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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x

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

For the Quarterly Period Ended September 30, 2014

OR

 

¨

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

Commission File No. 0-17082

 

 

QLT INC.

(Exact name of registrant as specified in its charter)

 

 

 

British Columbia, Canada   N/A
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

250 - 887 Great Northern Way,

Vancouver, B.C., Canada

  V5T 4T5
(Address of principal executive offices)   (Zip code)

Registrant’s telephone number, including area code: (604) 707-7000

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of October 21, 2014 the registrant had 51,185,922 outstanding shares of common stock.

 

 

 


Table of Contents

QLT INC.

QUARTERLY REPORT ON FORM 10-Q

September 30, 2014

TABLE OF CONTENTS

 

 

ITEM

      

PAGE

 
  PART I—FINANCIAL INFORMATION   
1.   FINANCIAL STATEMENTS      3   
 

Unaudited Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013

     3   
 

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2014 and September 30, 2013

     4   
 

Unaudited Condensed Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2014 and September 30, 2013

     5   
 

Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three and nine months ended September 30, 2014 and year ended December 31, 2013

     6   
 

Notes to Unaudited Condensed Consolidated Financial Statements

     7   
2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS      19   
3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      28   
4.   CONTROLS AND PROCEDURES      28   
  PART II—OTHER INFORMATION   
1.   LEGAL PROCEEDINGS      29   
1A.   RISK FACTORS      29   
6.   EXHIBITS      30   

 

2


Table of Contents

PART I—FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

QLT Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

                                   
(Unaudited)    September 30, 2014     December 31, 2013  

(In thousands of U.S. dollars except share amounts)

    

ASSETS

    

Current assets

    

Cash and cash equivalents

   $ 137,828      $ 118,521   

Accounts receivable, net of allowances for doubtful accounts (Notes 4)

     4,440        4,590   

Contingent consideration - current (Note 3)

     —          36,582   

Income taxes receivable

     68        77   

Deferred income tax assets - current

     —          191   

Prepaid and other assets

     787        1,863   
                  

Total current assets

     143,123        161,824   

Property, plant and equipment

     1,211        1,866   

Deferred income tax assets - non-current

     —          177   
                  

Total assets

     144,334        163,867   
                  
                  

LIABILITIES

    

Current liabilities

    

Accounts payable

   $ 2,405      $ 2,609   

Accrued liabilities (Note 5)

     1,283        1,498   

Accrued restructuring charges (Note 8)

     —          130   
                  

Total current liabilities

     3,688        4,237   

Uncertain tax position liabilities

     398        1,846   
                  

Total liabilities

     4,086        6,083   
                  

SHAREHOLDERS’ EQUITY

    

Share capital (Note 7)

    

Authorized

    

500,000,000 common shares without par value

    

5,000,000 first preference shares without par value, issuable in series

    

Issued and outstanding

    

Common shares

   $ 466,979      $ 466,229   

September 30, 2014 – 51,185,922 shares

    

December 31, 2013 – 51,081,878 shares

    
Additional paid-in capital      97,590        95,844   
Accumulated deficit      (527,290     (507,258
Accumulated other comprehensive income      102,969        102,969   
                  

Total shareholders’ equity

     140,248        157,784   
                  

Total shareholders’ equity and liabilities

   $ 144,334      $ 163,867   
                  
                  

See the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

 

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Table of Contents

QLT Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

 

                                                                       
     Three months ended
September 30,
    Nine months ended
September 30,
 
(In thousands of U.S. dollars except share and per share amounts)    2014     2013     2014     2013  

Expenses

        

Research and development

   $ 2,792      $ 5,243      $ 11,684      $ 13,715   

Selling, general and administrative

     2,388        1,676        8,642        5,568   

Depreciation

     222        230        680        717   

Restructuring charges (Note 8)

     —          354        744        1,847   

 

 
     5,402        7,503        21,750        21,847   

 

 

Operating loss

     (5,402     (7,503     (21,750     (21,847

Investment and other (expenses) income

        

Net foreign exchange losses

     —          (54     (74     (36

Interest income

     27        39        80        175   

Fair value change in contingent consideration (Note 3)

     —          71        1,466        1,904   

Other

     17        64        115        100   

 

 
     44        120        1,587        2,143   

 

 

Loss from continuing operations before income taxes

     (5,358     (7,383     (20,163     (19,704

Recovery of (provision for) income taxes (Note 9)

     432        (109     194        (434

 

 

Loss from continuing operations

     (4,926     (7,492     (19,969     (20,138

 

 

(Loss) income from discontinued operations, net of income taxes (Note 10)

     (6     96        (63     116   

 

 

Net loss and comprehensive loss

     (4,932   $ (7,396   $ (20,032   $ (20,022
                                  
                                  

Basic and diluted net loss per common share (Note 12)

        

Continuing operations

   $ (0.10   $ (0.15   $ (0.39   $ (0.40

Discontinued operations

     (0.00     0.00        (0.00     0.00   

 

 

Net loss per common share

   $ (0.10   $ (0.14   $ (0.39   $ (0.39
                                  
                                  

Weighted average number of common shares outstanding (in thousands)

        

Basic and diluted

     51,151        51,082        51,105        50,851   

See the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

 

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Table of Contents

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

                                                                       
     Three months ended
September 30,
    Nine months ended
September 30,
 
(In thousands of U.S. dollars)    2014     2013     2014     2013  

Cash used in operating activities

        

Net loss and comprehensive loss

   $ (4,932   $ (7,396   $ (20,032   $ (20,022

Adjustments to reconcile net loss to net cash used in operating activities

        

Depreciation

     222        230        680        717   

Stock-based compensation and restricted stock based compensation

     179        137        1,150        279   

Unrealized foreign exchange losses

     (11     69        83        204   

Deferred income taxes

     (416     108        (179     566   

Recovery on assets held for sale

     —          (37     —          (212

Gain on sale of discontinued operations (Note 10)

     —          —          —          (743

Gain on sale of long-lived assets

     —          (4     —          (4

Fair value change in contingent consideration (Note 3)

     —          761        —          1,249   

Changes in non-cash operating assets and liabilities

        

Accounts receivable

     4        (47     124        2,158   

Prepaid and other assets

     228        690        1,077        (264

Accounts payable

     (1,415     486        (172     (2,003

Income taxes receivable / payable

     —          204        9        146   

Accrued liabilities

     84        203        (181     (1,158

Accrued restructuring charges

     —          (436     (130     (1,633

 

 
     (6,057     (5,032     (17,571     (20,720

 

 

Cash provided by investing activities

        

Net proceeds from sale of long-lived assets

     —          30        —          239   

Net proceeds from sale of discontinued operations (Note 10)

     —          7,502        —          8,252   

Purchase of property, plant and equipment

     —          (129     (25     (129

Proceeds from contingent consideration (Note 3)

     5,544        8,483        36,582        25,035   

 

 
     5,544        15,886        36,557        33,397   

 

 

Cash used in financing activities

        

Common shares repurchased, including fees

     —          —          —          (14,079

Cash distribution paid to common shareholders (Note 7)

     —          —          —          (200,000

Issuance of common shares

     509        —          509        8,317   

 

 
     509        —          509        (205,762

 

 

Effect of exchange rate changes on cash and cash equivalents

     (101     52        (188     (213

 

 

Net increase (decrease) in cash and cash equivalents

     (105     10,906        19,307        (193,298

Cash and cash equivalents, beginning of period

     137,933        103,180        118,521        307,384   

 

 

Cash and cash equivalents, end of period

   $ 137,828      $ 114,086      $ 137,828      $ 114,086   
                                  
                                  

Supplementary cash flow information:

        

Income taxes paid

   $ —        $ —        $ 1      $ 1   
                                  

See the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

 

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Table of Contents

QLT Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

 

                                                                                                           
    

Common Shares

    Additional
Paid-in
Capital
    Accumulated
Deficit
    Accumulated
Other
Comprehensive
Income (1)
     Total
Shareholders’
Equity
 
     Shares     Amount           
 

(All amounts except share and per share information are expressed in thousands of U.S. dollars)

  

Balance at January 1, 2013

     51,589,405      $ 471,712      $ 296,024      $ (482,387   $ 102,969       $ 388,318   
Exercise of stock options, for cash, at prices ranging from CAD $2.44 to CAD $7.23 per share      1,183,952        9,978        (2,761     —          —           7,217   
Stock-based compensation      —          —          567        —          —           567   
Restricted stock based compensation      —          —          32        —          —           32   

Common share repurchase

(Note 7(b))

     (1,691,479     (15,461     1,982        —          —           (13,479
Cash distribution to common shareholders at $3.92 per share (Note 7(a))      —          —          (200,000     —          —           (200,000
Net loss and comprehensive loss      —          —          —          (24,871     —           (24,871
                                                   

Balance at December 31, 2013

     51,081,878      $ 466,229      $ 95,844      $ (507,258   $ 102,969       $ 157,784   
Stock-based compensation      —        $ —          538        —        $ —           538   
Restricted stock compensation      —          —          14        —        $ —           14   
Net loss and comprehensive loss      —        $ —            (6,462   $ —           (6,462
                                                   

Balance at March 31, 2014

     51,081,878        466,229        96,396        (513,720     102,969       $ 151,874   
Stock-based compensation      —          —          404        —          —           404   
Restricted stock compensation      —          —          15        —          —           15   
Net loss and comprehensive loss      —          —          —          (8,638     —           (8,638
                                                   

Balance at June 30, 2014

     51,081,878        466,229        96,815        (522,358     102,969         143,655   
Exercise of stock options, for cash, at prices ranging from CAD $4.54 to CAD $5.38 per share      104,044        750        (241     —          —           509   
Uncertain tax position liability recovery (Note 9)          837             837   
Stock-based compensation      —          —          165        —          —           165   
Restricted stock compensation      —          —          14        —          —           14   
Net loss and comprehensive loss      —          —          —        $ (4,932     —           (4,932
                                                   

Balance at September 30, 2014

     51,185,922        466,979        97,590        (527,290     102,969         140,248   
                                                   
                                                   

 

(1)

At September 30, 2014 our accumulated other comprehensive income is entirely related to historical cumulative translation adjustments resulting from the application of U.S. dollar reporting when the functional currency of QLT Inc. was the Canadian dollar

See the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

 

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Table of Contents

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Throughout this Quarterly Report on Form 10-Q (this “Report”), the words “we,” “us,” “our,” “the Company” and “QLT” refer to QLT Inc. and its wholly owned subsidiaries, QLT Plug Delivery, Inc., QLT Therapeutics, Inc. and QLT Ophthalmics, Inc., unless stated otherwise.

Business

QLT is a biotechnology company dedicated to the development and commercialization of innovative ocular products that address the unmet medical needs of patients and clinicians worldwide. Our core operations currently consist of clinical development programs dedicated to the development of our synthetic retinoid, QLT091001, for the treatment of certain age-related and inherited retinal diseases.

In parallel with our continued development efforts on QLT091001, in November 2013 we announced that we commenced a review of strategic alternatives for the Company and engaged Credit Suisse to act as our financial advisor.

On June 25, 2014, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) among QLT, Auxilium Pharmaceuticals, Inc., a Delaware corporation (“Auxilium”), QLT Holding Corp., a Delaware corporation and a wholly owned subsidiary of QLT (“HoldCo”), and QLT Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of HoldCo (“AcquireCo”). On October 8, 2014, the Merger Agreement terminated after Auxilum delivered a notice of termination to QLT informing QLT that Auxilum’s board of directors had reviewed an offer from Endo International plc to acquire all of the issued and outstanding shares of Auxilium (the “Endo Proposal”) and, after consulting with its financial advisors and external legal counsel, determined that the Endo Proposal was superior to the proposed merger with QLT. In accordance the termination provisions of the Merger Agreement, Auxilum paid QLT a termination fee of $28.4 million on October 9, 2014. For more information, refer to Note 2 – Terminated Merger Transaction with Auxilum.

 

1.   CONDENSED SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) for the presentation of interim financial information. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed, or omitted, pursuant to such rules and regulations. These financial statements do not include all disclosures required for the annual financial statements and should be read in conjunction with our audited consolidated financial statements and notes thereto included as part of our Annual Report on Form 10-K, as amended by Form 10-K/A, for the year ended December 31, 2013. All amounts herein are expressed in United States dollars unless otherwise noted.

In management’s opinion, the condensed consolidated financial statements reflect all adjustments (including reclassifications and normal recurring adjustments) necessary to present fairly the financial position at September 30, 2014, and results of operations and cash flows for all periods presented. The interim results presented are not necessarily indicative of results that can be expected for a full year.

The results of operations relating to our former punctal plug delivery system technology (the “PPDS Technology”), which we sold on April 3, 2013 to Mati Therapeutics, Inc. (“Mati”), and our Visudyne® business, which we sold on September 24, 2012 to Valeant Pharmaceuticals, Inc. (“Valeant”), have been excluded from continuing operations and are reported as discontinued operations for all periods presented. See Note 10 — Discontinued Operations for more information.

Principles of Consolidation

These condensed consolidated financial statements include the accounts of QLT and its subsidiaries, all of which are wholly owned. All intercompany transactions have been eliminated.

Use of Estimates

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of expenses during the reporting periods presented. Significant estimates include but are not limited to accounts receivable valuation provisions, allocation of overhead expenses to research and development, stock-based compensation, restructuring costs and provisions for taxes, tax assets and liabilities. Actual results may differ from estimates made by management.

 

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Segment Information

We operate in one industry segment, which is the business of developing, manufacturing, and commercializing opportunities in ophthalmology. As at the date of this report, our clinical development programs are solely focused on our synthetic retinoid, QLT091001. Our chief operating decision maker reviews our operating results and manages our operations as a single operating segment.

Discontinued Operations and Assets Held for Sale

We consider assets to be held for sale when management approves and commits to a formal plan to actively market the assets for sale. Upon designation as held for sale, the carrying value of the assets is recorded at the lower of their carrying value and their estimated fair value. We cease to record depreciation or amortization expense at that time.

The results of operations, including the gain on disposal for businesses that are classified as held for sale, are excluded from continuing operations and reported as discontinued operations for all periods presented. Other than the provision of certain transition services, we have not had any significant continued involvement with the Visudyne business or the PPDS Technology following their sales. Amounts billed to Valeant and Mati in connection with the provision of these transition services were included within discontinued operations.

Stock-Based Compensation

ASC topic 718 requires stock-based compensation expense, which is measured at fair value on the grant date, to be recognized in the statement of operations over the period in which a grantee is required to provide services in exchange for the stock award. Compensation expense recognition provisions are applicable to new awards as well as previously granted awards which are modified, repurchased or cancelled after the adoption date. We recognize stock-based compensation expense based on the estimated grant date fair value using the Black-Scholes valuation model, adjusted for estimated forfeitures. When estimating forfeitures, we consider attrition rates and trends of actual stock option forfeitures.

The Company has a Deferred Share Unit Plan (“DSU Plan”) for our directors. We recognize compensation expense for Deferred Share Units (“DSUs”) based on the market price of the Company’s stock. A vested DSU is convertible to cash only. The financial obligations related to the future settlement of these DSUs are recognized as compensation expense and accrued liabilities as the DSUs vest. Each reporting period, these obligations are revalued for changes in the market value of QLT’s common shares.

During 2013, the Company issued Restricted Stock Units (“RSUs”) to its directors as consideration for their provision of future services as directors (see Note 7(e)). Restricted stock-based compensation expense is measured based on the fair value market price of QLT’s common shares on the grant date and is recognized over the requisite service period, which coincides with the vesting period. RSUs can only be exchanged and settled for QLT’s common shares, on a one-to-one basis, upon vesting.

Income Taxes

Income taxes are reported using the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to: (i) differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and (ii) operating loss and tax credit carry forwards using applicable enacted tax rates. An increase or decrease in these tax rates will increase or decrease the carrying value of deferred net tax assets resulting in an increase or decrease to net income. Income tax credits, such as investment tax credits, are included as part of the provision for income taxes. The realization of our deferred tax assets is primarily dependent on generating sufficient capital gains and taxable income prior to expiration of any loss carry forward balance. A valuation allowance is provided when it is more likely than not that a deferred tax asset may not be realized. Changes in valuation allowances are included in our tax provision, or included within discontinued operations in the period of change.

Contingent Consideration

Contingent consideration arising from the sale of QLT USA and our Visudyne business is measured at fair value. The contingent consideration is revalued at each reporting period and changes are included in continuing operations. See Note 3 — Contingent Consideration.

 

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Net (Loss) Income Per Common Share

Basic net (loss) income per common share is computed using the weighted average number of common shares outstanding during the period. Diluted net (loss) income per common share is computed in accordance with the treasury stock method, which uses the weighted average number of common shares outstanding during the period and also includes the dilutive effect of common shares potentially issuable from outstanding stock options.

Fair Value of Financial Assets and Liabilities

The carrying values of cash and cash equivalents, trade receivables and payables, and contingent consideration approximate fair value. For cash and cash equivalents, trade receivables and trade payables, we estimate fair value using the market approach. For contingent consideration, we estimate fair value using the income approach. The fair values of our financial instruments reflect the amounts that would be received in connection with the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).

Recently Adopted Accounting Standards

No new accounting standards were adopted during the three months ended September 30, 2014.

Recently Issued Accounting Standards

In May 2014, FASB issued ASU No. 2014-09 - Revenue from Contracts with Customers. This update removes inconsistencies and weaknesses in revenue requirements, provides a more robust framework for addressing revenue issues, improves comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets, provides more useful information to users of financial statements through improved disclosure requirements and simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer. The guidance in this update supersedes the revenue recognition requirements in Topic 605 - Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the Codification. This update also supersedes some cost guidance included in Subtopic 605-35 - Revenue Recognition – Construction-Type and Production-Type Contracts. ASU No. 2014-09 is effective for public entities with reporting periods beginning after December 15, 2016. Early adoption is not permitted. Based on management’s current assessment, ASU No. 2014-09 is not expected to impact QLT’s consolidated financial statements.

On August 27, 2014, FASB issued ASU 2014-15 – Presentation of Financial Statements – Going Concern – Disclosure of Uncertainties about and Entity’s Ability to Continue as a Going Concern. The new guidance requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date of issuance of the entity’s financial statements. The update also provides guidance on when and how reporting entities should disclose going concern uncertainties in their financial statements. ASU 2014-15 is effective for annual periods ending after December 15, 2016 and interim periods thereafter. Management does not expect ASU 2014-15 to significantly impact QLT’s consolidated financial statements.

 

2.   TERMINATED MERGER TRANSACTION WITH AUXILIUM

On June 25, 2014, the Company entered into the Merger Agreement among QLT, Auxilium, HoldCo, and AcquireCo. The Merger Agreement contemplated a business combination, through a stock transaction, whereby AcquireCo would be merged with and into Auxilium; AcquireCo’s corporate existence would then subsequently cease; and Auxilium would continue as the surviving corporation (the “Merger”). On the date of the closing of the Merger, Auxilium would have become an indirect wholly owned subsidiary of QLT (the “Combined Company”) and Auxilium stockholders would have received common shares representing approximately 76% of the Combined Company, subject to certain adjustments.

On October 8, 2014, the Merger Agreement terminated after Auxilium delivered a notice of termination to QLT informing QLT that Auxilium’s board of directors had reviewed an offer from Endo International plc to acquire all of the issued and outstanding shares of Auxilium (the “Endo Proposal”) and, after consulting with its financial advisors and external legal counsel, determined that the Endo Proposal was superior to the proposed merger with QLT. Due to this change in recommendation by Auxilium’s board of directors and in accordance with the termination provisions of the Merger Agreement, on October 9, 2014, Auxilium paid QLT a termination fee of $28.4 million. On October 22, 2014, pursuant to the terms of our financial advisory services agreement with Credit Suisse, we paid Credit Suisse a fee of $5.7 million in connection with the termination of the Merger Agreement.

During the three and nine months ended September 30, 2014, QLT incurred consulting and transaction fees of $1.2 million and $4.4 million, respectively, in connection with our review and pursuit of strategic alternatives, including the Merger Agreement with Auxilium. These transaction fees have been reflected as part of the Selling, General and Administrative expenses on the condensed consolidated statements of operations and comprehensive loss.

 

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3.   CONTINGENT CONSIDERATION

Related to the Sale of QLT USA, Inc.

On October 1, 2009, we divested the Eligard® product line as part of the sale of all of the shares of our U.S. subsidiary, QLT USA, Inc. (“QLT USA”) to TOLMAR Holding, Inc. (“Tolmar”) for up to an aggregate $230.0 million plus cash on hand of $118.3 million. Pursuant to the stock purchase agreement with Tolmar dated October 1, 2009 (the “2009 Stock Purchase Agreement”), we received $20.0 million on closing, $10.0 million on October 1, 2010 and were entitled to certain consideration payable on a quarterly basis in amounts equal to 80% of the royalties paid under the license with Sanofi Synthelabo Inc. for the commercial marketing of Eligard in the U.S. and Canada (the “Sanofi License”), and the license with MediGene Aktiengesellschaft which, effective March 1, 2011, was assigned to Astellas Pharma Europe Ltd., for the commercial marketing of Eligard in Europe (the “Astellas License”). In accordance with the terms of the 2009 Stock Purchase Agreement, we were entitled to these payments until the earlier of our receipt of $200.0 million of such royalties or October 1, 2024. As at September 30, 2014 the $200.0 million of such consideration has been collected in full and no further amounts are outstanding.

Effective March 17, 2014, QLT entered into a consent and amendment agreement (the “Consent and Amendment Agreement”) to the 2009 Stock Purchase Agreement with Tolmar, under which Tolmar obtained our consent to consummate certain transactions that would affect the Sanofi License described above. Pursuant to the terms of the Consent and Amendment Agreement, in exchange for our consent, we received $17.0 million (the “Sanofi Prepayment”) on March 17, 2014 as pre-payment and full satisfaction of the remaining contingent consideration owing with respect to potential royalties under the Sanofi License. Among other things, Tolmar and its parent corporation, Dodley International Ltd (“Dodley”), also guaranteed payment of the remaining contingent consideration owing under the 2009 Stock Purchase Agreement with respect to the Astellas License on or before November 30, 2014.

During the three months ended September 30, 2014, we received the final $5.5 million (three months ended September 30, 2013 – $9.3 million) of remaining contingent consideration owing under the 2009 Stock Purchase Agreement. The $5.5 million of proceeds have been reflected as cash provided by investing activities in the condensed consolidated statements of cash flows for the three months ended September 30, 2014 (three months ended September 30, 2013 – $8.5 million) and no fair value changes were recorded during the period. However, during the three months ended September 30, 2013, $0.8 million of the proceeds collected were recognized as a fair value increase in contingent consideration on the condensed consolidated statement of operations and comprehensive loss and therefore reflected in the net loss and comprehensive loss line as part of the cash used in operating activities in the condensed consolidated statements of cash flows.

During the nine months ended September 30, 2014, proceeds received from the collection of the remaining contingent consideration, including the Sanofi Prepayment, totaled $38.1 million (nine months ended September 30, 2013 – $28.2 million). Approximately $36.6 million of these proceeds have been reflected as cash provided by investing activities in the condensed consolidated statements of cash flows (nine months ended September 30, 2013 – $25.0 million). The remaining $1.5 million of proceeds (nine months ended September 30, 2013 – $3.2 million) was recognized as the fair value increase in contingent consideration on the condensed consolidated statement of operations and comprehensive loss and therefore reflected in the net loss and comprehensive loss line as part of the cash used in operating activities in the condensed consolidated statements of cash flows.

Related to the Sale of Visudyne

On September 24, 2012, we completed the sale of our Visudyne business to Valeant. Pursuant to the Valeant Agreement, we received a payment of $112.5 million at closing, of which $7.5 million (previously held in escrow) was released to us on September 26, 2013. These funds were held in escrow for one year following the closing date to satisfy any potential indemnification claims that Valeant may have had. Subject to the achievement of certain future milestones, we are also eligible to receive the following additional consideration: (i) a milestone payment of $5.0 million if receipt of the registration required for commercial sale of the QcellusTM laser in the United States (the “Laser Registration”) is obtained by December 31, 2013, $2.5 million if the Laser Registration is obtained after December 31, 2013 but before January 1, 2015, and $0 if the Laser Registration is obtained thereafter (the “Laser Earn-Out Payment”); (ii) up to $5.0 million in each calendar year commencing January 1, 2013 (up to a maximum of $15.0 million in the aggregate) for annual net royalties exceeding $8.5 million pursuant to the Amended and Restated PDT Product Development, Manufacturing and Distribution Agreement with Novartis Pharma AG (the “Novartis Agreement”) or from other third-party sales of Visudyne outside of the United States; and (iii) a royalty on net sales attributable to new indications for Visudyne, if any should be approved by the United States Food and Drug Administration (the “FDA”). Following this divestiture, we did not have significant continuing involvement in the operations or cash flows of the Visudyne business other than the provision of certain transition services to Valeant pursuant to the transition services agreement. The activities related to transition services were complete as at August 31, 2013.

 

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On September 26, 2013, the FDA approved the premarket approval application (“PMA”) supplement for the Qcellus laser and on October 10, 2013, we invoiced Valeant for the $5.0 million Laser Earn-Out Payment. Valeant has disputed payment on the basis that it believes the Laser Earn-Out Payment remains contingent upon receipt of additional governmental authorizations with regard to the Qcellus laser. While we believe that the Laser Earn-Out Payment is currently due and payable by Valeant, the outcome of any dispute is uncertain and we may have difficulty collecting the Laser Earn-Out Payment in full.

As at September 30, 2014, the $5.0 million Laser Earn-Out Payment is recorded in accounts receivable on our condensed consolidated balance sheet net of $1.0 million of estimated collection costs to account for the increased uncertainty related to collection risk. The remaining estimated fair value of the contingent consideration, which relates to estimated future net royalties pursuant to the Novartis Agreement, is currently valued at nil.

The above contingent consideration payments related to the sale of QLT USA and our Visudyne business are not generated from a migration or continuation of activities and therefore are not direct cash flows of the divested businesses. See Note 10 — Discontinued Operations and Note 11 — Financial Instruments and Concentration of Credit Risk.

 

4.   ACCOUNTS RECEIVABLE

 

                                   
(In thousands of U.S. dollars)    September 30, 2014      December 31, 2013  
Accounts receivable - Laser Earn-Out Payment (a)      4,000         4,000   
Accounts receivable - Other      440         590   
                   
   $ 4,440       $ 4,590   
                   
                   

 

(a)

Accounts receivable relates to a milestone payment owing from Valeant related to the receipt of the PMA supplement for the Qcellus laser from the U.S. FDA on September 26, 2013. Refer to Note 3 – Contingent Consideration and Note 10 – Discontinued Operations for more information.

 

5.   ACCRUED LIABILITIES

 

                                   
(In thousands of U.S. dollars)    September 30, 2014      December 31, 2013  
Compensation    $ 868       $ 1,211   
Directors’ Deferred Share Units compensation (“DSU”)      390         265   
Other      25         22   
                   
   $ 1,283       $ 1,498   
                   
                   

 

6.   FOREIGN EXCHANGE FACILITY

We have a foreign exchange facility (as amended, the “Facility”) with HSBC Bank of Canada for the sole purpose of entering into foreign exchange contracts. The Facility allows us to enter into maximum of $12.5 million in forward foreign exchange contracts for terms up to one month and a maximum of $10.0 million for spot foreign exchange contracts.

The Facility requires security in the form of cash or money market instruments based on the contingent credit exposure for any outstanding foreign exchange transactions. At September 30, 2014 and December 31, 2013, no collateral was pledged as security for this facility given that we did not have any foreign exchange transactions outstanding.

 

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7.   SHARE CAPITAL

 

(a)

Cash Distribution

On June 27, 2013, we completed a $200.0 million special cash distribution, by way of a reduction of the paid-up capital of the Company’s common shares (the “Cash Distribution”). The Cash Distribution was approved by the Company’s shareholders at QLT’s annual and special shareholder’s meeting on June 14, 2013. All shareholders of record as at June 24, 2013 (the “Record Date”) were eligible to participate in the Cash Distribution and received a payment of approximately $3.92 per share based upon the 51,081,878 common shares issued and outstanding on the Record Date.

 

(b)

Share Repurchase Program

On October 2, 2012, we commenced a normal course issuer bid to repurchase up to 3,438,683 of our common shares, which represented 10% of our public float as of September 26, 2012. All purchases were affected in the open market through the facilities of the NASDAQ Stock Market in accordance with all applicable regulatory requirements. During the year ended December 31, 2013, we repurchased 1,691,479 (year ended December 31, 2012 – 1,747,204) common shares under the terms of this bid at a cost of $13.5 million, which represents an average price of $7.97 per common share (year ended December 31, 2012 – $13.7 million at an average price of $7.84 per common share). The bid was completed on March 12, 2013. We retired all of these shares as they were acquired. In connection with this retirement, we recorded an increase in additional paid-in capital of $2.0 million in 2013 (year ended December 31, 2012 – $2.4 million).

 

(c)

Stock Options

On April 25, 2013, the Company’s board of directors amended and restated the QLT 2000 Incentive Stock Plan (the “Plan”) to increase the number of shares of the Company’s common stock, without par value, available for grant under the Plan from 7,800,000 to 11,800,000 and to make certain other amendments to the Plan. The amendment and restatement of the Plan was subject to shareholder approval, which was obtained on June 14, 2013. On July 29, 2013, the Company filed a registration statement to register the issuance of up to 4,000,000 additional common shares that may be issued under the Plan as a result of the amendment to the Plan.

We use the Black-Scholes option pricing model to estimate the value of the options at each grant date. The Black-Scholes option pricing model was developed for use in estimating the value of traded options that have no vesting restrictions and are fully transferable. In addition, option pricing models require the input of highly subjective assumptions, including the expected stock price volatility. We project expected volatility and expected life of our stock options based upon historical and other economic data trended into future years. The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected life of our stock options. There were no stock options granted during the three and nine months ended September 30, 2014 and 2013.

The impact on our results of operations of recording stock-based compensation for the three and nine months ended September 30, 2014 and September 30, 2013 was as follows:

 

                                                                       
     Three months ended
September 30,
     Nine months ended
September 30,
 
(In thousands of U.S. dollars)    2014      2013      2014      2013  

Research and development

   $ 98       $ 77       $ 682       $ 171   

Selling, general and administrative

     67         45         425         90   

Discontinued operations

     —           —           —           3   
                                     

Stock-based compensation expense before income taxes

     165         122         1,107         264   

Related income tax benefits

     —           —           —           —     
                                     

Stock-based compensation, net of income taxes

   $ 165       $ 122       $ 1,107       $ 264   
   
                                     

 

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As at September 30, 2014, 688,072 stock options were exercisable (December 31, 2013 – 257,332) and 586,816 stock options were unvested (December 31, 2013 – 1,150,197). As at September 30, 2014, the total estimated unrecognized compensation cost related to unvested stock options and the expected weighted average periods over which such costs are expected to be recognized is as follows:

 

                 
      September 30,
2014
 

Unrecognized estimated compensation costs (in thousands of U.S. dollars)

   $ 1,256   

Expected weighted average period of recognition of compensation cost (in months)

     36   

Expected remaining weighted average period of compensation cost to be recognized (in years)

     1.75   

We issue new common shares upon exercise of stock options. During the three and nine months ended September 30, 2014, 104,044 stock options were exercised (three months ended September 30, 2013 – nil; nine months ended September 30, 2013 – 1,183,952). The intrinsic values associated with these stock options and the related cash received during the respective periods was as follows:

 

                                                                       
     Three months ended
September 30,
     Nine months ended
September 30,
 
(In thousands of U.S. dollars)    2014      2013      2014      2013  

Intrinsic value of stock options exercised

   $ 53       $ —         $ 53       $ 2,142   

Cash from exercise of stock options

     556         —           556         7,217   

 

(d)

Deferred Share Units

DSUs have only been issued to our directors. DSUs vest in thirty-six (36) successive and equal monthly installments beginning on the first day of the first month after the date of grant. A vested DSU can only be settled by conversion to cash (i.e. no share is issued), and is automatically converted after the director ceases to be member of the Board unless the director is removed from the Board for just cause.

The impact on our results of operations of recording DSU compensation expense for the three and nine months ended September 30, 2014 and September 30, 2013 was as follows:

 

                                                                       
     Three months ended
September 30,
     Nine months ended
September 30,
 
(In thousands of U.S. dollars)    2014     2013      2014      2013  
Research and development    $ (10   $ 22       $ 43       $ 33   
Selling, general and administrative      (16     37         102         56   
                                    
Deferred share unit compensation expense    $ (26   $ 59       $ 145       $ 89   
   
                                    

No cash payments were made under the DSU Plan during the three and nine months ended September 30, 2014 and September 30, 2013.

As at September 30, 2014, 85,556 DSUs were vested (December 31, 2013 – 47,056) and 68,444 DSUs were unvested (December 31, 2013 – 106,944).

 

(e)

Restricted Stock Units

RSUs vest in three (3) successive and equal yearly installments on the date of each of the first three annual general meetings of the Company held after the date of grant. Upon vesting, each RSU represents the right to receive one common share of the Company.

 

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The impact on our results of operations of recording RSU compensation expense for the three and nine months ended September 30, 2014 and September 30, 2013 was as follows:

 

                                                                       
     Three months ended
September 30,
     Nine months ended
September 30,
 
(In thousands of U.S. dollars)    2014      2013      2014      2013  
Research and development    $ 5       $ 6       $ 16       $ 6   
Selling, general and administrative      9         9         27         9   
                                     
Restricted stock unit compensation expense    $ 14       $ 15       $ 43       $ 15   
                                     
                                     

As at September 30, 2014, nil RSUs were vested (December 31, 2013 – nil) and 42,000 RSUs were unvested (December 31, 2013 – 42,000). In addition, the total estimated unrecognized compensation cost related to RSUs was $0.1 million (December 31, 2013 – $0.2 million) and the weighted average period over which such costs are expected to be recognized is 1.79 years (December 31, 2013 – 2.54 years).

 

8.   RESTRUCTURING CHARGE

In July 2012 we restructured our operations in order to focus our resources on our clinical development programs related to our synthetic retinoid, QLT091001, for the treatment of certain inherited retinal diseases. Following the sale of Visudyne to Valeant, we further reduced our workforce to better align the Company’s resources with our corporate objectives. Approximately 180 employees were affected by the restructuring. Severance and support provisions were made to assist these employees with outplacement. During the three and nine months ended September 30, 2014, we recorded charges of nil and $ 0.7 million (three months ended September 30, 2013 – $0.4 million, nine months ended September 30, 2013 - $1.8 million), respectively, related to this restructuring. The cumulative cost of the restructuring to date is $19.6 million (December 31, 2013 – $18.9 million).

Effective December 18, 2013, we entered into a letter agreement with Alexander R. Lussow, the Company’s Senior Vice President, Business Development and Commercial Operations, in which we, among other things, agreed to terminate him on either March 31, 2014, April 30, 2014 or May 31, 2014, at the Company’s discretion. Effective May 31, 2014, Alexander R. Lussow’s employment with QLT was terminated. The cost of his severance and termination benefits was $0.8 million, which was fully paid out on May 30, 2014.

The details of our restructuring accrual and activity are as follows:

 

                                                                                         
(In thousands of U. S. dollars)    Employee
Termination
Costs(1)
    Asset
Write-downs
    Contract
Termination
Costs(2)
    Other     Total  
Balance at January 1, 2013    $ 1,354      $ —        $ 579      $ —        $ 1,933   
Restructuring charge      1,542        —          266        223        2,031   
Cash payments      (2,880     —          (942     (223     (4,045
Discontinued operations      114        (304     97        —          (93
Non-cash portion        304        —          —          304   
                                          
Balance at December 31, 2013      130        —          —          —          130   
Restructuring charge      494        —          78        —          572   
Foreign exchange      (5     —          —          —          (5
Cash payments      (9     —          (78     —          (87
                                          
Balance at March 31, 2014      610        —          —          —          610   
Restructuring charge      172        —          —          —          172   
Cash payments      (782     —          —          —          (782
                                          
Balance at June 30, 2014    $ —        $ —        $ —        $ —        $ —     
                                          
Balance at September 30, 2014    $ —        $ —        $ —        $ —        $ —     
                                          
                                          

 

(1) 

Costs include severance, termination benefits, and outplacement support.

(2) 

Costs include lease costs related to excess office space and certain property, plant and equipment.

 

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9.   INCOME TAXES

As at September 30, 2014, our provision for uncertain tax positions was $0.4 million compared to $1.8 million as at December 31, 2013. The $1.4 million decrease was primarily due to the expiration of the statute of limitations applicable to certain tax positions taken on uncertain tax matters in prior years. During the three months ended September 30, 2014, this change in our provision for uncertain tax positions resulted in a $0.8 million balance sheet reclassification adjustment to additional-paid-in capital and a $0.4 million income tax recovery related to the reversal of the associated interest that was previously accrued. During the three months ended September 30, 2013, the provision for income taxes was $0.1 million, which primarily related to interest accrued on uncertain tax positions at that time. The provisions in both periods also reflect that we had insufficient evidence to support the current or future realization of the tax benefits associated with our development expenditures at that time.

During the nine months ended September 30, 2014, we recognized an income tax recovery of $0.2 million which consisted of the $0.4 million income tax recovery described above offset by the tax impact of gains from fair value changes in our previous Eligard related contingent consideration asset and interest accrued on uncertain tax positions at that time. During the nine months ended September 30, 2013, the $0.4 million provision for income taxes primarily related to the gains from fair value changes in our previous Eligard related contingent consideration asset. The provisions for both periods also reflect that we had insufficient evidence to support the current or future realization of the tax benefits associated with our development expenditures at that time.

During the nine months ended September 30, 2014, our net deferred tax asset was reduced to nil as a result of the collection of all outstanding amounts related to our previous Eligard related contingent consideration asset and no further fair value changes being recorded. Refer to Note 3 — Contingent Consideration for more information.

As insufficient evidence exists to support current or future realization of the tax benefits associated with the vast majority of our current and prior period operating expenditures, the benefit of certain tax assets was not recognized during the three and nine months ended September 30, 2014 and September 30, 2013.

 

10.   DISCONTINUED OPERATIONS

On September 24, 2012, we completed the sale of our Visudyne business to Valeant pursuant to the Valeant Agreement. Under the terms of the Valeant Agreement, we received a payment of $112.5 million at closing and are also eligible to receive certain other contingent consideration, which is described under Note 3 — Contingent Consideration.

On April 3, 2013, we completed the sale of our PPDS Technology to Mati pursuant to the terms of an asset purchase agreement (the “Mati Agreement”). On December 24, 2012, we entered into an exclusive option agreement with Mati, under which we granted Mati a 90-day option to acquire assets related to our PPDS technology in exchange for $0.5 million. Upon receipt of this payment, we recorded it as deferred income and recognized the $0.5 million rateably into income over the 90- day option term in accordance with our obligation to maintain the related intellectual property during that period. In accordance with the terms of the Mati Agreement, we received an additional payment of approximately $0.8 million upon closing. Under the Mati Agreement, we are eligible to receive future potential payments upon completion of certain product development and commercialization milestones that could reach $19.5 million (or exceed that amount if more than two products are commercialized), a low single digit royalty on world-wide net sales of all products using or developed from the PPDS Technology and a fee on payments received by Mati in respect of the PPDS Technology other than net sales. Under the terms of the Mati Agreement, we do not have any significant ongoing involvement in the operations or cash flows related to the PPDS Technology other than minor transition services which we agreed to provide. The activities related to transition services were complete as at September 30, 2013.

 

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The operating results related to our PPDS Technology and Visudyne business have been excluded from continuing operations and reported as discontinued operations for all periods presented:

 

                                                                               
       Three months ended        Nine months ended  
       September 30,        September 30,  
(In thousands of U.S. dollars)      2014        2013        2014        2013  
Recovery on assets held for sale (1)        —             37           —             212   
Operating pre-tax loss        (6        83           (63        (391
Gain on sale of discontinued operations (2)        —             —             —             743   
                                             
Pre-tax (loss) income        (6        83           (63        352   
                                             
Provision for income taxes        —             13           —             (236
                                             
Net (loss) income from discontinued operations      $ (6      $ 96         $ (63      $ 116   
                                             
                                             

 

(1) 

Relates to recoveries on equipment that was previously written down in connection with the sale of our PPDS Technology to Mati.

 

(2) 

Relates to the 2013 revenue recognition of funds received from Mati at the end of 2012, which were initially recorded as deferred income, for the 90-day option to acquire assets related to our former PPDS Technology.

 

11.   FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK

We have various financial instruments that must be measured under the fair value standard including cash and cash equivalents, accounts receivable, contingent consideration and, from time to time, forward currency contracts. Our financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy.

The following tables provide information about our assets and liabilities that are measured at fair value on a recurring basis at September 30, 2014 and December 31, 2013 and indicate the fair value hierarchy of the valuation techniques we utilized to determine such fair value:

 

                                                                               
       As at September 30, 2014  
(In thousands of U.S. dollars)      Level 1        Level 2        Level 3        Total  
Assets:                    
Cash and cash equivalents      $ 137,828         $ —           $ —           $ 137,828   
Accounts receivable - Laser Earn-Out Payment (1)        —             —             4,000           4,000   
                                             
Total      $ 137,828         $ —           $ 4,000         $ 141,828   
                                             
                                             

 

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       As at December 31, 2013  
(In thousands of U.S. dollars)      Level 1        Level 2        Level 3        Total  
Assets:                    
Cash and cash equivalents      $ 118,521         $ —           $ —           $ 118,521   
Accounts receivable - Laser Earn-Out Payment (1)        —             —             4,000         $ 4,000   
Contingent consideration(2)        —             —             36,582         $ 36,582   
                                             
Total      $ 118,521         $ —           $ 40,582         $ 159,103   
                                             
                                             

 

(1) 

In 2014, the estimated $4.0 million fair value of the Laser Earn-Out Payment was reclassified from contingent consideration to accounts receivable. For additional discussion, refer to Note 3 – Contingent Consideration.

 

(2) 

To estimate the fair value of contingent consideration we use a discounted cash flow model based on estimated timing and amount of future cash flows. As at December 31, 2013, we discounted the future cash flows using a cost of capital rate of 9% for the contingent consideration related to Eligard. The cost of capital rate was selected based on available market and industry information. Future cash flows were estimated by utilizing external market research to estimate market size, to which we applied market share, pricing and foreign exchange assumptions based on historical sales data, expected competition and current exchange rates.

The following table represents a reconciliation of our contingent consideration assets measured and recorded at fair value on a recurring basis, using significant unobservable inputs (Level 3):

 

                                                           
       Level 3  
(In thousands of U.S. dollars)     

Related to

Sale of
QLT USA

      

Related to

Sale of
Visudyne

       Total  
Balance at January 1, 2013      $ 71,195         $ 5,214         $ 76,409   
Transfer to Accounts Receivable        —             (3,956        (3,956
Settlements        (38,693        —             (38,693
Fair value change in contingent consideration        4,080           (1,258        2,822   
                                  
Balance at December 31, 2013        36,582           —             36,582   
Transfer to Accounts Receivable        (9,989        —             (9,989
Settlements        (28,059        —             (28,059
Fair value change in contingent consideration        1,466           —             1,466   
                                  
Balance at March 31, 2014        —             —             —     
                                  
Balance at June 30, 2014        —             —             —     
                                  
Balance at September 30, 2014      $ —           $ —           $ —     
                                  
                                  

As at September 30, 2014 and December 31, 2013 we had no outstanding forward foreign currency contracts. Other financial instruments that may be subject to credit risk include our cash and cash equivalents, accounts receivable and contingent consideration. To limit our credit exposure, we deposit our cash and cash equivalents with high quality financial institutions in accordance with our treasury policy goal to preserve capital and maintain liquidity. Our treasury policy limits investments to certain money market securities issued by governments, financial institutions and corporations with investment-grade credit ratings, and places restrictions on maturities and concentration by issuer.

 

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12.   NET LOSS PER SHARE

The following table sets out the computation of basic and diluted net (loss) income per common share:

 

                                                                       
     Three months ended     Nine months ended  
     September 30,     September 30,  
(In thousands of U.S. dollars, except share and per share data)    2014     2013     2014     2013  
Numerator:         

Loss from continuing operations

   $ (4,926   $ (7,492   $ (19,969   $ (20,138

Income from discontinued operations, net of income taxes

     (6     96        (63     116   
                                  
Net loss    $ (4,932   $ (7,396   $ (20,032   $ (20,022
                                  
                                  
Denominator: (thousands)         

Weighted average common shares outstanding

     51,151        51,082        51,105        50,851   
Basic and diluted net loss per common share         
Continuing operations    $ (0.10   $ (0.15   $ (0.39   $ (0.40
Discontinued operations      (0.00     0.00        (0.00     0.00   
                                  
Net loss per common share    $ (0.10   $ (0.14   $ (0.39   $ (0.39
                                  
                                  

For the three and nine months ended September 30, 2014, 1,274,888 stock options and 42,000 RSUs (three and nine months ended September 30, 2013—1,074,348 stock options and nil RSUs) were excluded from the calculation of diluted net loss per common share because their effect was anti-dilutive.

 

13.   SUBSEQUENT EVENTS

Termination Fees

As described in Note 2 – Terminated Merger Transaction with Auxilium, on October 8, 2014 the Merger Agreement terminated after Auxilum delivered a notice of termination to QLT informing QLT that Auxilium’s board of directors had determined that the Endo Proposal was a superior proposal under the terms of the Merger Agreement. Due to this change in recommendation by Auxilium’s board of directors and in accordance with the termination provisions of the Merger Agreement, on October 9, 2014 Auxilum paid QLT a termination fee of $28.4 million. On October 22, 2014, pursuant to the terms of our financial advisory services agreement with Credit Suisse, we paid Credit Suisse a fee of $5.7 million in connection the termination of the Merger Agreement. Given that these fees were triggered by the termination of the Merger Agreement which occurred on October 8, 2014, they have not been recognized on the September 30, 2014 consolidated balance sheet but will be accounted for in the fourth quarter of 2014.

Appointment of Interim Chief Executive Officer

On October 23, 2014, Dr. Geoffrey F. Cox, a current director of QLT, was appointed Interim Chief Executive Officer and the Executive Transition Committee of the Board of Directors was concurrently disbanded. The Executive Transition Committee was formed on August 2, 2012 to perform the function of the Chief Executive Officer while the board of directors explored strategic alternatives and determined the resources and management necessary to pursue such options.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following information should be read in conjunction with the accompanying unaudited interim condensed consolidated financial statements and notes thereto, which are prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) and our audited consolidated financial statements and notes thereto included as part of our Annual Report on Form 10-K, as amended on Form 10-K/A, for the year ended December 31, 2013 (our “2013 Annual Report”).

All of the following amounts are expressed in U.S. dollars unless otherwise indicated.

Note regarding Trademarks

The following words used in this Report are trademarks:

 

   

Eligard® is a registered trademark of Tolmar Therapeutics, Inc.

 

   

Visudyne® is a registered trademark of Novartis AG.

 

   

Qcellus™ is a trademark of Valeant Pharmaceuticals International, Inc.

Any words used in this Report that are trademarks but are not referred to above are the property of their respective owners.

Overview

Strategic Restructuring

QLT is a biotechnology company dedicated to the development and commercialization of innovative ocular products that address the unmet medical needs of patients and clinicians worldwide. On July 9, 2012, as a result of a comprehensive business and portfolio review by our Board of Directors (the “Board”), we announced a new corporate strategy and plans to restructure our operations in order to concentrate our resources on our clinical development programs related to our synthetic retinoid, QLT091001, for the treatment of certain inherited retinal diseases. In connection with the strategic restructuring of the Company, over the course of 2012 and 2013 we completed the sale of our Visudyne® business to Valeant Pharmaceuticals International, Inc. (“Valeant”) and the sale of our punctal plug drug delivery system (“PPDS”) to Mati Therapeutics Inc. (“Mati”), and, as a result, significantly reduced our workforce by approximately 180 employees. Our remaining employees have been focused on the development of QLT091001.

Over the course of 2013 and 2014, the Company met with the U.S. Food and Drug Administration (“FDA”) and the European Medicines Agency (“EMA”), including an end-of-phase II meeting with the FDA, in order to progress QLT091001 for the treatment of certain inherited retinal diseases toward pivotal trials. We also conducted a Phase IIa trial of QLT091001 for the treatment of impaired dark adaptation (IDA) to investigate the safety and efficacy of the drug in a larger patient population.

Terminated Merger Transaction with Auxilium Pharmaceuticals, Inc.

In parallel with our continued development efforts on QLT091001, in November 2013 we announced that we commenced a review of strategic alternatives for the Company and engaged Credit Suisse to act as our financial advisor.

On June 25, 2014, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) among QLT, Auxilium Pharmaceuticals, Inc., a Delaware corporation (“Auxilium”), QLT Holding Corp., a Delaware corporation and a wholly owned subsidiary of QLT (“HoldCo”), and QLT Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of HoldCo (“AcquireCo”). The Merger Agreement contemplated a business combination, through a stock transaction, whereby AcquireCo would be merged with and into Auxilium; AcquireCo’s corporate existence would then subsequently cease; and Auxilium would continue as the surviving corporation (the “Merger”). On the date of the closing of the Merger, Auxilium would have become an indirect wholly owned subsidiary of QLT (the “Combined Company”) and Auxilium stockholders would have received common shares representing approximately 76% of the Combined Company, subject to certain adjustments.

On October 8, 2014, the Merger Agreement terminated after Auxilum delivered a notice of termination to QLT informing QLT that Auxilum’s board of directors had reviewed an offer from Endo International plc to acquire all of the issued and outstanding shares of Auxilium (the “Endo Proposal”) and, after consulting with its financial advisors and external legal

 

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counsel, determined that the Endo Proposal was superior to the proposed merger with QLT. Due to this change in recommendation by Auxilium’s board of directors and in accordance with the termination provisions of the Merger Agreement, on October 9, 2014, Auxilium paid QLT a termination fee of $28.4 million. On October 22, 2014, pursuant to the terms of our financial advisory services agreement with Credit Suisse, we paid Credit Suisse a fee of $5.7 million in connection with the termination of the Merger Agreement.

During the three and nine months ended September 30, 2014, QLT incurred consulting and transaction fees of $1.2 million and $4.4 million, respectively. These transaction fees have been reflected as part of the Selling, General and Administrative expenses on the condensed consolidated statements of operations and comprehensive loss.

In light of the termination of the Merger Agreement, we have re-engaged in the assessment of the Company’s strategic options.

Appointment of Interim Chief Executive Officer

On October 23, 2014, Dr. Geoffrey F. Cox, a current director of QLT, was appointed Interim Chief Executive Officer and the Executive Transition Committee of the Board of Directors was concurrently disbanded. The Executive Transition Committee was formed on August 2, 2012 to perform the function of the Chief Executive Officer while the board of directors explored strategic alternatives and determined the resources and management necessary to pursue such options.

Sales of Assets and Discontinued Operations

Eligard®

On October 1, 2009, we divested the Eligard line of products to TOLMAR Holding, Inc. (“Tolmar”) as part of the sale of all of the shares of our U.S. subsidiary, QLT USA, Inc. (“QLT USA”). Pursuant to the stock purchase agreement dated October 1, 2009 (the “2009 Stock Purchase Agreement”), were entitled to future consideration payable quarterly in amounts equal to 80% of the royalties paid under the license with Sanofi Synthelabo Inc. (“Sanofi”) for the commercial marketing of Eligard in the U.S. and Canada (the “Sanofi License”), and the license with MediGene Aktiengesellschaft, which, effective March 1, 2011, was assigned to Astellas Pharma Europe Ltd., for the commercial marketing of Eligard in Europe (the “Astellas License”). We were entitled to these quarterly payments until the earlier of our receipt of $200.0 million or October 1, 2024. As at September 30, 2014 the $200.0 million of such consideration has been collected in full and no further amounts are outstanding.

Visudyne

In September 2012, in connection with the strategic restructuring, we sold our only commercial product, Visudyne, to Valeant. Pursuant to the asset purchase agreement between the Company and Valeant (the “Valeant Agreement”), we sold all of our assets related to our Visudyne business, including the QcellusTM laser then under development by us, for $112.5 million in upfront consideration, contingent payments up to $20.0 million, and a royalty on net sales of new indications for Visudyne, if any should be approved. We are entitled to the contingent payments upon the achievement of certain milestones, including: (i) $5.0 million if receipt of the registration required for commercial sale of the Qcellus lasers in the United States (the “Laser Registration”) is obtained by December 31, 2013, $2.5 million if the Laser Registration is obtained after December 31, 2013 but before January 1, 2015 and $0 if the Laser Registration is obtained thereafter (the “Laser Earn-Out Payment”) and (ii) up to $5.0 million in each calendar year commencing January 1, 2013 (up to a maximum of $15.0 million in the aggregate) for annual net royalties exceeding $8.5 million received by Valeant under the license agreement with Novartis Pharma AG, which we transferred to Valeant in connection with the sale, or from other third-party sales of Visudyne outside of the United States.

On September 26, 2013, the FDA approved the premarket approval application supplement for the Qcellus laser and on October 10, 2013, we invoiced Valeant for the $5.0 million Laser Earn-Out Payment. Valeant has disputed payment on the basis that it believes the Laser Earn-Out Payment remains contingent upon receipt of additional governmental authorizations with respect to the Qcellus laser. While we believe that the Laser Earn-Out Payment is currently due and payable by Valeant, the outcome of any dispute is uncertain and we may have difficulty collecting the Laser Earn-Out Payment in full.

Punctal Plug Delivery Program

On April 3, 2013, we completed the sale of our punctal plug drug delivery system technology (the “PPDS Technology”) to Mati, a development company founded by Robert L. Butchofsky, our former President and Chief Executive Officer. Mr. Butchofsky’s employment with QLT was terminated on August 2, 2012 as part of the strategic restructuring described above. Under the terms of our asset purchase agreement with Mati (the “Mati Agreement”), we are eligible to receive

 

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potential payments upon the satisfaction of certain product development and commercialization milestones that could reach $19.5 million (or exceed that amount if more than two products are commercialized), a low single digit royalty on world-wide net sales of all products using or developed from the PPDS Technology and a fee on payments received by Mati in respect of the PPDS Technology other than net sales.

Research and Development

QLT’s research and development efforts are currently focused solely on QLT091001.

QLT091001 orphan drug program for the treatment of Leber Congenital Amaurosis and Retinitis Pigmentosa. QLT is currently evaluating QLT091001 for the treatment of Leber Congenital Amaurosis (“LCA”) and Retinitis Pigmentosa (“RP”). Results from QLT’s initial Phase Ib clinical proof-of-concept study in patients with LCA and RP were reported for the 14 subject cohort of LCA patients in 2011 and for the 18 subject cohort of early-onset RP patients in March 2012. QLT also reported positive results from the Phase Ib retreatment study in these subjects on September 12, 2014.

QLT091001 has received orphan drug designations for the treatment of LCA (due to inherited mutations in lecithin:retinol acyltransferase (“LRAT”) or retinal pigment epithelium protein 65 (“RPE65”) genes) and RP (all mutations) by the FDA, and for the treatment of LCA and RP (all mutations) by the EMA. The FDA has also formally acknowledged that the orphan drug designations granted by the FDA on QLT091001 for the treatment of LCA (due to inherited mutations in LRAT or RPE65 genes) and RP (all mutations) also cover QLT091001 for the treatment of Inherited Retinal Disease caused by LRAT or RPE65 mutations (“IRD”), including severe early childhood onset retinal dystrophy (“SECORD”), which disease/condition QLT believes subsumes both LCA due to inherited mutations in LRAT or RPE65 genes and RP. On July 30, 2014, the EMA also formally acknowledged that a therapeutic indication of QLT091001 for the treatment of patients with Inherited Retinal Disease, who have been phenotypically diagnosed as LCA or RP caused by mutations in RPE65 or LRAT, would fall under the orphan drug designations of treatment of LCA and treatment of RP. The drug has also been granted two Fast Track designations by the FDA for the treatment of LCA and RP due to inherited mutations in the LRAT and RPE65 genes. QLT continues to further evaluate its development plans, including trial designs, indication and protocol requirements to advance the orphan drug program.

QLT has begun a compassionate use program for QLT091001 on a named-patient basis. Under the compassionate use program, QLT091001 may be made available to patients who participated in QLT’s Phase Ib clinical trial of QLT091001 for the treatment of LCA and RP. The program commenced in Ireland and participation for other patients will be determined on a case-by-case basis in accordance with applicable regulatory laws. Compassionate use programs provide experimental therapeutics to patients with serious or life-threatening diseases that cannot be treated satisfactorily with authorized therapies prior to final FDA, EMA or other applicable regulatory approval.

Given the ultra orphan nature of its indications under investigation, QLT has also been working toward establishing a central patient registry either independently or in conjunction with one or more third parties to identify and characterize patient status and then follow disease progression to track the natural history of the disease.

In May 2011, the United States Patent and Trademark Office issued Patent No. 7,951,841, a key patent related to this program, covering various methods of use of QLT091001 in the treatment of diseases associated with an endogenous 11-cis-retinal deficiency, expiring on July 27, 2027, including the period of patent term adjustment. Outside of the US, counterpart patents and patent applications to US Patent No. 7,951,841 with varying scope of protection are pending or have been granted, including European Patent No. 1765322 which was granted on November 6, 2013 and subsequently validated into national patents in 35 European countries, all of which are set to expire in 2025.

Study in RP subjects with autosomal dominant RPE65 mutation. RP is genetically heterogeneous and can be inherited in an autosomal recessive (AR), autosomal dominant (AD), or X-linked manner, with rare digenic and mitochondrial forms. Previously, all reported mutations in RPE65 were associated with recessive RP or LCA. Recently, however, a dominant-acting mutation in RPE65 was reported. In order to investigate the safety, tolerability and efficacy of oral QLT091001 as a novel treatment for RP subjects with an autosomal dominant mutation in RPE65, an open-label, Phase 1b, proof-of-concept study was initiated. This study evaluates the safety and treatment effects of a single course (once-daily for seven days) of oral 40 mg/m2 QLT091001 in five RP subjects with an autosomal dominant mutation in RPE65. Dosing of subjects has been completed and analysis is ongoing. We expect that an analysis of the data from the trial will be completed in the fourth quarter of 2014.

QLT091001 for the treatment of Impaired Dark Adaptation. In late 2013, we initiated a Phase IIa proof-of-concept randomized, multi-center, parallel-group, placebo-controlled trial of QLT091001 in adult subjects with Impaired Dark Adaptation (“IDA”), a condition that results in decreased ability to recover visual sensitivity in the dark after exposure to bright lights. The trial is designed to evaluate the safety profile and effects of QLT091001 on impaired dark adaptation time, glare recovery time and low luminance low contrast best corrected visual acuity. Subject dosing and follow-up has been completed. We expect that an analysis of the data from the trial will be completed in the fourth quarter of 2014.

 

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RESULTS OF OPERATIONS

The following table sets out our net losses from operations for the three and nine months ended September 30, 2014 and 2013:

 

                                                                       
     Three months ended
September 30,
    Nine months ended
September 30,
 
(In thousands of U.S. dollars, except per share data)    2014     2013     2014     2013  
Net loss and comprehensive loss    $ (4,932   $ (7,396   $ (20,032   $ (20,022
Basic and diluted net loss per common share    $ (0.10   $ (0.14   $ (0.39   $ (0.39

Detailed discussion and analysis of our results of operations are as follows:

Costs and Expenses

Research and Development

During the three months ended September 30, 2014, research and development (“R&D”) expenditures from continuing operations were $2.8 million compared to $5.2 million for the same period in 2013. The $2.4 million (47%) decrease was primarily due to higher costs incurred in 2013 related to certain toxicity studies, which commenced in the second half of 2013, and our LCA and RP Phase Ib retreatment study, which was substantially completed in 2013. The period-over-period decrease in R&D expenditures was further positively affected by savings realized in 2014 related to the continuing impact of our 2012 workforce reduction and other restructuring activities.

During the nine months ended September 30, 2014, R&D expenditures were $11.7 million compared to $13.7 million for the same period in 2013. The $2.0 million (15%) decrease was primarily due to higher costs incurred in 2013 related to our LCA and RP Phase Ib retreatment study, which was substantially completed in 2013, and savings realized in 2014 related to the continuing impact of our 2012 workforce reduction and other restructuring activities. These R&D expenditure decreases were partially offset by higher costs incurred in 2014 related to our IDA study, preparatory activities for the QLT091001 proposed pivotal trial, the toxicity studies mentioned above, and higher stock based compensation expense associated with certain stock options granted in July and November of 2013 for incentive and retention purposes.

Selling, General and Administrative Expenses

During the three months ended September 30, 2014, selling, general and administrative (“SG&A”), expenditures were $2.4 million compared to $1.7 million for the same period in 2013. The net $0.7 million increase (43%) in SG&A expenses was primarily due to $1.2 million of consulting and transaction fees incurred in connection the proposed Merger with Auxilium described above. These costs were partially offset by net overall savings realized in 2014 related to the continuing impact of our 2012 workforce reduction and other restructuring activities.

During the nine months ended September 30, 2014, SG&A expenditures were $8.6 million compared to $5.6 million for the same period in 2013. The $3.1 million (55%) increase was primarily due to $4.4 million of consulting and transaction fees incurred in connection with the evaluation of strategic alternatives and contemplated Merger with Auxilium described above as well as higher stock based compensation expense associated with stock options granted in 2013 for incentive and retention purposes. These costs were partially offset by net overall savings realized in 2014 related to our 2012 workforce reduction and other restructuring activities.

Restructuring Charges

During the three and nine months ended September 30, 2014, we recorded restructuring charges of nil and $0.7 million, respectively. These restructuring charges primarily relate to severance and termination benefits recorded in connection with the May 31, 2014 termination of our former Senior Vice President of Business Development and Commercial Operations, Alexander R. Lussow. The cumulative total cost of Dr. Lussow’s severance and termination benefits was $0.8 million, which was fully paid out on May 30, 2014.

 

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During the three and nine months ended September 30, 2013, we recorded restructuring charges of $0.4 million and $1.8 million, respectively. These restructuring charges included severance and termination benefits and contract termination costs related to our ongoing 2012 restructuring activities.

Investment and Other Income

Net Foreign Exchange Gains (Losses)

For the three and nine months ended September 30, 2014 and 2013, net foreign exchange losses comprised gains and losses from the impact of foreign exchange fluctuations on our monetary assets and liabilities that are denominated in currencies other than the U.S. dollar (principally the Canadian dollar). See Liquidity and Capital Resources – Interest and Foreign Exchange Rates below.

Fair Value Change in Contingent Consideration

During the three months ended September 30, 2014 and September 30, 2013, the fair value change in contingent consideration was nil and $0.1 million, respectively. These fair value gains diminished to nil given that the final amount of Eligard related contingent consideration was collected in August 2014 and no further amounts remain outstanding as at September 30, 2014.

During the nine months ended September 30, 2014 and September 30, 2013, we recorded fair value gains of $1.5 million and $1.9 million, respectively, in connection with our Eligard related contingent consideration. The $0.4 million decrease in these fair value gains is primarily due to the impact of cash collected during the period, which decreased the balance of future expected cash flows owed to us. For more detailed information, refer to the discussion under the Sales of Assets and Discontinued Operations – Eligard section above.

Income Taxes

As at September 30, 2014, our provision for uncertain tax positions was $0.4 million compared to $1.8 million as at December 31, 2013. The $1.4 million decrease was primarily due to the expiration of the statute of limitations applicable to certain tax positions taken on uncertain tax matters in prior years. During the three months ended September 30, 2014, this change in our provision for uncertain tax positions resulted in a $0.8 million balance sheet reclassification adjustment to additional-paid-in capital and a $0.4 million income tax recovery related to the reversal of the associated interest that was previously accrued. During the three months ended September 30, 2013, the provision for income taxes was $0.1 million, which primarily related to interest accrued on uncertain tax positions at that time. The provisions in both periods also reflect that we had insufficient evidence to support the current or future realization of the tax benefits associated with our development expenditures at that time.

During the nine months ended September 30, 2014, we recognized an income tax recovery of $0.2 million which consisted of the $0.4 million income tax recovery described above offset by the tax impact of gains from fair value changes in our previous Eligard related contingent consideration asset and interest accrued on uncertain tax positions at that time. During the nine months ended September 30, 2013, the $0.4 million provision for income taxes primarily related to the gains from fair value changes in our previous Eligard related contingent consideration asset. The provisions for both periods also reflect that we had insufficient evidence to support the current or future realization of the tax benefits associated with our development expenditures at that time.

During the nine months ended September 30, 2014, our net deferred tax asset was reduced to nil as a result of the collection of all outstanding amounts related to our previous Eligard related contingent consideration asset and no further fair value changes being recorded. Refer to Note 3 — Contingent Consideration for more information.

As insufficient evidence exists to support current or future realization of the tax benefits associated with the vast majority of our current and prior period operating expenditures, the benefit of certain tax assets was not recognized during the three and nine months ended September 30, 2014 and September 30, 2013.

As of September 30, 2014, we had a valuation allowance against specifically identified tax assets. The valuation allowance is reviewed periodically and if management’s assessment of the “more likely than not” criterion for accounting purposes changes, the valuation allowance is adjusted accordingly.

 

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LIQUIDITY AND CAPITAL RESOURCES

General

As at September 30, 2014, our cash resources, working capital, cash from divestitures, and other available financing resources are sufficient to service current product research and development needs, operating requirements, liability requirements, milestone payments, restructuring and change in control obligations, and future consulting and advisory fees we expect to incur in connection with the exploration of strategic alternatives.

However, factors that may affect our future capital availability or requirements may include: expenses incurred in connection with the exploration and pursuit future financial and/or strategic alternatives, returns of capital to shareholders, including future share repurchases; the status of competitors and their intellectual property rights; levels of future sales of Visudyne and receipt of certain earn-out payments and future contingent consideration under the Valeant Agreement; levels of any future payments under the Mati Agreement; the progress of our R&D programs, including preclinical and clinical testing; the timing and cost of obtaining regulatory approvals; the levels of resources that we devote to the development of manufacturing and other support capabilities; technological advances; the cost of filing, prosecuting and enforcing our patent claims and other intellectual property rights; pre-launch costs related to commercializing our products in development; acquisition and licensing activities; milestone payments and receipts; and our ability to establish collaborative arrangements with other organizations.

There is no guarantee that our future liquidity and capital resources will be sufficient to service our operating needs and financial obligations. In this event, our business could be materially and adversely affected and the Company would be required to seek other financing alternatives.

Sources and Uses of Cash

We finance operations, product development and capital expenditures primarily through existing cash, sales of assets and contingent consideration received.

Cash Used in Operating Activities

During the three months ended September 30, 2014, we used $6.1 million of cash in operations compared to $5.0 million for the same period in 2013. The $1.1 million negative cash flow variance was primarily attributable to the following:

 

   

Cash outflows of $2.7 million associated with consulting and transaction fees paid during the period in connection the proposed Merger with Auxilium;

 

   

A negative operating cash flow variance from a $1.1 million decrease in other income;

 

   

A positive operating cash flow variance of $1.9 million from lower operational spending; and

 

   

A positive operating cash flow variance of $0.8 million from lower spending on restructuring costs.

During the nine months ended September 30, 2014, we used $17.6 million of cash in operations compared to $20.7 million for the same period in 2013. The $3.1 million positive cash flow variance was primarily attributable to the following:

 

   

A positive operating cash flow variance from lower operational spending of $6.2 million related to the continuing savings from our 2012 restructuring initiatives;

 

   

A positive operating cash flow variance of $2.6 million from lower spending on restructuring costs;

 

   

Cash outflows of $4.0 million associated with consulting and transaction fees paid during the period in connection the proposed Merger with Auxilium; and

 

   

A negative operating cash flow variance from a $1.7 million decrease in other income.

Cash Provided by Investing Activities

During the three and nine months ended September 30, 2014, cash flows provided by investing activities consisted of Eligard related contingent consideration of $5.5 million and $36.6 million, respectively (see the Sale of Assets and Discontinued Operations—Eligard section above for additional information).

 

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During the three months ended September 30, 2013, cash flows provided by investing activities primarily consisted of $8.5 million of Eligard related contingent consideration; $7.5 million of proceeds, related to our 2012 sale of Visudyne, which was released to us on September 26, 2013 from an escrow account; and $0.1 million spent on capital expenditures.

During the nine months ended September 30, 2013, cash flows used in investing activities consisted of $25.0 million of Eligard related contingent consideration, $7.5 million of proceeds released from escrow as described above; $0.7 million of proceeds related to the sale of our PPDS Technology; and $0.2 million of proceeds from the sale of certain assets and property, plant and equipment, that was previously designated as held-for-sale.

As discussed under the Terminated Merger Transaction with Auxilium Pharmaceuticals, Inc. note, on October 9, 2014, QLT received a termination fee of $28.4 million from Auxilium in connection with termination of the Merger Agreement. The $28.4 million termination fee will be accounted for in the fourth quarter of 2014.

Cash Used in Financing Activities

During the three and nine months ended September 30, 2014, cash flows from financing activities consisted of $0.5 million of proceeds received in connection with the issuance of common shares for stock options exercised.

During the three months ended September 30, 2013, there were no cash flows from financing activities. During the nine months ended September 30, 2013, cash flows used in financing activities included the $200.0 million Cash Distribution to shareholders and $14.1 million of cash used to repurchase common shares, including share repurchase costs. These cash outflows were partially offset by $8.3 million of cash received in connection with the issuance of common shares for stock options exercised.

Interest and Foreign Exchange Rates

We are exposed to market risk related to changes in interest and foreign currency exchange rates, each of which could adversely affect the value of our current assets and liabilities. At September 30, 2014, we had $137.8 million in cash and cash equivalents and our cash equivalents had an average remaining maturity of approximately 14 days. If market interest rates were to increase immediately and uniformly by one hundred basis points from levels at September 30, 2014, the fair value of the cash equivalents would decline by an immaterial amount due to the short remaining maturity period.

The functional currency of QLT Inc. and its U.S. subsidiaries is the U.S. dollar and, therefore, our U.S. dollar-denominated cash and cash equivalents holdings do not result in foreign currency gains or losses in operations. To the extent that QLT Inc. holds a portion of its monetary assets and liabilities in Canadian dollars, we are subject to translation gains and losses. These translation gains and losses are included in operations for the period.

At September 30, 2014, we had no outstanding forward foreign currency contracts and no collateral was pledged for security.

Contractual Obligations

As of September 30, 2014, our material contractual obligations consist of our clinical and development agreements. We currently have a two year operating lease commitment, which commenced on September 1, 2013, for approximately 20,000 square feet of office and laboratory space.

Off-Balance Sheet Arrangements

In connection with the sale of assets and businesses, we provide indemnities related to certain matters, including product liability, patent infringement, and contract breach and misrepresentation. We also provide other indemnities to parties under the clinical trial, license, service, manufacturing, supply and other agreements that we enter into in the normal course of our business. If the indemnified party were to make a successful claim pursuant to the terms of the indemnification, we would be required to reimburse the loss. These indemnities are generally subject to certain threshold amounts, specified claims periods and other restrictions and limitations.

Except as described above and the contractual arrangements described in the Contractual Obligations section above, we do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future impact on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

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Outstanding Share Data

On April 25, 2013, the Company’s board of directors amended and restated the QLT 2000 Incentive Stock Plan (the “Plan”) to increase the number of shares of the Company’s common stock, without par value, available for grant under the Plan from 7,800,000 to 11,800,000 and to make certain other amendments to the Plan, including to permit the granting of restricted stock units (“RSUs”) under the Plan. The amendment and restatement of the Plan was subject to shareholder approval, which was obtained on June 14, 2013. On July 29, 2013, the Company filed a registration statement to register the issuance of up to an additional 4,000,000 common shares that may be issued under the Plan as a result of the amendment to the Plan.

As of October 21, 2014, there were 51,185,922 common shares issued and outstanding, which totaled $467.0 million in share capital. As of October 21, 2014, we had 1,274,888 stock options outstanding of which 716,763 were exercisable at a weighted average exercise price of CAD $5.14 per share. Each stock option is exercisable for one common share. As of October 21, 2014, we had 42,000 RSUs outstanding, none of which are vested. Upon vesting, each RSU represents the right to receive one common share of the Company. As of October 21, 2014, we had 154,000 deferred stock units outstanding of which 89,833 are vested. The cash value of the deferred stock units outstanding as at October 21, 2014 is $0.6 million.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the periods presented. Significant estimates include but are not limited to accounts receivable valuation provisions, contingent consideration measured at fair value, allocation of overhead expenses to research and development, stock-based compensation, restructuring costs, and provisions for taxes, tax assets and liabilities. Actual results may differ from estimates made by management. Please refer to our Critical Accounting Policies and Estimates included as part of our 2013 Annual Report.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Report contains forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 and “forward looking information” within the meaning of the Canadian securities legislation which are based on our current expectations and projections. Words such as “anticipate,” “project,” “potential,” “goal,” “believe,” “expect,” “forecast,” “outlook,” “plan,” “intend,” “estimate,” “should,” “may,” “assume,” “continue” and variations of such words or similar expressions are intended to identify our forward-looking statements and forward-looking information. Such statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of QLT to be materially different from the results of operations or plans expressed or implied by such forward-looking statements and forward-looking information. Many such risks, uncertainties and other factors are taken into account as part of our assumptions underlying the forward-looking statements and forward-looking information.

The following factors, among others, including those described under Item 1 A. Risk Factors in our 2013 Annual Report, as amended in our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2014 (the “Q2 2014 Quarterly Report”) and in Item 1 A. Risk Factors in Part II of this Report, could cause our future results to differ materially from those expressed in the forward-looking statements and forward-looking information:

 

   

our continued pursuit of strategic alternatives, or our decision to discontinue such pursuit, and the uncertainty of whether we will be successful in our efforts;

 

   

unanticipated negative effects of our strategic restructuring in 2012, including our significant reduction in workforce and disposition of our Visudyne business and PPDS Technology;

 

   

our ability to maintain adequate internal controls over financial reporting;

 

   

our ability to retain or attract key employees;

 

   

the anticipated timing, cost and progress of the development of our technology and clinical trials including the anticipated timing to commence future clinical trials of QLT091001;

 

   

the anticipated timing of regulatory submissions for product candidates;

 

   

the anticipated timing for receipt of, and our ability to maintain, regulatory approvals for product candidates;

 

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our ability to successfully develop and commercialize our synthetic retinoid program;

 

   

whether we pursue or obtain a potential partnering agreement for our synthetic retinoid program;

 

   

existing governmental laws and regulations and changes in, or the failure to comply with, governmental laws and regulations;

 

   

the scope, validity and enforceability of our and third party intellectual property rights;

 

   

the anticipated timing for receipt of, and our ability to obtain and maintain, orphan drug designations for our synthetic retinoid;

 

   

receipt of the full Laser Earn-Out Payment, which is currently subject to a dispute with Valeant, and receipt of all or part of the other contingent consideration pursuant to the Valeant Agreement, which is based on future sales of Visudyne outside of the United States and sales attributable to any new indications for Visudyne;

 

   

receipt of all or part of the contingent consideration pursuant to the asset purchase agreement with Mati based on Mati’s successful development and sales of products based on our PPDS Technology;

 

   

our ability to effectively market and sell any future products;

 

   

changes in estimates of prior years’ tax items and results of tax audits by tax authorities; and

 

   

unanticipated future operating results.

Although we believe that the assumptions underlying the forward-looking statements and forward-looking information contained herein are reasonable, any of the assumptions could be inaccurate, and therefore such statements and information included in this Quarterly Report may not prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements and forward-looking information included herein, the inclusion of such statements and information should not be regarded as a representation by us or any other person that the results or conditions described in such statements and information or our objectives and plans will be achieved. Any forward-looking statement and forward-looking information speaks only as of the date on which it is made. Except to fulfill our obligations under the applicable securities laws, we undertake no obligation to update any such statement or information to reflect events or circumstances occurring after the date on which it is made.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources in this Quarterly Report as well as Item 7A. Quantitative and Qualitative Disclosures about Market Risk of our 2013 Annual Report.

 

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed in filings made pursuant to the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified and in accordance with the SEC’s rules and forms and is accumulated and communicated to management, including our Interim Chief Executive Officer and Chief Financial Officer. Our Interim Chief Executive Officer and Chief Financial Officer have evaluated our disclosure controls and procedures as of the end of the period covered by this Quarterly Report and concluded that our disclosure controls and procedures were effective in timely alerting them to material information required to be included in our periodic SEC reports.

It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. However, our Interim Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective under circumstances where our disclosure controls and procedures should reasonably be expected to operate effectively.

Changes in Internal Control over Financial Reporting

Our internal control over financial reporting is designed with the objective of providing reasonable assurance regarding the reliability of our financial reporting and preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

No change was made to our internal controls over financial reporting during the fiscal quarter ended September 30, 2014, that has materially affected, or is reasonably likely to materially affect, such internal controls over financial reporting.

 

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PART II—OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

There are currently no material pending legal proceedings. For information regarding litigation and other risks, uncertainties and other factors that may materially and adversely affect our business, products, financial condition and operating results, refer to Item 1A. Risk Factors in our 2013 Annual Report and as amended in our Q2 2014 Quarterly Report and in this Report.

 

ITEM 1A. RISK FACTORS

Other than the updates to the risk factors below concerning our current operations, management believes that there have been no material changes to the Company’s risk factors as reported in Item 1A of our 2013 Annual Report as amended in our Q2 2014 Quarterly Report.

The risks described below and in our 2013 Annual Report, as amended in our Q2 2014 Quarterly Report, are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem not to be material also may materially adversely affect our business, products, financial condition and operating results.

We are exploring and evaluating strategic alternatives for the Company and there can be no assurance that we will be successful in identifying a strategic alternative, that such strategic alternative will yield additional value for stockholders or that the process will not have an adverse impact on our business.

In November 2013, we announced the initiation of a review of strategic alternatives, which could result in, among other things, a sale of the Company, a merger, consolidation, business combination or a disposition of all or a substantial portion of our assets in one or more transactions. However, there can be no assurance that the exploration of strategic alternatives will result in the identification or consummation of any transaction. In addition, we expect to incur substantial expenses associated with identifying and evaluating potential strategic alternatives. The process of exploring strategic alternatives may be time consuming and disruptive to our business operations and if we are unable to effectively manage the process, our business, financial condition and results of operations could be adversely affected. For example, while we were paid a termination fee of $28.4 million upon the termination of the Merger Agreement by Auxilium, we expended substantial time, expenses and management and other personnel resources on the transaction.

As a result of the termination of the Merger Agreement with Auxilium, we have re-engaged in the review of strategic options available to us. No decision has been made with respect to any transaction and we cannot assure you that we will be able to identify and undertake a transaction that allows our shareholders to realize an increase in the value of their stock or provide any guidance on the timing of such action, if any. We also cannot assure you that any potential transaction or other strategic alternative, if identified, evaluated and consummated, will provide greater value to our shareholders than that reflected in the current stock price. Any potential transaction would be dependent upon a number of factors that may be beyond our control, including, among other factors, market conditions, industry trends, the interest of third parties in our business and the availability of financing to potential buyers on reasonable terms.

We believe that we may be deemed a passive foreign investment company for the taxable year ended December 31, 2014, which could result in adverse United States federal income tax consequences to U.S. Holders and may deter certain U.S. investors from purchasing our stock, which could have an adverse impact on our stock price.

Based on the price of our common shares and the composition of our assets, we believe that we may be deemed a “passive foreign investment company” (“PFIC”) for United States federal income tax purposes for the taxable year ended December 31, 2014. We believe that we may be deemed a PFIC for the taxable years ended December 31, 2008 through 2013, and we may be a PFIC in future years. A non-U.S. corporation generally will be classified as a PFIC for U.S. federal income tax purposes in any taxable year in which, after applying relevant look-through rules with respect to the income and assets of subsidiaries, either 75% or more of its gross income is “passive income” or 50% or more of the average value of its assets consists of assets that produce, or are held for the production of, passive income. If we were a PFIC for any taxable year during a U.S. Holder’s holding period for our common shares, certain adverse United States federal income tax consequences could apply to such U.S. Holder, as that term is defined in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations – Certain Canadian and U.S. Federal Income Tax Information for U.S. Residents – U.S. Federal Income Tax Information – U.S. Holders in this Report, including on a return of capital to such U.S. Holders. In addition, our PFIC status may deter certain U.S. investors from purchasing our stock, which could have an adverse impact on our stock price.

 

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ITEM 6. EXHIBITS

The exhibits filed or furnished with this Quarterly Report are set forth in the Exhibit Index.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned thereunto duly authorized.

 

   

QLT Inc.

(Registrant)

Date: October 28, 2014

   

By:

 

/s/ Dr. Geoffrey F. Cox

     

Dr. Geoffrey F. Cox

     

Interim Chief Executive Officer

     

(Principal Executive Officer)

Date: October 28, 2014

   

By:

 

/s/ Sukhi Jagpal

     

Sukhi Jagpal

     

Chief Financial Officer

     

(Principal Financial and Accounting Officer)

 

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EXHIBIT INDEX

 

Exhibit
Number
     Description
  10.1   

Employment Agreement between QLT Inc. and Geoffrey F. Cox dated October 23, 2014

  10.2   

Form of employee stock option grant to Geoffrey F. Cox

  31.1   

Rule 13a-14(a) Certification of the Chief Executive Officer.

  31.2   

Rule 13a-14(a) Certification of the Chief Financial Officer.

  32.1   

Section 1350 Certification of the Chief Executive Officer.

  32.2   

Section 1350 Certification of the Chief Financial Officer.

  101.*      

The following financial statements from the QLT Inc. Quarterly Report on Form 10Q for the quarter ended September 30, 2014, formatted in Extensible Business Reporting Language (“XBRL”):

•   unaudited condensed consolidated balance sheets;

•   unaudited condensed consolidated statements of operations and comprehensive loss;

•   unaudited condensed consolidated statements of cash flows;

•   unaudited condensed consolidated statements of changes in shareholders’ equity; and

•   notes to unaudited condensed consolidated financial statements.

 

*

Filed herewith

 

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