NOVELION THERAPEUTICS INC. - FORM 10-K

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2015

¨	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

Securities registered pursuant to Section 12(b) of the Act:


Title of each class		Name of each exchange on which registered
Common Shares, without par value		The Nasdaq Stock Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

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 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 (§ 232.405 of this chapter) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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.

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 June 30, 2015, the aggregate market value of the common shares held by non-affiliates of the registrant (based on the last reported sale price of the common shares of U.S. $4.13, as reported on the NASDAQ Stock Market) was approximately U.S. $218,174,469.

As of February 18, 2016 the registrant had 52,829,398 outstanding common shares.

DOCUMENTS INCORPORATED BY REFERENCE

The information to be included in Part III of this Annual Report on Form 10-K will be provided in accordance with instruction G(3) to Form 10-K no later than April 29, 2016.

Note regarding references to QLT

Throughout this Annual Report on Form 10-K (this “Report”), the words “we,” “us,” “our,” “the Company” and “QLT” refer to QLT Inc. and our wholly owned subsidiaries, unless stated otherwise.

Note regarding Currency and Accounting Standards

All dollar amounts in this Report are denominated in U.S. dollars, except where otherwise stated. The audited consolidated financial statements in this Report were prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”).

Note regarding Exchange Rates

The table below shows relevant exchange rates which approximate the Noon buying rates in New York City as reported by the Federal Reserve Bank of New York for cable transfers expressed in Canadian dollars for the five most recent fiscal years of the Company.


	2015		2014		2013		2012		2011
High	$	1.3989	$	1.1644	$	1.0697	$	1.0417	$	1.0605

Low		1.1725		1.0612		0.9839		0.9710		0.9448

Average		1.2791		1.1043		1.0300		0.9995		0.9887

Period End		1.3839		1.1601		1.0637		0.9958		1.0168

Note regarding Trademarks

The following words used in this Report are trademarks:

•

Atrigel^® is a registered trademark of TOLMAR Therapeutics, Inc.

•

Eligard^® is a registered trademark of TOLMAR Therapeutics, Inc.

•

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

•

Visudyne^® is a registered trademark of Novartis AG

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

QLT INC.

ANNUAL REPORT ON FORM 10-K

DECEMBER 31, 2015

Table of Contents



Item 1. BUSINESS			4

Overview			4

Our Products in Development			9

Manufacturing			14

Product Sales, Marketing and Distribution			14

Financial Information about Segmented and Geographic Areas			14

Patents, Trademarks and Proprietary Rights			14

Competition			16

Government Regulation			16

Third-Party Coverage and Reimbursement			24

Research and Development Costs			25

Corporate Information			26

Item 1A. RISK FACTORS			27

Item 1B. UNRESOLVED STAFF COMMENTS			42

Item 2. PROPERTIES			42

Item 3. LEGAL PROCEEDINGS			42

Item 4. MINE SAFETY DISCLOSURES			42

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES			43

Item 6. SELECTED FINANCIAL DATA			47

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION			50

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			70

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA			70

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE			100

Item 9A. CONTROLS AND PROCEDURES			100

Item 9B. OTHER INFORMATION			102

Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE			103

Item 11. EXECUTIVE COMPENSATION			103

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS			103

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE			103

Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES			103

Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES			104

PART I

Item 1.

BUSINESS

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. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Special Note Regarding Forward-Looking Statements.

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 operations consist of clinical development programs focused on our synthetic retinoid, QLT091001, for the treatment of certain age-related and inherited retinal diseases caused by retinal pigment epithelium protein 65 (“RPE65”) and lecithin: retinol acyltransferase (“LRAT”) gene mutations. QLT091001 is an orally administered synthetic retinoid replacement for 11-cis-retinal, which is a key biochemical component of the visual retinoid cycle.

Following a comprehensive business review by our Board of Directors, in 2012 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. As part of that restructuring, we divested several assets, including Visudyne^®, which is a photosensitizer that we co-developed with Novartis for the treatment of wet age-related macular degeneration. In 2012, we sold all of the Company’s assets relating to Visudyne, our Qcellus^TM laser, and certain other photodynamic therapy intellectual property to Valeant Pharmaceuticals International, Inc. (“Valeant”). In 2013, we sold our Punctal Plug Delivery System (the “PPDS Technology”) for the treatment of glaucoma to Mati Therapeutics Inc. (“Mati”). Our product portfolio also previously included the Eligard^® line of products approved for the palliative treatment of advanced prostate cancer. In 2009, we divested Eligard to TOLMAR Holding, Inc. (“Tolmar”), as part of the sale of all of the shares of QLT USA, Inc. We no longer market these product lines or any other products currently approved for commercial distribution to patients.

Research and Development

QLT091001 orphan drug program for the treatment of Inherited Retinal Disease. We are currently developing QLT091001 for the treatment of Inherited Retinal Disease caused by RPE65 and LRAT gene mutations (“Inherited Retinal Disease” or “IRD”), which indication includes Leber Congenital Amaurosis (“LCA”) and Retinitis Pigmentosa (“RP”). 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 RPE65 or LRAT, and a Phase 1b study in five RP patients with autosomal dominant mutations in RPE65. See the Our Products in Development – Initial Target Indication (Orphan Program) section below for more information on these studies.

In an effort to potentially accelerate the commercial availability of QLT091001 as a treatment option, we are currently exploring with the European Medicines Agency (“EMA”) a submission of a Marketing Authorization Application (“MAA”) in the second half of 2016 for conditional approval of QLT091001 for the treatment of IRD based on the existing clinical data. 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 IRD. In this regard, we have continued to advance our pivotal trial start-up activities with a goal of initiating a Phase III pivotal trial in this indication in the third quarter of 2016. The pivotal trial is expected to enroll up to approximately 45 patients.

During the second half of 2015, we initiated a retrospective, uncontrolled, multicenter, case history study to determine the natural history of visual function in subjects with IRD. The goal of the natural history study is to assess and compare visual outcomes in patients treated with QLT091001, relative to the treatment of naïve patients, in order to assess the extent to which QLT091001 may improve or prolong visual function. This information is expected to further support our potential application for conditional approval and enrollment in our planned Phase III pivotal trial. The results of the natural history study are expected to be available by the end of the first quarter of 2016 for subsequent discussion and review with European regulatory authorities.

For more information on QLT091001’s orphan drug and Fast Track designations, refer to Our Products in Development – Initial Target Indication (Orphan Program) section.

Strategic Initiatives

2015

Terminated Merger Transaction with InSite

Following the 2014 termination of the Auxilium Merger Agreement (described below), in 2015 we continued to review our strategic and business options. Greenhill & Co. LLC (“Greenhill”) was engaged as our financial advisor to aid in developing, exploring and providing advice with respect to such strategic and business alternatives. As a result of our review of strategic alternatives in 2015, we entered into the agreements described below.

On June 8, 2015, the Company entered into an Agreement and Plan of Merger (as amended and restated on July 16, 2015 and August 26, 2015, the “InSite Merger Agreement”) among QLT, InSite Vision Incorporated, a Delaware corporation (“InSite”), and Isotope Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of QLT. InSite is an ophthalmic product development company advancing products to address unmet eye care needs. Under the terms of the InSite Merger Agreement, InSite would have become an indirect wholly owned subsidiary of QLT, and InSite stockholders would have received QLT common shares based on an exchange ratio equal to 0.078 of a QLT common share per share of InSite common stock, subject to a collar mechanism (the “InSite Merger”).

On September 15, 2015, the InSite Merger Agreement was terminated after InSite notified QLT that its board of directors had determined, after consultation with its financial and legal advisors, that a second unsolicited offer (as amended, the “Sun Proposal”) from Sun Pharmaceuticals Industries Ltd. (“Sun”) was superior to the proposed InSite Merger with QLT. The Sun Proposal was an all-cash offer to acquire InSite for $0.35 per share of InSite common stock. As a result, InSite notified QLT that it was exercising its right to terminate the InSite Merger Agreement in order to enter into an agreement with Sun, and InSite paid QLT a termination fee of $2.7 million.

In conjunction with the entry into the InSite Merger Agreement, on June 8, 2015 we granted InSite a secured line of credit (the “Secured Note”) for up to $9.9 million to fund continuing operations through to the completion of the InSite Merger, subject to certain conditions and restrictions. The Secured Note bore interest at 12% per annum and was secured by a first priority security interest in substantially all of InSite’s assets. Upon termination of the InSite Merger Agreement, InSite’s repayment obligations under the Secured Note were accelerated and InSite paid us $5.8 million on September 15, 2015, which consisted of $5.7 million of principal and $0.1 million of accrued interest.

During the year ended December 31, 2015, we incurred consulting and transaction fees of $9.4 million in connection with the pursuit of the InSite Merger and the other strategic transactions described below. These consulting and advisory fees have been reflected as part of Selling, General and Administrative expenses on the consolidated statements of operations and comprehensive loss.

Following the termination of the InSite Merger Agreement, we are continuing to identify, evaluate and review our strategic and business options in parallel with the ongoing development of our synthetic retinoid, QLT091001.

Aralez Investment and Distribution

On December 7, 2015, we entered into an Amended and Restated Share Subscription Agreement (the “Amended and Restated Subscription Agreement”) with Tribute Pharmaceuticals Canada Inc. (“Tribute”), POZEN Inc. (“POZEN”), Aralez Pharmaceuticals plc, (formally known as Aguono Limited) (“Aralez Ireland”), Aralez Pharmaceuticals Inc. (“Aralez Canada”), Deerfield Private Design Fund II, L.P., Deerfield International Master Fund, L.P., Deerfield Partners, L.P. (together “Deerfield”), Broadfin Healthcare Master Fund, Ltd. (“Broadfin”) and JW Partners, LP, JW Opportunities Fund, LLC and J.W. Opportunities Master Fund, Ltd. (together the “JW Parties”) (QLT, Deerfield, Broadfin and the JW Parties are referred to herein collectively as the “Co-Investors”). The Amended and Restated Subscription Agreement amended and restated a share subscription agreement entered into on June 8, 2015 (the “Subscription Agreement”) among QLT, Tribute, POZEN, Aralez Ireland, the Co-Investors and certain other investors. Pursuant to the Amended and Restated Subscription Agreement, immediately prior to the consummation of the merger transactions contemplated by the merger agreement governing the business combination of Tribute and POZEN (the “Aralez Merger”) Tribute agreed to sell to QLT and the other Co-Investors $75.0 million of the common shares of Tribute (the “Tribute Shares”) in a private placement at a purchase price per share equal to: (a) the lesser of (i) US$7.20, and (ii) a five percent (5) discount off the five day volume weighted average price (“VWAP”) per share of POZEN common stock calculated over the five trading days immediately preceding the date of closing of the Aralez Merger, not to be less than US$6.25 per share; multiplied by (b) the Aralez Merger exchange ratio of 0.1455. On consummation of the Aralez Merger, the Tribute Shares would be exchanged for common shares of Aralez Canada (the “Aralez Shares”). The transaction contemplated by the Amended and Restated Subscription Agreement was entered into by the Company for the purpose of returning capital to the Company’s shareholders pursuant to the special election distribution discussed below.

We intend to effect a special election distribution of the Aralez Shares to our shareholders as part of a reorganization of our share capital (the “Share Reorganization”) pursuant to a court-approved statutory Plan of Arrangement under Section 288 of the Business Corporations Act (British Columbia) (the “Plan of Arrangement”), payable, at the election of each shareholder, in either Aralez Shares or cash, subject to possible pro-ration (the “Aralez Distribution”).

In connection with the Aralez Distribution, QLT entered into a share purchase agreement (the “Backstop Agreement”) on June 8, 2015, as amended on December 7, 2015, among QLT, Broadfin and the JW Parties, under which Broadfin and the JW Parties agreed to purchase up to $15.0 million of the Aralez Shares from the Company at US$6.25 per share so that QLT shareholders will be given the opportunity to elect to receive, in lieu of Aralez Shares, up to an aggregate of US$15.0 million in cash, subject to proration among the shareholders.

As a result, QLT shareholders as of February 16, 2016, the record date for the Aralez Distribution (the “Record Date”), will receive approximately 0.13629 of an Aralez Share for each QLT common share held based on the current number of issued and outstanding QLT common shares, subject to the cash election funded pursuant to the terms of the Backstop Agreement. The final amount of Aralez Shares (or cash in lieu) payable in respect of each QLT share will be based on the number of issued and outstanding QLT shares on the Record Date. In order to elect to receive cash in lieu of all or part of their entitlement to Aralez Shares, QLT shareholders must complete and return an election form which was mailed on February 22, 2016 to registered shareholders on the Record Date. The election form must be returned to QLT’s transfer agent, Computershare Investor Services Inc., on or before the deadline which will be set out in the election form.

Meeting, the Share Reorganization is expected to permit QLT to make the Aralez Distribution to QLT shareholders in a tax efficient manner. If the Share Reorganization is not approved at the Special Meeting, the Board may implement the Aralez Distribution as a dividend in kind.

In accordance with the rules of the Toronto Stock Exchange and NASDAQ, “due bill” trading procedures have been applied in connection with the Aralez Distribution. Pursuant to these procedures, automated systems will track any trading of QLT shares in the period (the “Due Bill Period”) between the second trading day prior to the Record Date for the Aralez Distribution, being February 11, 2016, and the payment date for the Aralez Distribution, anticipated to be on or about March 22, 2016 (the “Distribution Date”). During the Due Bill Period, automated systems will attach “due bill” instruments to any QLT shares sold which will obligate sellers to deliver Aralez Shares they are entitled to pursuant to the Aralez Distribution (or cash in lieu of all or part of their entitlement to Aralez Shares, if an election is made as described above), to buyers of such QLT shares. Accordingly, if a QLT shareholder sells its QLT shares during the Due Bill Period, it will be selling away its right to receive the Aralez Shares it is entitled to pursuant to the Aralez Distribution (or cash in lieu of all or part of its entitlement to Aralez Shares) and such sale will include an obligation on the part of the seller, in the form of a “due bill”, to deliver such Aralez Shares or cash in lieu to the buyer of such QLT shares. It is anticipated that the buyers of QLT shares during the Due Bill Period will not know whether a cash election has been made with respect to their entitlement to the Aralez Distribution.

Private Placement

On June 8, 2015, QLT entered into a Share Purchase and Registration Rights Agreement (as amended, the “Share Purchase and Registration Rights Agreement”) with Broadfin, JW Partners, LP, JW Opportunities Fund, LLC, EcoR1 Capital Fund Qualified, L.P. and EcoR1 Capital Fund, LP (the “QLT Investors”). The Share Purchase and Registration Rights Agreement provides that, among other things, subject to the terms and conditions set forth therein, QLT will, following the completion of the Aralez Distribution, issue and sell to the QLT Investors a certain number of QLT common shares for an aggregate purchase price of $20.0 million (the “Private Placement”), reflecting a per share purchase price of $1.87. The closing of the share issuance contemplated by the Share Purchase and Registration Rights Agreement is subject to a number of conditions, some of which are outside of our control. Accordingly, there can be no guarantee that the transactions contemplated by such agreement will be consummated.

2014

Terminated Merger Transaction with Auxilium

On June 25, 2014, the Company entered into the Agreement and Plan of Merger (the “Auxilium 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 Auxilium 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 “Auxilium Merger”). On the date of the closing of the Auxilium Merger, Auxilium would have become an indirect wholly owned subsidiary of QLT and Auxilium stockholders would have received common shares representing approximately 76% of the combined company, subject to certain adjustments.

On October 8, 2014, the Auxilium 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 and legal advisors, 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 Auxilium 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 Auxilium Merger Agreement. Our financial advisory services agreement with Credit Suisse was subsequently terminated.

During the year ended December 31, 2014, QLT incurred $10.2 million of consulting and transaction fees in connection with our pursuit of the Auxilium Merger. The $10.2 million of consulting and transaction fees, which includes the $5.7 million Breakup Fee, are reflected as part of Selling, General and Administrative expenses on the consolidated statements of operations and comprehensive (loss) income.

2013 and Prior Years

Return of Capital

On June 27, 2013, we completed a special cash distribution to shareholders in the amount of $200.0 million, by way of a reduction of the paid-up capital of the common shares, resulting in the return of approximately $3.92 per share (the “Cash Distribution”). The Cash Distribution was made to shareholders without Canadian withholding taxes of up to 25% being payable, pursuant to an Advance Tax Ruling received from Canadian tax authorities. The Cash Distribution was approved by shareholders at our 2013 annual general and special meeting of shareholders on June 14, 2013 and was paid to shareholders of record as of June 24, 2013.

Divestitures

From 2009 to 2013, we divested the following product lines and significantly streamlined and restructured our operations to focus our resources on the development of QLT091001:

•

Eligard^® for the palliative treatment of advanced prostate cancer – Eligard incorporates a luteinizing hormone-releasing hormone agonist, known as leuprolide acetate, with the Atrigel^® drug delivery system. On October 1, 2009, the Eligard^® product line was divested to Tolmar as part of the sale of all of the shares of our former U.S. subsidiary, QLT USA, Inc. (“QLT USA”). Pursuant to the stock purchase agreement, we were entitled to future consideration payable quarterly in amounts equal to 80% of the royalties paid under the license agreements for the commercial marketing of Eligard in Europe, the U.S. and Canada until the earlier of (i) our receipt of $200.0 million of such payments or (ii) October 1, 2024. As of August 2014, the cumulative $200.0 million of such consideration payable under the stock purchase agreement was collected by us in full and no further amounts are outstanding.

•

Visudyne^® for the treatment of wet age-related macular degeneration (“AMD”) – Visudyne is a photosensitizer that we co-developed with Novartis Pharma AG (“Novartis”) for the treatment of wet AMD, the leading cause of blindness in people over the age of 50 in North America and Europe. On September 21, 2012, we entered into an asset purchase agreement with Valeant (“the Valeant Agreement”) pursuant to which we sold all of the Company’s assets related to Visudyne, including our Qcellus™ laser and certain other photodynamic therapy intellectual property, for an upfront payment of $112.5 million, contingent payments up to $20.0 million (for more information refer to Note 7 –Contingent Consideration of the audited consolidated financial statements for the year ended December 31, 2015), and a royalty on net sales of any new indications for Visudyne.

•

Punctal Plug Delivery System for the treatment of glaucoma – The PPDS Technology is a minimally invasive punctal plug drug delivery system that we acquired in 2007 to evaluate the delivery of drugs topically to the eye through controlled sustained release to the tear film. In July 2012, we retained Goldman Sachs to explore the sale or spin-out of our PPDS Technology and after an assessment of these alternatives, on April 3, 2013, we completed the sale of our PPDS Technology to Mati for approximately $1.3 million. Under the terms of the asset purchase agreement with Mati (the “Mati Agreement”), we are also eligible to receive additional consideration contingent on certain product development and commercialization milestones that could reach $19.5 million (or exceed that 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 (for more information refer to Note 7 – Contingent Consideration of the audited consolidated financial statements for the year ended December 31, 2015).

Our Products in Development

Our research and development efforts are currently focused solely on QLT091001. 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:


Indications		Status/Development Stage

QLT091001

Inherited Retinal Disease caused by RPE65 and LRAT gene mutations (includes LCA and RP)		Natural history study commenced in 2015 and is ongoing. Phase III pivotal trial start-up activities ongoing; trial initiation planned for the third quarter of 2016. Phase Ib study in LCA and RP completed in 2012. Phase Ib retreatment study in LCA and RP completed in 2014. Phase Ib study in RP with autosomal dominant mutation in RPE65 completed in 2014.

Impaired Dark Adaptation (IDA)		Phase IIa study completed in 2014.

Initial Target Indication (Orphan Program)

Inherited Retinal Disease (Leber Congenital Amaurosis and Retinitis Pigmentosa). We are currently developing QLT091001 for the treatment of Inherited Retinal Disease caused by RPE65 and LRAT gene mutations, which indication includes LCA and RP. LCA and RP are inherited, progressive, retinal degenerative diseases that arise from genetic mutations of enzymes or proteins required in the biochemistry of vision. LCA is characterized by abnormalities such as roving eye movements and sensitivity to light, and manifests in severe vision loss from birth. Both rod and cone photoreceptors are affected in LCA. Eye examinations of infants with LCA reveal normal appearing retinas; however, low level of retinal activity, measured by electroretinography, indicates very little visual function. RP is a set of hereditary retinal diseases demonstrating clinical features similar to LCA. RP is also characterized by degeneration of rod and cone photoreceptors, but it presents with a more variable loss of vision in late childhood to adulthood. Deficits in dark adaptation and peripheral vision are particular hallmarks of RP. LCA and RP diseases result from genetic mutations, including retinal pigment epithelium protein 65 (RPE65) or lecithin retinol acyltransferase (LRAT), which result in an inadequate production of 11-cis-retinal, an essential component of the visual retinoid cycle. QLT091001 is a replacement therapy for 11-cis retinal.

The clinical characteristics and progression of disease in LCA and RP overlap as do some of their genetic causes. At least seven of the known LCA disease genes, including LRAT and RPE65, have also been linked to the clinical appearance of RP. Despite disease heterogeneity and terminology, there is an overlap in the genetic mechanisms underlying some forms of LCA and RP such as those caused by LRAT and RPE65 mutations where 11-cis-retinal production is either severely or completely compromised. RP is the most common inherited retinal disease, and is generally the diagnosis given to patients who begin to lose vision after the first decade of life, whereas the diagnosis of LCA is given to patients who have central vision loss soon after birth. There is no universally accepted diagnostic term for patients with characteristics in between; clinicians have considered such cases as either LCA or severe RP. As a result of these factors, we have classified both LCA and RP due to inherited deficiency of RPE65 and LRAT as Inherited Retinal Disease (IRD).

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 (“FDA”), and for the

treatment of LCA and RP (all mutations) by 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 SECORD, which disease/condition we believe 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. See Government Regulation – Orphan Drug Regulation and Government Regulation – Fast Track Designations below.

Current Treatment. There are no FDA or EMA approved pharmacologic therapeutic treatments for LCA or RP.

Potential Patient Populations. Given the very low prevalence in these ultra-orphan diseases, there is limited epidemiological data available to determine definitively the potential patient population for treatment with QLT091001, and as such, there is significant uncertainty around the estimated total potential addressable patient population worldwide. According to epidemiological estimates, LCA affects approximately one in 81,000 newborns worldwide, of which approximately 10% carry the inherited deficiencies of either RPE65 or LRAT. Based on our market research, we estimate the potential treatment-eligible LCA patient population for QLT091001 at 1,000 to 2,000 patients worldwide. RP is currently estimated to affect at least 300,000 individuals worldwide, of which approximately 20% – 30% are autosomal recessive (arRP). It is currently estimated that less than 3% of autosomal recessive RP patients carry the inherited deficiencies of either RPE65 or LRAT. Thus, the potential treatment-eligible RP patient population for QLT091001 is currently estimated to be 2,000 to 3,000 patients worldwide. Further recent epidemiological data estimate the total potential treatment-eligible LCA and RP due to inherited deficiencies in RPE65 or LRAT patient population for QLT091001 at 2,400 patients in the U.S. and the five major European markets.

The uncertainty around the estimated total potential addressable patient population is exacerbated by the fact that the course and progression of photoreceptor dysfunction and degeneration in the retina over time varies considerably between individuals with IRD, and the rate and progression of decline of vision function in patients is currently not well understood. Over the course of the disease, we believe that IRD patients who do not retain a sufficient number of functionally viable photoreceptors may not benefit from treatment with QLT091001.

LCA and RP Phase Ib Single Course of Treatment Study. We have completed a Phase Ib multi-center, open-label clinical proof-of-concept trial to evaluate the safety profile and effects of a single seven-day course of treatment with QLT091001 on various parameters of retinal function and quality of life in patients with LCA and autosomal recessive RP due to inherited mutations in RPE65 or LRAT. In the study, LCA and RP patients received daily oral doses of QLT091001 for seven days with post-treatment follow-up at regular intervals for as long as visual function or subjective improvements were observed or until the patient was enrolled in our retreatment study (see below).

The study evaluated changes in several visual function parameters, including best-corrected visual acuity (“VA”) and visual field (“VF”) over the duration of the treatment and post-treatment follow-up. Visual acuity measures the acuteness or clearness of an individual’s central vision, expressed in the study as number of letters or number of lines read on a visual acuity eye chart. Visual field measures an individual’s entire scope or width of (central + peripheral) vision, expressed in the study as retinal areas. Peripheral vision is important in day-to-day mobility, whereas central vision reflects the ability to read and do fine vision work. Various medical conditions such as

LCA, RP and glaucoma are characterized by debilitating loss of visual field. Positive results from our Phase Ib clinical proof-of-concept study were reported for the 14 LCA patients in May and October 2011 and for the 18 early-onset RP patients in March 2012.

LCA and RP Phase Ib Retreatment Study. We have completed a Phase Ib multi-center, open-label clinical trial of repeated treatments of QLT091001 in patients with LCA and autosomal recessive RP due to inherited mutations in RPE65 or LRAT. In this study, patients that were treated with a single course of QLT091001 in our previously completed Phase Ib clinical trial received up to three 7-day courses of QLT091001 to assess visual outcomes and safety following retreatment. Visual field (VF) was assessed using Goldmann Visual Field (GVF) and visual acuity (VA) was assessed using best-corrected visual acuity (BCVA) at baseline and days 7, 14, 30 and 60 after each treatment course, then bimonthly until the next treatment course. Patients received treatment with QLT091001 at doses of 10, 40 or 60 mg/m², with the majority of patients receiving 40 mg/m². Retreatment was initially determined based on established retreatment criteria or at Investigator discretion. This was later amended to allow retreatment to occur as early as 30 days but no later than 60 days after a previous treatment course to maintain dosing within a fixed interval. For these reasons, the time between each treatment course in this trial varied between patients for each course and also varied between courses for each patient (1-13 months). There was also a wide range in time (7-32 months) per patient that elapsed between the single course treatment in the previously completed Phase Ib trial and treatment in this trial.

Results of the Phase 1b retreatment study reported on September 12, 2014 showed clinically meaningful improvements in VF and VA. Nineteen of 27 patients (70%) had an increase in VF retinal area from baseline of ³ 20% in at least 1 eye at 2 consecutive visits within 6 months from the start of any QLT091001 treatment course. In addition, 70% of patients had an increase in VA from baseline of ³ 5 letters in at least 1 eye at 2 consecutive visits within 6 months from the start of any QLT091001 treatment course. The percentage of VF and VA responders identified by disease and mutation is summarized below. Over the course of the entire study spanning multiple treatment courses, these responses were durable, with the visual field response lasting an average of 235 days (min-max = 7 – 742 days), and the visual acuity response lasting an average of 232 days (min-max = 7 – 616 days).

Table: Results for Visual Field and Visual Acuity Responders


	N		Visual Field Responders^a Number (%) of Patients			Visual Acuity Responders^b Number (%) of Patients
All Patients		27		19 (70%	)		19 (70%	)

All LCA		13		7 (54%	)		10 (77%	)

All RP		14		12 (86%	)		9 (64%	)

All RPE65		15		11 (73%	)		8 (53%	)

All LRAT		12		8 (67%	)		11 (92%	)

a: ³ 20% change in retinal area from baseline at 2 consecutive visits in at least 1 eye within 6 months of any treatment course.

b: ³ 5 letter increase from baseline at 2 consecutive visits in at least 1 eye within 6 months of any treatment course.

Adverse events reported in the trial were consistent with the retinoid class of medications and were transient and/or reversible. One serious adverse drug reaction (intracranial hypertension (ICH), a known class effect of retinoids), was reported in the study and it was resolved.

Study in RP patients 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. This form of RP is rare and has a milder disease presentation than the autosomal recessive form. In order to investigate the safety, tolerability and efficacy of oral QLT091001 as a novel treatment for RP patients with an autosomal dominant mutation in RPE65, an open-label, Phase 1b, proof-of-concept study was conducted. The study evaluated the safety and treatment effects of a single course (once-daily for seven days) of oral 40 mg/m² QLT091001 in five RP patients with an autosomal dominant mutation in RPE65. Visual field (VF) was assessed using Goldmann Visual Field (GVF) and visual acuity (VA) was assessed using best-corrected visual acuity (BCVA) at baseline and days 7, 14, 30 and 60 after treatment, then bimonthly for up to 12 months. Three of 5 patients (60%) had an increase in VF retinal area from baseline of ³ 20% in at least 1 eye at 2 consecutive visits within 6 months from the start of QLT091001 treatment. In addition, 60% of patients had an increase in VA from baseline of ³ 5 letters in at least 1 eye at 2 consecutive visits within 6 months from the start of QLT091001 treatment. Four of five patients (80%) showed a response to study treatment based on either an increase in retinal area of the primary isopter of at least 20% or an increase in BCVA of at least 5 letters in at least 1 eye at 2 consecutive visits within 6 months of treatment. No serious adverse events were reported in the trial and adverse events reported were consistent with the retinoid class of medications and were transient and/or reversible. The trial suggests 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.

Orphan Program Development Status. 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 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.

In an effort to accelerate the commercial availability of QLT091001 as a treatment option, we are currently exploring with the EMA an MAA submission in the second half of 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 were conducted with certain European regulatory authorities 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 IRD. In this regard, we have continued our pivotal trial start-up activities with the goal of initiating a Phase III pivotal trial in in the third quarter of 2016. In conjunction with our ongoing start-up activities around our Phase III study, we are currently further optimizing our pivotal trial protocol study design in order to further improve trial execution and protocol performance. See Government Regulation – EU Regulation – Approval of Medicinal Products and Item 1A. Risk Factors.

During the second half of 2015, we initiated a retrospective, uncontrolled, multicenter, case history study to determine the natural history of visual function in subjects with Inherited Retinal Disease phenotypically diagnosed as LCA or RP caused by autosomal recessive mutations in RPE65 or LRAT. The goal of the natural history study is to assess and compare visual outcomes in patients treated with QLT091001, relative to the treatment of naïve patients, in order to assess the extent to which QLT091001 may improve or prolong visual function. This information is expected to further support our potential application for conditional approval and enrollment in our planned Phase III pivotal trial. The results of the natural history study are expected to be available by the end of the first quarter of 2016 for subsequent discussion and review with European regulatory authorities European regulatory authorities.

The management and oversight of clinical operations is currently being led by Dr. Lana Janes, Ph.D., Senior Vice President, Intellectual Property and Technology Development and Chief Patent Officer and Dr. David Saperstein, M.D., our Chief Medical Advisor since 2012 and former Chief Medical Officer.

Additional Target Indication

Impaired Dark Adaptation. Impaired Dark Adaptation (IDA) is a condition that results in decreased ability of the eye to recover visual sensitivity in the dark following exposure to bright lights (photobleaching) that gets worse with age. Profoundly impaired dark adaptation is commonly associated with inherited retinal degenerations. More recently, mild to moderate impaired dark adaptation has been associated with AMD and is proportionate to the severity of the disease. IDA (and/or impaired low luminance vision) may occur due to age-related inefficiencies in the retinoid cycle which results in slower regeneration of the light sensing pigment 11-cis-retinal in the eye and increased levels of free unbound opsin that lead to delayed dark adaptation and reduced retinal sensitivity. Ultimately, these factors impair vision in low light or dark environments. The kinetics of the rod function have also been reported to be age-related, with the rod-mediated portion of the dark adaptation function significantly slower in older patients with normal retinal function than in younger adults. This rod-mediated dark adaptation time is further slowed down in patients with early signs of AMD but with good visual acuity.

IDA in this population causes symptomatic difficulties for functioning in dim light, especially after exposure to bright ambient light, and can hamper daily living activities such as driving, mobility and workplace tasks. Impaired mobility, in the form of falling, is one of the most common problems of old age. IDA is not a disease but a condition that can arise as a result of a number of pathologic or physiologic factors. Improving this condition has the potential to not only improve a patient’s quality of life but also delay the development of degenerative retinal conditions with more severe visual outcomes.

Current Treatment. There are currently no approved treatments for improving IDA.

IDA Phase IIa Proof-of-Concept Study. In late 2013, we initiated a Phase IIa proof-of-concept randomized, multi-center, parallel-group, placebo-controlled study of QLT091001 in adult (age 60 or older) patients with IDA or impaired LLLC BCVA in at least one eye and having no known ophthalmic pathologies to explain their condition other than early age-related macular degeneration (AMD). The trial, designed to evaluate the safety profile and effects of QLT091001 on impaired dark adaptation time, glare recovery time and LLLC BCVA, was 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 LLLC BCVA using the protocol and procedures of the study. QLT091001 treatment had an acceptable safety profile and was well-tolerated.

Compassionate Use Program

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.

Licensing

Retinagenix Co-Development Agreement

Under the terms of a co-development agreement (the “Retinagenix Agreement”) we entered into with Retinagenix LLC (“Retinagenix”) in April 2006, we obtained an exclusive, worldwide license and sub-license under certain intellectual property rights owned by Retinagenix or licensed to Retinagenix by the University of Washington, related to the synthetic retinoid compound under development. We are responsible for using commercially reasonable and diligent efforts to develop and commercialize, in certain major markets and other markets as we reasonably determine, one or more products covered by the licensed rights or developed using

such licensed rights for use in diagnosing, treating or preventing certain human diseases and conditions. We are also responsible for committing certain annual funding to support research and development of such products.

Pursuant to the co-development agreement, Retinagenix is eligible to receive the following milestone payments: (i) $1.0 million upon initiation of the first pivotal trial for the first target indication which uses such products, (ii) $1.5 million upon completion of a filing seeking EU approval or Japan approval for the use of such products in the first indication and (iii) up to a total of an additional $10.0 million upon the achievement of other specified development or regulatory milestones and, for each of up to two additional indications, up to a total of $9.0 million upon achievement of specified development or regulatory milestones. If we commercialize such products, we will also pay Retinagenix royalties of between 4% and 6% of net sales, subject to reduction under certain specified circumstances. Retinagenix is also eligible to receive up to a total of $15.0 million upon achievement of specified cumulative sales milestones for such products. The term of our co-development agreement with Retinagenix expires on the later of the expiration of 10 years after first commercial sale of licensed products, or the expiration, lapse or abandonment of all licensed patents. Retinagenix can terminate the agreement earlier if we fail in any material respect to meet our diligence requirements, and we may terminate the agreement for convenience. Each party may terminate the agreement for uncured material breach by the other party.

Manufacturing

In connection with our development of QLT091001, we utilize a small number of qualified and approved third party contractors, currently located in North America and Europe, to manufacture and supply active pharmaceutical ingredient and drug product and anticipate using the same vendors for our commercial needs. Key raw materials in the production of the active pharmaceutical ingredient and drug product can be sourced from multiple vendors. For the manufacturing activities performed in 2015, there were no production delays due to raw material shortages, and none are expected in 2016. We anticipate entering into supply agreements with suppliers of key raw materials for our future commercial needs.

We and our contract manufacturers are subject to the FDA’s current Good Manufacturing Practices (“cGMP”) regulations and other rules and regulations prescribed by regulatory authorities outside the U.S.

Product Sales, Marketing and Distribution

Given that we currently do not have any commercialized products, we do not have any sales or marketing personnel.

Financial Information about Segments and Geographic Areas

We operate in one segment. Financial information about this segment required herein is contained in Item 8. Financial Statements and Supplementary Data, and the geographic information required herein is contained in Note 17 – Segment Information in the Notes to the Consolidated Financial Statements and is incorporated by reference herein.

Patents, Trademarks and Proprietary Rights

We seek to protect our proprietary technology by obtaining patents to the extent we consider it advisable, and by taking contractual measures and other safeguards to protect our trade secrets and innovative ideas. We currently own or have acquired rights to a number of patents and patent applications for the technologies utilized in our products in development in the U.S., Canada and other jurisdictions.

Our policy is to file patent applications on a worldwide basis in those jurisdictions where we consider it beneficial, depending on the subject matter and our commercialization strategy. The most significant patents owned or licensed by us are described below.

QLT091001 – Synthetic Retinoid

Pursuant to our co-development agreement with Retinagenix, we have an exclusive, worldwide sub-license to patents and patent applications relating to various synthetic retinoids and uses thereof, including in the treatment of LCA and RP. These patents and patent applications are owned by the University of Washington, which has licensed the patents and patent applications to Retinagenix, and are sub-licensed to us by Retinagenix. On May 31, 2011, the United States Patent and Trademark Office (“the USPTO”) 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 7, 2027, including the period of patent term adjustment. This patent is owned by the University of Washington and is exclusively sub-licensed to us through our co-development agreement with Retinagenix. Outside of the U.S., counterpart foreign 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.

In 2015, six additional patents exclusively licensed to us pursuant to our Co-Development Agreement with Retinageix or owned by us, were granted by the USPTO, covering methods of using various synthetic retinal derivatives for the treatment of certain age-related and inherited retinal diseases, four of which are key patents relating to QLT091001 in the treatment of IRD.

On October 20, 2015, the USPTO issued U.S. Patent No. 9,162,978, relating to methods of use of various synthetic retinal esters, including QLT091001, for the treatment of RP due to a deficiency in endogenous 11-cis retinal in the eye, and which is projected to expire on June 20, 2025 This patent is owned by the University of Washington and is exclusively sub-licensed to us through our co-development agreement with Retinagenix.

On October 27, 2015, the USPTO issued U.S. Patent No. 9,169,204, relating to pharmaceutical ophthalmological compositions comprising various synthetic retinal esters, including QLT091001, for the treatment of a deficiency in endogenous 11-cis retinal in the eye due to inherited mutations in LRAT or RPE65, and which is projected to expire on June 20, 2025. This patent is owned by the University of Washington and is exclusively sub-licensed to us through our co-development agreement with Retinagenix.

On November 3, 2015, the USPTO issued U.S. Patent No. 9,174,936, relating to various methods of use of various synthetic retinal esters, including QLT091001, for the treatment of LCA and RP due to inherited mutations in LRAT or RPE65, and which is projected to expire on June 20, 2025, This patent is owned by the University of Washington and is exclusively sub-licensed to us through our co-development agreement with Retinagenix.

On November 3, 2015, the USPTO issued U.S. Patent No. 9,173,856, relating to various regimens for dosing certain synthetic retinal esters, including QLT091001, for treating a subject suffering from loss or impairment of vision due to inherited mutations in LRAT or RPE65 associated with LCA, and which is currently projected to expire on May 12, 2032, including the current period of patent term adjustment granted to us by the USPTO. Subsequent to grant of the patent, a petition was filed for reconsideration by the USPTO to further lengthen the period of patent term adjustment, and as such, the projected expiry date may be subject to further adjustment. Also, this patent is subject to terminal disclaimer, which could potentially shorten the projected expiry date.

Additional patents and patent applications exclusively sub-licensed to us through our co-development agreement with Retinagenix will expire between 2024 and 2030, not including any possible patent term extensions or adjustments that may be available. These patents and patent applications include additional methods of use patents and patent applications, directed to uses of synthetic retinoids, including QLT091001.

The molecule in QLT091001 is not eligible for composition of matter protection per se, as it was previously known in the scientific community. However, upon FDA approval, we believe that the active pharmaceutical ingredient in QLT091001 may qualify as a new chemical entity, or NCE, which provides for five years of exclusivity following approval. We intend to seek New Chemical Entity exclusivity; however, there is no

assurance that QLT091001 will qualify and gain the additional five-year exclusivity period, even if QLT091001 is approved. We also plan to secure regulatory exclusivity for QLT091001 in the EU; however, there can be no assurance that we will be successful in securing approval or regulatory exclusivity in the EU.

To further expand and strengthen our intellectual property portfolio, we have filed and continue to file additional patent applications on synthetic retinoids, pharmaceutical formulations thereof, methods of using and dosing synthetic retinoids, including QLT091001, in those jurisdictions where we consider it beneficial, depending on the subject matter and our commercialization strategy. Those patent applications, if issued, will expire between 2029 and 2034, not including any possible patent term extensions or adjustments that may be available. If QLT091001 is approved by the FDA and the EMA for marketing in the U.S. and EU, we plan to apply for any patent term extensions and regulatory exclusivities that are available to us under applicable law. See Government Regulation – Market Exclusivity and Government Regulation – Additional Regulatory Issues below.

Other Patents, Trademarks and Proprietary Rights

In addition to patent protection, we also rely on trade secrets, proprietary know-how and continuing technological innovation to develop and maintain a competitive position in our product areas.

We require our potential business collaborators, investigators, employees and consultants who might have access to or be provided with proprietary information to sign confidentiality agreements.

We have included information about risks and uncertainties relating to protection of our proprietary information under Item 1A. Risk Factors.

We own registered trademarks in the U.S. and Canada and in other jurisdictions.

Competition

The pharmaceutical and biotechnology industries are characterized by rapidly evolving technology and intense competition. Our competitors include major pharmaceutical and biopharmaceutical companies, many of which have financial, technical and marketing resources significantly greater than ours and have substantially greater experience in developing products, conducting preclinical and clinical testing, obtaining regulatory approvals, manufacturing and marketing. In addition, many biopharmaceutical companies have formed collaborations with large, established pharmaceutical companies to support research, development and commercialization of products that may be competitive with our products. Academic institutions, government agencies and other public and private research organizations also are conducting research activities, seeking patent protection and may commercialize products on their own or through joint ventures. The existence of these products, or other products or treatments of which we are not aware, or products or treatments that may be developed in the future, may adversely affect the marketability of products developed by us. For example, we are aware of a retinal implant (Argus^® II) developed by Second Sight Medical Products Inc. (“Second Sight”) to treat late stage RP, which received FDA approval under a Humanitarian Device Exemption in February 2013, as well as two implantable medical devices for RP that are approved in the European market: Argus^® II (Second Sight) and Alpha IMS (Retina Implant AG). In addition, we are aware of a number of early stage gene therapy products in development for LCA patients, as well as one gene therapy product which has completed Phase III trials and is predicted to be submitted for approval later in 2016 developed by Spark Therapeutics, Inc. in the U.S. for treatment of inherited retinal dystrophies (LCA) caused by mutations in the RPE65 gene.

Government Regulation

The research and development, preclinical studies and clinical trials, and ultimately, the manufacturing, marketing and labeling of our products, are subject to extensive regulation by the FDA and other regulatory authorities in the U.S. and other countries. The U.S. Food, Drug and Cosmetic Act and its regulations govern, among other things, the testing, manufacturing, safety, efficacy, labeling, packaging, storage, record keeping, approval, distribution, export and import, advertising and promotion of our products. Preclinical studies, clinical trials and the regulatory approval process can take years and may require the expenditure of substantial

resources. Regulatory approval of a product may occur much later than expected, at much greater cost than expected, or never. If granted, the approval may include significant limitations on the indications, dosing, distribution, packaging, labeling and sale of the product, including “black box” warnings and Risk Evaluation and Mitigation Strategy (“REMS”) requirements.

FDA Regulation – Approval of Drug Products

Under U.S. law, our QLT091001 product in development will be regulated as a drug. The steps ordinarily required before a drug may be marketed in the U.S. include:

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preclinical testing;

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submission of an Investigation New Drug application (“IND”) to the FDA, which must become effective before human clinical trials may commence;

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adequate and well-controlled human clinical trials to establish the safety and efficacy of the drug for its proposed intended use;

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validation, inspection and approval of the manufacturing facilities and process;

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submission of a new drug application (“NDA”) or abbreviated new drug application (“ANDA”) to the FDA; and

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FDA approval of the application, including approval of all labeling.

The testing and approval process requires substantial time, effort and financial resources and we cannot be certain that any approvals of our product candidates will be granted on a timely basis, if at all.

Preclinical tests include evaluation of product chemistry and formulation as well as in vitro and animal studies to assess the potential safety and efficacy of the product. The results of preclinical testing are submitted as part of an IND to the FDA. A 30-day waiting period after the filing of each new IND is required prior to the commencement of clinical testing in humans. In addition, the FDA may, at any time during this 30-day period, or anytime thereafter, impose a clinical hold on proposed or ongoing clinical trials. If the FDA imposes a clinical hold, clinical trials cannot commence or recommence without FDA authorization.

Clinical trials to support NDAs are typically conducted in three sequential phases, but the phases may overlap. In Phase I, the initial introduction of the drug into healthy human subjects or patients, the drug is tested to assess metabolism, pharmacokinetics, drug interaction, bioavailability and bioequivalence, pharmacodynamics and safety, including side effects associated with increasing doses. Phase II usually involves studies in a limited patient population to:

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assess the efficacy of the drug in specific, targeted indications;

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assess dosage tolerance and optimal dosage; and

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identify possible adverse effects and safety risks.

If a compound is found to be potentially effective and to have an acceptable safety profile in Phase II evaluations, Phase III trials are undertaken to further demonstrate clinical efficacy and to further test for safety within an expanded patient population at multiple study sites.

Protocols for clinical trials must be submitted to the FDA for review and to an Institutional Review Board (IRB) for approval. Sponsors are also required to report regularly to the FDA regarding trial results and safety. The FDA, the sponsor, or the sponsor’s data safety monitoring board may suspend or terminate a clinical trial at any time for a variety of reasons, including that the research subjects are being exposed to unacceptable health risks. An IRB may also suspend or terminate the conduct of a clinical trial at its institution.

After successful completion of the required clinical testing, the results of preclinical studies and clinical studies, along with descriptions of the manufacturing process, proposed labeling and other relevant information, are

submitted to the FDA as part of an NDA. The submission of an NDA typically requires payment of substantial user fees. Before accepting an NDA for filing, the FDA will review the application to ensure that it is sufficiently complete for substantive review, and may request additional information from the applicant. If the FDA accepts the NDA for filing, the agency will begin a detailed review of the application to determine whether the product is safe and effective for its intended use or uses. The FDA also reviews the NDA to determine, among other things, whether manufacturing controls for the product are adequate to ensure and preserve the product’s identity, strength, quality and purity. As part of the review, the FDA also typically inspects the facility where the product is manufactured to ensure compliance with current good manufacturing practices (“cGMPs”).

Under the Prescription Drug User Fee Act, the FDA aims to review and act on the NDA within 10 months if it is a standard application, or within six months if it is a priority review application. The FDA does not always meet its Prescription Drug User Fee Act goals. If the FDA evaluations of the NDA and the manufacturing facilities are favorable, the FDA may issue either an approval letter or a “complete response letter” that identifies the deficiencies in the NDA that must be corrected in order to secure final FDA approval of the NDA. When, and if, those deficiencies have been addressed to the FDA’s satisfaction, the FDA will issue an approval letter. Approval may be conditioned on the sponsor’s agreement to undertake Phase IV post-approval studies to further assess the drug’s safety and effectiveness, or on the development of a REMS that limits the labeling, distribution or promotion of a drug product.

FDA Regulation – Post-Approval Requirements

Even if regulatory approvals for our products are obtained, our products and the facilities manufacturing our products are subject to continued review and periodic inspections by the FDA. Each manufacturing establishment producing approved drugs for the U.S. market must be registered with the FDA and are typically subject to establishment fees. U.S. manufacturing establishments are subject to periodic inspections by the FDA and must comply with the cGMPs. In complying with cGMPs, manufacturers must expend funds, time and effort in the area of production and quality control to ensure full technical compliance. The FDA stringently applies regulatory standards for manufacturing.

The FDA also regulates labeling and promotional activities. Further, we must report adverse events involving our drugs to the FDA under regulations issued by the FDA. In addition, many states also have laws regulating the manufacture and distribution of drugs. Failure to maintain compliance with regulatory requirements may result in administrative or judicial actions, such as fines, warning letters, holds on clinical studies, product recalls or seizures, product detention or refusal to permit the import or export of products, refusal to approve pending applications or supplements, restrictions on marketing or manufacturing, injunctions, or civil or criminal penalties.

EU Regulation – Approval of Medicinal Products

Our QLT091001 product in development will be regulated as a medicinal product in the EU. In the European Economic Area (“EEA”) (which comprises the 28 Member States of the EU plus Norway, Iceland and Liechtenstein), medicinal products are subject to extensive pre- and post-market regulation at both the EU and national levels. They can, subject to specific exceptions, only be commercialized after obtaining a marketing authorization (or “MA”).

Clinical trials of medicinal products in the EU must be conducted in accordance with EU and national regulations and the International Conference on Harmonization (ICH) guidelines on Good Clinical Practices (GCP). If the sponsor of the clinical trial is not established within the EU, it must appoint an entity within the EU to act as its legal representative. Prior to commencing a clinical trial, the sponsor must obtain an authorization from the competent authority and a positive opinion from an independent ethics committee. The application for a clinical trial authorization must include, among other things, a copy of the trial protocol and an investigational medicinal product dossier that contains information about the manufacture and quality of the product under investigation. Clinical trial authorization applications must be submitted to the competent authority in each EU Member State in which the trial will be conducted. However, under the new EU Regulation on Clinical Trials, which is

expected to take effect in 2017 or 2018, a more harmonized procedure will apply. Any substantial changes to trial protocol or other information submitted with the clinical trial applications must be notified to or approved by the relevant competent authorities and ethics committees.

The sponsor of a clinical trial must register the clinical trial in advance, and information related to the product, patient population, phase of investigation, study sites and investigators, and other aspects of the clinical trial will be made public as part of the registration. The results of the clinical trial must be submitted to the competent authorities and, with the exception of non-pediatric Phase 1 trials, will be made public at the latest within 12 months after the end of the trial.

There are two types of marketing authorization procedures: the Union MAs and National (or Member State) MAs.

The Union MA is issued by the European Commission through the Centralised Procedure, based on the opinion of the Committee for Medicinal Products for Human Use (“CHMP”) of the EMA, and which is valid throughout the entire territory of the EU and is also implemented in the three EEA countries. The Centralised Procedure is compulsory for medicinal products that contain a new active substance and are indicated for the treatment of AIDS, cancer, neurodegenerative disorders, diabetes, auto-immune and other immune dysfunctions, and viral diseases, as well as for orphan medicinal products, advanced therapy products (such cell and gene therapies) and products developed through certain biotechnological processes. The Centralised Procedure is optional for products containing a new active substance not yet authorized in the EEA, or for products that constitute a significant therapeutic, scientific or technical innovation, or whose approval is in the interest of public health in the EU. In the Centralised Procedure applications are submitted directly to the EMA. The EMA’s CHMP then has 210 days (not including clock-stops) to adopt an opinion on whether the medicine should be marketed or not. The CHMP’s opinion is then transmitted to the European Commission, which has the ultimate authority for granting the Union MA.

For certain categories of medicinal products, including orphan medicines, in order to meet unmet medical needs of patients and in the interest of public health in the EU, granting of MAs on the basis of less complete data than is normally required may be necessary. In such cases, it is possible for the CHMP to recommend the granting of a MA subject to certain specific obligations (a “conditional MA”). The timelines for an EMA opinion of such an application are the same as provided above. A conditional MA may be granted when, although comprehensive clinical data have not been provided, all of the following requirements are met: benefit/risk balance is positive, it is likely that comprehensive clinical data will be provided by the applicant, unmet medical needs will be fulfilled, and benefit to public health of immediate availability outweighs risks that additional data are still required. Conditional MAs are valid for one year, on a renewable basis. The authorization holder will be required to complete ongoing studies or to conduct new studies with a view to confirming that the benefit-risk balance is positive. In addition, specific obligations may be imposed in relation to the collection of pharmacovigilance data. The granting of a conditional MA will allow medicines to reach patients with unmet medical needs earlier than might otherwise be the case, and will ensure that additional data on a product are generated, submitted, assessed and acted upon. Upon fulfilment of all specific obligations, the conditional MA may convert to a normal MA.

Similar to conditional approval, the CHMP may grant a marketing authorization under exceptional circumstances subject to a requirement for the applicant to introduce specific procedures, in particular concerning the safety of the medicinal product, notification to the competent authorities of any incident relating to its use, and action to be taken. Under exceptional circumstances, the applicant must show they are unable to provide comprehensive data on the efficacy and safety under normal conditions of use, due to (1) rarity of the disease, or (2) present state of scientific knowledge, or (3) ethical constraints to collect such information. A MA under exceptional circumstances is valid for 5 years (renewable) and is reviewed annually to reassess the risk-benefit balance. The fulfillment of any specific procedures/obligations imposed as part of the marketing authorization under exceptional circumstances is aimed at the provision of information on the safe and effective use of the product and will normally not lead to the completion of a full dossier. Approval under exceptional circumstance would not be granted if the CHMP deems that a conditional approval is more appropriate.

National MAs, which are issued by the competent authorities of the Member States of the EEA and only cover their respective territory, are available for products not falling within the mandatory scope of the Centralised Procedure. Where a product has already been authorized for marketing in a Member State of the EEA (the so-called Reference Member State), this National MA can be recognized in other Member States through the Mutual Recognition Procedure. If the product has not received a National MA in any Member State at the time of application, it can be approved simultaneously in various Member States through the Decentralised Procedure.

Under the Mutual Recognition Procedure, within 90 days of receipt of a valid application, the Reference Member State provides an updated assessment report together with the approved summary of product characteristics (“SPC”), labeling and package leaflet to the Member States where the applicant seeks recognition of its original MA (the Concerned Member States). After receipt of these documents, the Concerned Member States have another 90 days to recognize the decision of the Reference Member State and the approved SPC, package leaflet and labeling and grant a harmonized National MA. The Concerned Member States may, however, refuse to recognize the Reference Member States MA on grounds of a potential serious risk to public health, in which case the points of disagreement are referred to the Coordination Group for Mutual Recognition and Decentralised Procedures – Human (the “CMDh”). The CMDh will try to reach a consensus between the Reference Member State and the objecting Concerned Member States within 60 days, and if an agreement is not reached the matter will be referred to the EMA’s CHMP for arbitration.

Under the Decentralised Procedure, an identical dossier is submitted to the competent authorities of each of the Member States in which the MA is sought, one of which is selected by the applicant as the Reference Member State. The competent authority of the Reference Member State has 120 days to prepare a draft assessment report, a draft SPC, and a draft of the labeling and package leaflet, which are sent to the other Member States (i.e., the Concerned Member States) for their approval. If the Concerned Member States raise no objections, based on a potential serious risk to public health, to the assessment, SPC, labeling or packaging proposed by the Reference Member State, the product is subsequently granted a National MA in all the Member States (i.e., in the Reference Member State and the Concerned Member States). In case of disagreement, a procedure before the CMDh and/or the CHMP similar to the one described above must be followed.

Under all the above described procedures, before granting the MA, the EMA or the competent authorities of the Member States of the EEA make an assessment of the risk-benefit balance of the product on the basis of scientific criteria concerning its quality, safety and efficacy.

Further, under EU Regulation No. 1901/2006 on medicinal products for pediatric use, as amended, companies that wish to market their products in the EEA are required to submit the results of pediatric studies with their MA application. These studies must be undertaken in compliance with a pediatric investigation plan (“PIP”) that must be approved in advance by the EMA’s Pediatric Committee (“PDCO”). The obligation to provide the results of pediatric studies with the MA application can be waived for certain products or product classes if: (i) they are likely to be ineffective or unsafe in part or all of the pediatric population; (ii) the disease or condition for which they are intended occurs only in adult populations; or (iii) the specific product does not represent a significant therapeutic benefit over existing treatments for pediatric patients. If justified, applicants can obtain a deferral of the obligation to conduct pediatric studies until a time after the submission of the MA application, for instance, because it is appropriate to conduct studies in adults prior to initiating studies in children or when studies in children will take longer to conduct than studies in adults. A MA holder whose application incorporated the results of pediatric studies conducted in compliance with an approved PIP can under certain circumstances be eligible for a six-month extension to the basic patent extension protection (under a supplementary protection certificate or SPC) afforded to its product. This extended SPC protection period does not apply to orphan medicinal products, which can benefit instead from an extra two years of orphan market exclusivity.

The company that holds a marketing authorization must establish and maintain a pharmacovigilance system and appoint an individual qualified person for pharmacovigilance (QPPV), who is responsible for oversight of that system. Key obligations include expedited reporting of suspected serious adverse reactions and submission of periodic safety update reports (PSURs).

All new marketing authorization applications must include a risk management plan (RMP) describing the risk management system that the company will put in place and documenting measures to prevent or minimize the risks associated with the product. The regulatory authorities may also impose specific obligations as a condition of the marketing authorization. Such risk-minimization measures or post-authorization obligations may include additional safety or efficacy studies. Non-compliance with EU regulatory requirements, including those regarding safety monitoring or pharmacovigilance or under the pediatric rules, can result in significant financial penalties.

In addition, all advertising and promotional activities for the product must be consistent with the approved Summary of Product Characteristics. Direct-to-consumer advertising of prescription medicines is also prohibited in the EU. Although general requirements for advertising and promotion of medicinal products are established under EU directives, the details are governed by regulations in each member state and can differ from one country to another.

Market Exclusivity

In the U.S., the Drug Price Competition and Patent Term Restoration Act of 1984 (also known as the Hatch-Waxman Act) established abbreviated FDA approval procedures for drugs that are shown to be equivalent to proprietary drugs previously approved by the FDA through its NDA process. Approval to market and distribute generic drugs is obtained by filing an abbreviated new drug application, or ANDA, with the FDA. To receive approval, an ANDA must demonstrate (among other things) that the product is bioequivalent to the innovator drug, rather than independently demonstrate the safety and effectiveness of the product through the submission of preclinical and clinical data. An applicant may also seek approval of an abbreviated application under Section 505(b)(2) of the Food, Drug, and Cosmetic Act. Section 505(b)(2) allows the applicant to rely, in part, on the FDA’s findings of safety and efficacy for a drug previously approved through the NDA process or on published literature to support approval.

Patent protection may protect innovator drugs from some competition. In addition, the holder of an NDA may also be entitled to a period of non-patent (regulatory) market exclusivity, during which the FDA cannot approve an ANDA or 505(b)(2) application that relies on the innovator drug. If the innovator drug qualifies as a new chemical entity, the FDA may not accept an ANDA or 505(b)(2) application for a drug that contains the same active ingredient for five years following approval of the innovator NDA, except that an ANDA or 505(b)(2) application may be submitted after four years if it contains a certification of patent invalidity or non-infringement to one of the patents listed with the FDA (in the Orange Book) by the innovator NDA holder. New chemical entity exclusivity does not, however, prevent the FDA from approving a full NDA submitted by another company for the same active ingredient during this period. A drug can be classified as a new chemical entity if no active ingredient (including any ester or salt of the active ingredient) in the drug has been previously approved by the FDA. If the innovator drug is not a new chemical entity but the holder of the NDA conducts clinical trials essential to approval of the NDA or a supplement thereto, the FDA may not approve an ANDA that relies on the innovator NDA or a 505(b)(2) application for the conditions of approval of the NDA or the change approved in the NDA supplement before the expiration of three years. Additionally, an innovator NDA’s existing patent and market exclusivity periods may be extended by six months if the NDA holder complies with the terms of a written request from FDA to study the drug for pediatric use.

In the EEA, Regulation (EC) No. 726/2004/EC and Directive 2001/83/EC (each as amended) have established a harmonized approach to data and marketing exclusivity (known as the 8 + 2 + 1 formula). The approach permits eight years of data exclusivity and 10 years of marketing exclusivity. An additional non-cumulative one-year period of marketing exclusivity is possible if during the data exclusivity period (the first eight years of the 10-year marketing exclusivity period), the MA holder obtains an authorization for one or more new therapeutic indications that are deemed to bring a significant clinical benefit compared to existing therapies.

The data exclusivity period begins on the date of the product’s first MA in the EU and prevents generics from relying on the MA holder’s pharmacological, toxicological, and clinical data for a period of eight years. After eight years, a generic product application may be submitted and generic companies may rely on the MA holder’s

data. However, a generic cannot launch until two years later (or a total of 10 years after the first MA in the EU of the innovator product), or three years later (or a total of 11 years after the first MA in the EU of the innovator product) if the MA holder obtains MA for a new indication with significant clinical benefit within the eight-year data exclusivity period.

The 8 + 2 + 1 exclusivity scheme applies to products that have been authorized in the EU by either the EMA through the Centralized Procedure or the competent authorities of the Member States of the EEA (under the Decentralised, or Mutual Recognition procedures). The protection may not apply if the same or a similar active ingredient has been approved earlier in the EU or EEA.

Upon FDA approval, we believe that the active pharmaceutical ingredient in QLT091001 may qualify as a new chemical entity, in which case it would receive five years of market exclusivity following approval. We intend to seek new chemical entity exclusivity; however, there is no assurance that QLT091001 will qualify and gain the five-year exclusivity period, even if QLT091001 is approved. We also plan to secure regulatory exclusivity for QLT091001 in the EU; however, there can be no assurance that we will be successful in securing approval or regulatory exclusivity in the EU.

The exclusivities do not protect against the use of unapproved medicines or other treatments, nor against off-label use of approved medicines.

Orphan Drug Regulation

Some regulatory authorities provide incentives to drug manufacturers to develop and produce pharmaceuticals that are used to treat rare diseases or conditions. Since the extent and scope of our patent protection for QLT091001 is limited, orphan drug designation is especially important for this product candidate because such designation provides another period of market exclusivity with respect to the qualifying diseases or conditions. 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 FDA, and for the treatment of LCA and RP (all mutations) by the EMA.

In the U.S., the Orphan Drug Act provides certain incentives to drug manufacturers to develop and manufacture drugs for the treatment of rare diseases, currently defined as a disease or condition that affects fewer than 200,000 individuals in the U.S. If a product that has an orphan drug designation subsequently receives the first FDA approval for the indication for which it has such designation, the product is entitled to orphan exclusivity, i.e., the FDA may not approve any other applications to market the same drug for the same indication for a period of seven years following marketing approval, except in certain very limited circumstances, such as if the later product is shown to be clinically superior to the orphan product or a market shortage occurs. The market exclusivity granted by the FDA would not, however, prevent other drug manufacturers from obtaining approval of the same compound for other indications, including another orphan indication, or the use of other types of drugs for the same orphan indication. The Orphan Drug Act also allows for other incentives to promote the development of these orphan designated drugs, including regulatory guidance, FDA fee reductions and tax credits related to the development expenses. Orphan drug designation generally does not confer any special or preferential treatment in the regulatory review process. In addition, if a drug designated as an orphan product receives marketing approval for an indication broader than what is designated, it may not be entitled to orphan product exclusivity. Further, although obtaining orphan drug designation can be advantageous, there is no assurance that we will successfully develop or receive regulatory approval to market the product, nor can there be any assurance that we will be granted orphan drug designation for additional diseases or that orphan drug exclusivity will provide us with a material commercial advantage.

Legislation similar to the Orphan Drug Act has been enacted in other countries outside of the U.S., including the EU. The orphan legislation in the EU is available for products that are (i) intended for the diagnosis, prevention or treatment of chronic debilitating or life-threatening conditions that affect five or fewer out of 10,000 persons in the EU, or (ii) that are intended for the diagnosis, prevention or treatment of a life-threatening, seriously debilitating or serious and chronic condition in the EU, and without incentives it is unlikely that their

commercialization in the EU would generate sufficient return, provided that (iii) there is no satisfactory method of diagnosis, prevention or treatment of the condition in question that has been authorized in the EU, or if such a method exists, the medicinal product will be of significant benefit to those affected by the condition. The orphan drug designation is reassessed before the MA is granted and may be withdrawn at that stage. The EU market exclusivity period is for ten years, although that period can be reduced to six years if, at the end of the fifth year, available evidence establishes that the requirements for orphan drug designation are no longer fulfilled, e.g., because the product is sufficiently profitable not to justify maintenance of market exclusivity. The market exclusivity may be extended to 12 years if sponsors complete a pediatric investigation plan agreed upon with the EMA’s PDCO. MA applicants for MAs for orphan designated drugs can benefit from protocol assistance and significant fee reductions in the EMA authorization procedure.

The orphan exclusivity does not protect against the use of unapproved medicines or other treatments, nor against off-label use of approved medicines.

Fast Track Designation

QLT091001 has also been granted two Fast Track designations by the FDA for the treatment of LCA and autosomal recessive RP due to inherited mutations in the LRAT and RPE65 genes. The FDA’s Fast Track program is intended to facilitate the development and review of drugs that are intended to treat a serious or life-threatening condition and demonstrate the potential to address unmet medical needs for the condition. Under the program, the sponsor of a new drug may request that the FDA designate the drug for a specific indication as a Fast Track product concurrent with or after the filing of the IND for the product candidate. A drug that receives Fast Track designation may be eligible for more frequent meetings with the FDA to discuss the drug’s development; more frequent written correspondence from the FDA about the design of the proposed clinical trials; eligibility for accelerated approval, i.e., approval of an effect on a surrogate or substitute endpoint; and rolling review, meaning the sponsor may submit its NDA in sections rather than wait until the entire NDA is complete. Drugs with Fast Track designation may be more likely to become eligible for a Priority Review, which provides for FDA review of an NDA within a six-month time frame from the time the complete NDA is accepted for filing, as opposed to the ten-month time frame for a Standard Review. The FDA grants Priority Review for products that treat a serious condition and offer major advances in treatment, or provide a treatment where no adequate therapy exists.

Additional Regulatory Issues

We remain subject to various U.S. federal and state laws pertaining to health care “fraud and abuse,” including anti-kickback laws and false claims laws with respect to prior sales of and marketing activities for Visudyne in the U.S. and, if any of our product candidates are approved for commercial sale, will be subject to such laws with respect to any sales of those product candidates. For example, the Anti-Kickback Statute makes it illegal for a prescription drug manufacturer to solicit, offer, receive or pay any remuneration in exchange for, or to induce, the referral of business, including the purchase or prescription of a particular drug that is reimbursable under federal health care programs. Additionally, the False Claims Act prohibits anyone from knowingly presenting, or causing to be presented for payment to government third party payors (including Medicare and Medicaid), claims for reimbursed drugs or services that are false or fraudulent, claims for items or services not provided as claimed, or claims for medically unnecessary items or services. Numerous companies have been sued under these laws for a variety of alleged promotional and marketing activities. Most states also have statutes or regulations similar to the federal Anti-Kickback Statute and False Claims Act, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of whether the product is covered by government healthcare programs. Violations of fraud and abuse laws may be punishable by criminal and/or civil sanctions, including fines and civil monetary penalties, injunctive relief, as well as the possibility of exclusion from federal and state health care programs (including Medicare and Medicaid).

Recent health reform legislation has also enhanced the government’s ability to pursue actions against potential violators, by expanding the government’s investigative authority, expanding criminal and administrative penalties, and providing the government with expanded opportunities to pursue actions under the federal

Anti-Kickback Statute and the False Claims Act. For example, the Affordable Care Act (“ACA”) narrowed the public disclosure bar under the False Claims Act, allowing increased opportunities for whistleblower litigation. In addition, the legislation modified the intent standard under the federal Anti-Kickback Statute, making it easier for prosecutors to prove that alleged violators had met the requisite knowledge requirement.

The U.S. Foreign Corrupt Practices Act (“FCPA”) and similar worldwide anti-corruption laws generally prohibit companies and their intermediaries from making improper payments to public officials for the purpose of obtaining or retaining business. Our internal policies mandate compliance with these anti-corruption laws and we rely on our management structure, regulatory and legal resources and effective operation of our compliance program to direct, manage and monitor the activities of our employees. Despite our training, oversight and compliance programs, we cannot ensure that our internal control policies and procedures always will protect us from deliberate, reckless or inadvertent acts of our employees or agents that contravene our compliance policies or violate applicable laws. Violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our results of operations or financial condition.

Under the Drug Price Competition and Patent Term Restoration Act of 1984, under certain conditions, a patent that claims a product, use or method of manufacture covering drugs and certain other products may be eligible for limited patent term extension for a period of up to five years as a compensation for patent term lost during drug development and the FDA regulatory review process. However, this extension cannot be extended beyond 14 years from the drug’s approval date. The scope of rights during this period of extension is generally limited to the product that was subject to regulatory delay. The United States Patent and Trademark Office, in consultation with the FDA, reviews and approves applications for patent term extensions. We intend to seek the benefits of this statute, but there can be no assurance that we will be able to obtain any such benefits. Analogous protection in the majority of EU countries may also be available to us to provide periods of patent term extensions (in the form of a supplementary protection certificate or SPC) in various EU countries.

Since we conduct clinical trials in a number of countries, we are subject to a significant number of privacy and data protection laws and regulations globally. The legislative and regulatory landscape for privacy and data protection continues to evolve. There has been increased attention to privacy and data protection issues in both developed and emerging markets with the potential to affect directly our existing and future business, including additional restrictions or requirements imposed by European regulators related to the export of personal information from the EU to the U.S. and other countries, as well as increased enforcement and litigation activity related to privacy matters globally. We continue to review and monitor the changes in the privacy regimes in countries in which we operate or conduct clinical trials and have developed policies and practices to manage these evolving risks.

The EMA has adopted various policies with regard to transparency of data, and especially non-clinical and clinical data, in a MA dossier and new rules will in the future also provide for significant transparency of information related to clinical trials. Under these policies, clinical study reports for QLT products are expected to be made public after approval of the products, subject to limited redactions. The information thus made accessible will also be available to competitors of the Company.

Third-Party Coverage and Reimbursement

U.S. governmental and private insurance programs, such as Medicare, Medicaid, health maintenance organizations and private insurers, known collectively as third-party payors, fund the cost of a significant portion of medical care in the U.S. Under certain U.S. governmental insurance programs, a healthcare provider is reimbursed a fixed sum for services and products, including drugs used during the course of rendering healthcare services to patients, and governmental imposed limits on reimbursement to hospitals, physicians and other health care providers have significantly impacted spending budgets and purchasing patterns. Private third-party reimbursement plans are also developing increasingly sophisticated methods of controlling health care costs through re-design of benefits and exploration of more cost-effective methods of delivering health care. In general, these governmental and private measures have caused health care providers to be more selective in the purchase of medical products.

In the EU and EEA, governments influence the price of medicinal products through their pricing and reimbursement rules and control of national healthcare budgets. To obtain reimbursement or pricing approval, some Member States may require the completion of clinical trials that compare the cost-effectiveness of a particular product to currently available therapies. The downward pressure on healthcare costs in general has become intense. As a result, increasingly high barriers are being erected to the entry of new products. In addition, the exceptional circumstances or the conditional nature of the MA can result in a lower reimbursement price.

Both within and outside the U.S., significant uncertainty exists as to the reimbursement status of newly approved health care products, and we cannot provide assurance that adequate third-party reimbursement will be available. There have been, and we expect will continue to be, proposed and adopted healthcare reform measures that impacted or may impact our business. For example, the ACA provides for significant changes in the way healthcare is financed by both governmental and private insurers. Key provisions of the ACA specific to the pharmaceutical industry, among others, include the following:

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An annual, non-deductible fee on any entity that manufactures or imports certain branded prescription drugs and biologic agents into the U.S., apportioned among these entities according to their market share in certain federal government healthcare programs (excluding sales of any drug or biologic product marketed for an orphan indication), that began in 2011;

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An increase, from 15.1% to 23.1%, in the rebates a manufacturer must pay under the Medicaid Drug Rebate Program, retroactive to January 1, 2010;

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Extension of manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations, effective March 23, 2010; and

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Expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program, effective January 2010.

The ACA also contains the Physician Payment Sunshine Act (section 6002) (“PPSA”). On February 8, 2013, CMS issued final regulations under the PPSA that require applicable pharmaceutical, medical device, biological, and medical supply manufacturers to report annually to the Secretary of Health and Human Services (HHS) certain “payments or other transfers of value” to physicians and teaching hospitals. The PPSA also requires applicable manufacturers to report certain information regarding the ownership or investment interests held by physicians or the immediate family members of physicians in such entities. The first reports were due March 31, 2014 for the initial reporting period (August – December 2013), and thereafter for each calendar year. The report must include, among other things, information about the amount of the payment, the date on which the payment was made, the form of payment, and the nature of the payment (e.g., consulting fees, compensation for services, gifts, entertainment or research). Similar transparency legislations in EU Member States may require the public disclosure of payments made to healthcare professionals and institutions.

The ACA also requires providers and suppliers to report any Medicare or Medicaid overpayment and return the overpayment on the later of 60 days of identification of the overpayment or the date the cost report is due (if applicable), or all claims associated with the overpayment will become false claims. The ACA also provides that any claim submitted from an arrangement that violates the Anti-Kickback Statute is a false claim.

CMS and the Department of Health and Human Services have not yet finalized all of the rules and regulations implementing the provisions of the ACA. As a result, further regulations may be promulgated in the future that could substantially change the Medicare and Medicaid reimbursement system, or that impose additional eligibility requirements for participation in the federal and state healthcare programs. Such regulations could alter the current responsibilities of third-party insurance payors (including employer-sponsored health insurance plans, commercial insurance carriers and the Medicaid program) including, without limitation, with respect to cost-sharing obligations. Such new regulations could have materially adverse effects on our business and results.

Research and Development Costs

A significant portion of our operating expenses are related to research and development. During the years ended December 31, 2015, 2014, and 2013, our total company-sponsored research and development expenses were

$9.8 million, $13.8 million, and $18.5 million, respectively. See the Research and Development section above and Item 7. Management, Discussion and Analysis of Financial Condition and Results of Operations below.

Employees

As of February 18, 2016, we had approximately 23 employees, 13 of whom were engaged in research, development, clinical and regulatory affairs, quality control and assurance, and 10 of whom were engaged in finance, information technology, human resources, intellectual property and legal. None of our employees belong to a labour union.

When required, we also engage independent consultants and contractors to perform various professional services including, but not limited to; financial, advisory, clinical, regulatory, supply chain and other commercial services.

Corporate Information

QLT was formed in 1981 under the laws of the Province of British Columbia. Our principal executive office is located at 887 Great Northern Way, Suite 250, Vancouver, British Columbia, Canada, and our telephone number is 604-707-7000.

We make available free of charge on or through our Internet website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. Our internet address is www.qltinc.com. This website address is intended to be an inactive, textual reference only; none of the material on this website is part of this Report. Copies of our annual reports on Form 10-K will be furnished without charge to any person who submits a written request directed to the attention of our Secretary, at our offices located at 887 Great Northern Way, Suite 250, Vancouver, B.C., Canada V5T 4T5. The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

Item 1A.

RISK FACTORS

In addition to the other information included in this Report, you should consider carefully the following factors, which describe the risks, uncertainties and other factors that may materially and adversely affect our business, products, financial condition and operating results. There are many factors that affect our business and our results of operations, some of which are beyond our control. The following is a description of important factors that may cause our actual results of operations in future periods to differ materially from those currently expected or discussed in forward-looking statements set forth in this Report relating to our financial results, operations and business prospects. Except as required by law, we undertake no obligation to update any such forward-looking statements to reflect events or circumstances after the date on which it is made.

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

In December 2014, we retained Greenhill and our Board of Directors commenced a review of our strategic alternatives, which could result in, among other things, a sale of the Company, a merger, consolidation or business combination, asset divestiture, partnering or other collaboration agreements, or potential acquisitions or recapitalizations, in one or more transactions, in addition to continuing to operate the Company in the ordinary course of business. 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, as a result of our strategic alternatives process, while we were paid aggregate termination fees of $31.1 million upon the termination of the Auxilium Merger Agreement in 2014 and the termination of the InSite Merger Agreement in 2015, we were unable to complete the transactions and we expended substantial time, expenses and management and other personnel resources on the transactions.

Greenhill continues to act as our financial advisor to assist our Board of Directors to reassess the Company’s strategic options. No decision has been made with respect to any transaction and we cannot assure you that we will be able to identify and undertake any 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 have limited management and staff and our failure to attract or retain key personnel could adversely affect our ability to operate.

In connection with our strategic restructuring in 2012, we implemented a significant reduction in our work force, followed by additional reductions in 2013 and 2014. As of February 18, 2016, we have 23 employees. We depend, and will continue to depend in the foreseeable future, on the services of our executive management team and other key personnel. The ability to retain officers and key employees is critical to our success and growth. The unexpected loss of the services of one or more of these individuals could have a detrimental effect on our business. In addition, our success depends, in part, on our ability to attract and retain experienced scientific, clinical, manufacturing and other personnel. Competition for many of these professionals is intense. Any failure to attract or retain key personnel could result in unexpected delays in the development of our synthetic oral retinoid program, QLT091001, or could otherwise negatively impact our business. As a result, these factors may adversely impact our business and result of operations.

Further, due to our limited number of employees, we expect that we will continue to require the services of independent consultants and contractors to perform various professional services, including clinical, regulatory,

supply chain and other commercial services. If we experience significant delays in obtaining the services of such third parties or such parties do not perform as expected, our results of operations may be materially adversely affected.

We currently do not generate revenues from continuing operations and we continue to incur significant operating expenses. In order to fund our operations or strategic transactions, we may need additional capital in the future, and our prospects for obtaining the requisite amount of capital are uncertain.

We divested certain non-core assets in 2008 and 2009, sold assets related to our Visudyne business to Valeant in September 2012, and sold assets related to our PPDS Technology to Mati in April 2013. These transactions generated significant cash but we no longer generate revenues from the sale of those products and we will not generate any revenues from our products in development until such time, if ever, that they are approved for sale.

Further, in addition to the $200.0 million return of capital we completed in June 2013, our cash resources recently declined for a $45.0 million investment in common shares of Aralez Canada on February 5, 2016, which shares we expect to distribute to our shareholders as a return of capital.

Going forward, we may continue to incur significant operating expenses and, as a result, may not be able to fund our operations or any anticipated growth beyond the near term. This may require us to delay, scale back, or eliminate some or all of our activities or to relinquish greater or all rights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise choose, and, if we are unable to obtain additional financing, this may adversely affect our ability to operate as a going concern. The amount required to fund future operations will depend on many factors, including the success of our research and development programs, the extent and success of any collaborative research arrangements, and the results of product, technology or other acquisitions or business combinations. We could seek additional funds in the future from a combination of sources, including out-licensing, joint development, sale of assets and other financing arrangements. In addition, we may issue debt or equity securities if we determine that additional cash resources could be obtained under favorable conditions, if the $20.0 million capital contribution under our Share Purchase and Registration Rights Agreement is not consummated or if future development funding requirements cannot be satisfied with available cash resources. The terms of any financing arrangements we enter into may adversely affect the holdings or the rights of our shareholders and the issuance of additional securities, whether equity or debt, by us, or the possibility of such issuance, may cause the market price of our shares to decline. The sale of additional equity or convertible securities would dilute all of our shareholders. The availability of financing will depend on a variety of factors such as market conditions, the general availability of credit and the availability of credit to our industry, the volume of trading activities, our credit ratings and credit capacity, as well as the possibility that customers or lenders could develop a negative perception of our long-term or short-term financial prospects if we incur large investment losses or if the level of our business activity decreases due to a market downturn. Disruptions, uncertainty or volatility in the capital and credit markets may also limit our access to capital required to operate our business. As a result of any or all of these factors, we may not be able to successfully obtain additional financing on favorable terms, or at all.

The distribution of the Aralez Shares may not occur.

On December 7, 2015, we and a number of other co-investors entered into the Amended and Restated Share Subscription Agreement with Tribute, POZEN and Aralez Ireland and Aralez Canada and on February 5, 2016, we completed a $45.0 million investment in common shares of Aralez Canada. We currently intend to effect a special election distribution to each of our shareholders, payable at the election of each such shareholder in either Aralez Shares or cash, subject to proration to reflect a maximum cash component of $15 million (the “Aralez Cash Consideration”). We currently anticipate effecting the Aralez Distribution through a reorganization of our capital pursuant to a statutory Plan of Arrangement if a Plan of Arrangement is approved by our shareholders at the upcoming Special Meeting. If the Plan of Arrangement is not approved by our shareholders at the Special Meeting, we may effect the Aralez Distribution by way of a dividend. Although it is our current intention to effect the Aralez Distribution, we are under no obligation to make the Aralez Distribution to our shareholders and our Board of Directors may determine that the Aralez Distribution is not in our best interests and accordingly that

such distribution will not occur in the near term or at all. Further, our ability to distribute the Aralez Cash Consideration is entirely dependent on the completion of the transactions under the Backstop Agreement, and if the transactions contemplated under the Backstop Agreement are not completed for any reason, it is anticipated that, if the Aralez Distribution proceeds, shareholders would receive their entire pro rata entitlement to the Aralez Distribution in Aralez Shares, notwithstanding that they may have elected to receive cash. See Item 1. Business – Overview – Strategic Initiatives – 2015 section for more information on these transactions.

The transactions contemplated by the Share Purchase and Registration Rights Agreement may not be consummated; if the share issuance is consummated, it may be on terms that are below the then-current market price of our common shares.

On June 8, 2015, we announced that we had entered into a Share Purchase and Registration Rights Agreement with a number of investors providing for the contemplated issuance of QLT common shares to such investors in exchange for an aggregate cash purchase price of $20.0 million, which reflects a per share price of $1.87. This cash would be available to fund our on-going operations. The closing of the share issuance contemplated by the Share Purchase and Registration Rights Agreement is subject to a number of conditions, some of which are outside our control. Accordingly, there can be no guarantee that the transactions contemplated by such agreement will be consummated and that the $20.0 million of capital will be made available to us.

In addition, because the Share Purchase and Registration Rights Agreement contemplates the issuance of the QLT common shares at a fixed purchase price, the purchase price may be lower than the then-current market price of QLT’s common shares at the time of issuance.

We believe that we may be deemed a passive foreign investment company for the taxable year ended December 31, 2015, 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, 2015. We also believe that we may be deemed a PFIC for the taxable years ended December 31, 2008 through 2014, 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.

If we do not achieve our projected development goals in the timeframes we expect and announce, marketing approval and commercialization of our product candidates may be delayed and our credibility may be adversely affected and, as a result, our stock price may decline.

For strategic and operational planning purposes, we may estimate the timing of the accomplishment of various scientific, clinical, regulatory and other product development goals. These milestones may include the commencement or completion of scientific studies and clinical trials and the submission of regulatory filings. From time to time, we may publicly announce the expected timing of some of these milestones. All of these milestones are based on a variety of assumptions. The actual timing of these milestones can vary dramatically compared to our estimates, in many cases for reasons beyond our control. If we do not meet these milestones as publicly announced, the market approval and commercialization of our product candidates may be delayed and our credibility may be adversely affected and, as a result, our stock price may decline.

Our success is dependent upon obtaining regulatory approval for our product candidates for QLT091001. The regulatory approval process is costly and lengthy and we may not be able to successfully obtain all required regulatory approvals. If we fail to obtain all required regulatory approvals, our business may suffer.

As part of the regulatory approval process, we must conduct, at our own expense, preclinical studies and clinical trials on humans for each product candidate. Generally, in order to gain approval for a product, we must provide the FDA and other applicable regulatory authorities with clinical data that adequately demonstrate the safety and efficacy of that product for the intended disease or condition applied for in the NDA or respective regulatory file. We expect the number and size of clinical trials that the regulatory authorities will require will vary depending on the product candidate, the disease or condition the product is being developed to address, the expected size of the patient population and regulations applicable to the particular product. The length of time necessary to complete clinical trials and to submit an application for marketing approval varies significantly and may be difficult to predict. Further, the approval procedure varies among countries and can involve different testing or data review. Drug development is a long, expensive and uncertain process, and delay or failure can occur at any stage in our clinical trials. Product candidates that appear promising in research or development may be delayed or fail to reach later stages of development or the market for several reasons, including:

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preclinical studies show the product to be toxic or lack efficacy in animal models;

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the interim or final results of clinical trials are inconclusive, negative, or not as favorable as results of previous trials, or show the product candidate to be less safe or effective than desired;

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patients die or experience adverse side effects or events for a variety of reasons, including those related to our product candidates or due to the patient’s advanced stage of disease or medical problems, which may or may not be related to our product candidates;

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the FDA, EMA or other regulatory authorities do not permit us to proceed with a clinical trial protocol or a clinical trial, or place a clinical trial on hold;

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delay in commencing clinical trials due to review of clinical trial protocols, and amendments thereto, by FDA, EMA and ethics committees;

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the data and safety monitoring committee of a clinical trial recommends that a trial be placed on hold or suspended;

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our trial design is inadequate for demonstration of safety and/or efficacy;

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the FDA, EMA or other regulatory authorities determine that any study endpoints used in clinical trials are not sufficient for movement into a next stage clinical trial or for product approval;

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delay in or failure to enroll or retain a sufficient number of patients, or difficulty diagnosing, identifying and recruiting suitable patients, including, for example, due to the rarity of the disease being studied;

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inability to attract or retain personnel with appropriate expertise;

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third party clinical investigators do not perform our clinical trials on our anticipated schedule or consistent with the clinical trial protocol or other third-party organizations do not perform data collection and analysis in a timely or accurate manner;

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difficulties formulating the product or otherwise obtaining sufficient quantities of the product to complete clinical trials;

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inability to manufacture sufficient quantities of the product candidate which conform to design and performance specifications;

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our clinical trial expenditures are greater than anticipated or are constrained by our budgetary considerations;

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changes in governmental regulations, policies or administrative actions; or

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regulatory inspections of our clinical trials or manufacturing facilities, which may, among other things, require us to undertake corrective action or suspend or terminate our clinical trials if investigators find us not to be in compliance with regulatory requirements.

For example, a significant challenge for our clinical trials of QLT091001 for the treatment of Inherited Retinal Disease has been and will likely continue to be patient recruitment due to the small population of patients with LCA and RP, and in particular with the specific genetic mutations causing LCA and RP we are currently investigating. The challenge in recruiting subjects from this small population is further exacerbated by the lack of public awareness of such conditions and resulting delay in (or lack of) available genetic testing and diagnosis. Further, patients may be discouraged from enrolling in our clinical trials if the trial protocol requires them to undergo extensive procedures to assess the safety and effectiveness of our products, or they may be persuaded to participate in contemporaneous trials of competitive products. In addition, approval of a product for the treatment of IRD (LCA and RP) currently under development by our competitors could further hinder our ability to recruit and/or retain subjects in our clinical trials. Delay in, or failure of, enrollment of sufficient patients or failure of patients to continue to participate in a study may cause an increase in costs and delays or result in the failure of the trial. Our clinical trial costs will also increase if we have material delays in our clinical trials for other reasons or if we need to perform more or larger clinical trials than anticipated.

From time to time, we engage in discussions with the FDA, EMA and other regulatory authorities to determine the regulatory requirements for our development programs. These discussions may include deliberations on number and size of clinical trials, definition of patient population, study end points and safety. The final determination on these matters by the applicable regulatory authority may be difficult to predict, in particular where there are no approved precedents to establish drug development norms in a particular class of drug disease area, such as orphan drug development, and may be different, including more onerous, than we anticipated, which may delay, limit or prevent approval of our product candidates.

The FDA, EMA and other regulatory authorities also have substantial discretion in deciding whether any of our product candidates should be granted approval for the treatment of the particular disease or condition. Even if we believe that a clinical trial or trials has demonstrated the safety and efficacy of any of our product candidates, the results may not be satisfactory to the regulator. For example, while we currently plan to first pursue marketing approval in the EU, our current pivotal trial protocol for QLT091001 for IRD is designed with a goal of obtaining sufficient efficacy and safety data to pursue marketing approvals from both the FDA and the EMA. There can be no assurance, however, that study results from one pivotal trial will be sufficient to obtain such approvals, or that, even if marketing approval (or conditional marketing approval, as applicable) is obtained from one regulatory authority, we will likewise obtain marketing approval from the other regulatory authority. Preclinical and clinical data can be interpreted by regulators in different ways, which could delay, limit or prevent regulatory approval of our product candidates.

In addition, the FDA or other regulatory authorities may conduct inspections of manufacturing or clinical sites prior to approval of our drug product. A determination that manufacturing or clinical sites do not satisfy regulatory requirements could delay or preclude approval.

Further, after approval of the product, regulators may start review procedures based on pharmacovigilance or other safety data. They have broad discretion in amending, suspending or withdrawing approvals and may also impose obligations to conduct post-approval studies.

We may pursue conditional MA in the EU for QLT091001 for the treatment of IRD. There are specific risks associated with conditional approvals in the EU. It is possible that the EMA will refuse to grant the approval because the legal conditions for a conditional approval are not met, for instance because the data are not sufficiently convincing. When a conditional approval is granted, it is valid for renewable periods of one year and typically contains specific conditions, such as conducting one or more new studies, including pivotal studies, or enhanced pharmacovigilance obligations. We will need to comply with these specific conditions to secure renewal and new conditions may also be imposed. If the conditions are not complied with, or when new information results in a different benefit-risk assessment, the renewal may be refused. In addition, the conditional

approval may initially only cover a narrow therapeutic indication, which could possibly be broadened when more extensive data become available. The initial approval would, however, already start the regulatory data exclusivity and orphan market exclusivity periods and be taken into account for calculating the patent extension period (supplementary protection certificate or SPC).

Even if regulatory authorities approve our product candidates for the treatment of the diseases or conditions we are targeting, our product candidates may not be marketed or commercially successful. If our product candidates are not marketed or commercially successful, it would seriously harm our ability to generate revenue.

The successful commercialization of our technology, and in particular our synthetic retinoid, QLT091001, is crucial for our success. Successful product commercialization in the pharmaceutical industry is highly uncertain and very few product commercialization initiatives or research and development projects progress through all phases of development and/or produce a successful commercial product. Even if our products or product candidates are successfully developed, receive all necessary regulatory approvals and are commercially produced, there are number of risks and uncertainties involved in commercializing a product in this industry including the following:

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negative safety or efficacy data from post-approval marketing experience or production-quality problems could cause sales of our products to decrease or a product to be recalled;

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negative safety or efficacy data from clinical studies conducted by any party could cause sales of our products to decrease or a product to be recalled;

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regulatory approvals might limit how or to whom we can sell our products;

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we may face significant or unforeseen difficulties or expenses in manufacturing our products, which may only become apparent when scaling-up the manufacturing to commercial scale;

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we may need to obtain licenses under third-party patents which can be costly, or may not be available at all;

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our intellectual property rights could be challenged by third parties or we could be found to be infringing on intellectual property rights of third parties;

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small patient populations may impact distribution and marketing strategy, which may increase our distribution, marketing and per-patient or per-treatment costs;

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we may be unable to obtain or maintain sufficient market share at a price high enough to justify commercialization of the product; and

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effectiveness of our distribution and marketing strategy, including establishing and maintaining key relationships with distributors and suppliers;

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many jurisdictions, including may EU Member States, impose pricing restrictions or restrict reimbursement of products by the social security systems.

Numerous other factors may impact market acceptance and demand for our products, including but not limited to:

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uncertainty as to size of the addressable target populations for our product due to the very rare nature of IRD and consequently, the limited epidemiological data on which we base our estimates for our product;

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ability to identify and reach such small target populations with our product;

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our pricing decisions, including a decision to increase or decrease the price of a product, and the pricing decisions of our competitors;

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formulation of products in a manner in which they are marketable or subject to appropriate third-party coverage or reimbursement, or the inability to obtain appropriate third-party coverage or reimbursement for any other reason;

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availability and rate of market penetration by competing products;

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relative convenience and ease of administration;

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perceived safety or efficacy relative to other available therapies, including efficacy data from clinical studies conducted by a party showing similar or improved treatment benefit at a lower dose or shorter duration of therapy; and

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acceptance in the medical community and target patient populations to new products, treatment paradigms or standards of care.

If we are unsuccessful in dealing with any of these risks, or if we are unable to successfully commercialize our product candidates for some other reason, it would seriously harm our ability to generate revenue.

If we fail to comply with ongoing regulatory requirements, it will materially harm our business.

The regulatory approval process is lengthy, expensive and uncertain. We may not be able to obtain, continue to obtain, or maintain necessary regulatory approvals on a timely basis, or at all, for our product candidates in development, and delays in receipt or failure to receive such approvals, the loss of previously received approvals, or failure to comply with existing or future regulatory requirements could have a material adverse effect on our business and our financial condition.

Our product candidates are subject to extensive and rigorous regulation for safety, efficacy and quality by the U.S. federal government, principally the FDA, and by state and local governments and by foreign regulatory authorities in jurisdictions in which our product candidates may be sold or used in clinical development. Product labeling, manufacturing, adverse event reporting, pricing rules and restrictions, storage, distribution, advertising and promotion, and record keeping are some of the ongoing regulatory requirements to which products are subject. For example, we are subject to U.S. federal and state laws pertaining to healthcare “fraud and abuse,” including anti-kickback and false claims laws, for any actions taken prior to January 31, 2013 with respect to the marketing, sale and pricing of Visudyne, and will be subject to these laws with respect to the marketing, sale and pricing of any of our product candidates that are approved for commercial sale. Our failure or the failure of any third parties on whom we rely to comply with applicable requirements may be punishable by criminal and/or civil sanctions against the Company and/or our senior officers, including fines and civil monetary penalties, as well as the possibility of exclusion from federal health care programs, including Medicare and Medicaid, and could result in, among other things, product recalls or seizures, injunctions, price rebates, total or partial suspension of production and/or distribution, refusals to permit products to be imported into or exported out of the U.S. or elsewhere, FDA or other regulatory agency refusal to grant approval of drugs or to allow us to enter into governmental supply contracts, and withdrawals of previously approved marketing applications. Regulators can also withdraw a product’s approval under some circumstances, such as the failure to comply with regulatory requirements or unexpected safety issues.

The FDA often requires post-marketing testing and surveillance to monitor the effects of approved products. The FDA, EMA or other regulatory authorities may condition approval of our product candidates on the completion of such post-marketing clinical studies. These post-marketing studies may entail significant additional expense and may suggest that a product causes undesirable side effects or may present a risk to the patient. If data produced from post-marketing studies suggest that one of our approved products may present a risk to safety, the government authorities could withdraw our product approval, suspend production or place other marketing restrictions on our products. If we are unable to sell our products because we have failed to maintain regulatory approval or have to expend significant resources having to address compliance issues, our revenue, financial conditions or results of operations may be materially adversely affected. We are also subject to numerous federal, provincial/state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control and disposal of hazardous or potentially hazardous substances. In addition, advertising and promotional materials relating to drugs are, in certain instances, subject to regulation by the FDA, the Federal Trade Commission and other regulatory agencies in other jurisdictions. We may be required to incur significant costs to comply with such laws and regulations in the future, and such laws or regulations may materially harm our

business. Unanticipated changes in existing regulatory requirements, our failure to comply with such requirements or the adoption of new requirements could materially harm our business.

In addition, there has been an increased focus on privacy issues in countries around the world, including the United States and the European Union. The legislative and regulatory landscape for privacy and data protection continues to evolve, and there has been an increasing amount of focus on privacy and data protection issues with the potential to affect directly our clinical development activities and other areas of our business. In order to comply with the various privacy regimes, including any unanticipated changes in those requirements, in the countries in which we conduct clinical trials may increase the time and cost to perform a clinical trial. Any failure to fully comply with such laws may materially harm our business.

Product development is a long, expensive and uncertain process, and we may terminate one or more of our development programs. If we terminate a development program or product candidate, or if we decide to modify or continue a development program that does not succeed, our prospects may suffer and we may incur significant expenses that could adversely affect our financial condition or results of operations.

Our product candidate, QLT091001, is under evaluation in clinical programs for the treatment of (a) Inherited Retinal Disease caused by RPE65 and LRAT gene mutations, which includes LCA and RP (autosomal recessive) (IRD 02), (b) RP (autosomal dominant) (RP 01), and (c) Impaired Dark Adaptation (IDA 02). We may determine that certain programs do not have sufficient potential to warrant the continued allocation of resources to them. Accordingly, we may elect to suspend, terminate or modify one or more of our programs, which could include changing our clinical or business model for further development, including by attempting to extract or monetize value from the program by either selling, out-licensing or potentially partnering part or all of the program. If we terminate and seek to monetize part or all of a program in which we have invested significant resources, or we continue to expend further resources on a program, and subsequently fail to achieve our intended goals, our prospects may suffer, as we will have expended resources on a program that may not provide a suitable return, if any, on our investment and we may have missed the opportunity to allocate those resources to potentially more productive uses. In addition, in the event of a termination of a product candidate or program, we may incur significant expenses and costs associated with the termination of the program, which could adversely affect our financial condition or results of operations.

We face intense competition, which may limit our commercial opportunities and our ability to generate revenues.

The biopharmaceutical industry is highly competitive and is characterized by rapidly evolving technology. Competition in our industry occurs on many fronts, including developing and bringing new products to market before others, developing new technologies to improve existing products, developing new products to provide the same benefits as existing products at less cost, developing new products to provide benefits superior to those of existing products, and acquiring or licensing complementary or novel technologies from other pharmaceutical companies or individuals.

Our competitors include major pharmaceutical and biopharmaceutical companies, many of which are large, well-established companies with access to financial, technical and marketing resources significantly greater than ours and substantially greater experience in developing and manufacturing products, conducting preclinical and clinical testing and obtaining regulatory approvals. Our competitors may develop or obtain patent protection for products in clinical development earlier than us, design around patented technology developed by us, obtain regulatory approval for such products before us, or develop more effective or less expensive products than us. Our commercial opportunities will be reduced or eliminated if our competitors develop or acquire and market products that are more effective, have fewer or less severe adverse side effects, or are less expensive than our future products. Competitors also may develop or acquire products that make our future products obsolete. Any of these competitive products or events could have a significant negative impact on our business and financial results, including reductions in our market share, revenues and gross margins. See Item 1. Business – Competition for more information.

Our commercial success depends in part on our ability and the ability of our licensors to obtain and maintain patent protection on our product candidates and technologies, to preserve trade secrets, and to operate without infringing the proprietary rights of others.

We have applied for and continue to apply for patents for certain aspects of our product candidates and technology. We may not be able to obtain patent protection on aspects of our product candidates and technology. For example, while U.S. Patent No. 7,951,841 was issued on May 31, 2011 covering various methods of use of QLT091001 in the treatment of diseases associated with an endogenous 11-cis-retinal deficiency until 2027, and four additional key patents were granted in 2015 by the USPTO relating to uses of QLT091001 in the treatment of IRD, all of which are projected to expire between 2025-2032, not including any further potential adjustments due to patent term extensions, patent term adjustments, or terminal disclaimers, the molecule in QLT091001 is not eligible for composition of matter protection in the U.S. or elsewhere because it was previously known in the scientific community. Therefore, we may not be able to prevent competitors from commercializing the molecule in QLT091001 for the treatment of diseases that fall outside of the scope of our patents protecting these methods.

Our patent position and proprietary technologies are subject to certain risks and uncertainties. Although a patent has a statutory presumption of validity, the issuance of a patent is not conclusive as to its validity or as to enforceability of its claims. Accordingly, there can be no assurance that our patents will afford legal protection against competitors, nor can there be any assurance that the patents will not be infringed by others, nor that others will not obtain patents that we would need to license. In the United States, issued patent claims may be broadened, narrowed, otherwise amended, or even cancelled as a result of various post-issuance proceedings instituted by us or third parties at the United States Patent and Trademark Office. These proceedings include post-grant reviews, inter partes reviews, ex parte reexaminations, supplemental examinations, reissue applications, and challenges under the transitional program for covered business method patents. Further, at least some foreign jurisdictions in which we and our licensors have filed patent applications also have procedures that allow for post-issuance challenges at the respective intellectual property or patent office of that jurisdiction. Such challenges may result in the broadening, narrowing, otherwise amending, or even cancellation of issued patent claims in those jurisdictions. Post-issuance challenges at patent offices in the United States or in foreign jurisdictions can be an alternative to, or in addition to, challenges made by third parties using the appropriate jurisdiction’s judicial system. Our issued patents are subject to challenges through the judicial system of the appropriate jurisdiction.

With respect to pending patent applications we own or license, we do not know whether or not patent applications will result in issued patents. Securing patent protection for a product is a complex process involving many legal and factual questions. The patent applications that we and our licensors have filed in the United States and elsewhere are at varying stages of examination, the timing of which is outside of our control. Certain of these applications have not yet commenced examination in the United States Patent Office and other international patent offices, and we cannot predict the timing or results of such examinations. Further, because each country has its own requirements for determining patentable subject matter, the patent protection conferred by patent applications owned and licensed by us may result in varying scopes of protection, including but not limited to receiving no patent protection in some jurisdictions.

Likewise, to the extent a preferred position is conferred by patents we own or license, upon expiry of such patents, or if such patents are successfully challenged, invalidated or circumvented, our preferred position may be lost.

Patents issued or licensed to us may be infringed by the products or processes of other parties. The cost of enforcing our patent rights against infringers, if such enforcement is required, could be significant, and the time demands could interfere with our normal operations.

It is also possible that a court may find us to be infringing validly issued patents of third parties. In that event, in addition to the cost of defending the underlying suit for infringement, we may have to pay license fees and/or damages and may be enjoined from conducting certain activities. Obtaining licenses under third-party patents can be costly, and such licenses may not be available at all. Under such circumstances, we may need to materially alter our processes, may be unable to launch a product or may lose the right to manufacture and sell a product entirely or for a period of time.

Unpatented trade secrets, improvements, confidential know-how and continuing technological innovation are important to our scientific and commercial success. Although we attempt to, and will continue to attempt to, protect our proprietary information through reliance on trade secret laws and the use of confidentiality agreements with our collaborators, contract manufacturers, licensees, clinical investigators, employees and consultants and other appropriate means, these measures may not effectively prevent disclosure of or access to our proprietary information, and, in any event, others may develop independently, or obtain access to, the same or similar information.

If we fail to obtain or maintain orphan drug designation or other market exclusivity for QLT091001, our competitive position may be harmed.

Since the extent and scope of our patent protection for QLT091001 is limited, orphan drug designation is especially important for this product candidate. QLT091001 has received orphan drug designations for the treatment of LCA (due to inherited mutations in the LRAT or 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, including SECORD, which disease/condition we believe 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. These designations provide market exclusivity in the applicable jurisdiction for seven years and 10 years (which could be reduced), respectively, if a product is approved. This market exclusivity does not, however, pertain to indications other than those for which the drug was specifically designated in the approval, nor does it prevent other types of drugs from receiving orphan designations or approvals in these same indications. It is also possible that we could lose orphan drug status, or that a competing product with an orphan designation and the same indication as our product could reach the market before our product does. Further, even after an orphan drug is approved, the FDA can subsequently approve a drug with the same active moiety for the same condition if the FDA concludes that the new drug is clinically superior to the orphan product or a market shortage occurs.

We may seek orphan drug designations for QLT091001 for the treatment of other indications when we believe that such orphan drug designations could provide us with a commercial advantage. There is no assurance that we will receive such orphan drug designations or, even if we do, that such orphan drug designations will provide us with a commercial advantage. If we do not receive these orphan drug designations from one or both of the FDA or EMA in a timely manner or at all, our development plans and timelines to initiate pivotal trials for QLT091001 could be negatively impacted.

Additionally, upon FDA approval, we believe that the active pharmaceutical ingredient in QLT091001 may qualify as a new chemical entity, or NCE, which provides for five years of exclusivity following approval. We intend to seek New Chemical Entity exclusivity; however, there is no assurance that QLT091001 will qualify and gain the additional five-year exclusivity period, even if QLT091001 is approved. We also plan to secure regulatory exclusivity for QLT091001 in the EU; however, there can be no assurance that we will be successful in securing approval or regulatory exclusivity in the EU.

The commercialization of our product candidates may be dependent on our ability to establish and maintain effective sales and marketing capabilities or to enter into collaborations with partners to perform these services. If we are unable to establish and maintain effective sales and marketing capabilities, or fail to enter into agreements with third parties to sell and market our products, our ability to generate revenues from the sale of future products may be harmed.

In order to commercialize any of our product candidates that may be approved for commercial sale, we may need to establish and maintain an effective sales and marketing infrastructure or enter into collaborations with partners able to perform these services for us. We currently do not have an in-house sales and marketing organization. If

we are unable to successfully establish capabilities to sell and market our products within or outside the U.S. either through our own capabilities or by entering into collaborations with partners to market and distribute our products, we will have difficulty globally commercializing our products. In any of these events, our ability to generate revenues may be harmed.

The future growth of our business may depend in part on our ability to successfully identify, acquire on favorable terms, and assimilate technologies, products or businesses.

We actively evaluate various strategic transactions on an ongoing basis and may engage in negotiations to expand our operations and market presence by future product, technology or other acquisitions, in-licensing and business combinations, joint ventures or other strategic alliances with other companies. We may not be successful in identifying, initiating or completing such negotiations. Competition for attractive product acquisition or alliance targets can be intense, and we may not succeed in completing such transactions on terms that are acceptable to us. Even if we are successful in these negotiations, these transactions create risks, including:

•

difficulties in and costs associated with assimilating the operations, technologies, personnel and products of an acquired business;

•

assumption of known or unknown liabilities or other unanticipated events or circumstances;

•

acquired or in-licensed technology may not be successfully developed and commercialized;

•

the potential disruption to our ongoing business; and

•

the potential negative impact on our earnings and cash position.

Future acquisitions or dispositions could result in potentially dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities or amortization expenses or write-offs of goodwill, any of which could harm our financial condition. Any of these risks could harm our ability to achieve anticipated levels of profitability for acquired businesses or technology or to realize other anticipated benefits of the transaction. We cannot predict the number, timing or size of future acquisitions or other strategic transactions, or the effect that any such transactions might have on our operating results.

We expect to rely on third-party manufacturers, distributors and contract research organizations for the manufacture and distribution of our future commercial products and the management and conduct of our clinical trials. Any difficulties with such third parties could delay clinical trial results and future revenues from sales of our future commercial products.

We expect to rely on third parties to manufacture our product candidates for use in later stage clinical trials and, if commercialized, to manufacture and distribute our products in commercial quantities. We also expect to rely on contract research organizations (“CROs”) to manage and conduct our future clinical trials. If we are unable to obtain and maintain agreements on favorable terms with contract manufacturers and distributors, or these parties fail to supply required materials or comply with regulatory requirements, or if we fail to timely locate and obtain regulatory approval for additional or replacement manufacturers or distributors as needed, it could impair or prevent our ability to deliver our future commercial products on a timely basis, or at all, which in turn would materially and adversely harm our business and financial results. Similarly, if we are unable to obtain and maintain agreements on favorable terms with CROs in connection with our future clinical trials, or if any CROs we retain fail to timely provide the required services or comply with regulatory requirements, it could delay the development and approval of our product candidates and impair or prevent our ability to timely conduct successful clinical trials, which would impair our ability to obtain regulatory approval to sell our products, which in turn would materially and adversely harm our business and financial results.

For our product candidates and raw materials, we obtain supply from one or a limited number of sources. If we are unable to obtain components or raw materials, or products supplied by third parties, our ability to manufacture our product candidates for our clinical trials or, if approved, for future commercial use would be impeded, which could have a material adverse effect on our business, financial condition and results of operations and could cause the market value of our common stock to decline.

Some components and raw materials used in our product candidates are currently available only from one or a limited number of domestic or foreign suppliers. In the event an existing supplier fails to supply product on a timely basis and/or in the requested amount, supplies product that fails to meet regulatory requirements, becomes unavailable through business interruption or financial insolvency or loses its regulatory status as an approved source or we are unable to obtain or renew supply agreements and we do not have a second supplier, we may be unable to obtain the required components, raw materials or products on a timely basis or at commercially reasonable prices. We attempt to mitigate these risks by maintaining safety stock of these product candidates and raw materials, but such safety stock may not be sufficient. A prolonged interruption in the supply of a single-sourced raw material, including the active pharmaceutical ingredient, would materially and adversely harm our business and financial results.

In addition, these third party manufacturers may have the ability to increase the supply price payable by us for the manufacture and supply of our products, in some cases without our consent. Our dependence upon others to manufacture our products may adversely affect our profit margins and our ability to obtain approval for and produce our products on a timely and competitive basis, which would materially and adversely harm our business and financial results.

Healthcare reform and restrictions on reimbursements may limit our financial returns.

Our ability to commercialize our product candidates successfully will depend, in part, on the timeliness of, and the extent to which, adequate coverage and reimbursement for the cost of such products and related treatments is obtained from government health administration authorities, private health insurers and other organizations in the U.S. and foreign markets. These third parties are increasingly challenging both the need for and the price of new drug products. Significant uncertainty exists as to the reimbursement status of newly approved therapeutics. Applications or re-applications for coverage and reimbursement for any of our products may not result in approvals. Adequate third-party reimbursement may not be available for our product candidates to enable us to maintain price levels sufficient to realize an appropriate return on our investments in research and product development. Furthermore, the exceptional circumstances or the conditional nature of the MA can result in a lower reimbursement price.

We may become involved in legal proceedings from time to time and if there is an adverse outcome in our litigation or other legal actions, our business may be harmed.

We may become involved in legal actions in the ordinary course of our business. Litigation may result in verdicts against us, including excessive verdicts, which may include a judgment with a significant monetary award, as occurred in 2008 in the litigation with Massachusetts Eye and Ear Infirmary, including the possibility of punitive damages, a judgment that certain of our patent or other intellectual property rights are invalid or unenforceable and, as occurred in 2006 in the litigation with TAP Pharmaceuticals in the U.S., the risk that an injunction could be issued preventing the manufacture, marketing and sale of our products that are the subject of the litigation.

In addition, we may become involved in disputes or legal actions as a result of our past strategic corporate restructurings and divestitures, including the sale of, our assets related to Visudyne and our Qcellus laser under development to Valeant pursuant to the terms of the Valeant Agreement in 2012, or the sale of our PPDS Technology to Mati in 2013. Transactions such as these may result in disputes regarding representations and warranties, indemnities, future payments or other matters, and we may not realize some or all of the anticipated benefits of these transactions. For example, we recently filed a breach of contract lawsuit against Valeant in the Supreme Court of British Columbia, alleging that Valeant has failed to pay the $5 Million Laser Earn-Out Payment required under the terms of the Valeant Agreement. We seek to recover damages of $5.0 million from

Valeant and also claim failure of Valeant to use commercially reasonable efforts to promptly obtain laser registrations for the Qcellus laser in the United States. If we cannot favorably resolve this dispute, we may not receive any or all of the contingent consideration pertaining to regulatory approval of the Qcellus laser.

If disputes are resolved unfavorably, our financial condition and results of operations may be adversely affected. Additionally, any litigation, whether or not successful, may damage our reputation. Furthermore, we will have to incur substantial expense in defending these lawsuits and the time demands of such lawsuits could divert management’s attention from ongoing business concerns and interfere with our normal operations.

In addition, the testing, manufacturing, marketing and sale of human pharmaceutical products entail significant inherent risks of allegations of product liability. Our use of such products and medical devices in clinical trials exposes us to liability claims allegedly resulting from the use of these products or devices. These risks exist even with respect to those products or devices that are approved for commercial sale by the FDA or applicable foreign regulatory authorities and manufactured in facilities licensed and regulated by those regulatory authorities.

Our current insurance may not provide coverage or adequate coverage against potential claims, losses or damages resulting from such litigation. We also cannot be certain that our current coverage will continue to be available in the future on reasonable terms, if at all. If we were found liable for any claims in excess of our coverage or outside of our coverage, the cost and expense of such liability could materially harm our business and financial condition.

A portion of the consideration related to the sale of our Visudyne business and PPDS Technology in 2012 and 2013 in connection with our strategic restructuring is contingent upon the occurrence of certain milestones and other events. If we do not receive all or a material portion of these funds it may adversely impact our financial condition and results of operations.

Under the Valeant Agreement, pursuant to which we sold our Visudyne business to Valeant, we are entitled to receive 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 for sales of Visudyne outside of the United States by Novartis and a royalty on net sales attributable to new indications for Visudyne, if any should be approved by the FDA. Additionally, on September 26, 2013, the FDA approved the PMA supplement for the Qcellus laser and we invoiced Valeant for a $5.0 million Laser Earn-Out Payment under the terms of the Valeant Agreement. Valeant has disputed payment and on September 22, 2015, we filed a breach of contract lawsuit against Valeant in the Supreme Court of British Columbia seeking to recover damages of $5.0 million for failure to pay and also claim failure of Valeant to use commercially reasonable efforts to promptly obtain laser registrations for the Qcellus laser in the United States. While we believe that the Laser Earn-Out Payment is currently due and payable by Valeant, the outcome of litigation is uncertain and we may have difficulty collecting the Laser Earn-Out Payment in full.

Under our asset purchase agreement with Mati, we are eligible to receive 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.

With respect to Visudyne, as well as any future products resulting from the PPDS Technology, our receipt of contingent consideration depends on the success of third parties to market these products. For example, under the Visudyne asset purchase agreement, the contingent consideration depends on the sales of Visudyne outside of the United States, which is the responsibility of Novartis. Consequently, a portion of our income depends on the efforts of Novartis to market and sell Visudyne outside the U.S. and on the efforts of Valeant to collect royalties due to it from Novartis. To the extent such third parties do not perform adequately, or do not comply with applicable laws or regulations in performing their obligations, our income may be adversely affected.

Our receipt of contingent consideration may also be adversely affected by, among other things:

•

lower than expected Visudyne sales, including due to competition, product manufacturing, supply interruptions or recalls;

•

marketing or pricing actions by competitors or regulatory authorities;

•

changes in the reimbursement or substitution policies of third-party payors;

•

disputes relating to patents or other intellectual property rights;

•

failure to develop and commercialize any new indications for Visudyne; and

•

failure or delay by Mati in its development efforts, obtaining regulatory approval and commercializing the products related to the PPDS Technology.

If we do not ultimately receive all or a material portion of the consideration provided for under the asset purchase agreements due to the risks noted above or for any other reason, our cash position will suffer.

Our provision for income taxes and effective income tax rate may vary significantly and may adversely affect our results of operations and cash resources.

Significant judgment is required in determining our provision for income taxes and uncertain tax positions. Various internal and external factors may have favorable or unfavorable effects on our future provision for income taxes, uncertain tax positions, income taxes receivable, and our effective income tax rate. These factors include, but are not limited to, changes in tax laws, regulations and/or rates, results of audits by tax authorities, changing interpretations of existing tax laws or regulations, changes in estimates of prior years’ items, the impact of transactions we complete, future levels of research and development spending, changes in the overall mix of income among the different jurisdictions in which we operate, and changes in overall levels of income before taxes. Furthermore, new accounting pronouncements or new interpretations of existing accounting pronouncements (such as those described in Note 3 – Significant Accounting Policies in Notes to the Consolidated Financial Statements) can have a material impact on our effective income tax rate.

We file income tax returns and pay income taxes in jurisdictions where we believe we are subject to tax. In jurisdictions in which we do not believe we are subject to tax and therefore do not file income tax returns, we can provide no certainty that tax authorities in those jurisdictions will not subject one or more tax years (since our inception) to examination. Tax examinations are often complex as tax authorities may disagree with the treatment of items reported by us, the result of which could have a material adverse effect on our financial condition and results of operations.

We have incurred losses from continuing operations for several years and expect to continue to incur losses for the foreseeable future.

We have generated significant operating losses in prior years. During the year ended December 31, 2015 we incurred a net loss of $23.0 million and as at December 31, 2015 our accumulated deficit was approximately $534.3 million. Even though our research and development expenses are lower due to the sale of our former Visudyne business and PPDS Technology, we expect to continue to incur significant net losses from continuing operations for the foreseeable future due to clinical development costs related to our synthetic retinoid product and the absence of any revenue generating activities. We are uncertain when or if we will be able to achieve or sustain profitability. If we are unable to achieve or sustain profitability in the future, this may adversely affect our stock price.

Our operating expenses may fluctuate, which may cause our financial results to be below expectations and the market price of our securities to decline.

Our operating expenses may fluctuate from period to period for a number of reasons, some of which are beyond our control. An increase in operating expenses could arise from any number of factors, such as:

•

increased costs associated with the research and development of our product candidates;

•

fluctuations in currency exchange rates; and

•

product, technology or other acquisitions or business combinations.

The market price of our common shares is volatile and the value of an investment in our common shares could decline.

The market prices for securities of biotechnology companies, including us, have been and are likely to continue to be volatile. As a result, investors in companies such as ours may buy at high prices only to see the price drop substantially a short time later, resulting in an extreme drop in value in the holdings of these investors. Trading prices of the securities of many biotechnology companies, including us, have experienced extreme price and volume fluctuations which have, at times, been unrelated to the operating performance of the companies whose securities were affected. Some of the factors that may cause volatility in the price of our securities include:

•

announcements related to our strategic alternatives process;

•

results of our research and development programs;

•

issues with the safety or effectiveness of our product candidates;

•

announcements of technological innovations or new products by us or our competitors;

•

litigation commenced by or against us;

•

regulatory developments or delays concerning our products;

•

quarterly variations in our financial results; and

•

the timing and amounts of contingent consideration paid to us by third parties.

The price of our common shares may also be adversely affected by the estimates and projections of the investment community, general economic and market conditions, and the cost of operations in our product markets. Due to general economic conditions, extreme price and volume fluctuations occur in the stock market from time to time that can particularly affect the prices of biotechnology companies. These extreme fluctuations are sometimes unrelated or disproportionate to the actual performance of the affected companies.

Our information technology systems may be vulnerable to cybersecurity attacks which may adversely affect our business and operations.

We leverage advancements in technology to support our business model, including electronic data capture technologies for the efficient collection of clinical trial data. As a result, we are exposed to risks and may be subject to cyber-attacks and unauthorized access to our data. Cyber-attacks are often focused on compromising sensitive data for inappropriate use or disrupting business operations. Such an attack could compromise our confidential information as well as that of our clinical trial subjects and third parties with whom we interact and may result in negative consequences, including remediation costs, financial penalties, additional regulatory scrutiny, litigation and reputational damage that may materially and adversely harm our business and financial results and for which we may not have adequate, or any, insurance. We are actively working to take the necessary steps to reduce these risks through the use of processes, controls and by working with third party technology providers who have experience in addressing those risks, however, there can be no assurance that the measures we take will eliminate or reduce the incidence of a cybersecurity attack on our business.

If we fail to manage our exposure to global financial, securities market and foreign exchange risk successfully, our operating results and financial statements could be materially impacted.

The primary objective of our investment activities is to preserve principal while at the same time maintaining liquidity and maximizing yields without significantly increasing risk. To achieve this objective, our cash equivalents are high credit quality, liquid, money market instruments. If the carrying value of our investments exceeds the fair value, and the decline in fair value is deemed to be other-than-temporary, we will be required to write down the value of our investments, which could materially harm our results of operations and financial condition. Moreover, the performance of certain securities in our investment portfolio may correlate with the credit condition of governments, government agencies, financial institutions and corporate issuers. If the credit environment were to become unstable, as it did in the second half of 2008 and throughout much of 2009, we might incur significant realized, unrealized or impairment losses associated with these investments.

The functional currency of the Company is the U.S. dollar. As a result, to the extent that foreign currency-denominated (i.e., non-USD) monetary assets do not equal the amount of our foreign currency-denominated monetary liabilities, foreign currency gains or losses could arise and materially impact our financial statements.

Any of these events could have a significant negative impact on our business and financial results.

Item 1B.

UNRESOLVED STAFF COMMENTS

None.

Item 2.

PROPERTIES

During 2015, we entered into a sublease agreement to downsize our existing space in Vancouver, British Columbia, where our head office is located. We currently lease approximately 8,475 square feet of space under the terms of this sublease agreement. The lease term applicable to this space expires on August 31, 2016, with a one year renewal option on approximately 5,850 square feet of the space and a month-to-month renewal option on the remaining 2,625 square feet of space.

As at December 31, 2015, we no longer operate in the U.S. or have any leased properties in the U.S.

Item 3.

LEGAL PROCEEDINGS

From time to time we are involved in legal proceedings arising in the ordinary course of business.

On September 22, 2015, we commenced an action in the Supreme Court of British Columbia against Valeant for breach of contract, under the terms of the Valeant Agreement, with respect to failure to pay a $5.0 million Laser Earn-Out Payment and failure to use commercially reasonable efforts to promptly obtain the laser registrations for the Qcellus laser in the United States. Refer to Note 7(b) – Contingent Consideration – Related to the Sale of Visudyne for additional information.

Item 4.

MINE SAFETY DISCLOSURES

Not applicable.

PART II

Item 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Common Share Information

Our common stock is traded in Canada on the TSX under the symbol “QLT” and in the U.S. on the NASDAQ Stock Market under the symbol “QLTI.” The following table sets out, for the periods indicated, the high and low sales prices of the common shares, as reported by the TSX and NASDAQ.


	The Toronto Stock Exchange				The NASDAQ Stock Market
	High (CAD$)		Low (CAD$)		High (U.S.$)		Low (U.S.$)
2015

Fourth Quarter	$	4.10	$	3.42	$	3.22	$	2.56

Third Quarter		5.46		3.55		4.31		2.66

Second Quarter		5.40		4.30		4.39		3.57

First Quarter		5.66		4.77		4.56		3.80

2014

Fourth Quarter	$	5.11	$	3.91	$	4.54	$	3.35

Third Quarter		7.35		5.11		6.68		4.52

Second Quarter		7.11		5.19		6.65		4.69

First Quarter		7.90		5.71		7.10		5.08

The last reported sale price of the common shares on the TSX and on NASDAQ on February 18, 2016 was CAD $3.47 and U.S. $2.52, respectively.

As of February 18, 2016, there were 924 registered holders of our common shares, 795 of whom were residents of the U.S. Of the total 52,829,398 common shares outstanding, the portion held by registered holders resident in the U.S. was 40,631,094 or 76.9%.

Share Price Performance Graph

The graph below compares cumulative total shareholder return on the common shares of QLT for the last five fiscal years with the total cumulative return of the S&P/TSX Composite Index and the NASDAQ Biotechnology Index over the same period.

LOGO


	Dec. 31, 2010		Dec. 31, 2011		Dec. 31, 2012		Dec. 31, 2013		Dec. 31, 2014		Dec. 31, 2015
QLT Total Return		100.00		98.23		107.23		143.84		103.56		68.69

S&P/TSX Composite Index		100.00		89.23		97.72		103.35		104.55		80.50

NASDAQ Biotechnology Index		100.00		112.09		148.78		247.01		331.99		371.06

The graph above assumes $100 invested on December 31, 2010 in common shares of QLT and in each index. The returns shown above are historical and not indicative of future price performance.

The above graph and chart shall not be deemed to be incorporated by reference by any general statement incorporating by reference this Report into any filing under the Securities Act of 1933 as amended, or under the Exchange Act, except to the extent we specifically incorporate this information by reference, and shall not otherwise be deemed filed under those Acts.

Dividend Policy

We have not declared or paid any dividends on our common shares since inception. The declaration of dividend payments is at the sole discretion of our Board of Directors. The Board of Directors may declare dividends in the future depending upon numerous factors that ordinarily affect dividend policy, including the results of our operations, our financial position and general business conditions.

Recent Sales of Unregistered Securities

None.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

During the year ended December 31, 2015, there were no common share repurchases.

Exchange Controls and Other Limitations Affecting Holders of Common Shares

There is no limitation imposed by Canadian law or the Notice of Articles or Articles of the Company on the right of non-residents to hold or vote common shares in the Company, other than those imposed by the Investment Canada Act (Canada) (the “Investment Act”). Generally speaking, the Investment Act establishes the following two principal procedures for certain investments involving Canadian businesses, as defined by the Investment Act, by an individual, government or agency thereof, corporation, partnership, trust or joint venture that is not a “Canadian,” as defined in the Investment Act (a “non-Canadian”): either the filing of an application for review which, except in certain limited circumstances, must be filed before closing and the non-Canadian cannot complete its investment until the Minister responsible for the Investment Act has determined that the investment is “likely to be of net benefit to Canada,” or the filing of a notice, which must be filed within 30 days after the completion of the investment. A notice is not subject to substantive review and is required for investments that involve either the establishment of a new Canadian business or that involve an acquisition of control of a Canadian business but the prescribed thresholds for review are not exceeded. Subject to the possible application of the national security provisions, the Investment Act does not apply to investments in existing Canadian businesses that do not result in an acquisition of control, as defined under the Investment Act.

A direct investment by a non-Canadian to acquire control of a Canadian business is a reviewable investment where the value of the assets of the corporation, based on the corporation’s fiscal year immediately preceding the investment, is CAD$5 million or more. Higher limits apply for direct acquisitions by or from World Trade Organization (“WTO”) member country investors, as described below.

The acquisition of a majority of the voting interests of an entity or of a majority of the undivided ownership interests in the voting shares of an entity that is a corporation is deemed to be acquisition of control of that entity. The acquisition of less than a majority but one-third or more of the voting shares of a corporation or of an equivalent undivided ownership interest in the voting shares of the corporation is presumed to be acquisition of control of that corporation unless it can be established that, on the acquisition, the corporation is not controlled in fact by the acquirer through the ownership of voting shares. The acquisition of less than one-third of the voting shares of a corporation or of an equivalent undivided ownership interest in the voting shares of the corporation is deemed not to be acquisition of control of that corporation. Certain transactions in relation to common shares in the Company would be exempt from review from the Investment Act, including:

(a)

acquisition of common shares by a person in the ordinary course of that person’s business as a trader or dealer in securities;

(b)

acquisition of control of the Company in connection with the realization of security granted for a loan or other financial assistance and not for any purpose related to the provisions of the Investment Act; and

(c)

acquisition of control of the Company by reason of an amalgamation, merger, consolidation or corporate reorganization following which the ultimate direct or indirect control in fact of the Company, through the ownership of voting interests, remains unchanged.

Under the Investment Act, a direct investment in common shares of the Company by a non-Canadian who is a WTO investor (as defined in the Investment Act) would be reviewable only if it were an investment to acquire control of the Company and the enterprise value of the Company was CAD$600 million or more. This threshold will increase to CAD$800 million on April 24, 2017 and to $1 billion on April 24, 2019. A different threshold applies to an acquisition by a state-owned enterprise (“SOE”). Currently, where the acquisition is by a SOE, the investment would be reviewable if the value of the Company’s assets was CAD$369 million or more. This threshold is expected to increase to CAD$375 million in the coming weeks and is subject to an annual adjustment on the basis of a prescribed formula in the Investment Act to reflect the change in Canada’s gross domestic product.

The Minister of Industry can, within a prescribed period, require the review of an investment by a non-Canadian (even one that does not amount to an acquisition of control, and/or does not meet the review thresholds set out

above) on grounds of whether it is likely to be injurious to national security. Ultimately, the Cabinet can prohibit the completion of an investment, or require divestment of control of a completed investment, or impose terms and conditions on an investment where the investment is injurious to national security.

See also 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.

Item 6.

SELECTED FINANCIAL DATA

Annual Financial Data

The selected historical consolidated financial information presented below for each of the five years ended December 31, 2011 through to 2015, has been derived from our consolidated financial statements prepared in accordance with U.S. GAAP.

CONSOLIDATED STATEMENT OF OPERATIONS DATA

(In thousands of U.S. dollars except per share information)


Year Ended December 31,	2015⁽¹⁾			2014⁽²⁾			2013⁽³⁾			2012⁽⁴⁾			2011


Research and development expenses	$	9,790		$	13,803		$	18,509		$	24,578		$	23,043

Loss from continuing operations		(23,009	)		(4,005	)		(25,838	)		(42,264	)		(31,379	)

Net (loss) income		(23,009	)		(4,071	)		(24,871	)		45,698			(30,416	)

Basic and diluted net (loss) income per common share

Continuing operations		(0.44	)		(0.08	)		(0.51	)		(0.84	)		(0.63	)

Discontinued operations		—			(0.00	)		0.02			1.75			0.02

Net (loss) income per common share	$	(0.44	)	$	(0.08	)	$	(0.49	)	$	0.91		$	(0.61	)



CONSOLIDATED BALANCE SHEET DATA

Cash and cash equivalents⁽⁵⁾	$	141,824		$	155,908		$	118,521		$	307,384		$	205,597

Total assets		145,166			160,371			163,867			401,218			344,544

Total shareholders’ equity		141,341			156,512			157,784			388,318			329,005

For all years presented there were no cash dividends per common share.

⁽¹⁾

On September 15, 2015, the InSite Merger Agreement was terminated after InSite’s board of directors notified QLT that they had reviewed a second unsolicited offer from Sun Pharmaceuticals Industries Ltd. and determined that it was superior to the proposed InSite Merger with QLT. The Sun Proposal was an all-cash offer to acquire InSite for $0.35 per share of InSite common stock. As a result, InSite notified QLT that it was exercising its right to terminate the InSite Merger Agreement in order to enter into an agreement with Sun, and InSite paid QLT a termination fee of $2.7 million. During the year ended December 31, 2015, QLT incurred consulting and transaction fees of $9.4 million in connection with the pursuit of the InSite Merger and the strategic transactions as described above under Item 1. Business: Strategic Initiatives.

⁽²⁾

On October 8, 2014, the Auxilium Merger Agreement among QLT, Auxilium, HoldCo, and AcquireCo, terminated after Auxilium 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 Auxilium Merger Agreement. Due to this change in recommendation by Auxilium’s board of directors and in accordance with the termination provisions of the Auxilium 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 the termination of the Auxilium Merger Agreement. During the year ended December 31, 2014, QLT incurred consulting and transaction fees of $10.2 million in connection with our pursuit of the Auxilium Merger.

⁽³⁾

On April 3, 2013, we completed the sale of our punctal plug drug delivery system technology to Mati pursuant to an asset purchase agreement. During the year ended December 31, 2013, we recognized a $1.1 million gain within discontinued operations, which represented $1.2 million of sale proceeds net of the $0.2 million carrying value of certain equipment sold and a negligible amount of other transaction fees. See Note 7 – Contingent Consideration and Note 12 –Discontinued Operations in the Notes to the Consolidated Financial Statements.

⁽⁴⁾

On September 24, 2012, we completed the sale of our Visudyne business to Valeant pursuant to an asset purchase agreement. During the year ended December 31, 2012, we recognized a pre-tax gain of $101.4 million related to this transaction within discontinued operations. See Note 7 – Contingent Consideration and Note 12 –Discontinued Operations in the Notes to the Consolidated Financial Statements.

⁽⁵⁾

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 shareholders’ 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.

Quarterly Financial Data

Set out below is selected consolidated financial information for each of the fiscal quarters of 2015 and 2014.


(In thousands of U.S. dollars except per share information) Quarter Ended	December 31			September 30			June 30			March 31
2015^(a)

Research and development expenses	$	2,036		$	2,142		$	3,404		$	2,208

Loss from continuing operations		(3,680	)		(2,682	)		(10,751	)		(5,896	)

Net loss		(3,680	)		(2,682	)		(10,751	)		(5,896	)

Basic and diluted net loss per common share^(c)	$	(0.06	)	$	(0.05	)	$	(0.21	)	$	(0.12	)


2014^(b)

Research and development expenses	$	2,119		$	2,792		$	4,079		$	4,813

Income (loss) from continuing operations		15,964			(4,926	)		(8,581	)		(6,462	)

Net income (loss)		15,961			(4,932	)		(8,638	)		(6,462	)

Basic and diluted net income (loss) per common share^{(c) (d)}

Continuing operations		0.31			(0.10	)		(0.17	)		(0.13	)

Discontinued operations		0.00			0.00			0.00			0.00

Net income (loss) per common share	$	0.31		$	(0.10	)	$	(0.17	)	$	(0.13	)

^(a)

On September 15, 2015, the InSite Merger Agreement was terminated after InSite’s board of directors notified QLT that they had reviewed a second unsolicited offer from Sun Pharmaceuticals Industries Ltd. and determined that it was superior to the proposed InSite Merger with QLT. The Sun Proposal was an all-cash offer to acquire InSite for $0.35 per share of InSite common stock. Due to this change in recommendation by InSite’s board of directors and in accordance with the termination provisions of the InSite Merger Agreement, InSite paid QLT a termination fee of $2.7 million. During the year ended December 31, 2015, QLT incurred consulting and transaction fees of $9.4 million in connection with the pursuit of the InSite Merger and the strategic transactions as described above under Item 1. Business: Strategic Initiatives.

^(b)

^(c)	Basic and diluted income (loss) per share are determined separately for each quarter. As a result, the sum of the quarterly amounts may differ from the annual amounts disclosed in the consolidated financial statements due to the use of different weighted average numbers of shares outstanding.

^(d)

At December 31, 2014, basic income per common share was calculated using a weighted average common share total of 51,190,589, while diluted income per common share was calculated using a weighted average common share total of 51,219,970, as the RSUs had a dilutive impact during the three months ended December 31, 2014. However, the dilutive impact did not change the income per common share value, as basic and diluted net income per common share were both calculated as $0.31.

Item 7.

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

The following information should be read in conjunction with the accompanying 2015 consolidated financial statements and notes thereto, which are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). All of the following amounts are expressed in U.S. dollars unless otherwise indicated.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

The following factors, among others, including those described under Item 1 A. Risk Factors in 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;

•

risks and uncertainties related to our decision, ability and timing to effect the Aralez Distribution and the associated tax consequences of the Aralez Distribution for the QLT shareholders;

•

the risk that the closing of the Private Placement contemplated under the Share Purchase and Registration Rights Agreement may not occur for any reason, including due to a condition of the closings not being satisfied;

•

our ability to retain or attract key employees and executives;

•

the anticipated timing, cost and progress of the development of our technology and clinical trials including the anticipated timing to commence and obtain results from the natural history study and pivotal 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 European Medicines Agency (“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, including the impact of competition and pricing;

•

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 7 – Contingent Consideration of the audited consolidated financial statements for the year ended December 31, 2015), which is currently subject to a dispute with Valeant Pharmaceuticals International, Inc. (“Valeant”),

and receipt of all or part of the other contingent consideration pursuant to the asset purchase agreement with Valeant (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 U.S. Food and Drug Administration (“FDA”);

•

receipt of all or part of the contingent consideration pursuant to the asset purchase agreement with Mati Therapeutics, Inc. (“Mati”) related to Mati’s successful development and sales of products based on the punctal plug drug delivery technology (the “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 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.

Business Overview

We are currently developing QLT091001 for the treatment of Inherited Retinal Disease caused by RPE65 and LRAT gene mutations (“Inherited Retinal Disease” or “IRD”), which indication includes Leber Congenital Amaurosis (“LCA”) and Retinitis Pigmentosa (“RP”). To date, we have completed an initial Phase Ib clinical proof of concept study, a follow-up retreatment study in LCA and RP patients with autosomal recessive mutations in RPE65 or LRAT (the “Retreatment Study”), and a Phase 1b study in 5 RP patients with autosomal dominant mutations in RPE65. We are continuing to advance our pivotal trial start-up activities with the goal of initiating a Phase III pivotal trial in the third quarter of 2016 for the treatment of Inherited Retinal Disease. In addition, we are concurrently exploring with the EMA the submission of a Marketing Authorization Application (“MAA”) in the second half of 2016 for the conditional approval of QLT091001, which would potentially accelerate its commercial availability as a treatment option. Refer to the Item 1 – Business – Our Products in Development for more information.

Our net loss for the year ended December 31, 2015 was $23.0 million compared to $4.1 million for the year ended December 31, 2014. The $18.9 million increase in net loss was primarily due to the receipt of a $28.4 million termination fee received on October 9, 2014, in connection with our pursuit of a strategic merger with Auxilium Pharmaceuticals, Inc. (see the Terminated Merger Transaction with Auxilium section below), as compared to a lower termination fee of $2.7 million received on September 15, 2015 in connection with our pursuit of a strategic merger with InSite Vision Incorporated (see the Terminated Merger Transaction with InSite section below). The variance between the termination fee received in each respective year was also partially offset by a general decline in operating expenses in 2015. As at December 31, 2015, our accumulated deficit was

$534.3 million. We have devoted a significant amount of resources to our research and development activities and we expect to continue to incur significant expenses, milestone payments and operating losses as we advance the clinical development of QLT091001. See the Contractual Obligations section below for more information.

Our operations and strategic activities are currently funded through cash on hand. As at December 31, 2015, we had $141.8 million of cash and cash equivalents, which are invested in highly liquid investments. On February 5, 2016, QLT completed $45.0 million cash investment in Aralez Pharmaceuticals, Inc. (“Aralez Canada”) in exchange for 7,200,000 of Aralez common shares (the “Aralez Shares”) at a price of US$6.25 per share. We intend to effect a special election distribution of the Aralez Shares to our shareholders by way of a reorganization of share capital pursuant to a Plan of Arrangement, payable, at the election of each such shareholder, in either Aralez Shares or cash, subject to possible pro-ration (the “Aralez Distribution”). Any cash to be distributed pursuant to the Aralez Distribution will be funded pursuant to the terms of the Backstop Agreement, as amended, described below.

Following the termination of the proposed InSite Merger and Auxilium Merger described below, we are continuing to identify, evaluate and review our strategic and business options in parallel with the ongoing development of our synthetic retinoid, QLT091001. We may incur significant expenses related to the pursuit of these strategic and business options.

Strategic Initiatives

2015

Terminated Merger Transaction with InSite

Following the 2014 termination of the Auxilium Merger Agreement (as described below), in 2015 we continued to review our strategic and business options. Greenhill & Co. LLC (“Greenhill”) was engaged as our financial advisor to aid in developing, exploring and providing advice with respect to such strategic and business alternatives. As a result of our review of strategic alternatives in 2015, we entered into the agreements described below.

On June 8, 2015, the Company entered into an Agreement and Plan of Merger (as amended and restated on July 16, 2015 and August 26, 2015 (the “InSite Merger Agreement”) among QLT, InSite Vision Incorporated, a Delaware corporation (“InSite”), and Isotope Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of QLT. Under the terms of the InSite Merger Agreement, InSite would have become an indirect wholly owned subsidiary of QLT, and InSite stockholders would have received QLT common shares based on an exchange ratio equal to 0.078 of a QLT common share per share of InSite common stock, subject to a collar mechanism (the “InSite Merger”).

In conjunction with the entry into the InSite Merger Agreement, on June 8, 2015 we granted InSite a secured line of credit (the “Secured Note”) for up to $9.9 million to fund continuing operations through to the completion of the InSite Merger, subject to certain conditions and restrictions. The Secured Note bore interest at 12% per annum and was secured by a first priority security interest in substantially all of InSite’s assets. Upon termination of the InSite Merger Agreement, InSite’s repayment obligations under the Secured Note were accelerated and InSite paid QLT $5.8 million on September 15, 2015, which consisted of $5.7 million of principal and $0.1 million of accrued interest.

During the year ended December 31, 2015, QLT incurred consulting and transaction fees of $9.4 million in connection with the pursuit of the InSite Merger and the strategic transactions described below. These consulting and advisory fees have been reflected as part of Selling, General and Administrative expenses on the consolidated statements of operations and comprehensive loss.

Aralez Investment and Distribution

We intend to effect a special election distribution of the Aralez Shares to our shareholders as part of a reorganization of our share capital (the “Share Reorganization”) pursuant to a court-approved statutory Plan of Arrangement under Section 288 of the Business Corporations Act (British Columbia) (the “Plan of Arrangement”), payable, at the election of each shareholder, in either Aralez Shares or cash, subject to possible pro-ration (the “Aralez Distribution”).

The Share Reorganization requires the approval of our shareholders which will be sought at a special meeting (the “Special Meeting”) of shareholders scheduled to be held on March 18, 2016. If approved at the Special Meeting, the Share Reorganization is expected to permit QLT to make the Aralez Distribution to QLT shareholders in a tax efficient manner. If the Share Reorganization is not approved at the Special Meeting, the Board may implement the Aralez Distribution as a dividend in kind. The Aralez Distribution is anticipated to be completed on or around March 22, 2016. See Item 1. Business – Overview – Strategic Initiatives – 2015 for more information.

Private Placement

2014

Terminated Merger Transaction with Auxilium

On October 8, 2014, the Auxilium 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 legal advisors, 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 Auxilium 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 Auxilium Merger Agreement. Our financial advisory services agreement with Credit Suisse was subsequently terminated.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with generally accepted accounting principles 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 reporting periods presented. Significant estimates are used for, but not limited to, the fair value of contingent consideration, allocation of overhead expenses to research and development, stock-based compensation, and provisions for taxes, uncertain tax positions, tax assets, and tax liabilities. Actual results may differ from estimates made by management. The significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include those which follow:

Contingent Consideration

When contingent consideration assets arise, they are measured at fair value and revalued at the end of each reporting period. Furthermore, fair value changes are reported as part of Other (Expense) Income related to continuing operations. Fair value changes in contingent consideration are positively impacted by the passage of time, since all remaining expected cash flows are closer to collection, thereby increasing their present value. Fair value changes in contingent consideration are also impacted by the projected amount and timing of expected future cash flows as well as the cost of capital used to discount these cash flows.

As described under Note 7 – Contingent Consideration of the audited consolidated financial statements for the year ended December 31, 2015, we are currently in dispute with Valeant related to a $5.0 million earn-out milestone (the “Laser Earn-Out Payment”) which is payable to QLT under the terms of the Valeant Agreement. On December 15, 2015, QLT commenced an action against Valeant for breach of contract related to this matter. As at December 31, 2015, the Laser Earn-Out Payment is recorded in accounts receivable on our consolidated balance sheet at its estimated fair value of $2.0 million (2014 – $2.0 million) to reflect the collection risk associated with the Valeant dispute and litigation. During the year ended December 31, 2014, we recorded a $2.0 million decrease in the estimated fair value of the Laser Earn-Out Payment to account for the potential collection costs, increased uncertainty and assessed collection risk. In 2015 and 2014, the fair value of the Laser Earn-Out Payment was estimated using a probability weighted approach to examine the various possible outcomes with respect to the timing and amount, net of collection costs, that may be collected.

Stock-Based Compensation

Accounting Standards Codification (“ASC”) topic 718 requires stock-based compensation to be recognized as compensation expense in the statement of earnings based on their fair values on the date of the grant, with the compensation expense recognized 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 any awards modified, repurchased or cancelled after the adoption date.

We use the Black-Scholes option pricing model to estimate the value of our stock option awards at each grant date. The Black-Scholes option pricing model was developed for use in estimating the value of such 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 the expected life of such options based on historical and other economic data trended into future years. The risk-free interest rate assumption is based upon observed interest rates that coincide with the terms of our options.

For the year ended December 31, 2015, stock-based compensation expense of $2.1 million was expensed as follows: $1.2 million to research and development costs, and $0.9 million to selling, general and administrative costs. The weighted average assumptions used to value the options granted during 2015 included: volatility of 41.3%, a 6.8 year expected life, and a 1.4% risk-free interest rate.

For the year ended December 31, 2014, stock-based compensation expense of $1.4 million was expensed as follows: $0.8 million to research and development costs and $0.6 million to selling, general and administrative costs. The weighted average assumptions used to value the options granted during 2014 included: volatility of 42.4%, a 6.8 year expected life, and a 1.6% risk-free interest rate.

For the year ended December 31, 2013, stock-based compensation expense of $0.6 million was expensed as follows: $0.4 million to research and development costs and $0.2 million to selling, general and administrative costs. The weighted average assumptions used to value the options granted during 2013 included: volatility of 46.0%, a 6.5 year expected life, and a 2.0% risk-free interest rate.

Research and Development

Research and development (“R&D”) costs are expensed as incurred and consist of direct and indirect expenditures, including a reasonable allocation of overhead expenses to our various R&D programs. Overhead expenses generally consist of costs incurred to provide general and administrative support to the R&D programs, including costs associated with rent, facility maintenance, utilities, office services, information technology, legal, accounting and human resources. Significant judgment is required in selecting an appropriate methodology for the allocation of overhead expenses. Our overhead allocation methodology is based on our workforce composition. We determine the proportion of our workforce that is dedicated to R&D activities and allocate a proportionate amount of overhead expenses to R&D expense. We believe that this is a reasonable method of allocation based on the nature of our business and workforce. Changes in the composition of our workforce and the types of support activities are factors that may influence the allocation of our overhead expenses. Costs related to the acquisition of development rights, for which no alternative use exists, are classified as research and development and expensed as incurred. Patent application, filing and defense costs are also expensed as incurred.

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 carryforwards using applicable enacted tax rates. An increase or decrease in these tax rates will increase or decrease the carrying value of future 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. Significant estimates are required in determining our provision for income taxes and uncertain tax positions. Some of these estimates are based on interpretations of existing tax laws or regulations. Various internal and external factors may have favorable or unfavorable effects on our future effective tax rate. These factors include, but are not limited to, changes in tax laws, regulations and/or rates, changing interpretations of existing tax laws or regulations, changes in estimates of prior years’ items, results of tax audits by tax authorities, future levels of research and development spending, changes in estimates related to repatriation of undistributed earnings of foreign subsidiaries, and changes in overall levels of pre-tax earnings. The realization of our deferred tax assets is primarily dependent on whether we are able to generate 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 will not be realized. The assessment of whether or not a valuation allowance is required often requires significant judgment including the long-range forecast of future taxable income and the evaluation of tax planning initiatives. Adjustments to the deferred tax valuation allowances are made to earnings in the period when such assessments are made.

We record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances and information available at the reporting date. There is inherent uncertainty in quantifying income tax positions. We have recorded tax benefits for those tax positions where it is more likely than not that a tax benefit will result upon ultimate settlement with a tax authority that has all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will result, no tax benefit has been recognized in the financial statements. See Note 13 – Income Taxes in Notes to the Consolidated Financial Statements.

Recently Issued and Recently Adopted Accounting Standards

See Note 3 – Significant Accounting Policies in Notes to the Consolidated Financial Statements for a discussion of recently adopted and new accounting pronouncements.

COMPARISON OF YEARS ENDED DECEMBER 31, 2015, 2014 and 2013

The following table presents our net (losses) income for the years ended December 31, 2015, 2014 and 2013:


	Year Ended December 31,
(In thousands of U.S. dollars, except per share data)	2015			2014			2013
Net loss and comprehensive loss	$	(23,009	)	$	(4,071	)	$	(24,871	)

Basic and diluted net loss per common share	$	(0.44	)	$	(0.08	)	$	(0.49	)

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

Expenses

Research and Development

During the year ended December 31, 2015, research and development (“R&D”) expenditures from continuing operations were $9.8 million compared to $13.8 million for the same period in 2014. The $4.0 million (29%) decrease was primarily due to higher costs incurred in 2014 related to certain toxicity studies, preparatory activities for the QLT091001 pivotal trial, our IDA study, and trailing costs from the Retreatment Study, which was substantially completed in 2013. The 2015 decline in R&D expenditures was also attributable to lower salary and overhead costs resulting from R&D headcount attrition, the foreign exchange impact of the weakening Canadian dollar, and downsizing of our lease space as described under the Contractual Obligations section below. These costs savings were partially offset by: (i) an increase in stock based compensation expense related to the June 7, 2015 accelerated vesting of all unvested stock options in connection with the proposed InSite Merger and strategic transactions described above, (ii) costs related to the transfer and outsourcing of our analytical and bio-analytical testing functions to certain contract research organizations, and (iii) costs related to the commencement of the natural history study during the second half of 2015.

During the year ended December 31, 2014, R&D expenditures from continuing operations were $13.8 million compared to $18.5 million for the same period in 2013. The $4.7 million (25%) decrease was primarily due to higher costs incurred in 2013 related to our Retreatment Study 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 preparatory activities for the QLT091001 pivotal trial, IDA study, and higher stock based compensation expense associated with certain stock options granted for incentive and retention purposes.

During the year ended December 31, 2013, R&D expenditures from continuing operations were $18.5 million compared to $24.6 million for the same period in 2012. The $6.1 million (25%) decrease was primarily due to: (i) $4.8 million of savings resulting from our 2012 workforce reduction and lower spending on our synthetic retinoid program QLT091001, and (ii) the $1.2 million impact of the accelerated vesting of certain stock options recorded in 2012 in connection with the election of a new Board of Directors on June 4, 2012.

Trailing R&D expenditures related to our former Visudyne business and PPDS Technology are presented as discontinued operations on the Consolidated Statements of Operations and Comprehensive (Loss) Income. For additional discussion on these expenditures, refer to the Income from Discontinued Operations, Net of Income Taxes section below and Note 12 – Discontinued Operations in the Notes to the Consolidated Financial Statements for the year ended December 31, 2015.

Total cumulative costs incurred through December 31, 2015 related to QLT091001 were $118.0 million.

For a more detailed description of our QLT091001 development program, refer to the Our Products in Development section under Item 1 of Part I of this Report.

Selling, General and Administrative Expenses

During the year ended December 31, 2015, selling, general and administration (“SG&A”) expenses were $15.7 million compared to $16.8 million for the same period in 2014. The $1.1 million (7%) decrease was primarily due to a $1.2 million decrease in transaction and consulting fees related to our exploration and pursuit of certain strategic alternatives. During the year ended December 31, 2015, we incurred $9.4 million of transaction and consulting fees related to our pursuit of the InSite Merger and strategic transactions described above, compared to $10.2 million of similar fees incurred in 2014 related to our pursuit of the Auxilium Merger. In addition, during the year ended December 31, 2015, we incurred $0.2 million of general consulting fees related to our consideration of future strategic options, compared to $0.6 million of similar fees incurred in 2014. Furthermore, 2015 SG&A expense was positively impacted by a decrease in directors fees related to our October 2014 appointment of Dr. Geoffrey Cox as Interim Chief Executive Officer and a decrease in overall operating costs related to the downsizing of our lease space as well as the foreign exchange impact of the weakening Canadian dollar. These cost savings were substantially offset by higher stock based compensation expense associated with the June 7, 2015 accelerated vesting of all unvested stock options as described above and a decrease in the amount of overhead expenses allocated to our R&D programs due to R&D headcount attrition.

During the year ended December 31, 2014, SG&A expenses were $16.8 million compared to $7.0 million for the same period in 2013. The $9.8 million (141%) increase was primarily due to the following factors: $10.2 million of consulting and transaction fees related to the proposed Merger with Auxilium (see the Terminated Merger Transaction with Auxilium Pharmaceuticals, Inc. section above), general consulting fees incurred in connection with our review of other strategic alternatives, stock based compensation expense associated with certain stock options granted for incentive and retention purposes, and contractual severance benefits triggered by the November 26, 2014 resignation of QLT’s former Chief Financial Officer. These cost increases 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 year ended December 31, 2013, SG&A expenses were $7.0 million compared to $15.1 million for the same period in 2012. The $8.1 million (54%) decrease was primarily due to: (i) $6.9 million of savings resulting from our 2012 workforce reduction, a decrease in discretionary spending and other restructuring activities; and (ii) higher compensation expense incurred in 2012 related to the $1.2 million impact of the accelerated vesting of certain stock options and directors’ deferred stock units in connection with the election of a new Board of Directors on June 4, 2012.

Depreciation

During the years ended December 31, 2015, 2014 and 2013, depreciation expense was $0.6 million, $0.9 million, and $1.0 million, respectively. The progressive decline in depreciation expense is primarily due to assets reaching the end of their useful lives.

Restructuring charges

During the year ended December 31, 2012, we restructured our operations to focus our resources on our clinical development programs related to our synthetic retinoid, QLT091001, for the treatment of certain inherited retinal diseases. The cumulative cost of the restructuring, which was substantially complete in 2014, was $19.6 million. We did not incur restructuring expenses during the year ended December 31, 2015.

During the year ended December 31, 2014, we recorded a charge of $0.7 million related to certain severance and termination benefits paid to QLT’s former Senior Vice President, Business Development and Commercial Operations, whose employment terminated effective May 31, 2014.

During the year ended December 31, 2013, we recorded $2.0 million of restructuring charges, which primarily consisted of $1.7 million of severance and termination benefits, $0.4 million of lease termination costs related to excess office space which was vacated in 2012 and 2013, and $0.2 million of relocation charges related to the downsizing of our office space. These charges were partially offset by a $0.3 million recovery from sales of certain property, plant and equipment that was previously written off in 2012 and/or classified as held for sale.

Termination Fees

In connection with the termination of the InSite Merger Agreement on September 15, 2015, InSite paid QLT a $2.7 million termination fee.

In connection with the termination of the Auxilium Merger Agreement on October 9, 2014, Auxilium paid QLT a $28.4 million termination fee.

Other (Expense) Income

Net Foreign Exchange Losses

For the years ended December 31, 2015, 2014 and 2013, net foreign exchange gains (losses) represent 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 the Liquidity and Capital Resources: Interest and Foreign Exchange Rates section below.

Interest Income

During the years ended December 31, 2015, 2014 and 2013, interest income was $0.3 million, $0.1 million, and $0.2 million respectively. Interest income in 2015 includes $0.1 million of interest earned on the Secured Note granted to InSite in connection with the proposed InSite Merger described under the Strategic Initiatives – Terminated Merger Transaction with InSite section above.

Fair Value Change in Contingent Consideration

Assets recognized in connection with contingent consideration owed to QLT related to previous divestitures are estimated, measured and recorded at the present value of future expected payments. Fair value changes primarily arise from the following factors: accretion; cash collected during the period, which decreases the balance of future expected cash flows owed to us; and changes in the projected amount and timing of the expected future cash flows.

No fair value changes were recorded in 2015 given that the remaining contingent consideration owing from our previous sale of QLT USA and Eligard to TOLMAR Holding, Inc. (“Eligard Contingent Consideration”) was collected in full by the end of 2014.

During the year ended December 31, 2014, we recorded a net fair value loss of $0.5 million, which consisted of a $1.5 million fair value gain related to our Eligard Contingent Consideration offset by a $2.0 million fair value decrease recorded for the Laser Earn-Out Payment to account for the increased uncertainty, collection risk associated with the passage of time and potential collection costs.

During the year ended December 31, 2013, we recorded a net fair value gain of $2.9 million, which consisted of a $4.1 million fair value gain related to our Eligard Contingent Consideration offset by (i) a $0.8 million decrease in the estimated fair value of Laser Earn-Out Payment to reflect our assessment of collection risk at that time, and (ii) a net $0.5 million decrease in the estimated fair value of our contingent consideration related to a revision in our estimate of potential future net royalties owing from Visudyne sales.

Income from Discontinued Operations, Net of Income Taxes

In accordance with the accounting standard for discontinued operations, the results of operations related to our former PPDS Technology and Visudyne business have been excluded from continuing operations and reported as discontinued operations for all periods presented.

During the year ended December 31, 2014, we incurred a loss of $0.1 million from discontinued operations, which primarily consisted of certain residual costs related to the former sale of our Visudyne business.

During the year ended December 31, 2013, income from discontinued operations, net of taxes, was $1.0 million and primarily consisted of a $1.1 million gain derived from the sale of our PPDS Technology.

Income Taxes

During the year ended December 31, 2015, the provision for income taxes from continuing operations was insignificant and primarily relates to the accrual of interest on uncertain tax provisions.

During the year ended December 31, 2014, the $0.2 million income tax recovery from continuing operations primarily relates to a $0.4 million reversal of interest accrued on uncertain tax positions which decreased in 2014 due to the expiration of the statute of limitations. This recovery was partially offset by the tax impact of gains from fair value changes in our previous Eligard related contingent consideration asset balance and interest accrued on remaining uncertain tax positions.

During the year ended December 31, 2013, the provision for income taxes related to continuing operations was $0.6 million. The provision primarily relates to the 2013 gain on the fair value change of our previous Eligard related contingent consideration. In addition, the provision also reflected our position of having insufficient evidence to support current or future realization of the tax benefits associated with our development expenditures.

The 2015, 2014 and 2013 provisions for income taxes also reflect that we had insufficient evidence to support the current or future realization of the tax benefits associated with our development expenditures.

During the years ended December 31, 2015 and 2014, the provisions for income taxes related to discontinued operations were nil. During the year ended December 31, 2013, the provision for income taxes related to discontinued operations was $0.2 million. The provision primarily relates to the drawdown of a prepaid tax asset that was recorded in a prior year in connection with the intercompany transfer of certain intellectual property and the subsequent sale of such technology to Mati in April 2013. The provision also reflects our position of having insufficient evidence to support current or future realization of the tax benefits associated with expenditures related to our discontinued operations.

As at December 31, 2015, prior to the deferred income tax asset offset described below, our provision for uncertain tax positions (“UTP Provision”) was $7.3 million (December 31, 2014 – $5.6 million). Approximately $5.5 million of this UTP Provision as at December 31, 2015 relates to tax filing positions taken on certain transaction costs incurred in 2015 and 2014, $1.4 million relates to uncertain tax positions that are currently under audit examination and the remaining balance relates to other tax positions on uncertain tax matters from prior years. Given that we have sufficient tax deferred tax assets to shelter these potential liabilities, approximately $6.9 million (December 31, 2014 – $5.2 million) of the UTP Provision has been offset on the consolidated balance sheet in accordance with ASU No. 2013-11 – Income Taxes (Topic 740): Presentation of Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, which was adopted prospectively effective January 1, 2014. The remaining net UTP Provision of $0.3 million as at December 31, 2015 (December 31, 2014 – $0.4 million) is reflected on consolidated balance sheet and is expected to decrease in 2016 upon the expiration of the statute of limitations applicable to certain tax positions taken on uncertain tax matters in prior years.

As at December 31, 2015 and 2014, our respective net deferred tax assets were nil given that we had a full valuation allowance applied against these specific 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. See Note 13 – Income Taxes in Notes to the Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

Overview

As at December 31, 2015, our cash resources, working capital, and other available financing resources are sufficient to service current product research and development needs, operating requirements, liability requirements, milestone payments, change of control obligations and future consulting and advisory fees we may incur in connection with the exploration of strategic alternatives.

On February 5, 2016, our cash and cash equivalents decreased by $45.0 million in connection with our investment in Aralez. We intend to effect a special distribution on or around March 22, 2016 of the Aralez Shares to our shareholders as part of a Share Reorganization pursuant to a court-approved statutory Plan of Arrangement. The special distribution will be payable, at the election of each shareholder, in either Aralez Shares or cash, subject to proration as may be necessary to reflect a maximum cash component of $15.0 million. The entitlement of a QLT shareholder to a portion of the Aralez Shares (or cash in lieu therefore, subject to proration) is 0.13629 per QLT common share held, based on the 7,200,000 Aralez Shares acquired divided by the 52,829,398 QLT shares outstanding on the February 16, 2016 record date for the special distribution. For more information, refer to the Strategic Initiatives – Aralez Investment and Distribution section above.

Additional factors that may affect our future capital availability or requirements may include: expenses incurred in connection with the exploration, pursuit and completion of future financial and/or strategic alternatives; return of capital to shareholders, including any future distributions and/or share repurchases; potential legal costs related to the litigation and dispute with Valeant regarding the Laser Earn-Out Payment; the status of competitors and their intellectual property rights; levels of future sales of Visudyne and the receipt of certain future contingent consideration under the Valeant Agreement; levels of any future payments related to the PPDS Technology we sold under the 2012 asset purchase agreement with Mati; 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 the commercialization of 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 currently do not generate any revenue from product sales. We fund operations, product development and capital expenditures through existing cash resources.

Cash (Used in) Provided by Operating Activities

During the year ended December 31, 2015, cash used by operating activities was $19.4 million compared to $0.5 million of cash provided by operating activities in the same period in 2014. The $19.9 million decrease in operating cash flows was primarily attributable to the following:

•

A $25.7 million negative cash flow variance related to a $28.4 million termination fee received in 2014 related to the proposed Auxilium Merger as compared to the $2.7 million termination received in 2015 related to the proposed InSite Merger (refer to the Strategic Initiatives – Termination Merger Transaction with InSite and Terminated Merger Transaction with Auxilium Pharmaceuticals, Inc. sections above for more information);

•

A negative operating cash flow variance of $1.5 million related to the portion of the Eligard Contingent Consideration that was received in 2014 and recognized as part of cash used in operations.

•

A positive cash flow variance of $5.0 million resulting from: (i) lower salary costs related to changes in the R&D and SG&A head count, lower lease costs and the foreign exchange impact of the weakening Canadian dollar, and (ii) higher cash outlays in the prior year related to the following 2014 research and development activities: toxicity studies, preparatory activities for the QLT091001 pivotal trial and trailing costs from our Retreatment Study. These positive cash flow variances were partially offset by increased cash outlays in 2015 related to: (i) the transfer and outsourcing of our analytical and bio-analytical testing functions to certain contract research organizations and (ii) spending related to the commencement of our natural history study.

•

A positive cash flow variance of $1.5 million due to lower consulting and advisory fees paid during the year ended December 31, 2015 as compared to the same period in 2014. During the year ended December 31, 2015, we paid $8.7 million of transaction and consulting fees related to our exploration and pursuit of the InSite Merger and the strategic transactions described above. In comparison, during the year ended December 31, 2014, we paid $10.2 million of transaction and consulting fees related to our pursuit of the Auxilium Merger.

•

A $0.9 million positive cash flow variance associated with restructuring charges paid out in 2014 for accrued severance and termination benefits.

During the year ended December 31, 2014, cash provided by operating activities was $0.5 million compared to $25.8 million of cash used in the same period in 2013. The $26.3 million increase in operating cash flows was primarily attributable to the following factors:

•

A positive cash flow variance related to the $28.4 million termination fee received in connection with the proposed Auxilium Merger.

•

A positive cash flow variance of $2.9 million from lower spending on restructuring costs;

•

A positive operating cash flow variance from $8.8 million of lower operational spending associated with our 2012 restructuring initiatives;

•

A negative cash flow variance of $10.2 million associated with consulting and transaction fees paid in 2014 in connection with the proposed Auxilium Merger;

•

A negative operating cash flow variance related to the fair value change in contingent consideration of $2.6 million;

•

A negative operating cash flow variance of $0.6 million related to the reversal of certain liabilities recorded for uncertain tax positions; and

•

A negative operating cash flow variance from other income items of $0.4 million.

For the year ended December 31, 2013, we used $25.8 million of cash in operations as compared to $41.6 million for the same period in 2012. The $15.8 million positive cash flow variance is primarily attributable to:

•

A positive operating cash flow variance from lower operational spending of $37.1 million associated with our 2012 restructuring initiatives;

•

A positive operating cash flow variance from lower spending on restructuring costs of $11.1 million;

•

A positive operating cash flow variance from higher tax recoveries of $1.0 million;

•

A positive operating cash flow variance from other income items of $0.6 million;

•

A negative operating cash flow variance from lower cash receipts from previous product sales and royalties of $29.9 million; and

•

A negative operating cash flow variance related to the fair value change in contingent consideration of $4.1 million.

Cash Provided by Investing Activities

During the year ended December 31, 2015, cash flows provided by investing activities was insignificant.

During the year ended December 31, 2014, cash flows provided by investing activities primarily consisted of $36.6 million of Eligard Contingent Consideration received and $0.1 million of net proceeds related to the sale of certain property, plant and equipment.

During the year ended December 31, 2013, cash flows provided by investing activities consisted of $34.6 million of Eligard Contingent Consideration and $8.5 million of proceeds from the sale of discontinued operations, which includes: (i) $7.5 million of proceeds released from escrow in connection with our former 2012 sale of Visudyne; (ii) $0.8 million of proceeds related to the sale of our PPDS Technology; and (iii) $0.2 million of proceeds from the sale of certain assets and property, plant and equipment, that was previously designated as held for sale. These cash inflows were partially offset by $0.2 million of capital expenditures.

Cash Provided By (Used in) Financing Activities

During the year ended December 31, 2015, cash flows provided by financing activities consisted of $5.5 million of proceeds received in connection with the issuance of common shares for stock options exercised.

During the year ended December 31, 2014, cash flows provided by financing activities consisted of $0.5 million of proceeds received in connection with the issuance of common shares for stock options exercised.

During the year ended December 31, 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 repurchase costs (refer to Note 10 – Share Capital of the consolidated financial statements for more information). These cash outflows were partially offset by $8.3 million of cash received for the issuance of common shares related to the exercise of stock options.

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 December 31, 2015, we had $141.8 million in cash and cash equivalents and our cash equivalents had an average remaining maturity of approximately 8 days. If market interest rates were to increase immediately and uniformly by one hundred basis points from levels at December 31, 2015, 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, 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 December 31, 2015 and 2014, we had no outstanding forward foreign currency contracts.

Contractual Obligations

In the normal course of business, we enter into purchase commitments related to daily operations. We have entered into certain lease agreements for office space and photocopiers with the following minimum annual commitment:


	Payments due by period
Contractual Obligations⁽¹⁾	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
(in thousands of U.S. dollars)

Operating Leases		132		132		—		—		—


Total	$	132	$	132	$	—	$	—	$	—

⁽¹⁾	The following contractual obligations have been excluded from the table above due to the reasons stated below:

⁽ⁱ⁾

Uncertain Tax Positions

As disclosed under Note 13 – Income Taxes in the consolidated financial statements for the year ended December 31, 2015, we have identified certain potential long-term liabilities associated with uncertain tax positions. Given that we are unable to reasonably or reliably estimate the timing of these future payments, if any, due to uncertainties about the timing and/or future outcomes of tax audits that may arise, these uncertain tax liabilities have been excluded from the table above.

⁽ⁱⁱ⁾

Purchase Orders

As at December 31, 2015, we have certain open purchase orders related to potential and/or expected future expenditures. The total $2.5 million value of these purchase orders is not currently reflected on our Consolidated Balance Sheet and has been excluded from the table above given that the amounts are not fixed contractual obligations and would only give rise to liabilities to the extent that goods and services are provided to QLT. In addition, all of our material research contracts with third-parties have normal course termination and cancellation provisions. These purchase orders reflect estimated future expenditures based on existing arrangements and do not reflect any future modifications to, or terminations of, existing contracts or potential new contracts. Approximately $2.1 million of our open purchase orders consists of expected expenditures related to ongoing research contracts with third-party organizations and $0.4 million relates to expected general and administrative expenses that are in the normal course of business.

⁽ⁱⁱⁱ⁾

Contract Research Organization (“CRO”) Agreement

On October 9, 2015, we engaged a CRO to provide research and project management services (the “Services”) in connection with the execution of our future Phase III pivotal trial. The estimated amount of Services is excluded from the table above given that Services have not yet been performed as at the December 31, 2015 balance sheet date and they would only give rise to liabilities to the extent that Services are provided to QLT and pass through expenses are incurred. The agreement with our selected CRO contains normal course termination and cancellation provisions. In the event of cancellation of this agreement, QLT would be obligated to pay for all direct fees, pass through costs, and services performed or incurred through the termination date. In addition, QLT would be required to reimburse the CRO for all future non-cancelable obligations to third parties, where such obligations were created in connection with services authorized by QLT.

^(iv)

Milestone Obligations

We have also committed to make potential future milestone payments to certain third parties as part of our licensing, development, and purchase agreements. Payments under these arrangements are generally contingent and payable upon achievement of certain developmental, regulatory or commercial milestones. As at December 31, 2015, none of these payments have been triggered by the specified developmental, regulatory or commercial milestones. For more information refer to Note 16 – Contingencies, Commitments and Guarantees – Milestone and Royalty Obligations in the Consolidated Financial Statements for the year ended December 31, 2015 and Item 1. Business – Our Products in Development, QLT091001- Synthetic Retinoid Program of this Report on Form 10-K.

As described under the Business Overview section above, we are currently progressing pivotal trial start-up activities with the goal of initiating our Phase III pivotal trial in the third quarter of 2016 and we are currently exploring with the EMA the submission of a MAA in the second half of 2016 for the conditional approval of QLT091001. If we are successful in initiating our Phase III pivotal trial and completing our submission of the MAA, we expect that the $2.5 million of milestone payments will become due and payable during 2016 to Retinagenix pursuant to terms of our co-development agreement with Retinagenix.

^(v)

On February 5, 2016 we paid Greenhill a $4.0 million advisory fee pursuant to the terms of our financial advisory services agreement with Greenhill dated December 4, 2014 (as amended, the “Greenhill Agreement”). The recognition and payment of the advisory fee was both contingent upon the satisfaction of various terms and conditions, which were met on February 5, 2016, and subject to the outcome of certain external factors and uncertainties, which were settled by February 5, 2016 but were beyond the Company’s control.

Off-Balance Sheet Arrangements

In connection with the sale of assets and businesses, we provide indemnities with respect to certain matters, including product liability, patent infringement, contractual breaches and misrepresentations, and we provide other indemnities to third parties under the clinical trial, license, service, manufacturing, supply, distribution 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 threshold amounts, specified claims periods and other restrictions and limitations. As at December 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 current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

CERTAIN CANADIAN AND U.S. FEDERAL INCOME TAX INFORMATION FOR U.S. RESIDENTS

The following is a summary of certain Canadian and U.S. federal income tax considerations applicable to holders of common shares of the Company. These tax considerations are stated in brief and general terms and are based on Canadian and U.S. law currently in effect. There are other potentially significant Canadian and U.S. federal income tax considerations and provincial, state and local income tax considerations with respect to ownership and disposition of the common shares which are not discussed herein. The tax considerations relative to ownership and disposition of the common shares may vary from shareholder to shareholder depending on the shareholder’s particular status. Accordingly, shareholders and prospective shareholders are encouraged to consult with their tax advisors regarding tax considerations which may apply to the particular situation.

Canadian Federal Tax Information

The following is a general summary of the principal Canadian federal income tax considerations generally applicable to a holder of common shares of the Company who, at all relevant times, for purposes of the Income Tax Act (Canada) (the “Canadian Tax Act”) (i) is not, or is not deemed to be, a resident of Canada, (ii) holds the common shares as capital property, (iii) deals at arm’s length with, and is not affiliated with, the Company and (iv) does not and will not use or hold, and is not and will not be deemed to use or hold, common shares of the Company in connection with carrying on a business in Canada (a “Non-Resident Holder”). Special rules, which are not discussed in this summary, may apply to a Non-Resident Holder that is an insurer carrying on business in Canada and elsewhere. Common shares of the Company will generally be considered to be capital property to a holder thereof, unless the shares are held in the course of carrying on a business or were acquired in a transaction considered to be an adventure in the nature of trade.

Dividends paid, deemed to be paid, or credited on the common shares held by Non-Resident Holders will generally be subject to Canadian withholding tax at the rate of 25% of the gross amount of the dividend unless the rate is reduced by an applicable income tax convention or treaty. The Canada-U.S. Income Tax Convention (1980) (the “Convention”) provides that the withholding tax rate on dividends paid on the common shares to U.S. residents who qualify for the benefit of the Convention will generally be reduced to 15% of the gross amount of the dividend.

A Non-Resident Holder will generally not be subject to Canadian income tax in respect of any gain realized on the disposition of common shares unless the common shares constitute “taxable Canadian property” to such Non-Resident Holder and such Non-Resident Holder is not entitled to relief under an applicable income tax treaty or convention. Generally, provided the common shares are then listed on a designated stock exchange for purposes of the Canadian Tax Act (which includes the TSX and the NASDAQ), the common shares will not be “taxable Canadian property” to a Non-Resident Holder unless, at any particular time during the 60-month period immediately preceding the disposition (i) 25% or more of the issued shares of any class or series of the capital stock of the Company were owned by such Non-Resident Holder, by persons with whom the Non-Resident Holder did not deal at arm’s length, or any combination thereof and (ii) the shares derived more than 50% of their fair market value directly or indirectly from one or any combination of real or immovable property situated in Canada, Canadian resource properties or timber resource properties (as defined in the Canadian Tax Act), or options in respect of, or interests or rights in any of the foregoing. A gain realized upon the disposition of the common shares by a U.S. resident who qualifies for the benefits of the Convention that is otherwise subject to Canadian tax may be exempt from Canadian tax under the Convention.

Where the common shares are disposed of by way of an acquisition of such common shares by the Company, other than a purchase in the open market in the manner in which common shares normally would be purchased by any member of the public in the open market, the amount paid by the Company in excess of the paid-up capital of such common shares will be treated as a dividend and will be subject to non-resident withholding tax as described above.

U.S. Federal Income Tax Information

Special U.S. federal income tax rules apply to “U.S. Holders” (as defined below) of stock of a “passive foreign investment company” (a “PFIC”). As previously disclosed, the Company believes, but cannot offer any assurance, that it was classified as a PFIC for one or more taxable years prior to 2000, and that it was not a PFIC during any of the taxable years from the taxable year ended December 31, 2000 through the taxable year ended December 31, 2007. The Company further believes that it was a PFIC for the taxable years ended December 31, 2008 through 2015, which significantly impacts the U.S. federal income tax consequences to U.S. Holders. The Company is uncertain regarding its potential PFIC status for the taxable year ending December 31, 2016. The Company’s actual PFIC status for a given taxable year will not be determinable until the close of such year and, accordingly, no assurances can be given regarding the Company’s PFIC status in 2016 or any future year. See further discussion of the PFIC rules below. In addition, the following assumes that the common shares are held as a capital asset within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the “Code”).

This summary is of a general nature only and is not intended for non-U.S. Holders. Furthermore, it is not intended to constitute, and should not be construed to constitute, legal or tax advice to any particular U.S. Holder, and it does not address U.S. federal income tax considerations that may be relevant to U.S. Holders that are subject to special treatment under U.S. federal income tax law. U.S. Holders are urged to consult their own tax advisors as to the tax consequences in their particular circumstances.

U.S. Holders

A “U.S. Holder” is a holder of the Company’s common shares that is (i) an individual who is a citizen or resident of the United States for U.S. federal income tax purposes; (ii) a corporation (or other entity taxed as a corporation for U.S. federal income tax purposes) created or organized under the laws of the United States, any U.S. state or the District of Columbia; (iii) an estate the income of which is subject to U.S. federal income taxation regardless of the income’s source; or (iv) a trust (a) if a U.S. court is able to exercise primary supervision over the trust’s administration and one or more U.S. persons, as defined under Section 7701(a)(30) of the Code, have authority to control all of the trust’s substantial decisions; or (b) that was in existence on August 20, 1996, was treated as a U.S. person under the Code on the previous day and has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.

Sale or Other Disposition of Common Shares

Subject to different treatment pursuant to the PFIC rules discussed below, if a U.S. Holder engages in a sale, exchange or other taxable disposition of such U.S. Holder’s common shares, (i) such U.S. Holder will recognize gain or loss equal to the difference between the amount realized by such U.S. Holder and such U.S. Holder’s adjusted tax basis in the common shares, (ii) any such gain or loss will be capital gain or loss, and (iii) such capital gain or loss will be long-term capital gain or loss if the holding period of the common shares exceeds one year as of the date of the sale. Such gain generally is treated as U.S. source gain for U.S. foreign tax credit limitation purposes.

If the Company purchases common shares from a U.S. Holder, such transaction will be treated as a taxable sale or exchange of the common shares by the U.S. Holder if the transaction meets certain conditions under U.S. federal income tax rules, or otherwise will be treated as a distribution by the Company in respect of the U.S. Holder’s common shares, as described below.

Distributions on Common Shares

Subject to different treatment pursuant to the PFIC rules discussed below, a distribution with respect to our common shares generally will be treated as a dividend, taxable as ordinary income, to the extent of the Company’s current or accumulated earnings and profits, as determined under U.S. federal income tax principles. In general, to the extent that the amount of the distribution exceeds the Company’s current and accumulated earnings and profits, the excess first will be treated as a tax-free return of capital that will reduce the holder’s tax basis in the holder’s common shares, and to the extent of any remaining portion in excess of such tax basis, the

excess will be taxable as capital gain. Any such capital gain will be long-term capital gain if the U.S. Holder has held the common shares for more than one year at the time of the distribution. However, under U.S. Treasury regulations regarding the treatment of PFICs, a purchase of common shares from a U.S. Holder by the Company that does not qualify as a “sale or exchange” under U.S. federal income tax rules, and hence is treated as a distribution, is in fact treated as a distribution in full for PFIC purposes regardless of whether there are any earnings and profits.

A dividend received by a corporate U.S. Holder generally will not be eligible for a dividends-received deduction. In addition, a dividend received by an individual U.S. Holder will not qualify for the 15% reduced maximum rate if the Company is a PFIC in the year in which the dividend is paid or in the preceding year.

Dividends will constitute foreign source income for foreign tax credit limitation purposes. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends distributed by the Company with respect to our common shares will constitute “passive category income” or, in the case of certain U.S. Holders, “general category income.”

Passive Foreign Investment Company

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” (the income test) 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 (the asset test). For this purpose, passive income generally includes, among other things, dividends, interest, certain rents and royalties and gains from the disposition of passive assets.

The Company believes that it may be deemed a PFIC for 2008 through 2015. Please be aware that the Company’s status as a PFIC can have significant adverse tax consequences for U.S. Holders.

A U.S. Holder that holds common shares while the Company is a PFIC may be subject to increased tax liability upon the sale, exchange or other disposition of the common shares or upon the receipt of certain distributions, regardless of whether the Company is a PFIC in the year in which such disposition or distribution occurs. These adverse tax consequences will not apply, however, if (i) a U.S. Holder timely filed and maintained (and in certain cases, continues to maintain), or timely files and maintains, as the case may be, a qualified electing fund (“QEF”) election to be taxed annually on the U.S. Holder’s pro rata portion of the Company’s earnings and profits, (ii) the U.S. Holder timely made or makes, as the case may be, a mark-to-market election as described below, or (iii) a U.S. Holder is eligible to make a “purging” election and timely does so, as described below.

The adverse tax consequences include:

(a)

“Excess distributions” by the Company are subject to the following special rules. An excess distribution generally is the excess of the amount a PFIC distributes to a shareholder during a taxable year over 125% of the average amount it distributed to the shareholder during the three preceding taxable years or, if shorter, the part of the shareholder’s holding period before the taxable year. Distributions with respect to the common shares made by the Company during the taxable year to a U.S. Holder that are excess distributions must be allocated ratably to each day of the U.S. Holder’s holding period. The amounts allocated to the current taxable year and to taxable years prior to the first year in which the Company was classified as a PFIC are included as ordinary income in a U.S. Holder’s gross income for that year. The amount allocated to each other prior taxable year is taxed as ordinary income at the highest tax rate in effect for the U.S. Holder in that prior year (without offset by any net operating loss for such year) and the tax is subject to an interest charge at the rate applicable to deficiencies in income taxes (the “special interest charge”).

(b)

The entire amount of any gain realized upon the sale or other disposition of the common shares will be treated as an excess distribution made in the year of sale or other disposition and as a consequence will be treated as ordinary income and, to the extent allocated to years prior to the year of sale or disposition, will be subject to the special interest charge described above.

QEF Election. A U.S. Holder of stock in a PFIC may make a QEF election with respect to such PFIC to elect out of the tax treatment discussed above. Generally, a QEF election, on U.S. Internal Revenue Service (“IRS”) Form 8621, should be made with the filing of a U.S. Holder’s U.S. federal income tax return for the first taxable year for which both (i) the U.S. Holder holds common shares of the Company, and (ii) the Company was a PFIC. A U.S. Holder that timely makes a valid QEF election with respect to a PFIC will generally include in gross income for a taxable year (i) as ordinary income, such holder’s pro rata share of the corporation’s ordinary earnings for the taxable year, and (ii) as long-term capital gain, such holder’s pro rata share of the corporation’s net capital gain for the taxable year. However, the QEF election is available only if such PFIC provides such U.S. Holder with certain information regarding its earnings and profits as required under applicable U.S. Treasury regulations. The Company will provide, upon request, all information and documentation that a U.S. Holder making a QEF election is required to obtain for U.S. federal income tax purposes (e.g., the U.S. Holder’s pro rata share of ordinary income and net capital gain, and a “PFIC Annual Information Statement” as described in applicable U.S. Treasury regulations, which will be made available on the Company’s website).

Deemed Sale Election. If the Company is a PFIC for any year during which a U.S. Holder holds common shares, but the Company ceases in a subsequent year to be a PFIC (which could occur, for example, if the Company were a PFIC for 2015 but is not a PFIC for 2016), then a U.S. Holder can make a “purging” election, in the form of a deemed sale election, for such subsequent year in order to avoid the adverse PFIC tax treatment described above that would otherwise continue to apply because of the Company having previously been a PFIC. If such election is timely made, the U.S. Holder would be deemed to have sold the common shares held by the holder at their fair market value, and any gain from such deemed sale would be taxed as an excess distribution (as described above). The basis of the common shares would be increased by the gain recognized, and a new holding period would begin for the common shares for purposes of the PFIC rules. The U.S. Holder would not recognize any loss incurred on the deemed sale, and such a loss would not result in a reduction in basis of the common shares. After the deemed sale election, the U.S. Holder’s common shares with respect to which the deemed sale election was made would not be treated as shares in a PFIC, unless the Company subsequently becomes a PFIC. A U.S. Holder may also be able to make a deemed sale election with respect to the Company’s subsidiaries that are PFICs, if any. The rules regarding deemed sale elections are very complex. U.S. Holders are strongly urged to consult their tax advisors about the deemed sale election with regard to the Company and any subsidiaries.

Mark-to-Market Election. Alternatively, a U.S. Holder of “marketable stock” (as defined below) in a PFIC may make a mark-to-market election for such stock to elect out of the adverse PFIC tax treatment discussed above. If a U.S. Holder makes a mark-to-market election for shares of marketable stock, the holder will include in income each year an amount equal to the excess, if any, of the fair market value of the shares as of the close of the holder’s taxable year over the holder’s adjusted basis in such shares. A U.S. Holder is allowed a deduction for the excess, if any, of the adjusted basis of the shares over their fair market value as of the close of the taxable year. However, deductions are allowable only to the extent of any net mark-to-market gains on the shares included in the holder’s income for prior taxable years. Amounts included in a U.S. Holder’s income under a mark-to-market election, as well as gain on the actual sale or other disposition of the shares, are treated as ordinary income. Ordinary loss treatment also applies to the deductible portion of any mark-to-market loss on the shares, as well as to any loss realized on the actual sale or disposition of the shares, to the extent that the amount of such loss does not exceed the net mark-to-market gains previously included for such shares. A U.S. Holder’s basis in the shares will be adjusted to reflect any such income or loss amounts. However, the special interest charge and related adverse tax consequences described above for non-electing holders may continue to apply on a limited basis if the U.S. Holder makes the mark-to-market election after such holder’s holding period for the shares has begun.

The mark-to-market election is available only for “marketable stock,” which is stock that is traded in other than de minimis quantities on at least 15 days during each calendar quarter on a qualified exchange or other market, as defined in applicable U.S. Treasury regulations. The Company’s common shares are listed on the TSX and quoted on NASDAQ, each of which constitutes a “qualified exchange or other market” under applicable U.S. Treasury regulations. U.S. Holders of common shares are urged to consult their tax advisors as to whether the common shares would qualify for the mark-to-market election.

Subsidiary PFICs. To the extent any of the Company’s subsidiaries is also a PFIC, a U.S. Holder will also be deemed to own shares in such lower-tier PFIC and could incur a liability for the deferred tax and special interest charge described above if either (i) the Company receives a distribution from, or disposes of all or part of its interest in, the lower-tier PFIC, or (ii) the U.S. Holder disposes of all or part of such holder’s common shares. In addition, the mark-to-market election cannot be made for a subsidiary of a PFIC if the stock of such subsidiary is not itself marketable stock.

PFIC Reporting Requirement. Unless otherwise provided by the U.S. Treasury, each U.S. person that is a direct or indirect shareholder of a PFIC is required to file an annual report on IRS Form 8621 containing such information as the U.S. Treasury may require. U.S. Holders should consult their tax advisors regarding any reporting requirements that may apply to them and the effect, if any, this reporting may have on their ownership and disposition of our common shares.

THE APPLICABILITY AND CONSEQUENCES OF THE PFIC RULES ARE EXCEEDINGLY COMPLEX. IN ADDITION, THE FOREGOING SUMMARY DOES NOT ADDRESS ALL OF THE POTENTIAL U.S. FEDERAL INCOME TAX CONSEQUENCES WITH RESPECT TO PFIC STATUS THAT MAY BE RELEVANT TO A PARTICULAR INVESTOR IN LIGHT OF SUCH INVESTOR’S PARTICULAR CIRCUMSTANCES OR THAT MAY BE RELEVANT TO INVESTORS THAT ARE SUBJECT TO SPECIAL TREATMENT UNDER U.S. FEDERAL INCOME TAX LAW. ACCORDINGLY, INVESTORS ARE STRONGLY URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE APPLICATION OF THE PFIC RULES TO THEM AND THE ADVISABILITY OF MAKING ANY OF THE ELECTIONS DESCRIBED ABOVE.

Outstanding Share Data

Under the amended and restated QLT 2000 Incentive Stock Plan (the “Plan”), the maximum number of common shares, without par value, that are allotted for stock option and restricted stock unit grants under the Plan is 11,800,000. As at December 31, 2015, there are 3,007,042 remaining common shares available for future grants under the Plan.

As of February 18, 2016, there were 52,829,398 common shares issued and outstanding, which totaled $475.3 million in share capital. As of February 18, 2016, we had 428,152 stock options outstanding of which 428,152 were exercisable at a weighted average exercise price of CAD $5.07 per share. Each stock option is exercisable for one common share. As of February 18, 2016, we had nil RSU’s outstanding and 154,000 deferred stock units outstanding of which 143,306 are vested. The cash value of the deferred stock units outstanding as at February 18, 2016 is $0.4 million.

Item 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See “Interest and Foreign Exchange Rates” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” which is incorporated by reference herein.

Item 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of QLT Inc.

We have audited the accompanying consolidated balance sheets of QLT Inc. and subsidiaries (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of operations and comprehensive (loss) income, cash flows, and changes in shareholders’ equity for each of the three years in the period ended December 31, 2015. Our audits also included the financial statement schedules listed in the index under Item 15. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of QLT Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2016 expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/ DELOITTE LLP

Chartered Professional Accountants

Vancouver, BC

February 25, 2016

CONSOLIDATED BALANCE SHEETS


As at December 31,	2015			2014
(In thousands of U.S. dollars)

ASSETS

Current assets

Cash and cash equivalents	$	141,824		$	155,908

Accounts receivable, net of allowances for doubtful accounts		287			363

Income taxes receivable		14			47

Prepaid and other		611			1,053

Total current assets		142,736			157,371

Accounts receivable – non-current (Note 7(b))		2,000			2,000

Property, plant and equipment (Note 8)		430			1,000

Total assets	$	145,166		$	160,371


LIABILITIES

Current liabilities

Accounts payable	$	1,656		$	1,943

Accrued liabilities (Note 9)		1,827			1,528

Total current liabilities		3,483			3,471

Uncertain tax position liabilities, net (Note 13)		342			388

Total liabilities		3,825			3,859

SHAREHOLDERS’ EQUITY

Share capital (Note 10)

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	$	475,333		$	467,034

December 31, 2015 – 52,829,398 shares

December 31, 2014 – 51,199,922 shares

Additional paid-in capital		97,377			97,838

Accumulated deficit		(534,338	)		(511,329	)

Accumulated other comprehensive income		102,969			102,969

Total shareholders’ equity		141,341			156,512

Total shareholders’ equity and liabilities	$	145,166		$	160,371

See the accompanying Notes to the Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME


Year ended December 31,	2015			2014			2013
(In thousands of U.S. dollars except share and per share information)

Expenses

Research and development	$	9,790		$	13,803		$	18,509

Selling, general and administrative (Note 4, 5)		15,646			16,791			6,986

Depreciation		576			891			964

Restructuring charges (Note 11)		—			744			2,031

Termination Fee (Note 4, 5)		(2,667	)		(28,400	)		—

		23,345			3,829			28,490


Operating loss		(23,345	)		(3,829	)		(28,490	)

Other income (expense)

Net foreign exchange gains (losses)		32			(62	)		(32	)

Interest income		277			113			211

Fair value change in contingent consideration (Notes 7, 14)		—			(534	)		2,865

Other gains		49			115			207


		358			(368	)		3,251

Loss from continuing operations before income taxes		(22,987	)		(4,197	)		(25,239	)

(Provision for) recovery of income taxes (Note 13)		(22	)		192			(599	)

Loss from continuing operations		(23,009	)		(4,005	)		(25,838	)

(Loss) income from discontinued operations, net of income taxes (Note 12)		—			(66	)		967

Net loss and comprehensive loss	$	(23,009	)	$	(4,071	)	$	(24,871	)



Basic and diluted net (loss) income per common share (Note 15)

Continuing operations	$	(0.44	)	$	(0.08	)	$	(0.51	)

Discontinued operations		—			(0.00	)		0.02

Net loss per common share	$	(0.44	)	$	(0.08	)	$	(0.49	)



Weighted average number of common shares outstanding (thousands)

Basic and diluted		52,169			51,126			50,909

See the accompanying Notes to the Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS


Year ended December 31,	2015			2014			2013
(In thousands of U.S. dollars)

Cash (used in) provided by operating activities

Net loss and comprehensive loss	$	(23,009	)	$	(4,071	)	$	(24,871	)

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

Depreciation		576			891			964

Stock-based compensation and restricted stock based compensation		2,330			1,453			599

Unrealized foreign exchange (gains) losses		(120	)		75			254

Deferred income taxes (Note 13)		18			(177	)		730

Impairment of long-lived assets		11			—			64

Recovery on assets held for sale		—			—			(153	)

Gain on sale of discontinued operations (Note 12)		—			—			(1,053	)

Gain on sale of long-lived assets		(36	)		—			(221	)

Fair value change in contingent consideration (Notes 7, 14)		—			2,000			1,273

Changes in non-cash operating assets and liabilities

Accounts receivable		10			73			2,306

Prepaid and other assets		442			810			(421	)

Accounts payable		(184	)		(607	)		(2,916	)

Income taxes receivable / payable		33			30			478

Accrued liabilities		570			108			(1,047	)

Accrued restructuring		—			(130	)		(1,803	)


		(19,359	)		455			(25,817	)

Cash provided by investing activities

Net proceeds from sale of long-lived assets		43			115			102

Net proceeds from sale of discontinued operations (Note 12)		—			—			8,486

Purchase of property, plant and equipment		(9	)		(25	)		(223	)

Proceeds from contingent consideration (Notes 7, 14)		—			36,582			34,599

Other		—			—			66

		34			36,672			43,030

Cash provided by (used in) financing activities

Common shares repurchased, including fees		—			—			(14,079	)

Cash distribution paid to common shareholders (Note 10(b))		—			—			(200,000	)

Issuance of common shares		5,508			509			8,317

		5,508			509			(205,762	)

Effect of exchange rate changes on cash and cash equivalents		(267	)		(249	)		(314	)

Net (decrease) increase in cash and cash equivalents		(14,084	)		37,387			(188,863	)

Cash and cash equivalents, beginning of year		155,908			118,521			307,384

Cash and cash equivalents, end of year	$	141,824		$	155,908		$	118,521


Supplementary cash flow information:
Income taxes paid	$	—		$	—		$	—

See the accompanying Notes to the Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

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


	Common Shares						Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income⁽¹⁾		Total Shareholders’ Equity
	Shares			Amount			Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income⁽¹⁾		Total Shareholders’ Equity
(All amounts except share and per share information are expressed in thousands of U.S. dollars)
Balance at December 31, 2012		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 compensation								32								32

Common share repurchase (Note 10(c))		(1,691,479	)		(15,461	)		1,982								(13,479	)

Cash distribution to common shareholders at $3.92 per share (Note 10(b))								(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

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 isssued in connection with RSUs vested (Note 10(f))		14,000			55			(55	)							—

Uncertain tax position liability recovery (Note 13)								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 prices ranging from CAD $4.08 to CAD $4.54 per share		1,565,476			8,077			(2,569	)							5,508

Shares issued in connection with RSUs vested (Note 10(f))		64,000			222			(222	)							—

Stock-based compensation								2,132								2,132

Restricted stock compensation								198								198

Net loss and comprehensive loss											(23,009	)				(23,009	)

Balance at December 31, 2015		52,829,398		$	475,333		$	97,377		$	(534,338	)	$	102,969	$	141,341

⁽¹⁾	At December 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 Note 3 – Significant Accounting Policies.

See the accompanying Notes to the Consolidated Financial Statements.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Throughout these Notes to the Consolidated Financial Statements of QLT Inc. and its subsidiaries, the words “we,” “us,” “our,” “the Company” and “QLT” refer to QLT Inc. and its wholly owned subsidiaries, unless otherwise stated.

BASIS OF PRESENTATION

These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). All amounts herein are expressed in U.S. dollars unless otherwise noted.

In accordance with Accounting Standards Codification (“ASC”) No. 205-20-Discontinued Operations, the results of operations relating to our former punctal plug drug delivery system technology (the “PPDS Technology”) and Visudyne business have been excluded from continuing operations and are reported as discontinued operations for all periods presented. See Note 12 – Discontinued Operations.

In management’s opinion, the audited consolidated financial statements reflect all adjustments (including reclassifications and normal recurring adjustments) necessary to present fairly the financial position of QLT as at December 31, 2015 and the result of operations and cash flows for all periods presented.

PRINCIPLES OF CONSOLIDATION

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

SIGNIFICANT ACCOUNTING POLICIES

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, and provisions for taxes, uncertain tax positions, tax assets and tax liabilities. Actual results may differ from estimates made by management.

Reporting Currency

QLT’s functional and reporting currency is the U.S. dollar. Given that the Company has significant U.S. denominated expenditures and cash flows, the U.S. dollar functional currency is reflective of the primary currency in which QLT operates. Foreign currency denominated monetary assets and liabilities are translated at the rate of exchange in effect at the balance sheet date. The resulting foreign exchange gains (losses) are included in income or loss for the period. Foreign denominated expenses are translated at the approximate exchange rate in effect at the time of the transaction. The resulting foreign exchange gains and losses are included in income or loss for the period.

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. In addition, we cease to record depreciation or amortization expense at that time.

The results of operations, including the gain on disposal for businesses that have been sold or 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 described in Note 12 – Discontinued Operations, we have not had any significant continued involvement with the Visudyne business or the PPDS Technology following their sale. Amounts billed in connection with the provision of these transition services are included within discontinued operations.

Cash and Cash Equivalents

Cash and cash equivalents include highly liquid investments with insignificant interest rate risk and original maturities of three months or less from the date of purchase. Cash and cash equivalents and restricted cash are considered available-for-sale. They are recorded at fair value and include any unrealized holding gains and losses.

Property, Plant and Equipment

We depreciate property, plant and equipment using the straight-line method over their estimated economic lives, which range from three to five years. Determining the economic lives of property, plant and equipment requires us to make significant judgments that may materially impact our operating results.

Property, plant and equipment are recorded at cost and are amortized as follows:


	Years
Office furnishings, fixtures and other assets		5

Research equipment		5

Computer hardware and operating system		3-5

Leasehold improvements are depreciated over their expected useful lives, which coincide with the lease term, except where the lease renewal is determined to be reasonably assured and failure to renew the lease would impose a significant penalty on the Company.

We evaluate our long-lived assets annually for potential impairment at year end. However, whenever specific events or changes in circumstances suggest that the carrying amount of an asset or group of assets is not recoverable, we will perform these evaluations more frequently. An estimate of undiscounted future cash flows generated by the long-lived asset is compared to its carrying value to determine whether impairment exists. In the event that such cash flows are not expected to be sufficient to recover the carrying value of the assets, the assets are written-down to their estimated fair values.

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 voluntary terminations and trends of actual stock option forfeitures.

The Company has a Directors’ Deferred Share Unit Plan (“DDSU Plan”) for our directors. Given that vested Deferred Share Units (“DSUs”) are convertible to cash only, we recognize compensation expense for DSUs based on the market price of the Company’s stock. We also record an accrued liability to recognize the expected financial obligation related to the future settlement of these DSUs as they vest. Each reporting period, the expected obligation is revalued for changes in the market value of QLT’s common shares.

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

Research and Development

Research and development costs, including certain acquired in-process research and development related to acquired assets or groups of assets that do not meet the definition of a business under applicable accounting standards, are expensed as incurred. These costs generally consist of direct and indirect expenditures, including a reasonable allocation of overhead expenses, associated with our various research and development programs. Overhead expenses comprise general and administrative costs incurred to support research and development programs such as rent, facility maintenance, utilities, office services, information technology, legal, accounting and human resources. Patent application, filing and defense costs are expensed as incurred.

Income Taxes

Contingent Consideration

Where contingent consideration asset balances arise, they are measured at fair value, and are revalued at the end of each reporting period. Resulting changes in fair value are reported in continuing operations on the consolidated statement of operations and comprehensive (loss) income. See Note 7 – Contingent Consideration and Note 14 – Financial Instruments and Concentration of Credit Risk for more information on our historic contingent consideration asset balances.

Contingencies Related to Legal Proceedings

We record a liability in the consolidated financial statements for litigation related matters when a loss is considered probable and the amount can be reasonably estimated. If the loss is not probable or a range cannot reasonably be estimated, no liability is recorded in the consolidated financial statements.

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 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 and RSUs.

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. We estimate the fair value of our financial instruments using the market 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 Pronouncements

On November 20, 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2015-17 – Simplifying Balance Sheet Classification of Deferred Taxes, which requires entities to present deferred tax assets (“DTAs”) and deferred tax liabilities (“DTLs”) as noncurrent on the balance sheet. ASU No. 2015-17 simplifies the current guidance, which requires entities to separately present DTAs and DTLs as current, or noncurrent, on the balance sheet. Under ASU No. 2015-17, netting of DTAs and DTLs by tax jurisdiction is still required. ASU No. 2015-17 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods, however, early adoption is permitted. The adoption of this standard in the fourth quarter of 2015 did not have a significant impact on the presentation of QLT’s balance sheet.

On June 15, 2015, the FASB issued ASU No. 2015-10 – Technical Corrections and Improvements, which makes certain technical corrections (i.e. minor clarifications and improvements) to the FASB’s ASC. Under ASU No. 2015-10, amendments requiring transition guidance are effective for fiscal years, and interim periods, beginning after December 15, 2015. All other amendments became effective on June 15, 2015. The adoption of this standard in the second quarter of 2015 did not have a significant impact on the Company’s financial position or results of operations.

On May 11, 2015, the FASB issued ASU No. 2015-08 – Business Combinations: Pushdown Accounting Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115. The amendments in ASU No. 2015-08 conforms the SEC’s guidance on pushdown accounting to FASB’s guidance issued under ASU No. 2014-17. The guidance was effective immediately and did not have a significant impact on the Company’s financial position or results of operations.

Recently Issued Accounting Pronouncements

On September 25, 2015, the FASB issued ASU No. 2015-16 – Business Combinations (Topic 805) Simplifying the Accounting for Measurement-Period Adjustments. Under the new guidance, an acquirer must recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. ASU No. 2015-16 also requires acquirers to present separately on the face of the income statement, or disclose in the notes, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU No. 2015-16 is effective for annual periods, and interim periods, beginning after December 15, 2015. As at the date of this assessment, management does not expect ASU No. 2015-16 to significantly impact the Company’s consolidated financial statements.

On August 12, 2015, the FASB issued ASU No. 2015-14 – Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of its revenue standard, ASU No. 2014-09 –Revenue from Contracts with Customers. Under ASU No. 2015-14, the effective date of ASU No. 2014-09 was deferred by one year, and is now effective for public entities with reporting periods beginning after December 15, 2017. As at the date of this assessment, ASU No. 2014-09 is not expected to impact QLT’s consolidated financial statements.

On April 15, 2015, the FASB issued ASU No. 2015-05 – Customers’ Accounting for Cloud Computing Costs. Under the new guidance, a customer must determine whether a cloud computing arrangement contains a software license. If so, the customer would account for the fees related to the software license element in a manner consistent with how the acquisition of other software licenses are accounted for under ASC No. 350-40 –Intangibles – Goodwill and Other. An arrangement would contain a software license element if both of the

following criteria are met: (i) the customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty; and (ii) it is feasible for the customer to either run the software on its own hardware or contract with another party, unrelated to the vendor, to host the software. If the arrangement does not meet both criteria, it is considered a service contract, and does not constitute a purchase of a software license. ASU No. 2015-05 is effective for annual periods, and interim periods, beginning after December 15, 2015. As at the date of this assessment, ASU No. 2015-03 is not expected to impact QLT’s consolidated financial statements.

On April 7, 2015, the FASB issued ASU No. 2015-03 – Simplifying the Presentation of Debt Issuance Costs. The new guidance changes the presentation of debt issuance costs in financial statements. Under ASU No. 2015-03, entities will be required to present such costs on the balance sheet as a direct deduction from the related debt liability rather than as an asset. ASU No. 2015-03 is effective for fiscal years, and interim periods, beginning after December 15, 2015. Management is currently assessing the impact of ASU No. 2015-03 on the presentation of the Company’s consolidated financial statements.

On February 18, 2015, FASB issued ASU No. 2015-02 – Amendments to Consolidation Analysis. The new guidance amends consolidation requirements under ASC No. 810 – Consolidation, 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.

On January 9, 2015, the 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.

TERMINATED MERGER TRANSACTION WITH AUXILIUM

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 Auxilium Merger Agreement. Our financial advisory services agreement with Credit Suisse was subsequently terminated.

During the year ended December 31, 2014, QLT incurred $10.2 million of consulting and transaction fees in connection with our pursuit of the Auxilium Merger. The $10.2 million of consulting and transaction fees, which includes the $5.7 million Breakup Fee, has been reflected as part of Selling, General and Administrative expenses on the consolidated statements of operations and comprehensive (loss) income.

TERMINATED MERGER TRANSACTION WITH INSITE

Following the termination of the Auxilium Merger Agreement (as described under Note 4 – Terminated Merger Transaction with Auxilium), we continued to review our strategic and business options. Greenhill & Co. LLC (“Greenhill”) was engaged as our financial advisor to aid in developing, exploring and providing advice with respect to such strategic and business alternatives. As a result of our review of strategic alternatives in 2015, we entered into the agreements described below.

On June 8, 2015, the Company entered into an Agreement and Plan of Merger (as amended and restated on July 16, 2015 and August 26, 2015) (the “InSite Merger Agreement”) among QLT, InSite Vision Incorporated, a Delaware corporation (“InSite”), and Isotope Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of QLT. Under the terms of the InSite Merger Agreement, InSite would have become an indirect wholly owned subsidiary of QLT, and InSite stockholders would have received QLT common shares based on an exchange ratio equal to 0.078 of a QLT common share per share of InSite common stock, subject to a collar mechanism (the “InSite Merger”).

In conjunction with the entry into the InSite Merger Agreement, on June 8, 2015 QLT granted InSite a secured line of credit (the “Secured Note”) for up to $9.9 million to fund continuing operations through to the completion of the InSite Merger, subject to certain conditions and restrictions. The Secured Note bore interest at 12% per annum and was secured by a first priority security interest in substantially all of InSite’s assets. Upon termination of the InSite Merger Agreement, InSite’s repayment obligations under the Secured Note were accelerated and InSite paid us $5.8 million on September 15, 2015, which consisted of $5.7 million of principal and $0.1 million of accrued interest.

STRATEGIC TRANSACTIONS

Aralez Investment and Distribution

(“POZEN”), Aralez Pharmaceuticals plc, (formally known as Aguono Limited) (“Aralez Ireland”), Aralez Pharmaceuticals Inc. (“Aralez Canada”), Deerfield Private Design Fund II, L.P., Deerfield International Master Fund, L.P., Deerfield Partners, L.P. (together “Deerfield”), Broadfin Healthcare Master Fund, Ltd. (“Broadfin”) and JW Partners, LP, JW Opportunities Fund, LLC and J.W. Opportunities Master Fund, Ltd. (together the “JW Parties”) (QLT, Deerfield, Broadfin and the JW Parties are referred to herein collectively as the “Co-Investors”). The Amended and Restated Subscription Agreement amended and restated a share subscription agreement entered into on June 8, 2015 (the “Subscription Agreement”) among QLT, Tribute, POZEN, Aralez Ireland, the Co-Investors and certain other investors. Pursuant to the Amended and Restated Subscription Agreement, immediately prior to the consummation of the merger transactions contemplated by the merger agreement governing the business combination of Tribute and POZEN (the “Aralez Merger”) Tribute agreed to sell to QLT and the other Co-Investors $75.0 million of the common shares of Tribute (the “Tribute Shares”) in a private placement at a purchase price per share equal to: (a) the lesser of (i) US$7.20, and (ii) a five percent (5) discount off the five day volume weighted average price (“VWAP”) per share of POZEN common stock calculated over the five trading days immediately preceding the date of closing of the Aralez Merger, not to be less than US$6.25 per share; multiplied by (b) the Aralez Merger exchange ratio of 0.1455. On consummation of the Aralez Merger, the Tribute Shares would be exchanged for common shares of Aralez Canada (the “Aralez Shares”).

On February 5, 2016, the Aralez Merger was consummated and QLT completed its investment of $45.0 million, receiving 7,200,000 Aralez Shares (representing 10.1% of the issued and outstanding Aralez Shares) at a price of US$6.25 per share. The Aralez Shares are listed on the NASDAQ and Toronto Stock Exchange. On February 5, 2016, pursuant to QLT’s financial advisory services agreement with Greenhill dated December 4, 2014 (as amended, the “Greenhill Agreement”), we paid Greenhill a $4.0 million advisory fee in connection with the completion of QLT’s $45.0 million investment in Aralez and exploration of other strategic initiatives described under Note 5 – Terminated Merger Transaction with InSite and Note 6 – Strategic Initiatives.

We intend to effect a special election distribution of the Aralez Shares to our shareholders as part of a reorganization of our share capital (the “Share Reorganization”) pursuant to a court-approved statutory Plan of Arrangement under Section 288 of the Business Corporations Act (British Columbia) (the “Plan of Arrangement”), payable, at the election of each shareholder, in either Aralez Shares or cash, subject to possible pro-ration (the “Aralez Distribution”).

The Share Reorganization requires the approval of our shareholders which will be sought at a special meeting (the “Special Meeting”) of shareholders scheduled to be held on March 18, 2016. If approved at the Special Meeting, the Share Reorganization is expected to permit QLT to make the Aralez Distribution to QLT shareholders in a tax efficient manner. If the Share Reorganization is not approved at the Special Meeting, the Board may implement the Aralez Distribution as a dividend in kind. The Aralez Distribution is expected to be completed on or around March 22, 2016. See Item 1. Business – Overview – Strategic Initiatives – 2015 for more information.

Convertible Notes

On June 8, 2015, the Company announced that it was contemplating an additional $25.0 million return of capital to QLT shareholders by way of issuance of certain convertibles notes (the “Convertible Notes”). The Convertible Notes would be redeemable in the form of cash or QLT shares at each shareholder’s discretion. On December 28, 2015, QLT announced that, in light of the termination of the InSite Merger Agreement, the issuance of the Convertible Notes was no longer determined to be in the best interest of the Company.

Private Placement

CONTINGENT CONSIDERATION

(a) 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.

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.

As at August 2014, the cumulative $200.0 million of such consideration was collected in full and no further amounts remain outstanding as at December 31, 2015.

Given that all contingent consideration under the terms of the Tolmar Agreement was collected in full by August 31, 2014, during the year ended December 31, 2015, we recorded nil fair value gains or losses. However, during the year ended December 31, 2014, we collected $38.1 million (2013 – $38.7 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. During the year ended December 31, 2014, approximately $36.6 million of proceeds was reflected as cash provided by investing activities in the consolidated statements of cash flows (2013 – $34.6 million). The remaining proceeds of $1.5 million (2013 – $4.1 million) were recognized as a fair value increase in contingent consideration on the consolidated statement of operations and comprehensive (loss) income and were therefore reflected in the net loss and comprehensive loss line as part of the cash used in operating activities in the consolidated statements of cash flows.

(b) 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 laser registrations for the Qcellus laser in the United States are obtained by December 31, 2013, $2.5 million if the laser registrations are obtained after December 31, 2013 but before January 1, 2015, and $0 if the laser registrations are 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 U.S. Food and Drug Administration (“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 subsequently 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. As a result, on September 22, 2015 QLT commenced an action in the Supreme Court of British Columbia against Valeant for breach of contract, under the terms of the Valeant Agreement, with respect to failure to pay the $5.0 million Laser Earn-Out Payment and failure to use commercially reasonable efforts to promptly obtain the laser registrations for the Qcellus laser in the United States. While we believe that the $5.0 million Laser Earn-Out Payment has been triggered and is currently due and payable by Valeant, the outcome of such a dispute and litigation is uncertain and we may have difficulty in recovering damages and collecting the Laser Earn-Out Payment in full.

As at December 31, 2015, the $5.0 million Laser Earn-Out Payment continues to be 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). The fair value estimate of the Laser Earn-Out Payment was derived using a probability weighted approach to examine various possible outcomes with respect to the timing and amount that may be collected. In addition, it also reflects management’s assessment of collection risk, the impact of the passage of time and potential collection costs associated with the Valeant litigation. 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. During the year ended December 31, 2015 and 2014, we received no proceeds related to the collection of the contingent consideration for our previous sale of Visudyne.

(c) Related to the Sale of the PPDS Technology

On April 3, 2013, we completed the sale of our punctal plug drug delivery system technology for approximately $1.3 million (the “PPDS Technology”) to Mati Therapeutics Inc. (“Mati”). Pursuant to the terms of our asset purchase agreement with Mati (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.

PROPERTY, PLANT AND EQUIPMENT


	December 31, 2015
(In thousands of U.S. dollars)	Cost		Accumulated Depreciation		Net Book Value
Leasehold improvements	$	207	$	207	$	—

Office furnishings, fixtures, and other		258		246		12

Research equipment		3,471		3,092		379

Computer hardware and operating system		9,844		9,805		39

	$	13,780	$	13,350	$	430


	December 31, 2014
(In thousands of U.S. dollars)	Cost		Accumulated Depreciation		Net Book Value
Leasehold improvements	$	464	$	395	$	69

Office furnishings, fixtures, and other		258		236		22

Research equipment		3,485		2,749		736

Computer hardware and operating system		11,408		11,235		173

	$	15,615	$	14,615	$	1,000

In connection with the downsizing of our lease space in 2015 (see Note 16 – Contingencies, Commitments and Guarantees for more information), we retired the use of certain property, plant and equipment with zero or minimal net book values.

ACCRUED LIABILITIES


(In thousands of U.S. dollars)	December 31, 2015		December 31, 2014
Compensation	$	1,460	$	1,136

DSU compensation		367		392

	$	1,827	$	1,528

10.

SHARE CAPITAL

(a)	Authorized Shares

There were no changes to the authorized share capital of QLT for the years ended December 31, 2015 and 2014.

(b)	Cash Distribution

(c)	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 effected in the open market through the facilities of the NASDAQ Stock Market in accordance with all applicable regulatory requirements. During the years ended December 31, 2013 and 2012, we repurchased 1,691,479 and 1,747,204 common shares under the terms of this bid at a cost of $13.5 million (average price of $7.97 per common share) and $13.7 million (average price of $7.84 per common share), respectively. 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 and $2.4 million in 2012.

(d)	Stock Options

We currently have one equity compensation plan, the QLT 2000 Incentive Stock Plan (as amended, the “Plan”), which provides for the issuance of common shares to directors, officers, employees and consultants of QLT and its affiliates. No financial assistance is provided by us to the participants under the Plan. Below is a summary of the principal terms of the Plan:

Awards. The Plan provides for grants of stock options (both incentive stock options and nonqualified stock options) and RSUs to eligible persons. Each award must be evidenced by a written award agreement with terms and conditions consistent with the Plan.

Share Reserve. We have reserved an aggregate of 11,800,000 common shares for issuance under the Plan. Common shares subject to an award of stock options or RSUs that terminates, expires or lapses for any reason are made available under subsequent awards under the Plan. The number of common shares with respect to one or more stock options that can be granted to any one individual in any one calendar year is 2,000,000 common shares. As at December 31, 2015, there are 3,007,042 remaining common shares available for future grants of stock options and RSUs under the Plan.

Administration. The Compensation Committee of the Board of Directors administers the Plan.

Eligibility. The directors, officers, employees and consultants of QLT or its affiliates who are or will be considered important to our success, as determined by the Compensation Committee, are eligible to participate in the Plan.

Grant of Awards. Subject to the terms of the Plan, the Compensation Committee may grant to any eligible person one or more options or RSUs as it deems appropriate. The Compensation Committee may also impose such limitations or conditions on the exercise or vesting of any award as it deems appropriate.

Options expire automatically on the earlier of (i) the date on which such option is exercised in respect of all of the common shares that may be purchased under the Plan, and (ii) the expiration date fixed by the Compensation Committee at the granting of such options, which date will not be more than ten years from the date of grant. Options that would otherwise expire within, or within two business days after the end of, a “black-out” period established by QLT will not expire until the tenth business day after the earlier of the end of such black-out period or, provided the black-out period has ended, the expiry date. In the event of termination of service, death or disability, stock options or RSUs are subject to early termination pursuant to the specific terms of each applicable award agreement. Generally, unvested options cease to vest immediately on termination of service and vested options terminate 90 days after termination of service. Unvested RSUs are automatically forfeited, terminated and cancelled immediately on termination of service without payment of any further consideration by the Company.

Exercise Price. The exercise price of options granted is determined by the Compensation Committee, but is in no event less than the closing price of our common shares on the Toronto Stock Exchange (“TSX”) on the date of grant. RSUs are granted pursuant to the Plan with no monetary consideration required from the participant.

Vesting. Vesting provisions applicable to awards are determined on the grant date at the discretion of the Compensation Committee. Options granted in the past have generally vested over terms ranging from six (6) months to thirty-six (36) months. RSU grants to date have only been awarded to our directors and 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. In certain circumstances, such as a change of control, the vesting provisions applicable to unvested options and RSUs may be accelerated subject to the Compensation Committee and/or board’s discretion and approval.

Transferability. No award may be transferred or assigned except by will or by operation of the laws of devolution or distribution and descent or pursuant to a qualified domestic relations order, as defined by the U.S. Internal Revenue Code of 1986, and may be exercised only by a grantee during his or her lifetime.

Amendments or Terminations. The Plan will terminate on April 25, 2023. The Compensation Committee, subject to approval of the Board of Directors, may terminate, amend or modify the Plan at any time prior to this; provided, however, that shareholder approval will be obtained (i) to increase the number of common shares available under the Plan, (ii) to amend the terms of any outstanding option to reduce the per share exercise price, (iii) to cancel any outstanding option in exchange for cash or another option or award having an exercise price that is less than the exercise price of the original option, (iv) to extend the term of any option beyond the original expiration date, (v) to permit the transfer or assignment of any award in any manner other than as permitted by the Plan, (vi) to grant any award under the Plan if the Plan has been suspended or terminated, and (vii) to make any amendments to the powers of the Compensation Committee to suspend, amend or terminate the Plan as specified in the Plan. Any other amendments can be made to the Plan by the Compensation Committee without shareholder approval.

Valuation. 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.

As at December 31, 2015, 428,152 options were outstanding under the Plan, which are exercisable at prices ranging between CAD $4.08 and CAD $7.23 per common share.

Stock option activity with respect to our Plan is presented below:


(In CAD dollars)	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)
Outstanding at December 31, 2012		1,416,016			6.25

Granted		1,312,000			4.76

Exercised		(1,183,952	)		7.99

Forfeited and expired		(136,535	)		6.28

Outstanding at December 31, 2013		1,407,529			4.94

Granted		840,150			4.15

Exercised		(104,044	)		5.35

Forfeited and expired		(53,486	)		4.98

Outstanding at December 31, 2014		2,090,149			4.60

Granted		100,000			4.84

Exercised		(1,565,476	)		4.34

Forfeited and expired		(196,521	)		5.80

Outstanding at December 31, 2015		428,152			5.07	8.26

Exercisable at December 31, 2015		428,152			5.07	8.26

As of December 31, 2015, the number of options issued and outstanding under the Plan represents 0.8% (2014 –4.1%, 2013 – 2.8%) of the issued and outstanding common shares.

In connection with the strategic transactions announced on June 8, 2015 as described under Note 5 – Terminated Merger Transaction with InSite and Note 6 – Strategic Transactions, on June 7, 2015 the Board of Directors accelerated the vesting provisions applicable to 1,086,473 options outstanding and unvested at that date. The impact of the accelerated vesting of these stock options on stock-based compensation expense for the year ended December 31, 2015 was $1.5 million.

On January 6, 2015, the Board of Directors granted 100,000 stock options to QLT’s Chief Financial Officer, W. Glen Ibbott. These stock options were originally expected to vest and become exercisable in thirty six (36) successive and equal monthly installments from the grant date. As described above, the vesting provisions applicable to these stock options were accelerated on June 7, 2015. These stock options 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.

On December 17, 2014, the Board of Directors granted 690,150 stock options. These stock options were originally expected to vest and become exercisable in thirty-six (36) successive and equal monthly installments from the grant date. As described above, the vesting provisions applicable to these stock options were accelerated on June 7, 2015. These options were subject to a ten (10) year expiration period and had an exercise price of CAD $4.08 per common share, which was equal to the closing price of the Company’s common shares on the TSX on the date of grant.

On October 29, 2014, the Board of Directors granted 150,000 stock options to QLT’s Interim Chief Executive Officer, Dr. Geoffrey F. Cox. These stock options were originally expected to vest and become exercisable in six (6) successive and equal monthly installments from the grant date. As described above, the vesting provisions

applicable to these stock options were accelerated on June 7, 2015. The remaining 90,000 stock options outstanding as at December 31, 2015 are subject to a ten (10) year expiration period and have an exercise price of CAD $4.47 per common share, which is equal to the closing price of the Company’s common shares on the TSX on the date of grant.

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


	2015			2014			2013
Annualized volatility		41.3	%		42.4	%		46.0	%

Risk-free interest rate		1.4	%		1.6	%		2.0	%

Expected life (years)		6.8			6.8			6.5

The weighted average grant date fair value of stock options granted during the year ended December 31, 2015 was CAD $2.12 (year ended December 31, 2014 – $1.87, year ended December 31, 2013 – $2.28).

The impact on our results of operations of recording stock option compensation for the years ended December 31, 2015, 2014, and 2013 is as follows:


(In thousands of U.S. dollars)	2015⁽¹⁾		2014		2013
Research and development	$	1,193	$	840	$	358

Selling, general and administrative		939		554		209

Stock-based compensation expense	$	2,132	$	1,394	$	567

⁽¹⁾

Approximately $1.5 million of the 2015 stock-based compensation expense relates to the June 7, 2015 accelerated vesting of 1,086,473 stock options in connection with the with the strategic transactions announced on June 8, 2015 (see Note 5 – Terminated Merger Transaction with InSite and Note 6 – Strategic Transactions).

Given the accelerated vesting of stock options at June 7, 2015, nil stock options were unvested at December 31, 2015 (2014 – 1,283,980, 2013 – 1,150,197), and the total estimated unrecognized compensation cost related to unvested stock options is nil.

The aggregate intrinsic values of options outstanding and exercisable as at December 31, 2015, 2014 and 2013 are as follows:


(In thousands of CAD dollars)	2015		2014		2013
Aggregate intrinsic value of options outstanding	$	—	$	487	$	1,572

Aggregate intrinsic value of options exercisable		—		48		224

New common shares are issued upon exercise of stock options. The intrinsic value of stock options exercised and the related cash from exercise of stock options during the years ended December 31, 2015, 2014 and 2013 are as follows:


(In thousands of U.S. dollars)	2015		2014		2013
Intrinsic value of stock options exercised	$	986	$	46	$	2,171

Cash from exercise of stock options		5,508		509		7,217

(e)	Deferred Share Units

Under the DDSU Plan, at the discretion of the Board of Directors, directors can receive all or a percentage of their equity-based compensation in the form of DSUs. DSUs vest in thirty-six (36) successive and equal monthly installments beginning on the first day of the first month after the grant date. A vested DSU can only be settled by conversion to cash (no share is issued), and is automatically converted after the director ceases to be a member of the Board unless the director is removed from the Board for just cause. Prior to conversion, the value of each DSU, at any point in time, is equivalent to the latest closing price of QLT’s common shares on the TSX on that trading day. When converted to cash, the value of a vested DSU is equivalent to the closing price of a QLT common share on the trading day immediately prior to the conversion date.

DSU activity is presented below:


	Number of DSUs
Outstanding at December 31, 2012		88,000

Granted		88,000

Redeemed		(6,111	)

Cancelled		(15,889	)

Outstanding at December 31, 2013, December 31, 2014, December 31, 2015		154,000

Vested at December 31, 2015		139,028

The obligation to settle DSUs in cash is recorded as a liability in our financial statements and is marked-to-market at the end of each reporting period. See Note 9 – Accrued Liabilities. Cash payments under the DDSU Plan during the years ended December 31, 2015, 2014 and 2013 were as follows:


(In thousands of U.S. dollars)	2015		2014		2013⁽¹⁾
Cash payments under the DDSU plan	$	—	$	—	$	28

⁽¹⁾	In connection with Vicente Anido Jr.’s resignation from the Board of Directors effective November 9, 2013, the Company paid $0.03 million to Mr. Anido in accordance with the terms of the DDSU Plan.

The impact on our results of operations of recording DSU compensation expense for the years ended December 31, 2015, 2014 and 2013 is as follows:


(In thousands of U.S. dollars)	2015		2014		2013
Research and development	$	13	$	49	$	77

Selling, general and administrative		32		111		129

Deferred share unit compensation expense	$	45	$	160	$	206

(f)	Restricted Stock Units

RSU activity is presented below:


	Number of RSUs
Outstanding at December 31, 2012		—

Granted⁽¹⁾		48,000

Redeemed		—

Cancelled⁽²⁾		(6,000	)

Outstanding at December 31, 2013		42,000

Granted		36,000

Redeemed⁽³⁾		(14,000	)

Cancelled		—

Outstanding at December 31, 2014		64,000

Granted		—

Redeemed		(64,000	)

Cancelled		—

Outstanding at December 31, 2015		—

⁽¹⁾	The weighted average grant date fair value of the RSUs granted during the year ended December 31, 2015 was nil (December 31, 2014 –CAD $4.08, December 31, 2013 – CAD $4.54).

⁽²⁾	On November 9, 2013, 6,000 RSUs were cancelled in connection with Vicente Anido Jr.’s resignation from the Board of Directors.

⁽³⁾	On December 15, 2014, the date of QLT’s Annual General Meeting, 14,000 RSUs vested and 14,000 shares were issued to the Company’s directors.

RSU’s are only issued to directors as consideration for their provision of future services and are governed by the terms of the Plan. RSUs usually 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.

RSU compensation expense is measured at fair value based on the market price of QLT’s common shares on the grant date and the full cost is recognized on a straight line basis over the three year vesting period, which coincides with the requisite service period.

In connection with the strategic transactions announced on June 8, 2015 (see Note 5 – Terminated Merger Transaction with InSite and Note 6 – Strategic Transactions), the Board of Directors accelerated the vesting provisions applicable to 64,000 RSUs that were outstanding and unvested on June 7, 2015. The impact of the accelerated vesting of these RSUs during the year ended December 31, 2015 was $0.2 million. As a result of the June 7, 2015 accelerated vesting of RSUs and related issuance of shares, nil RSUs were outstanding and unvested as at December 31, 2015 (December 31, 2014 – 64,000). In addition, the total estimated unrecognized compensation cost related to RSUs as at December 31, 2015 is nil (December 31, 2014 – $0.2 million) and the weighted average period over which such costs are expected to be recognized is nil (December 31, 2014 – 2.34 years).

The impact on our results of operations of RSU compensation expense for the years ended December 31, 2015, 2014, and 2013 is as follows:


(In thousands of U.S. dollars)	2015		2014		2013
Research and development	$	61	$	22	$	13

Selling, general and administrative		137		37		20

Restricted stock unit compensation expense	$	198	$	59	$	33

11.

RESTRUCTURING CHARGES

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. The cumulative cost of the restructuring from 2012 to 2014 was $19.6 million. During the years ended December 31, 2015, 2014 and 2013, we recorded nil, $0.7 million, and $2.0 million of restructuring charges, respectively.

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 December 31, 2013	$	130		$	—		$	130

Restructuring charge		666			78			744

Foreign exchange		(5	)		—			(5	)

Cash payments		(791	)		(78	)		(869	)

Balance at December 31, 2014, and December 31, 2015	$	—		$	—		$	—

⁽¹⁾	Costs include severance, termination benefits, and outplacement support.

⁽²⁾	Costs include lease costs related to excess office space.

12.

DISCONTINUED OPERATIONS

The results of operations relating to our former PPDS Technology and Visudyne business have been excluded from continuing operations and are reported as discontinued operations for all periods presented below:


(In thousands of U.S. dollars)	2015		2014			2013
Total revenues	$	—	$	—		$	—

Recovery on assets held for sale		—		—			153

Operating pre-tax (loss) income		—		(66	)		149

Gain on sale of discontinued operations		—		—			1,053	⁽¹⁾

Pre-tax (loss) income⁽²⁾		—		(66	)		1,202

Provision for income taxes		—		—			(235	)

Net (loss) income from discontinued operations	$	—	$	(66	)	$	967

⁽¹⁾

During the year ended December 31, 2013, the net gain on sale of discontinued operations of $1.1 million represents total proceeds of $1.2 million related to the sale of our PPDS Technology to Mati in April 2013, net of the $0.2 million carrying value of certain equipment sold, which was previously classified as held for sale, and a negligible amount of transaction fees.

⁽²⁾	The results for the years ended December 31, 2014, and 2013 include operating pre-tax losses of nil, and $0.4 million, respectively, related to our PPDS Technology. The remaining amounts of pre-tax operating income (losses) relate to Visudyne.

13.

INCOME TAXES

Loss from continuing operations before income taxes is as follows:


(In thousands of U.S. dollars)	2015			2014			2013
Canada	$	(22,987	)	$	(4,197	)	$	(25,239	)

United States		—			—			—

Loss from continuing operations before income taxes	$	(22,987	)	$	(4,197	)	$	(25,239	)

The components of the income tax (provision) recovery were as follows:


(In thousands of U.S. dollars)	2015			2014		2013
Canada	$	(22	)	$	192	$	(599	)

United States		—			—		—

(Provision for) recovery of income taxes	$	(22	)	$	192	$	(599	)


(In thousands of U.S. dollars)	2015			2014		2013
Current income taxes	$	—		$	—	$	—

Deferred income taxes		(22	)		192		(599	)

(Provision for) recovery of income taxes	$	(22	)	$	192	$	(599	)

Differences between our statutory income tax rates and our effective income tax rates, as applied to the loss from continuing operations before income taxes, are reconciled as follows:


(In thousands of U.S. dollars)	2015			2014			2013
Loss from continuing operations before income taxes	$	(22,987	)	$	(4,197	)	$	(25,239	)

Canadian statutory tax rates		26.00	%		26.00	%		25.75	%

Expected income tax recovery		5,977			1,091			6,499

Net decrease (increase) in valuation allowance		(2,486	)		731			(6,717	)

Non-taxable portion of capital gains		—			230			608

Investment tax credits		(222	)		1,628			990

Stock-based compensation		(606	)		(377	)		(154	)

Changes in tax rates		—			—			145

Non-taxable (deductible) expenditures		76			1,752			(1,834	)

Changes in uncertain tax positions		(1,784	)		(4,793	)		(97	)

Adjustments to capital losses for settlement of uncertain tax positions		(560	)		—			—

Other		(417	)		(70	)		(39	)

(Provision for) recovery of income taxes	$	(22	)	$	192		$	(599	)

During the year ended December 31, 2015, the provision for income taxes from continuing operations was insignificant and primarily relates to the accrual of interest on uncertain tax positions.

During the year ended December 31, 2014, the $0.2 million income tax recovery from continuing operations primarily relates to the reversal of interest accrued on uncertain tax positions, which decreased in 2014 due to the expiration of the statute of limitations. This recovery was partially offset by the tax impact of gains from fair value changes in our previous Eligard related contingent consideration asset balance and interest accrued on remaining uncertain tax positions.

During the year ended December 31, 2013, the provision for income taxes from continuing operations was $0.6 million. The provision primarily relates to the 2013 gain on the fair value change of our previous Eligard related contingent consideration.

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 in the years ended December 31, 2015, 2014 and 2013.

Deferred tax assets and liabilities

The tax effects of temporary differences that give rise to significant components of our deferred income tax assets and liabilities are presented as follows:


(In thousands of U.S. dollars)	2015			2014
Deferred tax assets

Net operating loss carryforwards	$	45,365		$	41,064

Research and development tax credit carryforwards		14,164			14,668

Capital loss carryforwards		36,207			37,138

Depreciable and amortizable assets		1,645			2,030

Other temporary differences		197			195

Total gross deferred income tax assets		97,579			95,095

Less: valuation allowance		(97,579	)		(95,095	)

Net deferred income tax assets	$	—		$	—

The realization of deferred income tax assets is dependent on the generation of sufficient taxable income during future periods in which temporary differences are expected to reverse. Where the realization of such assets does not meet the more likely than not criterion, the Company applies a valuation allowance against the deferred income tax asset under consideration. The valuation allowance is reviewed periodically and if the assessment of the more likely than not criterion changes, the valuation allowance is adjusted accordingly.

As at December 31, 2015, our valuation allowance increased primarily due to the ongoing development of our synthetic retinoid, which resulted in an increase in operating losses from continuing operations.

At December 31, 2015, we had approximately $181.8 million (2014 – $169.4 million) of total operating loss carryforwards, of which $146.6 million (December 31, 2014 – $134.2 million) relate to Canada and $35.2 million (December 31, 2014 – $35.2 million) relate to our U.S. subsidiaries. The loss carryforwards expire at various dates through 2035. As at December 31, 2015, we also had approximately $14.2 million (December 31, 2014 –$14.7 million) of federal and state research and development credits available for carryforward of which approximately $1.3 million (December 31, 2014 – $1.3 million) were generated by our U.S. subsidiaries. The research and development credit carryforwards expire at various dates through 2035. As at December 31, 2015, our Scientific, Research and Experimental Development pool was $9.0 million (December 31, 2014 – $4.7 million). Furthermore, as at December 31, 2015, we had approximately $280.0 million (December 31, 2014 –$285.7 million) of capital loss carryforwards, which carryforward indefinitely. The deferred tax benefit of these loss carryforwards and research and development credits is ultimately subject to final determination by the respective taxation authorities.

At December 31, 2015, we have determined that substantially all of the U.S. accumulated operating loss carryforwards of $35.2 million (December 31, 2014 – $35.2 million) and research and development credits of $1.3 million (December 31, 2014 – $1.3 million) are subject to utilization limitations due to changes in ownership in 2012. As a result of this limitation, it is expected that substantially all of these deferred tax assets will expire before they can be utilized by the U.S. subsidiaries.

The following table summarizes the activity related to our uncertain tax position liabilities:


(In thousands of U.S. dollars)	2015			2014			2013
Balance as at January 1	$	5,557		$	1,846		$	1,875

Increases related to current year tax positions		347			5,169			—

Changes in tax positions of a prior period		1,934			11			(29	)

Lapse of statute of limitations		—			(1,469	)		—

Settlements with taxing authorities		(560	)		—			—

Total uncertain tax position liabilities	$	7,278		$	5,557		$	1,846


Deferred tax assets available to offset uncertain tax position liabilities		(6,936	)		(5,169	)		—

Balance as at December 31	$	342		$	388		$	1,846

During the year ended December 31, 2015, our provision for uncertain tax positions (“UTP Provision”) increased by a net amount of $1.7 million. Approximately $1.4 million of the net increase relates to uncertain tax positions that are currently still under audit examination and the remaining $0.3 million relates to tax filing positions taken on certain transaction costs incurred in 2015.

During the year ended December 31, 2014, our UTP provision increased by $5.2 million in connection with tax filing positions taken on certain transaction costs incurred in 2014. This increase in our UTP Provision was partially offset by a $1.5 million decrease related to the expiration of the statute of limitations applicable to certain tax positions taken on uncertain tax matters in prior years. This change in our UTP Provision also resulted in a $1.0 million balance sheet reclassification adjustment to additional-paid-in-capital and a $0.4 million income tax recovery related to the reversal of associated interest that was previously accrued. A related deferred income tax asset was also reversed, which resulted in a balance sheet reclassification adjustment of $0.2 million to additional-paid-in capital.

During the year ended December 31, 2013, there were no significant changes to our provision for uncertain tax positions.

Given that the potential net 2015 liability increase of $1.7 million and potential net 2014 liability increase of $3.7 million are fully sheltered by our existing deferred tax assets, we have offset the total liability on our consolidated balance sheet in accordance with ASU No. 2013-11 – Income Taxes (Topic 740): Presentation of Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU No. 2013-11 was adopted on a prospective basis effective January 1, 2014.

The remaining December 31, 2015 UTP Provision of $0.3 million (December 31, 2014 – $0.4 million), which is reflected on our consolidated balance sheet, is expected to decrease in 2016 upon the expiration of the statute of limitations applicable to certain tax positions taken on uncertain tax matters in prior years.

If recognized in future periods, the change in our UTP Provision would not affect our effective tax rate given that we have sufficient deferred tax assets to offset the impact. In addition, we recognize potential accrued interest and penalties related to uncertain tax position liabilities within our income tax provision.

QLT and its subsidiaries file income tax returns and pay income taxes in jurisdictions where we determine we are subject to tax. In jurisdictions in which QLT and its subsidiaries determine that we are not subject to tax and do not file income tax returns, we cannot provide assurance that tax authorities in those jurisdictions will not select one or more tax years for examination. While the statute of limitations in each jurisdiction where an income tax return has been filed generally limits the examination period, as a result of loss carryforwards, the limitation

period for examination does not generally expire until several years after the loss carryforwards are utilized. We are subject to routine tax credit, tax refund and tax return audits by tax authorities. Our major tax jurisdictions are Canada and the U.S. With few exceptions, QLT and its subsidiaries should not be subject to Canadian income tax examinations in respect of taxation years before 2009 and U.S. income tax examinations in respect of taxation years before 2010.

14.

FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK

We have various financial instruments that are measured at fair value including cash and cash equivalents, 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 as defined by ASC No. 820 – Fair Value Measurements and Disclosures.

The following tables provide information about our assets and liabilities as at December 31, 2015 and 2014 that are measured at fair value on a recurring basis:


	As at December 31, 2015
(In thousands of U.S. dollars)	Level 1		Level 2		Level 3		Total
Assets:

Cash and cash equivalents	$	141,824	$	—	$	—	$	141,824

Accounts receivable – Laser Earn-Out Payment⁽¹⁾		—		—		2,000		2,000

Total	$	141,824	$	—	$	2,000	$	143,824


	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⁽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 7 – 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			Total
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 December 31, 2014 and December 31, 2015	$	—		$	—

As of each of December 31, 2015 and 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.

NET LOSS PER SHARE

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


(In thousands of U.S. dollars, except share and per share data)	2015			2014			2013
Numerator:

Loss from continuing operations	$	(23,009	)	$	(4,005	)	$	(25,838	)

(Loss) income from discontinued operations, net of income taxes		—			(66	)		967

Net loss and comprehensive loss		(23,009	)		(4,071	)		(24,871	)


Denominator: (thousands)

Weighted average common shares outstanding		52,169			51,126			50,909

Basic and diluted net (loss) income per common share

Continuing operations		(0.44	)		(0.08	)		(0.51	)

Discontinued operations		—			(0.00	)		0.02

Net loss per common share	$	(0.44	)	$	(0.08	)	$	(0.49	)

At December 31, 2015, there were 428,152 stock options outstanding (2014 – 2,090,149, 2013 – 1,407,529) and nil RSUs outstanding (2014 – 64,000, 2013 – 42,000). These stock options and RSUs were excluded from the computation of net loss per common share, in the respective periods, because inclusion would have been antidilutive.

16.

CONTINGENCIES, COMMITMENTS AND GUARANTEES

(a)	Contingencies

Litigation

From time to time we are subject to legal proceedings that arise in the ordinary course of business.

On September 22, 2015, QLT commenced an action in the Supreme Court of British Columbia against Valeant for breach of contract, under the terms of the Valeant Agreement, with respect to failure to pay a $5.0 million Laser Earn-Out Payment and failure to use commercially reasonable efforts to promptly obtain the laser registrations for the Qcellus laser in the United States. Refer to Note 7(b) – Contingent Consideration – Related to the Sale of Visudyne for additional information. Given that the outcome of such a dispute and litigation is uncertain and we may have difficulty in recovering damages and collecting the Laser Earn-Out Payment in full, we have recorded the Laser Earn-Out Payment at its estimated fair value of $2.0 million on our December 31, 2015 consolidated balance sheet.

The fair value estimate of the Laser Earn-Out Payment was derived using a probability weighted approach to examine various possible outcomes with respect to the timing and amount that may be collected. In addition, it also reflects management’s assessment of collection risk, the impact of the passage of time and potential collection costs associated with the Valeant litigation.

(b)	Commitments and Guarantees

Lease Obligations

During 2015, we entered into a sublease agreement (as amended, the “Lease Agreement”) to downsize our existing space in Vancouver, British Columbia, where our head office is located. We currently lease approximately 8,475 square feet of space under the terms of this Lease Agreement. The lease term applicable to this space expires on August 31, 2016, with a one year renewal option on approximately 5,850 square feet of the space and a month-to-month renewal option of the remaining 2,625 square feet of space.

Estimated operating lease payments for office space and office equipment over the next five years are summarized as follows:


(In thousands of U.S. dollars) Year ending December 31,
2016	$	132

2017		—

2018		—

2019		—

2020 and thereafter		—

Total	$	132

Rent expense was $0.4 million in 2015, $0.5 million in 2014, and $1.4 million in 2013.

Research and Development Milestone and Royalty Obligations

We are committed to make potential future milestone payments to third parties as part of our various licensing, development and purchase agreements. Payments under these arrangements generally become due and payable upon achievement of certain development, regulatory or commercial milestones. As at December 31, 2015, no amounts have been accrued in connection with such milestones.

QLT091001. Under the terms of the April 2006 co-development agreement (as amended, the “Retinagenix Agreement”) we entered into with Retinagenix LLC (“Retinagenix”), we obtained an exclusive, worldwide license and sub-license to certain intellectual property rights owned or controlled by Retinagenix related to the synthetic retinoid compound under development. Under the terms of this agreement, we are responsible for using commercially reasonable and diligent efforts to develop and commercialize in certain major markets and other markets as we reasonably determine, one or more products covered by the licensed rights or developed using such licensed rights for use in diagnosing, treating or preventing certain human diseases and conditions.

Pursuant to the Retinagenix Agreement, in connection with certain development and regulatory milestones for a first indication, we are obligated to pay certain milestone payments, including the following: (i) $1.0 million upon initiation of the first pivotal trial and (ii) $1.5 million upon completion of a filing seeking EU approval or Japan approval for the use of such products in the first indication. As described under the Business Overview section of Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2015, we are currently progressing pivotal trial start-up activities with the goal of initiating our Phase III pivotal trial in the third quarter of 2016 for the treatment of Inherited Retinal Disease caused by retinal pigment epithelium protein 65 (“RPE65”) and lecithin:retinol acyltransferase (“LRAT”) gene mutations, which includes Leber Congenital Amaurosis (“LCA”) and Retinitis Pigmentosa (“RP”). As such, we expect that the $1.0 million milestone identified above will become due and payable to Retinagenix upon initiation of our Phase III pivotal trial for this first indication. In addition, we are currently exploring with the European Medicines Agency (“EMA”) the submission of a Marketing Authorization Application (“MAA”) in the second

half of 2016 for the conditional approval of QLT091001, which would potentially accelerate the commercial availability of QLT091001 as a treatment option. If we complete the submission of such an MAA, we expect that the $1.5 million milestone identified above will also become due and payable to Retinagenix for this first indication.

Under the terms of the Retinagenix Agreement, we are also obligated to pay up to a total of an additional $10.0 million upon the achievement of other specified development or regulatory milestones and, for each of up to two additional indications, up to a total of $9.0 million per indication upon achievement of specified development or regulatory milestones. If we commercialize such products, we will also be obligated to pay Retinagenix royalties between 4% and 6% of net sales, subject to reduction under certain specified circumstances. Retinagenix is also eligible to receive up to a total of $15.0 million upon achievement of certain specified cumulative sales milestones for such products.

Financial Advisory Services Milestone Obligation

On February 5, 2016, pursuant to the Greenhill Agreement, we paid Greenhill a $4.0 million advisory fee in connection with the completion of QLT’s $45.0 million investment in Aralez and exploration of other strategic initiatives described under Note 5 – Terminated Merger Transaction with InSite and Note 6 – Strategic Initiatives. The recognition and payment of the advisory fee was both contingent upon the satisfaction of various terms and conditions, which were met on February 5, 2016, and subject to the outcome of certain external factors and uncertainties, which were settled by February 5, 2016 but were beyond the Company’s control.

Indemnities

In connection with the sale of assets and businesses, we provided indemnities with respect to certain matters, including product liability, patent infringement, contractual breaches and misrepresentations, and we provide other indemnities to third parties under the clinical trial, license, service, 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 indemnifications are generally subject to threshold amounts, specified claims periods and other restrictions and limitations. As at December 31, 2015, no amounts have been accrued in connection with such indemnities.

17.

SEGMENT INFORMATION

We operate in one industry segment, which is the business of developing, manufacturing, and commercializing opportunities in ophthalmology. Our chief operating decision makers review our operating results on a company-wide basis and manage our operations as a single operating segment. As at December 31, 2015, 90% of our property, plant and equipment is located in Canada. The remaining 10% of our property, plant and equipment relates to certain research and development equipment that is located in the U.S. at a vendor that is assisting us with our pivotal trial start-up activities.

18.

SUBSEQUENT EVENTS

Pursuant to the terms of the Aralez Share Subscription Agreement (as described under Note 6 – Strategic Transactions – Aralez Investment and Distribution), on February 5, 2016, we completed a $45.0 million investment in Aralez upon closing of the Aralez Merger. In exchange, QLT received 7,200,000 Aralez Shares, which represents a 10.1% ownership interest in the total number of Aralez Shares issued and outstanding, at a price of US$6.25 per share.

On February 5, 2016, pursuant to the Greenhill Agreement, we paid Greenhill a $4.0 million advisory fee in connection with the completion of QLT’s $45.0 million investment in Aralez and exploration of other strategic initiatives described under note 5 – Terminated Merger Transaction with InSite and note 6 – Strategic Initiatives. The recognition and payment of the advisory fee was both contingent upon the satisfaction of various terms and conditions, which were met on February 5, 2016, and subject to the outcome of certain external factors and uncertainties, which were settled by February 5, 2016 but were beyond the Company’s control.

Item 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

Item 9A.

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 Exchange Act 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 the Interim Chief Executive Officer and the Chief Financial Officer. Our principal executive and financial officers have evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934) as of the end of the period covered by this Annual Report and concluded that our disclosure controls and procedures were effective as on such period.

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.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the U.S. Securities Exchange Act of 1934, Rules 13a-15(f) and 15d-15(f) of the Securities and Exchange Act of 1934. Under the supervision and with the participation of our management, including the Interim Chief Executive Officer and the Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Based on our evaluation under the framework in Internal Control – Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of December 31, 2015.

Deloitte LLP, the independent registered public accounting firm that audited our December 31, 2015 consolidated annual financial statements, has issued an attestation report on our internal control over financial reporting.

Changes in Internal Control over Financial Reporting

There were no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Securities and Exchange Act of 1934) during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

100

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of QLT Inc.

We have audited the internal control over financial reporting of QLT Inc. and subsidiaries (the “Company”) as of December 31, 2015, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2015 of the Company and our report dated February 25, 2016 expressed an unqualified opinion on those financial statements.

/s/ DELOITTE LLP

Chartered Professional Accountants

Vancouver, Canada

February 25, 2016

101

Item 9B.

OTHER INFORMATION

None

102

PART III

Item 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE