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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 March 31, 2015

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 April 23, 2015 the registrant had 51,255,700 outstanding shares of common stock.

 

 

 


QLT INC.

QUARTERLY REPORT ON FORM 10-Q

March 31, 2015

TABLE OF CONTENTS

 

ITEM

       PAGE  
  PART I—FINANCIAL INFORMATION   
1.   FINANCIAL STATEMENTS      3   
 

Unaudited Condensed Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014

     3   
 

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2015 and March 31, 2014

     4   
 

Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and March 31, 2014

     5   
 

Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2015 and year ended December 31, 2014

     6   
 

Notes to Unaudited Condensed Consolidated Financial Statements

     7   
2.  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     17   
3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      24   
4.   CONTROLS AND PROCEDURES      24   
  PART II—OTHER INFORMATION   
1.   LEGAL PROCEEDINGS      25   
1A.   RISK FACTORS      25   
6.   EXHIBITS      25   

 

2


PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

QLT Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

                                   
(Unaudited) March 31, 2015   December 31, 2014  

(In thousands of U.S. dollars)

ASSETS

Current assets

Cash and cash equivalents

$ 151,270    $ 155,908   

Accounts receivable, net of allowances for doubtful accounts - current (Note 4)

  258      363   

Income taxes receivable

  14      47   

Prepaid and other

  1,016      1,053   
                  

Total current assets

  152,558      157,371   

Accounts receivable - non-current (Note 4)

  2,000      2,000   

Property, plant and equipment

  812      1,000   
                  

Total assets

$ 155,370    $ 160,371   
   
                  

LIABILITIES

Current liabilities

Accounts payable

$ 2,659    $ 1,943   

Accrued liabilities (Note 5)

  1,164      1,528   
                  

Total current liabilities

  3,823      3,471   

Uncertain tax position liabilities

  360      388   
                  

Total liabilities

  4,183      3,859   
                  

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

$ 467,339    $ 467,034   

March 31, 2015 – 51,255,700 shares

December 31, 2014 – 51,199,922 shares

Additional paid-in capital

  98,104      97,838   

Accumulated deficit

  (517,225   (511,329

Accumulated other comprehensive income

  102,969      102,969   
                  

Total shareholders’ equity

  151,187      156,512   
                  

Total shareholders’ equity and liabilities

$ 155,370    $ 160,371   
   
                  

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

 

3


QLT Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

 

                                   
Three months ended March 31, 2015   2014  
(In thousands of U.S. dollars except share and per share information)

Expenses

Research and development

$ 2,208    $ 4,813   

Selling, general and administrative (Note 2)

  3,619      2,156   

Depreciation

  188      229   

Restructuring charges (Note 8)

  —        571   
                  
  6,015      7,769   
                  

Operating loss

  (6,015   (7,769

Other (expense) income

Net foreign exchange gains (losses)

  98      (21

Interest income

  32      22   

Fair value change in contingent consideration (Notes 3, 10)

  —        1,466   

Other

  (2   55   
                  
  128      1,522   
                  

Loss before income taxes

  (5,887   (6,247

Provision for income taxes (Note 9)

  (9   (215
                  

Net loss and comprehensive loss

$ (5,896 $ (6,462
   
                  

Basic and diluted net loss per common share (Note 11)

Net loss per common share

$ (0.12 $ (0.13

Weighted average number of common shares outstanding (in thousands)

Basic and diluted

  51,237      51,082   

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

 

4


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

                             
Three months ended March 31, 2015   2014  
(In thousands of U.S. dollars)

Cash used in operating activities

Net loss and comprehensive loss

$ (5,896 $ (6,462

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

Depreciation

  188      229   

Stock-based compensation and restricted stock based compensation

  365      552   

Unrealized foreign exchange

  (162   58   

Deferred income taxes

  4      214   

Changes in non-cash operating assets and liabilities

Accounts receivable

  61      184   

Prepaid and other assets

  37      236   

Accounts payable

  812      65   

Income taxes receivable / payable

  33      9   

Accrued liabilities

  (209   (624

Accrued restructuring charges

  —        485   
                   
  (4,767   (5,054
                   

Cash provided by investing activities

Proceeds from contingent consideration (Note 3)

  —        26,593   
                   
  —        26,593   
                   

Cash provided by financing activities

Issuance of common shares

  206      —     
                   
  206      —     
                   

Effect of exchange rate changes on cash and cash equivalents

  (77   (151
                   

Net (decrease) increase in cash and cash equivalents

  (4,638   21,388   

Cash and cash equivalents, beginning of period

  155,908      118,521   
                   

Cash and cash equivalents, end of period

$ 151,270    $ 139,909   
   
                   

Supplementary cash flow information:

Income taxes paid

$ 4    $ 1   
                   

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

 

5


QLT Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

 

                                                                                                                       
  Common Shares  

Additional
Paid-in

Capital

  Accumulated
Deficit
  Accumulated
Other
Comprehensive
Income
  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, 2014

  51,081,878    $ 466,229    $ 95,844    $ (507,258 $ 102,969    $ 157,784   
Exercise of stock options, for cash, at prices ranging from CAD $4.54 to CAD $5.38 per share   104,044      750      (241   509   
Shares issued in connection with RSUs vested   14,000      55      (55   —     
Uncertain tax position liability recovery   837      837   
Stock-based compensation   1,394      1,394   
Restricted stock compensation   59      59   
Net loss and comprehensive loss   (4,071   (4,071
                                                     

Balance at December 31, 2014

  51,199,922    $ 467,034    $ 97,838    $ (511,329 $ 102,969    $ 156,512   
Exercise of stock options, for cash, at a price of CAD $4.54 per share   55,778      305      (99   206   
Stock-based compensation   342      342   
Restricted stock compensation   23      23   
Net loss and comprehensive loss   (5,896   (5,896
                                                     

Balance at March 31, 2015

  51,255,700    $ 467,339    $ 98,104    $ (517,225 $ 102,969    $ 151,187   
                                                     
                                                     

 

(1)

At March 31, 2015, our accumulated other comprehensive income is entirely related to historical cumulative translation adjustments 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.

 

6


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.

Following the October 8, 2014 termination of the Agreement and Plan of Merger (the “Merger Agreement”) dated June 25, 2014 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”), we have continued to review our strategic and business options. We have engaged Greenhill & Co. to act as our financial advisor in connection with developing and providing advice with respect to various strategic and business alternatives. Strategic and business alternatives which QLT may consider include, but are not limited to, asset divestiture, partnering or other collaboration agreements, merger, reverse merger, reorganization or similar transactions, and potential acquisitions or recapitalizations. For more information on the previously contemplated merger with Auxilium, refer to Note 2 – Terminated Merger Transaction with Auxilium.

 

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 for the year ended December 31, 2014. 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 as at March 31, 2015, 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.

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 and fair value adjustments, allocation of overhead expenses to research and development, stock-based compensation, and provisions for taxes, tax assets and liabilities. Actual results may differ from estimates made by management.

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.

 

7


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.

The Company issues Restricted Stock Units (“RSUs”) to its directors as consideration for their provision of future services as directors. 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.

Contingent Consideration

Where contingent consideration assets are recorded, they are measured at fair value and revalued at each reporting period. The resulting fair value changes are included in continuing operations. See Note 3 — Contingent Consideration.

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

On January 9, 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2015-01 – Extraordinary Items. The new guidance eliminates from U.S. GAAP the concept of an extraordinary item, which is an event or transaction that is both (1) unusual in nature and (2) infrequently occurring. Under the ASU No. 2015-01, an entity is no longer permitted to (1) segregate an extraordinary item from the results of ordinary operations; (2) separately present an extraordinary item on its income statement, net of tax, after income from continuing operations; or (3) disclose income taxes and earnings-per-share data applicable to an extraordinary item. This update is effective for annual periods beginning after December 15, 2015, and interim periods within those annual periods. The adoption of this standard in the first quarter of 2015 did not have a significant impact on the Company’s financial position or results of operations.

 

8


Recently Issued Accounting Standards

On February 18, 2015, FASB issued ASU No. 2015-02 – Amendments to Consolidation Analysis. The new guidance amends consolidation requirements under ASC No. 810, and significantly changes the consolidation analysis required under U.S. GAAP. ASU No. 2015-02 makes specific amendments to the current consolidation guidance for variable interest entities. ASU No. 2015-02 is effective for annual periods beginning after December 15, 2016, and interim periods beginning after December 15, 2017. As at the date of this assessment, management does not expect ASU No. 2015-02 to significantly impact the Company’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 (the “Endo Proposal”) to acquire all of the issued and outstanding shares of Auxilium 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 Securities (USA) LLC (“Credit Suisse”), we paid Credit Suisse a breakup fee of $5.7 million (the “Breakup Fee”) in connection with the termination of the Merger Agreement. Our financial advisory services agreement with Credit Suisse was subsequently terminated.

During the three months ended March 31, 2014, QLT incurred consulting and transaction fees of $0.7 million in connection with our pursuit of a merger with Auxilium. Following the termination of the Merger Agreement with Auxilium, we have continued to review our strategic and business options and we engaged Greenhill & Co. to act as our financial advisor in connection with developing and providing advice with respect to various strategic and business alternatives. Strategic and business alternatives which QLT may consider include, but are not limited to, asset divestiture, partnering or other collaboration agreements, merger, reverse merger, reorganization or similar transactions, and potential acquisitions or recapitalizations. During the three months ended March 31, 2015, we incurred $1.9 million of consulting and advisory fees related to our exploration of these strategic options. For both comparative periods, these fees have been reflected in Selling, General and Administrative expenses on the consolidated statements of operations and comprehensive (loss) income.

 

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 “Tolmar 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 Tolmar Agreement, we were entitled to these payments until the earlier of (i) our receipt of $200.0 million of such payments or (ii) October 1, 2024. As at August 2014, the cumulative $200.0 million of such consideration was collected in full and no further amounts remain outstanding as at March 31, 2015.

Effective March 17, 2014, QLT entered into a consent and amendment agreement (the “Consent and Amendment Agreement”) to the Tolmar Agreement, 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 on March 17, 2014 as prepayment and full satisfaction of the remaining contingent consideration owing with respect to potential royalties under the Sanofi License.

 

9


Given that all contingent consideration under the terms of the Tolmar Agreement was collected in full by August 31, 2014, during the three months ended March 31, 2015, we received nil proceeds and recorded nil fair value gains or losses under the Tolmar Agreement. However, during the three months ended March 31, 2014, we collected $28.1 million of proceeds from the contingent consideration, which included the prepayment pursuant to the Consent and Amendment Agreement with respect to potential royalties under the Sanofi License described above. Approximately $26.6 million of these proceeds were reflected as cash provided by investing activities in the condensed consolidated statements of cash flows. The remaining proceeds of $1.5 million were recognized as a fair value increase in contingent consideration on the condensed consolidated statement of operations and comprehensive loss and were 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 Pharmaceuticals International, Inc. (“Valeant”). Pursuant to the asset purchase agreement with Valeant (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 under certain provisions of the Valeant Agreement. 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 Qcellus 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 FDA.

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 $5.0 million 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 March 31, 2015, the $5.0 million Laser Earn-Out Payment is recorded in accounts receivable on our condensed consolidated balance sheet at its estimated fair value of $2.0 million (December 31, 2014 – $2.0 million). Management’s fair value estimate reflects its assessment of collection risk, the impact of the passage of time and potential collection costs associated with the Valeant dispute. 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. We received no proceeds related to the collection of the contingent consideration for the sale of Visudyne during the three months ended March 31, 2015 and 2014.

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 business. See Note 10 — Financial Instruments and Concentration of Credit Risk.

Related to the Sale of the PPDS Technology

On April 3, 2013, we completed the sale of our punctal plug drug delivery system technology (the “PPDS Technology”) to Mati Therapeutics Inc. (“Mati”) pursuant to the terms of our asset purchase agreement with Mati (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. Furthermore, 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 did not have any significant ongoing involvement in the operations or cash flows related to the PPDS Technology other than minor transition services which we provided. The activities related to transition services were complete as at September 30, 2013.

 

10


4.   ACCOUNTS RECEIVABLE

 

                                       
(In thousands of U.S. dollars)

March 31,

2015

 

December 31,

2014

 
Accounts receivable - Laser Earn-Out Payment - non-current (a) $ 2,000    $ 2,000   
Accounts receivable - Other - current   258      363   
                       
$ 2,258    $ 2,363   
   
                       

 

(a)

Accounts receivable relates to the Laser Earn-Out Payment as described in Note 3 – Contingent Consideration and Note 10 – Financial Instruments and Concentration of Credit Risk.

 

5.   ACCRUED LIABILITIES

 

                                       
(In thousands of U.S. dollars)

March 31,

2015

 

December 31,

2014

 
Compensation $ 726    $ 1,136   
Directors’ Deferred Share Units compensation (“DSU”)   438      392   
                       
$ 1,164    $ 1,528   
   
                       

 

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 March 31, 2015, and December 31, 2014, no collateral was pledged as security for this facility given that we did not have any foreign exchange transactions outstanding.

 

7.   SHARE CAPITAL

 

(a)

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 with the SEC 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.

On January 6, 2015, the Board of Directors granted 100,000 stock options to QLT’s Interim Chief Financial Officer, Glen Ibbott. These stock options vest and become exercisable in thirty six (36) successive and equal monthly installments from the grant date. Furthermore, they are subject to a ten (10) year expiration period and have an exercise price of CAD $4.84 per common share, which is equal to the closing price of the Company’s common shares on the Toronto Stock Exchange on the date of grant.

There were no stock options granted during the three months ended March 31, 2014.

 

11


The following weighted average assumptions (no dividends are assumed) were used to value stock options granted in each of the following years:

 

                                       
 

Three months ended

March 31,

 
   2015   2014  
Annualized volatility   41.3   —     
Risk-free interest rate   1.4   —     
Expected life (years)   6.8      —     
                       

The weighted average grant date fair value of stock options granted during the three months ended March 31, 2015 was CAD $2.12 (three months ended March 31, 2014 – nil).

The impact on our results of operations of recording stock-based compensation for the three months ended March 31, 2015 and 2014 was as follows:

 

                                       
 

Three months ended

March 31,

 
(In thousands of U.S. dollars) 2015   2014  
Research and development $ 205    $ 335   
Selling, general and administrative   137      203   
                       
Stock-based compensation expense $ 342    $ 538   
                       

As at March 31, 2015, 961,947 stock options were exercisable (December 31, 2014 – 816,197) and 1,107,979 stock options were unvested (December 31, 2014 – 1,273,952). As at March 31, 2015, 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:

 

                 
  

March 31,

2015

 
Unrecognized estimated compensation costs (in thousands of U.S. dollars) $ 1,639   
Expected weighted average period of recognition of compensation cost (in months)   31   
Expected remaining weighted average period of compensation cost to be recognized (in years)   2.21   
          

We issue new common shares upon exercise of stock options. During the three months ended March 31, 2015, 55,778 stock options were exercised (three months ended March 31, 2014 – nil). The intrinsic values associated with these stock options and the related cash received during the respective periods was as follows:

 

                                       
 

Three months ended

March 31,

 
(In thousands of U.S. dollars) 2015   2014  
Intrinsic value of stock options exercised $ 44    $ —     
Cash from exercise of stock options   206      —     
                       

 

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(b)

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 months ended March 31, 2015 and 2014 was as follows:

 

                                       
  Three months ended
March 31,
 
(In thousands of U.S. dollars) 2015   2014  
Research and development $ 24    $ 24   
Selling, general and administrative   54      54   
                       
Deferred share unit compensation expense $ 78    $ 78   
   
                       

No cash payments were made under the DSU Plan during the three months ended March 31, 2015 and 2014.

As at March 31, 2015, 111,222 DSUs were vested (December 31, 2014 – 98,389) and 42,778 DSUs were unvested (December 31, 2014 – 55,611).

 

(c)

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.

The impact on our results of operations of recording RSU compensation expense for the three months ended March 31, 2015 and 2014 was as follows:

 

                                       
  Three months ended
March 31,
 
(In thousands of U.S. dollars) 2015   2014  
Research and development $ 7    $ 5   
Selling, general and administrative   16      9   
                       
Restricted stock unit compensation expense $ 23    $ 14   
   
                       

Upon vesting of RSUs, common shares are issued and these vested RSUs are no longer considered outstanding but are rather reflected as part of the total number of shares outstanding. As such, as at March 31, 2015 nil RSUs were vested (December 31, 2014 – nil) and 64,000 RSUs were unvested (December 31, 2014 – 64,000). In addition, the total estimated unrecognized compensation cost related to RSUs was $0.2 million (December 31, 2014 – $0.2 million) and the weighted average period over which such costs are expected to be recognized is 2.09 years (December 31, 2014 – 2.34 years).

 

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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 months ended March 31, 2015, we recorded charges of nil (three months ended March 31, 2014 – $0.6 million), related to this restructuring. The cumulative cost of the restructuring to date is $19.6 million (December 31, 2014 – $19.6 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)
  Contract
Termination
Costs(2)
  Total  
Balance at January 1, 2014 $ 130    $ —      $ 130   
Restructuring charge   666      78      744   
Foreign exchange   (5   —        (5
Cash payments   (791   (78   (869
                                  
Balance at December 31, 2014   —        —        —     
                                  
Balance at March 31, 2015 $ —      $ —      $ —     
   
                                  

 

(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.

 

9.   INCOME TAXES

During the three months ended March 31, 2015, the provision for income taxes was negligible compared to a provision of $0.2 million for the same period in 2014. The provision for income taxes in 2014 primarily relates to the gain on the fair value change of our Eligard related contingent consideration. 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.

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 months ended March 31, 2015 and 2014.

 

14


10.   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 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 March 31, 2015 and December 31, 2014 and indicate the fair value hierarchy of the valuation techniques we utilized to determine such fair value:

 

                                                                               
  As at March 31, 2015  
(In thousands of U.S. dollars) Level 1   Level 2   Level 3   Total  
Assets:
Cash and cash equivalents $ 151,270    $ —      $ —      $ 151,270   
Accounts receivable - Laser Earn-Out Payment - non-current (1)   —        —        2,000    $ 2,000   
                                             
Total $ 151,270    $ —      $ 2,000    $ 153,270   
   
                                             
  As at December 31, 2014  
(In thousands of U.S. dollars) Level 1   Level 2   Level 3   Total  
Assets:
Cash and cash equivalents $ 155,908    $ —      $ —      $ 155,908   
Accounts receivable - Laser Earn-Out Payment - non-current (1)   —        —        2,000    $ 2,000   
   
Total $ 155,908    $  —      $ 2,000    $ 157,908   
   
                                             

 

(1) 

Represents the estimated fair value of the Laser Earn-Out Payment as described in Note 3 – Contingent Consideration. The fair value of the Laser Earn-Out Payment was estimated using a probability weighted approach to examine various possible outcomes with respect to the timing and amount that may be collected.

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

 
Balance at January 1, 2014 $ 36,582   
Transfer to Accounts Receivable   (9,989
Settlements   (28,059
Fair value change in contingent consideration   1,466   
          
Balance at December 31, 2014   —     
          
Balance at March 31, 2015 $ —     
          
          

As at March 31, 2015 and December 31, 2014 we had no outstanding forward foreign currency contracts. Other financial instruments that may be subject to credit risk include our cash and cash equivalents and accounts receivable. 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.

 

15


11.   NET LOSS PER SHARE

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

 

                                   
 

Three months ended

March 31,

 
(In thousands of U.S. dollars, except share and per share data) 2015   2014  
Numerator:

Net loss and comprehensive loss

$ (5,896 $ (6,462
Denominator: (in thousands)

Weighted average number of common shares outstanding

  51,237      51,082   
                  
Basic and diluted net loss per common share $ (0.12 $ (0.13
                  
                  

As at March 31, 2015, 2,069,926 stock options (December 31, 2014 – 2,090,149) and 64,000 RSUs (December 31, 2014 – 64,000) were excluded from the calculation of diluted net loss per common share because their effect was anti-dilutive.

 

16


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 for the year ended December 31, 2014 (our “2014 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

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 focused on our synthetic retinoid, QLT091001, for the treatment of certain age-related and inherited retinal diseases.

From 2009 to 2013, we divested our Eligard product line, Visudyne business and punctal plug drug delivery system technology (the “PPDS Technology”). Following these divestitures, we significantly streamlined and restructured our operations to focus our resources on the development of QLT091001.

Strategic Review

On October 8, 2014, Auxillium Pharmaceuticals, Inc. (“Auxilium”) terminated the Agreement and Plan of Merger dated June 25, 2014 (the “Merger Agreement”) among QLT, Auxilium, QLT Holding Corp, and QLT Acquisition Corp.; which contemplated a business combination whereby Auxilium would have become an indirect wholly-owned subsidiary of QLT and Auxilium’s stockholders would have received common shares representing approximately 76% of the combined company. Following the termination of the Merger Agreement, we have continued to review our strategic and business options. We have engaged Greenhill & Co. to act as our financial advisor in connection with developing and providing advice with respect to various strategic and business alternatives. Strategic and business alternatives which QLT may consider include, but are not limited to, asset divestiture, partnering or other collaboration agreements, merger, reverse merger, reorganization or similar transactions, and potential acquisitions or recapitalizations.

During the three months ended March 31, 2015, QLT incurred consulting and advisory fees of $1.9 million related to its current strategic review. These transaction fees have been reflected as part of the Selling, General and Administrative expenses on the consolidated statements of operations and comprehensive loss.

 

17


Research and Development

QLT091001 is an orally administered synthetic retinoid replacement for 11-cis-retinal, which is a key biochemical component of the visual retinoid cycle. The following table sets forth the stage of development of our technology:

 

Product/Indication Status/Development Stage

QLT091001

Leber Congenital Amaurosis (LCA) and Retinitis Pigmentosa (RP)

Phase Ib study completed in 2012. Phase Ib retreatment study completed in 2014.

Retinitis Pigmentosa (RP) with autosomal dominant mutation in RPE65

Phase Ib study completed in 2014.

Impaired Dark Adaptation (IDA)

Phase IIa study completed in 2014.

QLT091001 orphan drug program for the treatment of Leber Congenital Amaurosis and Retinitis Pigmentosa. We are currently developing QLT091001 for the treatment of Leber Congenital Amaurosis (“LCA”) and Retinitis Pigmentosa (“RP”). As indicated above, we have completed an initial Phase Ib clinical proof of concept study and a follow-up retreatment study in LCA and RP patients with autosomal recessive mutations in retinal pigment epithelium protein 65 (“RPE65”) or lecithin:retinol acyltransferase (“LRAT”). A Phase 1b study in 5 RP patients with autosomal dominant mutation in RPE65 was also completed. The trial suggested that QLT091001 can improve visual function in patients with autosomal dominant RP due to RPE65 mutations with a safety profile similar to that seen in the IRD01 Phase 1b clinical trials in LCA and RP patients (IRD) with autosomal recessive mutations in RPE65 or LRAT.

QLT091001 has received orphan drug designations for the treatment of LCA (due to inherited mutations in the LRAT and RPE65 genes) and RP (all mutations) by the U.S. Food and Drug Administration (the “FDA”), and for the treatment of LCA and RP (all mutations) by the European Medicines Agency (the “EMA”). These designations provide market exclusivity in the applicable jurisdiction after a product is approved for 10 years (possibly subject to reduction) in the EU and seven years in the U.S. Orphan drug designation in the EU can also provide an additional two years of market exclusivity for pediatric orphan drug designated drug products. 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, 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. 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.

QLT091001 has also been granted two Fast Track designations by the FDA for the treatment of the LRAT and RPE65 genetic mutations in both LCA and autosomal recessive RP. The FDA’s Fast Track is a process designed to facilitate the development and expedite the review of drugs that are intended for the treatment of serious diseases and fill an unmet medical need.

Over the course of 2013 and 2014, the Company met with the FDA and the 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. Following meetings with the FDA and EMA, in 2014 we amended and finalized our proposed pivotal trial protocol to test the safety and efficacy of QLT091001 in subjects with Inherited Retinal Disease phenotypically diagnosed as LCA or RP caused by RPE65 or LRAT gene mutations, which disease/condition we believe subsumes both LCA due to inherited mutations in LRAT or RPE65 genes and RP.

In an effort to potentially accelerate the commercial availability of QLT091001 as a treatment option, we are currently exploring with the EMA a submission of a Marketing Authorization Application (“MAA”) in 2016 for conditional approval of QLT091001 for the treatment of Inherited Retinal Disease based on the existing clinical data. During the first quarter of 2015, advisory meetings with certain European regulatory authorities were conducted and we are continuing our discussions with the European regulatory authorities regarding the MAA for conditional approval. Conditional approval, if granted, would be made subject to specified conditions, including among other things that we complete and have favorable safety and efficacy data from additional studies, including one or more pivotal trials of QLT091001 for Inherited Retinal Disease.

 

18


Given the ultra orphan nature of LCA and RP, we have 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 addition, we have 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 our completed 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.

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 U.S., counterpart patents and patent applications to U.S. 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. All of the national patents in the European jurisdictions where European Patent No. 1765322 is validated will be set to expire in 2025.

QLT091001 for the treatment of Impaired Dark Adaptation (“IDA”). In late 2013, we initiated a Phase IIa proof-of-concept randomized, multi-center, parallel-group, placebo-controlled trial of QLT091001 in adult patients with IDA, a condition that results in decreased ability to recover visual sensitivity in the dark after exposure to bright lights. The trial evaluated the safety profile and effects of QLT091001 on impaired dark adaptation time, glare recovery time and low luminance low contrast best corrected visual acuity in 43 patients. The study has been completed and results were reported on December 5, 2014. Forty-three patients were randomized to receive placebo or one of two different doses (10 or 40 mg/m2) of QLT091001 once per week for three consecutive weeks with one additional dose the day after the third dose, with 4 weeks of follow-up. Patients treated with QLT091001 showed trends to improvement in dark adaptation time and glare recovery time relative to patients treated with placebo. There was no clear treatment effect on low luminance low contrast best corrected visual acuity using the protocol and procedures of the study. QLT091001 treatment had an acceptable safety profile and was well-tolerated.

 

19


RESULTS OF OPERATIONS

The following table sets out our net losses from operations for the three months ended March 31, 2015 and 2014:

 

                                       
  Three months ended
March 31,
 
(In thousands of U.S. dollars, except per share data) 2015   2014  
Net loss and comprehensive loss $ (5,896 $ (6,462
Basic and diluted net loss per common share $ (0.12 $ (0.13

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

Costs and Expenses

Research and Development

During the three months ended March 31, 2015, research and development (“R&D”) expenditures from continuing operations were $2.2 million compared to $4.8 million for the same period in 2014. The $2.6 million (54%) decrease was primarily due to higher costs incurred in 2014 related to certain toxicity studies, our impaired dark adaptation study and trailing costs from our LCA and RP Phase Ib retreatment study, which was substantially completed in 2013.

Selling, General and Administrative Expenses

During the three months ended March 31, 2015, selling, general and administrative (“SG&A”), expenditures were $3.6 million compared to $2.2 million for the same period in 2014. The $1.4 million (64%) increase in SG&A expenses was primarily due to higher consulting and advisory fees of $1.9 million incurred in connection with our current exploration and review of strategic alternatives. In comparison, during the three months ended March 31, 2014, we incurred $0.7 million of consulting and transaction fees related to our pursuit of a merger with Auxilium.

Restructuring Charges

During the three months ended March 31, 2015, we recorded nil restructuring charges compared to $0.6 million for the same period in 2014. The 2014 restructuring charges primarily related to accrued 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.

Other (Expense) Income

Net Foreign Exchange Gains (Losses)

For the three months ended March 31, 2015 and 2014, 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 March 31, 2015 and 2014, the fair value change in contingent consideration was nil and $1.5 million, respectively. These fair value gains diminished to nil given that the final amount of Eligard related contingent consideration owing to QLT, under the terms of the stock purchase agreement with TOLMAR Holding, Inc. (“TOLMAR”) dated October 1, 2009 (the “Tolmar Agreement”), was collected in August 2014 and no further amounts remain outstanding as at March 31, 2015.

Income Taxes

During the three months ended March 31, 2015, the provision for income taxes was negligible compared to a provision of $0.2 million for the same period in the prior year. The provision for income taxes in 2014 primarily relates to the gain on the fair value change of our Eligard related contingent consideration. 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.

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 months ended March 31, 2015 and 2014.

 

20


As of March 31, 2015, 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.

LIQUIDITY AND CAPITAL RESOURCES

General

As at March 31, 2015, 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 of future financial and/or strategic alternatives and returns of capital to shareholders, including future distributions and/or 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 2012 asset purchase agreement with Valeant Pharmaceuticals International, Inc. (the “Valeant Agreement”); levels of any future payments related to the PPDS Technology we sold under the 2013 asset purchase agreement with Mati Therapeutics, Inc. (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 March 31, 2015, we used $4.8 million of cash in operations compared to $5.1 million for the same period in 2014. The $0.3 million improvement in operating cash flows was primarily attributable to the following:

 

   

A positive operating cash flow variance of $2.8 million from lower operational spending;

 

   

A negative cash flow variance of $1.0 million associated with consulting and advisory fees paid during the period in connection with our exploration and review of strategic alternatives; and

 

   

A negative operating cash flow variance related to the fair value change in contingent consideration of $1.5 million.

Cash Provided by Investing Activities

During the three months ended March 31, 2015, there were no cash flows related to investing activities.

During the three months ended March 31, 2014, cash flows provided by investing activities primarily consisted of $26.6 million of contingent consideration received in connection with our previous sale of QLT USA under the terms of the Tolmar Agreement.

Cash Used in Financing Activities

During the three months ended March 31, 2015, cash flows from financing activities consisted of $0.2 million of proceeds received in connection with the issuance of common shares for stock options exercised.

During the three months ended March 31, 2014, there were no cash flows from financing activities.

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 March 31, 2015, we had $151.3 million in cash and cash equivalents and our cash equivalents had an average remaining maturity of approximately 15 days. If market interest rates were to increase immediately and uniformly by one hundred basis points from levels at March 31, 2015, the fair value of the cash equivalents would decline by an immaterial amount due to the short remaining maturity period.

 

21


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 March 31, 2015, we had no outstanding forward foreign currency contracts and no collateral was pledged for security.

Contractual Obligations

As of March 31, 2015, our material contractual obligations consist of our clinical and development agreements. We currently have an operating lease commitment, for approximately 20,000 square feet of office and laboratory space, which expires on August 31, 2015. We are currently pursuing alternative arrangements for space for our head office upon expiration of our lease.

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. As at March 31, 2015, no amounts have been accrued in connection with such indemnities.

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.

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 April 14, 2015, there were 51,255,700 common shares issued and outstanding, which totaled $467.3 million in share capital. As of April 14, 2015, we had 1,942,232 stock options outstanding of which 858,536 were exercisable at a weighted average exercise price of CAD $4.75 per share. Each stock option is exercisable for one common share. As of April 14, 2015, we had 64,000 RSUs outstanding, none of which are vested. Upon vesting, each RSU represents the right to receive one common share of the Company. As of April 14, 2015, we had 154,000 deferred stock units (“DSUs”) outstanding of which 115,500 are vested. The cash value of the DSUs outstanding as at April 14, 2015 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 and fair value adjustments, 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 2014 Annual Report.

 

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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 2014 Annual 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 and 2013, 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 QLT091001, including the timing and outcome of our evaluation of a potential submission to the EMA for conditional approval;

 

   

the anticipated timing for receipt of, and our ability to maintain, regulatory approvals for product candidates, including QLT091001;

 

   

our ability to successfully develop and commercialize QLT091001;

 

   

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, if applicable, maintain, orphan drug designations and/or qualification as a new chemical entity for our synthetic retinoid;

 

   

receipt of the Laser Earn-Out Payment (as defined and described under Note 3 – Contingent Consideration of the consolidated unaudited financial statements for the three months ended March 31, 2015), 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 approved by the FDA;

 

   

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 2014 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 Interim Chief Financial Officer. Our Interim Chief Executive Officer and Interim 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 Interim 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 quarter ended March 31, 2015, 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 2014 Annual Report.

 

ITEM 1A. RISK FACTORS

Management believes that there have been no material changes to the Company’s risk factors as reported in Item 1A of our 2014 Annual Report.

The risks described in our 2014 Annual 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 may also materially adversely affect our business, products, financial condition and operating results.

 

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: April 30, 2015 By:

/s/ Dr. Geoffrey F. Cox

Dr. Geoffrey F. Cox
Interim Chief Executive Officer
(Principal Executive Officer)
Date: April 30, 2015 By:

/s/ W. Glen Ibbott

W. Glen Ibbott
Interim Chief Financial Officer
(Principal Financial and Accounting Officer)

 

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EXHIBIT INDEX

 

Exhibit
Number

Description

10.76 Employment Agreement, effective as of January 5, 2015, by and between the Company and Glen Ibbott (incorporated by reference to Exhibit 10.76 of the Company’s current report on Form 8-K dated January 5, 2015 and filed with the commission on January 5, 2015).
10.79 Amendment to the Employment Agreement between the Company and Dr. Geoffrey Cox dated April 22, 2015 (incorporated by reference to Exhibit 10.79 of the Company’s current report on Form 8-K dated April 22, 2015 and filed with the commission on April 23, 2015).
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 March 31, 2015, 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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