 | 25,000 | 0.01 | |||||||||||||||||
|
0.52 |
100,000 | 0.07 | 0.02 | 100,000 | 0.04 | |||||||||||||||||
|
0.53 |
125,000 | 0.14 | 0.02 | 125,000 | 0.05 | |||||||||||||||||
|
0.58 |
35,000 | 0.02 | 0.01 | 35,000 | 0.02 | |||||||||||||||||
|
0.58 |
600,000 | 0.79 | 0.13 | 300,000 | 0.13 | |||||||||||||||||
|
0.58 |
75,000 | 0.10 | 0.02 | 37,500 | 0.02 | |||||||||||||||||
|
0.60 |
30,000 | 0.01 | 0.01 | 30,000 | 0.01 | |||||||||||||||||
|
0.62 |
300,000 | 0.36 | 0.07 | 275,000 | 0.13 | |||||||||||||||||
|
0.73 |
600,000 | 2.16 | 0.16 | - | - | |||||||||||||||||
|
0.73 |
50,000 | 0.09 | 0.01 | - | - | |||||||||||||||||
|
0.76 |
225,000 | 0.83 | 0.06 | - | - | |||||||||||||||||
|
|
2,710,000 | 5.36 | 0.60 | 485,000 | 1,303,750 | 0.53 | 320,000 | |||||||||||||||
Stock-based compensation expense recognized in 2016 with regards to the stock options was $195 thousand (2015: $130 thousand). As at December 31, 2016 the Company has $320 thousand (2015 - $158 thousand) of unrecognized stock-based compensation, of which $11 thousand (2015 – $nil) relates to options granted to a consultant. The amount of $195 thousand will be recognized as an expense over a period of two years. A change in control of the Company due to acquisition would cause the vesting of the stock options granted to employees and directors to accelerate and would result in $195 thousand being charged to stock based compensation expense.
Warrants
In the year ended December 31, 2016 a total of 1,056,765 warrants were exercised for 1,056,765 common shares having a par value of $Nil in aggregate, for cash consideration of approximately $596 thousand, resulting in an increase in additional paid-in capital of approximately $596 thousand. No warrants were exercised during the year ended December 31, 2015.
Information with respect to warrant activity for 2015 and 2016 is as follows:
|
|
Number of | Weighted average | |||||
|
|
warrants | exercise price | |||||
|
|
(All Exercisable) | $ | |||||
|
Outstanding – January 1, 2015 and 2016 |
7,231,123 | 0.5646 | |||||
|
|
|||||||
|
Exercised |
(1,056,765 | ) | (0.5646 | ) | |||
|
|
|||||||
|
Outstanding - December 31, 2016 |
6,174,358 | 0.5646 |
|
|||
| 13. |
Income Taxes |
|
Income taxes reported differ from the amount computed by applying the statutory rates to net income (losses). The reasons are as follows: |
|
|
2016 | 2015 | |||||
|
Statutory income taxes |
$ | (305 | ) | $ | 387 | ||
|
Net operating losses for which no tax benefits have been recorded |
201 | - | |||||
|
Net operating losses used for which no tax benefit had been recorded |
- | (484 | ) | ||||
|
Deficiency of depreciation over capital cost allowance |
(206 | ) | (98 | ) | |||
|
Non-deductible expenses |
105 | 44 | |||||
|
Undeducted research and development expenses |
245 | 178 | |||||
|
Investment tax credit |
(40 | ) | (27 | ) | |||
|
|
|||||||
|
|
|||||||
| $ | - | $ | - |
The major components of the deferred tax assets classified by the source of temporary differences are as follows:
|
|
2016 | 2015 | |||||
|
Leasehold improvements and equipment |
$ | 201 | $ | 117 | |||
|
Net operating losses carryforward |
2,062 | 1,770 | |||||
|
Undeducted research and development expenses |
1,501 | 1,274 | |||||
|
Non-refundable tax credits carryforward |
1,190 | 1,022 | |||||
|
|
|||||||
|
|
4,954 | 4,183 | |||||
|
|
|||||||
|
Valuation allowance |
(4,954 | ) | (4,183 | ) | |||
|
|
$ | - | $ | - |
As at December 31, 2016, management determined that enough uncertainty existed relative to the realization of deferred income tax asset balances to warrant the application of a full valuation allowance. Although management believes that certain of the net operating losses will be applied against earnings in 2017, management continues to believe that enough uncertainty exists relative to the realization of the remaining deferred income tax asset balances such that no recognition of deferred income tax assets is warranted.
There were Canadian and provincial net operating losses of approximately $7,585 thousand (2015: $6,462 thousand) and $7,763 thousand (2015: $6,725 thousand) respectively, that may be applied against earnings of future years. Utilization of the net operating losses is subject to significant limitations imposed by the change in control provisions. Canadian and provincial losses will be expiring between 2027 and 2036. A portion of the net operating losses may expire before they can be utilized.
As at December 31, 2016, the Company had non-refundable tax credits of $1,190 thousand (2015: $1,022 thousand) of which $8 thousand is expiring in 2026, $10 thousand is expiring in 2027, $168 thousand is expiring in 2028, $147 thousand is expiring in 2029, $126 thousand is expiring in 2030, $133 thousand is expiring in 2031, $167 thousand is expiring in 2032 and $111 thousand is expiring in 2033, $84 thousand expiring in 2034 and $99 thousand is expiring in 2035 and $137 thousand expiring in 2036 and undeducted research and development expenses of $5,438 thousand (2015: $4,563 thousand) with no expiration date.
The deferred tax benefit of these items was not recognized in the accounts as it has been fully provided for.
Unrecognized Tax Benefits
The Company does not have any unrecognized tax benefits.
Tax Years and Examination
The Company files tax returns in each jurisdiction in which it is registered to do business. For each jurisdiction a statute of limitations period exists. After a statute of limitations period expires, the respective tax authorities may no longer assess additional income tax for the expired period. Similarly, the Company is no longer eligible to file claims for refund for any tax that it may have overpaid. The following table summarizes the Company’s major tax jurisdictions and the tax years that remain subject to examination by these jurisdictions as of December 31, 2016:
| Tax Jurisdictions | Tax Years | ||
| Federal - Canada | 2013 and onward | ||
| Provincial - Quebec | 2013 and onward | ||
| Federal - USA | 2013 onward |
|
|||
| 14. |
Statement of Cash Flows Information |
|
In US$ thousands |
2016 | 2015 | |||||
|
|
|||||||
|
Additional Cash Flow Information: |
|||||||
|
|
|||||||
|
Interest paid |
$ | 176 | $ | 23 |
|
|||
| 15. |
Related party transactions |
|
Included in management salaries are $2 thousand (2015 - $3 thousand) for options granted to the Chief Executive Officer, $60 thousand (2015 - $39 thousand) for options granted to the Chief Financial Officer, $12 thousand (2015-$9 thousand) for options granted to the Vice President, Operations, $5 thousand (2015 - $nil) for options granted to the Vice-President, Research and Development, $21 thousand (2015 - $nil) for options granted to the former Vice President, Corporate Development, and $8 thousand for options granted to Vice- President, Business and Corporate Development (2015 – $nil) under the 2006 or 2016 Stock Option Plans and $52 thousand (2015 - $70 thousand) for options granted to non-employee directors. |
|
|
Included in general and administrative expenses are director fees of $184 thousand (2015: $179 thousand). During the year a non-employee director rendered consulting services amounting to $14 thousand (2015 - $nil). |
|
|
The above related party transactions have been measured at the exchange amount which is the amount of the consideration established and agreed upon by the related parties. |
|
|||
| 17. |
Subsequent event |
|
Subsequent to the end of the year, 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”). 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 $55 thousand) per year, which will increase at a rate of CA$0.25 ($0.19) per square foot every two years. IntelGenx plans to use the newly leased space to expand its manufacture of oral film VersaFilm TM . |
|
|||
|
Revenue Recognition |
|
|
The Company recognizes revenue from research and development contracts as the contracted services are performed or when milestones are achieved, recorded as other revenue, in accordance with the terms of the specific agreements and when collection of the payment is reasonably assured. In addition, the performance criteria for the achievement of milestones are met if substantive effort was required to achieve the milestone and the amount of the milestone payment appears reasonably commensurate with the effort expended. Amounts received in advance of the recognition criteria being met, if any, are included in deferred income. |
|
|
IntelGenx has license agreements that specify that certain royalties are earned by the Company on sales of licensed products in the licensed territories. Royalty revenue is recognized on an accrual basis in accordance with the relevant license agreement. |
|
|
For the year ended December 31, 2016, the Company recognized royalty revenue earned under a licensing agreement totaling $1,041 thousand compared to $981 thousand in 2015. |
|
|
For the year ended December 31, 2016, the Company recognized revenues as a result of sales milestones achieved under a licensing agreement totaling $358 thousand compared to $2,808 thousand in 2015. |
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The financial statements include estimates based on currently available information and management's judgment as to the outcome of future conditions and circumstances. Significant estimates in these financial statements include the useful lives and impairment of long-lived assets, stock-based compensation costs, and the investment tax credits receivable. Changes in the status of certain facts or circumstances could result in material changes to the estimates used in the preparation of the financial statements and actual results could differ from the estimates and assumptions.
Cash and Cash Equivalents
Cash and cash equivalents is comprised of cash on hand and term deposits with original maturity dates of less than three months that are stated at cost, which approximates fair value.
Accounts Receivable
The Company accounts for trade receivables at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a quarterly basis. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer's financial condition, credit history and current economic conditions. The Company writes off trade receivables when they are deemed uncollectible and records recoveries of trade receivables previously written-off when they receive them. Management has determined that no allowance for doubtful accounts is necessary in order to adequately cover exposure to loss in its December 31, 2016 accounts receivable (2015: $Nil).
Investment Tax Credits
Investment tax credits relating to qualifying expenditures are recognized in the accounts at the time at which the related expenditures are incurred and there is reasonable assurance of their realization. Management has made estimates and assumptions in determining the expenditures eligible for investment tax credits claimed. Investment tax credits received in the year ended December 31, 2016 totaled $Nil (2015: $108 thousand).
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:
|
On the declining balance method - |
||
|
|
||
|
Laboratory and office equipment |
20% | |
|
Computer equipment |
30% | |
|
|
||
|
On the straight-line method - |
||
|
|
||
|
Leasehold improvements |
over the lease term | |
|
Manufacturing equipment |
5 – 10 years |
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.
Security Deposits
Security deposits represent a refundable deposit paid to the landlord in accordance with the lease agreement and deposits held as guarantees by the Company’s lenders in accordance with the lending facilities.
Impairment of Long-lived Assets
Long-lived assets held and used by the Company are reviewed for possible impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the estimated undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value thereof.
Deferred Lease Obligations
Rent under operating leases is charged to expense on a straight-line basis over the lease term. Any difference between the rent expense and the rent payable is reflected as deferred lease obligations on the balance sheet.
Deferred lease obligations are amortized on a straight-line basis over the term of the related leases. Lease term includes free rent periods as well as the construction period prior to the commencement of the lease.
Foreign Currency Translation
The Company's reporting currency is the U.S. dollar. The Canadian dollar is the functional currency of the Company's Canadian operations, which is translated to the United States dollar using the current rate method. Under this method, accounts are translated as follows:
Assets and liabilities - at exchange rates in effect at the balance sheet date;
Revenue and expenses - at average exchange rates prevailing during the year;
Equity - at historical rates.
Gains and losses arising from foreign currency translation are included in other comprehensive income.
Income Taxes
The Company accounts for income taxes in accordance with FASB ASC 740 "Income Taxes". Deferred taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Unrecognized Tax Benefits
The Company accounts for unrecognized tax benefits in accordance with FASB ASC 740 “Income Taxes”. ASC 740 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. ASC 740 contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon ultimate settlement with a taxing authority, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement.
Additionally, ASC 740 requires the Company to accrue interest and related penalties, if applicable, on all tax positions for which reserves have been established consistent with jurisdictional tax laws. The Company elected to classify interest and penalties related to the unrecognized tax benefits in the income tax provision.
Share-Based Payments
The Company accounts for share-based payments to employees in accordance with the provisions of FASB ASC 718 "Compensation—Stock Compensation" and accordingly recognizes in its financial statements share-based payments at their fair value. In addition, the Company will recognize in the financial statements an expense based on the grant date fair value of stock options granted to employees. The expense will be recognized on a straight-line basis over the vesting period and the offsetting credit will be recorded in additional paid-in capital. Upon exercise of options, the consideration paid together with the amount previously recorded as additional paid-in capital will be recognized as capital stock. The Company estimates its forfeiture rate in order to determine its compensation expense arising from stock-based awards. The Company uses the Black-Scholes option pricing model to determine the fair value of the options.
The Company measures compensation expense for its non-employee stock-based compensation under ASC 505-50, “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services". The fair value of the option issued is used to measure the transaction, as this is more reliable than the fair value of the services received. The fair value is measured at the value of the Company’s common stock on the date that the commitment for performance by the counterparty has been reached or the counterparty’s performance is complete. The fair value of the equity instrument is charged directly to compensation expense and additional paid-in capital. For common stock issuances to non-employees that are fully vested and are for future periods, the Company classifies these issuances as prepaid expenses and expenses the prepaid expenses over the service period. At no time has the Company issued common stock for a period that exceeds one year.
(Loss) Earnings Per Share
Basic (loss) earnings per share is calculated based on the weighted average number of shares outstanding during the year. Any antidilutive instruments are excluded from the calculation of diluted (loss) earnings per share.
Fair Value Measurements
ASC 820 applies to all assets and liabilities that are being measured and reported on a fair value basis. ASC 820 requires disclosure that establishes a framework for measuring fair value in US GAAP, and expands disclosure about fair value measurements. This statement enables the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. The statement requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
| Level 1: | Quoted market prices in active markets for identical assets or liabilities. | |
| Level 2: | Observable market based inputs or unobservable inputs that are corroborated by market data. | |
| Level 3: | Unobservable inputs that are not corroborated by market data. |
In determining the appropriate levels, the Company performs a detailed analysis of the assets and liabilities that are subject to ASC 820. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3. Short-term investments are classified as Level 1.
Fair Value of Financial Instruments
The fair value represents management’s best estimates based on a range of methodologies and assumptions. The carrying value of receivables and payables arising in the ordinary course of business and the investment tax credits receivable approximate fair value because of the relatively short period of time between their origination and expected realization.
Recent Accounting Pronouncements
ASU 2016-18 – Statement of Cash Flows (Topic 230) Restricted Cash
In November 2016, the FASB issued ASU 2016-18 which requires that the statement of cash flows explain the change during the period in the total cash, cash equivalents, and amounts generally described as restricted or restricted cash equivalents. The statement is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted in any interim or annual period and should be applied on a retrospective basis. The Company is currently evaluating the impact of this Statement on its consolidated financial statements.
ASU 2016-15 – Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments
In August 2016, the FASB issued ASU 2016-15 which clarifies how certain cash receipts and payments are to be presented in the Statement of cash flows. The statement is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted in any interim or annual period, with any adjustments reflected as of the beginning of the fiscal year of adoption. The Company is currently evaluating the impact of this Statement on its consolidated financial statements.
ASU 2016-06 - Derivatives and Hedging (Topic 815) Contingent Put and Call Options in Debt Instruments
The amendments in this Update clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this Update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence.
For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years and should be applied on a retrospective basis.
ASU 2016-09 - Compensation—Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting
FASB issued this Update as part of its Simplification Initiative. The areas for simplification in this Update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.
For public business entities, the amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any entity in any interim or annual period, with any adjustments reflected as of the beginning of the fiscal year of adoption. The Company is currently evaluating the impact of this Statement on its consolidated financial statements.
ASU 2016-01 – Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued ASU 2016-01, which will significantly change practice for all entities. The targeted amendments to existing guidance are expected to include:
| 1. |
Equity investments that do not result in consolidation and are not accounted for under the equity method would be measured at fair value through net income, unless they qualify for the proposed practicability exception for investments that do not have readily determinable fair values. |
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| 2. |
Changes in instrument-specific credit risk for financial liabilities that are measured under the fair value option would be recognized in other comprehensive income. |
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| 3. |
Entities would make the assessment of the realizability of a deferred tax asset (DTA) related to an available- for-sale (AFS) debt security in combination with the entity’s other DTAs. The guidance would eliminate one method that is currently acceptable for assessing the realizability of DTAs related to AFS debt securities. That is, an entity would no longer be able to consider its intent and ability to hold debt securities with unrealized losses until recovery. |
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| 4. |
Disclosure of the fair value of financial instruments measured at amortized cost would no longer be required for entities that not public business entities. |
For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact of this Statement on its consolidated financial statements.
ASU 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.
Revenue from Contracts with Customers (Topic 606):
The FASB and IASB (the Boards) have issued converged standards on revenue recognition. ASU No. 2014-09 which affects any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition and most industry-specific guidance. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps:
| • | Step 1: Identify the contract(s) with a customer. | |
| • | Step 2: Identify the performance obligations in the contract. | |
| • | Step 3: Determine the transaction price. | |
| • | Step 4: Allocate the transaction price to the performance obligations in the contract. | |
| • | Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation. |
In the year ended December 31, 2016, the FASB issued three new amendments related to Topic 606:
| 1. |
ASU 2016-08: Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) which was issued to add clarification to the implementation guidance on principle versus agent considerations. This amendment does not provide any changes to the previously issued ASU No. 2014-09 and is effective for the same reporting period which was deferred by one year in ASU 2015-14: Revenue From Contracts With Customers (Topic 606), Deferral of the Effective Date. |
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| 2. |
ASU 2016-10: Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing which was issued to clarifying the following two aspects of topic 606; identifying performance obligations and the licensing implementation guidance. This amendment does not provide any changes to the previously issued ASU No. 2014-09 and is effective for the same reporting period which was deferred by one year in ASU 2015-14: Revenue From Contracts With Customers (Topic 606), Deferral of the Effective Date. |
| 3. |
ASU 2016-11 Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting. With this amendment, the SEC Staff is rescinding the following SEC Staff Observer comments that are codified in Topic 605, Revenue Recognition, and Topic 932, Extractive Activities—Oil and Gas, effective upon adoption of Topic 606. This amendment is effective immediately. |
Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in Update 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.
This ASU is to be applied retrospectively, with certain practical expedients allowed. The Company is currently evaluating the impact of this Statement on its consolidated financial statements.
ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory
The amendments in this Update more closely align the measurement of inventory in GAAP with the measurement of inventory in International Financial Reporting Standards (IFRS). An entity should measure inventory within the scope of this Update at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method.
The Board has amended some of the other guidance in Topic 330 to more clearly articulate the requirements for the measurement and disclosure of inventory. However, the Board does not intend for those clarifications to result in any changes in practice. Other than the change in the subsequent measurement guidance from the lower of cost or market to the lower of cost and net realizable value for inventory within the scope of this Update, there are no other substantive changes to the guidance on measurement of inventory.
The amendments in this Update do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost.
For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments in this Update should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The adoption of this Statement is not expected to have a material effect on the Company’s financial position or results of operations.
ASU 2015-17 – Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (“ASU 2015 - 17 ”)
In November 2015, the FASB issued ASU 2015-17, which require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position.
The amendments apply to all entities that present a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments.
For public business entities, the amendments are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company is currently evaluating the impact of this Statement on its consolidated financial statements.
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On the declining balance method - |
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Laboratory and office equipment |
20% | |
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Computer equipment |
30% | |
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On the straight-line method - |
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Leasehold improvements |
over the lease term | |
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Manufacturing equipment |
5 – 10 years |
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2016 | 2015 | |||||||||||
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Accumulated | Net Carrying | Net Carrying | ||||||||||
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Cost | Depreciation | Amount | Amount | |||||||||
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Manufacturing equipment |
$ | 2,550 | $ | 121 | $ | 2,429 | $ | 1,050 | |||||
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Laboratory and office equipment |
1,222 | 415 | 807 | 821 | |||||||||
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Computer equipment |
66 | 43 | 23 | 17 | |||||||||
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Leasehold improvements |
2,786 | 315 | 2,471 | 2,350 | |||||||||
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$ | 6,624 | $ | 894 | $ | 5,730 | $ | 4,238 |
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December 31, 2016 | December 31, 2015 | |||||
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$ | $ | |||||
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Term loan facility |
2,636 | 1,188 | |||||
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Secured loan |
633 | 542 | |||||
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Total debt |
3,269 | 1,730 | |||||
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Less: current portion |
704 | 184 | |||||
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Total long-term debt |
2,565 | 1,546 |
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| 2017 | $83 | ||
| 2018 | 85 | ||
| 2019 | 87 | ||
| 2020 | 89 | ||
| 2021 | 90 | ||
| Thereafter | 390 |
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2016 | 2015 | |||||
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Authorized - |
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100,000,000 common shares of $0.00001 par value |
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20,000,000 preferred shares of $0.00001 par value |
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Issued - |
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64,812,020 (December 31, 2015: 63,615,255) common shares |
$ | 1 | $ | 1 |
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Expected volatility |
66% | |
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Expected life |
2.5 years | |
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Risk-free interest rate |
0.87% | |
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Dividend yield |
nil |
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Expected volatility |
62% | |
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Expected life |
3.13 years | |
|
Risk-free interest rate |
0.87% | |
|
Dividend yield |
nil |
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Expected volatility |
63% | |
|
Expected life |
3.13 years | |
|
Risk-free interest rate |
1.09% | |
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Dividend yield |
nil |
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Expected volatility |
62% | |
|
Expected life |
3.13 years | |
|
Risk-free interest rate |
1.06% | |
|
Dividend yield |
nil |
|
Expected volatility |
63% | |
|
Expected life |
3.13 years | |
|
Risk-free interest rate |
1.25% | |
|
Dividend yield |
nil |
|
Expected volatility |
63% | |
|
Expected life |
3.13 years | |
|
Risk-free interest rate |
1.11% | |
|
Dividend yield |
nil |
| Expected volatility | 66% | |
| Expected life | 2.5 years | |
| Risk-free interest rate | 1.11% | |
| Dividend yield | nil |
| Expected volatility | 65% | |
| Expected life | 5.63 years | |
| Risk-free interest rate | 1.30% | |
| Dividend yield | nil |
| Expected volatility | 64% | |
| Expected life | 3.13 years | |
| Risk-free interest rate | 0.87% | |
| Dividend yield | nil |
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Expected volatility |
63% | |
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Expected life |
5.63 years | |
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Risk-free interest rate |
2.20% | |
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Dividend yield |
nil |
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Weighted average | ||||||
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Number of options | exercise price | |||||
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$ | ||||||
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Outstanding – January 1, 2015 |
1,130,000 | 0.54 | |||||
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Granted |
1,125,000 | 0.58 | |||||
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Forfeited |
(410,000 | ) | (0.59 | ) | |||
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Expired |
(25,000 | ) | (0.45 | ) | |||
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Exercised |
(150,000 | ) | (0.41 | ) | |||
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Outstanding – December 31, 2015 |
1,670,000 | 0.56 | |||||
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Granted |
1,300,000 | 0.62 | |||||
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Forfeited |
(50,000 | ) | (0.53 | ) | |||
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Expired |
(120,000 | ) | (0.53 | ) | |||
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Exercised |
(140,000 | ) | (0.45 | ) | |||
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Outstanding – December 31, 2016 |
2,660,000 | 0.60 |
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Weighted average | ||||||
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Number of options | exercise price | |||||
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$ | ||||||
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Outstanding – January 1, 2015 |
100,000 | 0.59 | |||||
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Expired |
(100,000 | ) | 0.59 | ||||
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Outstanding – December 31, 2015 |
- | - | |||||
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Granted |
50,000 | 0.73 | |||||
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Outstanding – December 31, 2016 |
50,000 | 0.73 |
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Outstanding options | Exercisable options | ||||||||||||||||||||
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Weighted | Weighted | ||||||||||||||||||||
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Weighted average | average | Aggregate | average | Aggregate | |||||||||||||||||
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Exercise |
Number of | remaining | exercise | intrinsic | Number of | exercise | intrinsic | |||||||||||||||
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prices |
options | contractual life | price | value | options | price | value | |||||||||||||||
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$ |
(years) | $ | $ | $ | $ | |||||||||||||||||
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0.41 |
375,000 | 0.57 | 0.06 | 281,250 | 0.09 | |||||||||||||||||
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0.48 |
150,000 | 0.22 | 0.03 | 75,000 | 0.03 | |||||||||||||||||
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0.51 |
20,000 | 0.00 | 0.00 | 20,000 | 0.01 | |||||||||||||||||
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0.52 |
25,000 | 0.00 | 0.00 | 25,000 | 0.01 | |||||||||||||||||
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0.52 |
100,000 | 0.07 | 0.02 | 100,000 | 0.04 | |||||||||||||||||
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0.53 |
125,000 | 0.14 | 0.02 | 125,000 | 0.05 | |||||||||||||||||
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0.58 |
35,000 | 0.02 | 0.01 | 35,000 | 0.02 | |||||||||||||||||
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0.58 |
600,000 | 0.79 | 0.13 | 300,000 | 0.13 | |||||||||||||||||
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0.58 |
75,000 | 0.10 | 0.02 | 37,500 | 0.02 | |||||||||||||||||
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0.60 |
30,000 | 0.01 | 0.01 | 30,000 | 0.01 | |||||||||||||||||
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0.62 |
300,000 | 0.36 | 0.07 | 275,000 | 0.13 | |||||||||||||||||
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0.73 |
600,000 | 2.16 | 0.16 | - | - | |||||||||||||||||
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0.73 |
50,000 | 0.09 | 0.01 | - | - | |||||||||||||||||
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0.76 |
225,000 | 0.83 | 0.06 | - | - | |||||||||||||||||
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2,710,000 | 5.36 | 0.60 | 485,000 | 1,303,750 | 0.53 | 320,000 | |||||||||||||||
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Number of | Weighted average | |||||
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warrants | exercise price | |||||
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(All Exercisable) | $ | |||||
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Outstanding – January 1, 2015 and 2016 |
7,231,123 | 0.5646 | |||||
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Exercised |
(1,056,765 | ) | (0.5646 | ) | |||
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Outstanding - December 31, 2016 |
6,174,358 | 0.5646 |
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2016 | 2015 | |||||
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Statutory income taxes |
$ | (305 | ) | $ | 387 | ||
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Net operating losses for which no tax benefits have been recorded |
201 | - | |||||
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Net operating losses used for which no tax benefit had been recorded |
- | (484 | ) | ||||
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Deficiency of depreciation over capital cost allowance |
(206 | ) | (98 | ) | |||
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Non-deductible expenses |
105 | 44 | |||||
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Undeducted research and development expenses |
245 | 178 | |||||
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Investment tax credit |
(40 | ) | (27 | ) | |||
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| $ | - | $ | - |
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2016 | 2015 | |||||
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Leasehold improvements and equipment |
$ | 201 | $ | 117 | |||
|
Net operating losses carryforward |
2,062 | 1,770 | |||||
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Undeducted research and development expenses |
1,501 | 1,274 | |||||
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Non-refundable tax credits carryforward |
1,190 | 1,022 | |||||
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4,954 | 4,183 | |||||
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Valuation allowance |
(4,954 | ) | (4,183 | ) | |||
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$ | - | $ | - |
| Tax Jurisdictions | Tax Years | ||
| Federal - Canada | 2013 and onward | ||
| Provincial - Quebec | 2013 and onward | ||
| Federal - USA | 2013 onward |
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In US$ thousands |
2016 | 2015 | |||||
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Additional Cash Flow Information: |
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Interest paid |
$ | 176 | $ | 23 |
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