ITEM 1.
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FINANCIAL STATEMENTS
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QLT Inc.
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CONDENSED CONSOLIDATED BALANCE SHEETS
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(Unaudited)
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June 30, 2014
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December 31, 2013
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(In thousands of U.S. dollars except share amounts)
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ASSETS
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Current assets
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Cash and cash equivalents
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$
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137,933
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$
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118,521
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Accounts receivable, net of allowances for doubtful accounts (Note 4)
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10,006
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4,590
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Contingent consideration - current (Note 3)
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-
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36,582
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Income taxes receivable
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68
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77
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Deferred income tax assets - current
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-
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191
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Prepaid and other assets
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1,014
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1,863
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Total current assets
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149,021
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161,824
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Property, plant and equipment
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1,433
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1,866
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Deferred income tax assets - non-current
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-
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177
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Total assets
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150,454
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163,867
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LIABILITIES
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Current liabilities
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Accounts payable
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$
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3,848
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$
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2,609
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Accrued liabilities (Note 5)
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1,242
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1,498
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Accrued restructuring charges (Note 8)
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-
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130
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Total current liabilities
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5,090
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4,237
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Uncertain tax position liabilities
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1,709
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1,846
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Total liabilities
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6,799
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6,083
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SHAREHOLDERS EQUITY
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Share capital (Note 7)
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Authorized
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500,000,000 common shares without par value
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5,000,000 first preference shares without par value, issuable in series
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Issued and outstanding
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Common shares
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$
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466,229
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$
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466,229
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June 30, 2014 51,081,878 shares
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December 31, 2013 51,081,878 shares
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Additional paid-in capital
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96,815
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95,844
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Accumulated deficit
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(522,358)
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(507,258)
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Accumulated other comprehensive income
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102,969
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102,969
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Total shareholders equity
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143,655
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157,784
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Total shareholders equity and liabilities
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$
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150,454
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$
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163,867
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See the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
3
QLT Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
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Three months ended
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Six months ended
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June 30,
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June 30,
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(In thousands of U.S. dollars except share and per share amounts)
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2014
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2013
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2014
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2013
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Expenses
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Research and development
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$
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4,079
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$
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4,392
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$
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8,893
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$
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8,472
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Selling, general and administrative
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4,098
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1,810
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6,254
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3,892
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Depreciation
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229
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252
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458
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487
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Restructuring charges (Note 8)
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172
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671
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744
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1,493
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8,578
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7,125
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16,349
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14,344
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Operating loss
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(8,578)
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(7,125)
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(16,349)
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(14,344)
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Investment and other income
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Net foreign exchange losses
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(53)
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84
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(74)
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18
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Interest income
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31
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80
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53
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136
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Fair value change in contingent consideration (Note 3)
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-
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1,038
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1,466
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1,833
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Other
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42
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36
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99
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36
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20
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1,238
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1,544
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2,023
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Loss from continuing operations before income taxes
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(8,558)
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(5,887)
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(14,805)
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(12,321)
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Provision for income taxes (Note 9)
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(23)
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(142)
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(238)
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(325)
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Loss from continuing operations
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(8,581)
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(6,029)
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(15,043)
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(12,646)
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Income from discontinued operations, net of income taxes (Note 10)
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(57)
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(170)
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(57)
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20
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Net loss and comprehensive loss
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$
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(8,638)
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$
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(6,199)
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$
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(15,100
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)
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$
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(12,626
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)
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Basic and diluted net loss per common share
(Note 12)
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Continuing operations
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($0.17)
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($0.12)
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($0.29)
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($0.25)
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Discontinued operations
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(0.00)
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(0.00)
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(0.00)
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0.00
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Net loss per common share
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($0.17)
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($0.12)
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($0.29)
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($0.25)
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Weighted average number of common shares outstanding (in thousands)
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Basic and diluted
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51,082
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50,883
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51,082
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50,736
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See the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
4
QLTInc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Three months ended
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Six months ended
|
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June 30,
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June 30,
|
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(In thousands of U.S. dollars)
|
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2014
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2013
|
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2014
|
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2013
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Cash used in operating activities
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Net loss and comprehensive loss
|
|
$
|
(8,638)
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$
|
(6,199)
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$
|
(15,100)
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$
|
(12,626)
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|
Adjustments to reconcile net loss to net cash used in operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Depreciation
|
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|
229
|
|
|
|
252
|
|
|
|
458
|
|
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|
487
|
|
Stock-based compensation and restricted stock based compensation
|
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|
419
|
|
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|
94
|
|
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|
971
|
|
|
|
142
|
|
Unrealized foreign exchange losses
|
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|
36
|
|
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|
(74)
|
|
|
|
94
|
|
|
|
135
|
|
Deferred income taxes
|
|
|
23
|
|
|
|
189
|
|
|
|
237
|
|
|
|
458
|
|
Recovery on assets held for sale
|
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|
-
|
|
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|
(22)
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|
-
|
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(175)
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|
Gain on sale of discontinued operations (Note 10)
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|
-
|
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(287)
|
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|
-
|
|
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|
(743)
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Fair value change in contingent consideration (Note 3)
|
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|
-
|
|
|
|
(24)
|
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|
|
-
|
|
|
|
488
|
|
Changes in non-cash operating assets and liabilities
|
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|
-
|
|
|
|
|
|
|
|
-
|
|
|
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|
Accounts receivable
|
|
|
(64)
|
|
|
|
1,184
|
|
|
|
120
|
|
|
|
2,205
|
|
Prepaid and other assets
|
|
|
613
|
|
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|
(30)
|
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|
849
|
|
|
|
(954)
|
|
Accounts payable
|
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|
1,177
|
|
|
|
(259)
|
|
|
|
1,242
|
|
|
|
(2,489)
|
|
Income taxes receivable / payable
|
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|
-
|
|
|
|
(43)
|
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|
9
|
|
|
|
(58)
|
|
Accrued liabilities
|
|
|
360
|
|
|
|
(16)
|
|
|
|
(264)
|
|
|
|
(1,361)
|
|
Accrued restructuring charges
|
|
|
(615)
|
|
|
|
(1,167)
|
|
|
|
(130)
|
|
|
|
(1,197)
|
|
|
|
|
|
|
(6,460)
|
|
|
|
(6,402)
|
|
|
|
(11,514)
|
|
|
|
(15,688)
|
|
|
|
|
|
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Cash provided by investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net proceeds from sale of long-lived assets
|
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|
-
|
|
|
|
19
|
|
|
|
-
|
|
|
|
209
|
|
Net proceeds from sale of discontinued operations (Note 10)
|
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|
-
|
|
|
|
750
|
|
|
|
-
|
|
|
|
750
|
|
Purchase of property, plant and equipment
|
|
|
(25)
|
|
|
|
-
|
|
|
|
(25)
|
|
|
|
-
|
|
Proceeds from contingent consideration (Note 3)
|
|
|
4,445
|
|
|
|
6,995
|
|
|
|
31,038
|
|
|
|
16,552
|
|
|
|
|
|
|
4,420
|
|
|
|
7,764
|
|
|
|
31,013
|
|
|
|
17,511
|
|
|
|
|
|
|
|
|
Cash used in financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares repurchased, including fees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(14,079)
|
|
Cash distribution paid to common shareholders (Note 7)
|
|
|
-
|
|
|
|
(200,000)
|
|
|
|
-
|
|
|
|
(200,000)
|
|
Issuance of common shares
|
|
|
-
|
|
|
|
3,556
|
|
|
|
-
|
|
|
|
8,317
|
|
|
|
|
|
|
-
|
|
|
|
(196,444)
|
|
|
|
-
|
|
|
|
(205,762)
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
64
|
|
|
|
(83)
|
|
|
|
(87)
|
|
|
|
(265)
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(1,976)
|
|
|
|
(195,165)
|
|
|
|
19,412
|
|
|
|
(204,204)
|
|
Cash and cash equivalents, beginning of period
|
|
|
139,909
|
|
|
|
298,345
|
|
|
|
118,521
|
|
|
|
307,384
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
137,933
|
|
|
$
|
103,180
|
|
|
$
|
137,933
|
|
|
$
|
103,180
|
|
|
|
|
|
|
|
|
Supplementary cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
|
See the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
5
QLT Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares
|
|
|
Additional
Paid-in
Capital
|
|
|
Accumulated
Deficit
|
|
|
Accumulated
Other
Comprehensive
Income
(1)
|
|
|
Total
Shareholders
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
|
|
(All amounts except share and per share information are expressed in thousands of U.S. dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2013
|
|
|
51,589,405
|
|
|
$
|
471,712
|
|
|
$
|
296,024
|
|
|
$
|
(482,387)
|
|
|
$
|
102,969
|
|
|
$
|
388,318
|
|
|
|
|
|
|
|
|
Exercise of stock options, for cash, at prices ranging from CAD $2.44 to CAD $7.23 per share
|
|
|
1,183,952
|
|
|
|
9,978
|
|
|
|
(2,761)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,217
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
567
|
|
|
|
-
|
|
|
|
-
|
|
|
|
567
|
|
|
|
|
|
|
|
|
Restricted stock based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
32
|
|
|
|
-
|
|
|
|
-
|
|
|
|
32
|
|
|
|
|
|
|
|
|
Common share repurchase (Note 7(b))
|
|
|
(1,691,479)
|
|
|
|
(15,461)
|
|
|
|
1,982
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(13,479)
|
|
|
|
|
|
|
|
|
Cash distribution to common shareholders at $3.92 per share (Note 7(a))
|
|
|
-
|
|
|
|
-
|
|
|
|
(200,000)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(200,000)
|
|
|
|
|
|
|
|
|
Net loss and comprehensive loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(24,871)
|
|
|
|
-
|
|
|
|
(24,871)
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2013
|
|
|
51,081,878
|
|
|
$
|
466,229
|
|
|
$
|
95,844
|
|
|
$
|
(507,258)
|
|
|
$
|
102,969
|
|
|
$
|
157,784
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
538
|
|
|
|
-
|
|
|
|
-
|
|
|
|
538
|
|
|
|
|
|
|
|
|
Restricted stock compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
14
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14
|
|
|
|
|
|
|
|
|
Net loss and comprehensive loss
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
(6,462)
|
|
|
|
-
|
|
|
|
(6,462)
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2014
|
|
|
51,081,878
|
|
|
|
466,229
|
|
|
|
96,396
|
|
|
|
(513,720)
|
|
|
|
102,969
|
|
|
$
|
151,874
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
404
|
|
|
|
-
|
|
|
|
-
|
|
|
|
404
|
|
|
|
|
|
|
|
|
Restricted stock compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
15
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15
|
|
|
|
|
|
|
|
|
Net loss and comprehensive loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,638)
|
|
|
|
-
|
|
|
|
(8,638)
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2014
|
|
|
51,081,878
|
|
|
$
|
466,229
|
|
|
$
|
96,815
|
|
|
$
|
(522,358)
|
|
|
$
|
102,969
|
|
|
$
|
143,655
|
|
|
|
(1)
|
At June 30, 2014 our accumulated other comprehensive income is entirely related to historical cumulative translation adjustments resulting from the application of U.S. dollar reporting when the functional currency
of QLT Inc. was the Canadian dollar
|
See the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
6
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Throughout this Quarterly Report on Form 10-Q (this Report), the words we, us, our, the
Company and QLT refer to QLT Inc. and its wholly owned subsidiaries, QLT Plug Delivery, Inc., QLT Therapeutics, Inc. and QLT Ophthalmics, Inc., unless stated otherwise.
Business
QLT is a biotechnology
company dedicated to the development and commercialization of innovative ocular products that address the unmet medical needs of patients and clinicians worldwide. Our core operations currently consist of clinical development programs dedicated to
the development of our synthetic retinoid, QLT091001, for the treatment of certain inherited retinal diseases.
In parallel with our
continued development efforts on QLT091001, in November 2013 we announced that we commenced a review of strategic alternatives for the Company and have engaged Credit Suisse to act as our financial advisor.
On June 25, 2014, we entered into an Agreement and Plan of Merger (the Merger Agreement) among QLT, Auxilium Pharmaceuticals,
Inc., a Delaware corporation (Auxilium), QLT Holding Corp., a Delaware corporation and a wholly owned subsidiary of QLT (HoldCo), and QLT Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of HoldCo
(AcquireCo). The Merger Agreement provides for a business combination whereby AcquireCo will be merged with and into Auxilium (the Merger). As a result of the Merger, the separate corporate existence of AcquireCo will cease
and Auxilium will continue as the surviving corporation. On the date of the closing of the Merger, Auxilium will become an indirect wholly owned subsidiary of QLT (the Combined Company) and Auxilium stockholders will own approximately
76% of the outstanding common shares of the Combined Company on a fully diluted basis. QLT is the legal acquirer and accounting acquiree in the Merger transaction. While the Merger has been unanimously approved by the Boards of Directors of
Auxilium, QLT, HoldCo and AcquireCo, the transaction is still subject to various conditions and approvals which are described in Note 2
Proposed Merger Transaction with Auxilium.
1. CONDENSED SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in
the United States (U.S. GAAP) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (the SEC) for the presentation of interim financial information. Accordingly, certain information
and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed, or omitted, pursuant to such rules and regulations. These financial statements do not include all disclosures required
for the annual financial statements and should be read in conjunction with our audited consolidated financial statements and notes thereto included as part of our Annual Report on Form 10-K, as amended by Form 10-K/A, for the year ended
December 31, 2013. All amounts herein are expressed in United States dollars unless otherwise noted.
In managements opinion,
the condensed consolidated financial statements reflect all adjustments (including reclassifications and normal recurring adjustments) necessary to present fairly the financial position at June 30, 2014, and results of operations and cash flows
for all periods presented. The interim results presented are not necessarily indicative of results that can be expected for a full year.
While the costs incurred by the Company in connection with the proposed Merger have been reflected in these consolidated financial statements,
the results of the Combined Company will not be reflected until the completion of the Merger transaction. For more information on the proposed Merger refer to Note 2
Proposed Merger Transaction with Auxilium
.
The results of operations relating to our former punctal plug delivery system technology (the PPDS Technology), which we sold on
April 3, 2013 to Mati Therapeutics, Inc. (Mati), and our Visudyne
®
business, which we sold on September 24, 2012 to Valeant Pharmaceuticals, Inc. (Valeant),
have been excluded from continuing operations and are reported as discontinued operations for all periods presented. See Note 10
Discontinued Operations for more information.
Principles of Consolidation
These
condensed consolidated financial statements include the accounts of QLT and its subsidiaries, all of which are wholly owned. All intercompany transactions have been eliminated.
Use of Estimates
The preparation of
financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of expenses during the reporting periods presented. Significant estimates include but are not limited to accounts receivable valuation provisions, contingent consideration measured at fair value, allocation of
overhead expenses to research and development, stock-based compensation, restructuring costs and provisions for taxes, tax assets and liabilities. Actual results may differ from estimates made by management.
7
Segment Information
We operate in one industry segment, which is the business of developing, manufacturing, and commercializing opportunities in ophthalmology. As
at the date of this report, our clinical development programs are solely focused on our synthetic retinoid, QLT091001. Our chief operating decision maker reviews our operating results and manages our operations as a single operating segment.
Discontinued Operations and Assets Held for Sale
We consider assets to be held for sale when management approves and commits to a formal plan to actively market the assets for sale. Upon
designation as held for sale, the carrying value of the assets is recorded at the lower of their carrying value and their estimated fair value. We cease to record depreciation or amortization expense at that time.
The results of operations, including the gain on disposal for businesses that are classified as held for sale, are excluded from continuing
operations and reported as discontinued operations for all periods presented. Other than the provision of certain transition services, we have not had any significant continued involvement with the Visudyne business or the PPDS Technology following
their sales. Amounts billed to Valeant and Mati in connection with the provision of these transition services were included within discontinued operations.
Stock-Based Compensation
ASC topic 718
requires stock-based compensation expense, which is measured at fair value on the grant date, to be recognized in the statement of operations over the period in which a grantee is required to provide services in exchange for the stock award.
Compensation expense recognition provisions are applicable to new awards as well as previously granted awards which are modified, repurchased or cancelled after the adoption date. We recognize stock-based compensation expense based on the estimated
grant date fair value using the Black-Scholes valuation model, adjusted for estimated forfeitures. When estimating forfeitures, we consider attrition rates and trends of actual stock option forfeitures.
The Company has a Deferred Share Unit Plan (DSU Plan) for our directors. We recognize compensation expense for Deferred Share
Units (DSUs) based on the market price of the Companys stock. A vested DSU is convertible to cash only. The financial obligations related to the future settlement of these DSUs are recognized as compensation expense and accrued
liabilities as the DSUs vest. Each reporting period, these obligations are revalued for changes in the market value of QLTs common shares.
During 2013, the Company issued Restricted Stock Units (RSUs) to its directors as consideration for their provision of future
services as directors (see Note 7(e)). Restricted stock-based compensation expense is measured based on the fair value market price of QLTs 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 QLTs common shares, on a one-to-one basis, upon vesting.
Income Taxes
Income taxes are reported using the asset and liability method, whereby deferred tax assets and liabilities are recognized for the
future tax consequences attributable to: (i) differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and (ii) operating loss and tax credit carry forwards using
applicable enacted tax rates. An increase or decrease in these tax rates will increase or decrease the carrying value of deferred net tax assets resulting in an increase or decrease to net income. Income tax credits, such as investment tax credits,
are included as part of the provision for income taxes. The realization of our deferred tax assets is primarily dependent on generating sufficient capital gains and taxable income prior to expiration of any loss carry forward balance. A valuation
allowance is provided when it is more likely than not that a deferred tax asset may not be realized. Changes in valuation allowances are included in our tax provision, or included within discontinued operations in the period of change.
Contingent Consideration
Contingent
consideration arising from the sale of QLT USA and our Visudyne business is measured at fair value. The contingent consideration is revalued at each reporting period and changes are included in continuing operations. See Note 3
Contingent
Consideration.
Net (Loss) Income Per Common Share
Basic net (loss) income per common share is computed using the weighted average number of common shares outstanding during the period. Diluted
net (loss) income per common share is computed in accordance with the treasury stock method, which uses the weighted average number of common shares outstanding during the period and also includes the dilutive effect of common shares potentially
issuable from outstanding stock options.
8
Fair Value of Financial Assets and Liabilities
The carrying values of cash and cash equivalents, trade receivables and payables, and contingent consideration approximate fair value. For
cash and cash equivalents, trade receivables and trade payables, we estimate fair value using the market approach. For contingent consideration, we estimate fair value using the income approach. The fair values of our financial instruments reflect
the amounts that would be received in connection with the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).
Recently Adopted Accounting Standards
No new accounting
standards were adopted during the three months ended June 30, 2014.
Recently Issued Accounting Standards
In May 2014, FASB issued ASU No. 2014-09 -
Revenue from Contracts with Customers.
This update removes inconsistencies and
weaknesses in revenue requirements, provides a more robust framework for addressing revenue issues, improves comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets, provides more useful
information to users of financial statements through improved disclosure requirements and simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer. The guidance in this update supersedes
the revenue recognition requirements in Topic 605 -
Revenue Recognition
, and most industry-specific guidance throughout the Industry Topics of the Codification. This update also supersedes some cost guidance included in Subtopic 605-35 -
Revenue Recognition Construction-Type and Production-Type Contracts
. ASU No. 2014-09 is effective for public entities with reporting periods beginning after December 15, 2016. Early adoption is not permitted. Management is
still in the process of assessing the impact of ASU No. 2014-09 on the Companys consolidated financial statements.
2.
|
PROPOSED MERGER TRANSACTION WITH AUXILIUM
|
On June 25, 2014, the Company entered into the Merger Agreement among QLT, Auxilium, HoldCo, and AcquireCo. The Merger
contemplates a business combination whereby AcquireCo will be merged with and into Auxilium. As a result of the Merger, the separate corporate existence of AcquireCo will cease and Auxilium will continue as the surviving corporation. On the date of
the closing of the Merger, Auxilium will become an indirect wholly owned subsidiary of QLT. While QLT is the legal acquirer, QLT will in substance be the accounting acquiree and the reverse acquisition guidance under Accounting Standards
Codification (ASC) No. 805
Business Combinations
is expected to apply.
While the Merger has been
unanimously approved by the Boards of Directors of Auxilium, QLT, HoldCo and AcquireCo, the transaction is still subject to various conditions and approvals which are described below. In addition, the Merger Agreement provides that the Combined
Companys Board of Directors, upon completion of the Merger, shall consist of seven individuals designated by the Auxilium Board of Directors prior to the Merger and two individuals designated by the QLT Board of Directors and acceptable to
Auxilium.
Upon consummation of the Merger, each outstanding share of Auxilium common stock, other than shares owned by Auxilium, QLT,
HoldCo or AcquireCo, will be converted into the right to receive 3.1359 QLT common shares (the Equity Exchange Ratio), subject to the adjustment described as follows:
If at or immediately after the effective time of the Merger, QLT receives aggregate cash consideration pursuant to any sale, license,
sublicense or similar transaction related to its proprietary synthetic retinoid product in development known as QLT091001, which is:
(a) less than $25 million but equal to or greater than $20 million then, the Equity Exchange Ratio shall be increased by 0.0192;
(b) less than $20 million but equal to or greater than $15 million, then the Equity Exchange Ratio shall be increased by 0.0385;
(c) less than $15 million but equal to or greater than $10 million, then the Equity Exchange Ratio shall be increased by 0.0577;
(d) less than $10 million but equal to or greater than $5 million, then the Equity Exchange Ratio shall be increased by 0.0770;
or
(e) less than $5 million, or in the event that no such transaction is consummated at or immediately after the effective time of
the Merger, then the Equity Exchange Ratio shall be increased by 0.0962.
Upon completion of the Merger and assuming no increase in the
Equity Exchange Ratio, current QLT stockholders will own approximately 24% of the outstanding common shares of the Combined Company on a fully diluted basis and current Auxilium stockholders will own approximately 76% of the outstanding common
shares of the Combined Company on a fully diluted basis, subject to certain adjustments.
9
The completion of the Merger is subject to the approval of stockholders of Auxilium and QLT. In
addition, the Merger is subject to other customary closing conditions, including, among others, (i) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, which
has occurred as at the date of the filing of this Form 10-Q, (ii) the declaration by the Securities and Exchange Commission (SEC) of the effectiveness of the Registration Statement on Form S-4 filed with the SEC on August
4, 2014, (iii) the approval of the listing on NASDAQ of the common shares of the Combined Company to be issued in connection with the Merger, (iv) the receipt by QLT of notice from the Toronto Stock Exchange (TSX) approving the
delisting of QLTs shares from the TSX effective as of the consummation of the Merger and (v) the receipt by Auxilium of all necessary third party and lender consents or amendments as may be required under certain Auxilium debt
instruments, or consummation of a suitable refinancing of some or all of certain Auxilium debt. To ensure that Auxilium has sufficient proceeds available to refinance its senior secured credit facility if those financial investors currently holding
participations in Auxiliums senior secured credit facility do not consent to the Merger, or impose conditions to their respective consents on terms that Auxilium determines are unfavorable, Auxilium has entered into a commitment letter for a
$225 million loan facility with Deutsche Bank AG New York Branch and Deutsche Bank Securities, Inc. (the DB Facility).
Each partys obligation to close the Merger is also subject to the continued (i) accuracy of the representations and warranties made
and (ii) compliance with the covenants agreed to by the other party to the Merger Agreement, in each case, subject to certain materiality standards as set forth in the Merger Agreement. Furthermore, each partys obligation to close the
Merger is subject to the absence of certain legal restraints and the absence of any Material Adverse Effect (as defined in the Merger Agreement) on the other party since the date of the Merger Agreement.
Auxiliums obligation to close the Merger is also subject to additional closing conditions, including (i) receipt by Auxilium of an
opinion of counsel stating that Section 7874 of the United States Internal Revenue Code, as amended (the Code) (or any other U.S. tax law), regulations promulgated thereunder, and official interpretations thereof as set forth in
published guidance should not apply in such a manner so as to cause QLT to be treated as a domestic corporation for U.S. federal income tax purposes from and after the closing date of the Merger, provided that such opinion may only take into account
the law in effect on the earlier of the date of the Merger and October 31, 2014 and (ii) on or before October 31, 2014, there shall have been no change in applicable law (whether or not such change in law is yet effective) with
respect to Section 7874 of the Code (or any other U.S. tax law), or official interpretation thereof as set forth in published guidance by the IRS (other than news releases) (whether or not such change in official interpretation is yet
effective), and there shall have been no bills that would implement such a change passed by the United States House of Representatives and the United States Senate and for which the time period for the President of the United States to sign or veto
such bills has not yet elapsed, in each case, that, once effective, in the opinion of nationally recognized U.S. tax counsel, would cause QLT to be treated as a United States domestic corporation for U.S. federal income tax purposes.
Auxilium and QLT have each agreed to customary representations, warranties and covenants in the Merger Agreement. Among them, both Auxilium
and QLT have agreed (i) to conduct their respective businesses in the ordinary course during the period between the execution of the Merger Agreement and the closing of the Merger and (ii) not to solicit alternative transactions or, except
under limited circumstances to permit Auxiliums and QLTs respective Boards of Directors to comply with their respective fiduciary duties, participate in any discussions or negotiations or furnish to third parties any information with
respect thereto. In the event that QLT receives an alternative acquisition proposal, Auxilium has the right to match the alternative acquisition proposal upon the terms and subject to the conditions set forth in the Merger Agreement.
The Merger Agreement contains certain termination provisions for both Auxilium and QLT, including in the event that the Merger is not
consummated by December 31, 2014, or if the requisite stockholder approvals are not received. The Merger Agreement further provides that, upon termination of the Merger Agreement under specified circumstances, including termination of the
Merger Agreement by Auxilium or QLT as a result of an adverse change in the recommendation of the other partys board of directors, Auxilium may be required to pay QLT a termination fee of $28.4 million or QLT may be required to pay
Auxilium a termination fee of $14.2 million. Auxilium is also required to pay such fee if all joint closing conditions and all other closing conditions in favor of Auxilium are satisfied except for the closing condition that Auxilium has
obtained, and has delivered to QLT, all necessary third party and lender consents or amendments as may be required under certain Auxilium debt instruments, or shall have consummated a suitable refinancing of some or all of certain Auxilium debt
instruments substantially on terms and conditions set forth in the DB Facility.
During the three and six months ended June 30,
2014, QLT incurred consulting and transaction fees of $2.5 million and $3.2 million, respectively. These transaction fees have been reflected as part of the Selling, General and Administrative expenses on the condensed consolidated statements of
operations and comprehensive loss. Under the terms of our financial advisory services agreement with Credit Suisse, the arrangement provides for a significant fee, which is contingent and payable to Credit Suisse upon the successful closing and
completion of the Merger.
10
3.
|
CONTINGENT CONSIDERATION
|
Related to the Sale of QLT USA, Inc.
On October 1, 2009, we divested the Eligard
®
product line as part of the sale of
all of the shares of our U.S. subsidiary, QLT USA, Inc. (QLT USA) to TOLMAR Holding, Inc. (Tolmar) for up to an aggregate $230.0 million plus cash on hand of $118.3 million. Pursuant to the stock purchase agreement
with Tolmar dated October 1, 2009 (the 2009 Stock Purchase Agreement), we received $20.0 million on closing and $10.0 million on October 1, 2010 and we are entitled to future consideration payable on a quarterly basis
in amounts equal to 80% of the royalties paid under the license with Sanofi Synthelabo Inc. for the commercial marketing of Eligard in the U.S. and Canada (the Sanofi License), and the license with MediGene Aktiengesellschaft which,
effective March 1, 2011, was assigned to Astellas Pharma Europe Ltd., for the commercial marketing of Eligard in Europe (the Astellas License). In accordance with the terms of the 2009 Stock Purchase Agreement, we are entitled to
these payments until the earlier of our receipt of $200.0 million of such royalties or October 1, 2024.
Effective March 17,
2014, QLT entered into a consent and amendment agreement (the Consent and Amendment Agreement) to the 2009 Stock Purchase Agreement with Tolmar, under which Tolmar obtained our consent to consummate certain transactions that would affect
the Sanofi License described above. Pursuant to the terms of the Consent and Amendment Agreement, in exchange for our consent, we received $17.0 million (the Sanofi Prepayment) on March 17, 2014 as pre-payment and full satisfaction
of the remaining contingent consideration owing with respect to potential royalties under the Sanofi License. Among other things, Tolmar and its parent corporation, Dodley International Ltd (Dodley), also guaranteed payment of the
remaining contingent consideration owing under the 2009 Stock Purchase Agreement with respect to the Astellas License on or before November 30, 2014.
During the three months ended June 30, 2014, proceeds received from the collection of the remaining contingent consideration totaled
$4.4 million (three months ended June 30, 2013 $8.0 million). The full $4.4 million of these proceeds have been reflected as cash provided by investing activities in the condensed consolidated statements of cash flows for the
three months ended June 30, 2014 (three months ended June 30, 2013 $7.0 million). During the three months ended June 30, 2014, no fair value change was recorded for contingent consideration given that the remaining
contingent consideration owing was reflected in accounts receivable at face value. However, during the three months ended June 30, 2013, $1.5 million of the proceeds collected was recognized as a fair value increase in contingent consideration
on the condensed consolidated statement of operations and comprehensive loss and was therefore reflected in the net loss and comprehensive loss line as part of the cash used in operating activities in the condensed consolidated statements of cash
flows.
During the six months ended June 30, 2014, proceeds received from the collection of the remaining contingent consideration,
including the Sanofi Prepayment, totaled $32.5 million (six months ended June 30, 2013 $18.9 million). Approximately $31.0 million of these proceeds have been reflected as cash provided by investing activities in the condensed
consolidated statements of cash flows (six months ended June 30, 2013 $16.6 million). The remaining $1.5 million of proceeds (six months ended June 30, 2013 $2.3 million) was recognized as the fair value
increase in contingent consideration on the condensed consolidated statement of operations and comprehensive loss and is therefore reflected in the net loss and comprehensive loss line as part of the cash used in operating activities in the
condensed consolidated statements of cash flows.
As at June 30, 2014, we have received an aggregate $194.5 million
(December 31, 2013 $162.0 million) of Eligard related contingent consideration. Given that Tolmar and Dodley have guaranteed payment of the remaining contingent consideration balance on or before November 30, 2014, the $5.5
million face value of the expected payment has been reflected in accounts receivable on the condensed consolidated balance sheet as at June 30, 2014.
Related to the Sale of Visudyne
On
September 24, 2012, we completed the sale of our Visudyne business to Valeant. Pursuant to the Valeant Agreement, we received a payment of $112.5 million at closing, of which $7.5 million (previously held in escrow) was released to us
on September 26, 2013. These funds were held in escrow for one year following the closing date to satisfy any potential indemnification claims that Valeant may have had. Subject to the achievement of certain future milestones, we are also
eligible to receive the following additional consideration: (i) a milestone payment of $5.0 million if receipt of the registration required for commercial sale of the Qcellus
TM
laser in
the United States (the Laser Registration) is obtained by December 31, 2013, $2.5 million if the Laser Registration is obtained after December 31, 2013 but before January 1, 2015, and $0 if the Laser Registration is
obtained thereafter (the Laser Earn-Out Payment); (ii) up to $5.0 million in each calendar year commencing January 1, 2013 (up to a maximum of $15.0 million in the aggregate) for annual net royalties exceeding
$8.5 million pursuant to the Amended and Restated PDT Product Development, Manufacturing and Distribution Agreement with Novartis Pharma AG (the Novartis Agreement) or from other third-party sales of Visudyne outside of the United
States; and (iii) a royalty on net sales attributable to new indications for Visudyne, if any should be approved by the United States Food and Drug Administration (the FDA). Following this divestiture, we did not have significant
continuing involvement in the operations or cash flows of the Visudyne business other than the provision of certain transition services to Valeant pursuant to the transition services agreement. The activities related to transition services were
complete as at August 31, 2013.
11
On September 26, 2013, the FDA approved the premarket approval application (PMA)
supplement for the Qcellus laser and on October 10, 2013, we invoiced Valeant for the $5.0 million Laser Earn-Out Payment. Valeant has disputed payment on the basis that it believes the Laser Earn-Out Payment remains contingent upon receipt of
additional governmental authorizations with regard to the Qcellus laser. While we believe that the Laser Earn-Out Payment is currently due and payable by Valeant, the outcome of any dispute is uncertain and we may have difficulty collecting the
Laser Earn-Out Payment in full.
As at June 30, 2014, the $5.0 million Laser Earn-Out Payment is recorded in accounts receivable on
our condensed consolidated balance sheet net of $1.0 million of estimated collection costs to account for the increased uncertainty related to collection risk. The remaining estimated fair value of the contingent consideration, which relates to
estimated future net royalties pursuant to the Novartis Agreement, is currently valued at nil.
The above contingent consideration
payments related to the sale of QLT USA and our Visudyne business are not generated from a migration or continuation of activities and therefore are not direct cash flows of the divested business. See Note 10
Discontinued Operations
and Note 11
Financial Instruments and Concentration of Credit Risk
.
|
|
|
|
|
|
|
|
|
(In thousands of U.S. dollars)
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
|
|
|
|
|
Accounts receivable - Consideration related to sale of QLT USA
(a)
|
|
$
|
5,544
|
|
|
$
|
-
|
|
Accounts receivable - Laser Earn-Out Payment
(b)
|
|
|
4,000
|
|
|
|
4,000
|
|
Accounts receivable - Other
|
|
|
462
|
|
|
|
590
|
|
|
|
|
|
$
|
10,006
|
|
|
$
|
4,590
|
|
|
|
(a)
|
Accounts receivable relates to the remaining amount of consideration owing from Tolmar in connection with our previous divestiture of our Eligard
product line in 2009. Under the terms of the Consent and Amendment Agreement, Tolmar and Dodley have guaranteed payment of this balance on or before November 30, 2014. Refer to Note 3
Contingent Consideration
for more information.
|
(b)
|
Accounts receivable relates to a milestone payment owing from Valeant related to the receipt of the PMA supplement for the Qcellus laser from the
U.S. FDA on September 26, 2013. Refer to Note 3
Contingent Consideration
and Note 10
Discontinued Operations
for more information.
|
|
|
|
|
|
|
|
|
|
(In thousands of U.S. dollars)
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
|
|
Compensation
|
|
$
|
777
|
|
|
$
|
1,211
|
|
Directors Deferred Share Units compensation (DSU)
|
|
|
438
|
|
|
|
265
|
|
Other
|
|
|
27
|
|
|
|
22
|
|
|
|
|
|
$
|
1,242
|
|
|
$
|
1,498
|
|
|
|
6.
|
FOREIGN EXCHANGE FACILITY
|
We have a foreign exchange facility (as amended, the Facility) with HSBC Bank of Canada for the sole purpose of
entering into foreign exchange contracts. The Facility allows us to enter into maximum of $12.5 million in forward foreign exchange contracts for terms up to one month and a maximum of $10.0 million for spot foreign exchange contracts.
The Facility requires security in the form of cash or money market instruments based on the contingent credit exposure for any outstanding
foreign exchange transactions. At June 30, 2014 and December 31, 2013, no collateral was pledged as security for this facility given that we did not have any foreign exchange transactions outstanding.
12
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 Companys common shares (the Cash Distribution). The Cash Distribution was approved by the Companys shareholders at QLTs 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.
(b)
|
Share Repurchase Program
|
On October 2, 2012, we commenced a normal course issuer bid to
repurchase up to 3,438,683 of our common shares, which represented 10% of our public float as of September 26, 2012. All purchases were effected in the open market through the facilities of the NASDAQ Stock Market in accordance with all
applicable regulatory requirements. During the year ended December 31, 2013, we repurchased 1,691,479 (year ended December 31, 2012 1,747,204) common shares under the terms of this bid at a cost of $13.5 million, which represents an
average price of $7.97 per common share (year ended December 31, 2012 $13.7 million at an average price of $7.84 per common share). The bid was completed on March 12, 2013. We retired all of these shares as they were acquired. In
connection with this retirement, we recorded an increase in additional paid-in capital of $2.0 million in 2013 (year ended December 31, 2012 $2.4 million).
On April 25, 2013, the Companys board of directors amended and
restated the QLT 2000 Incentive Stock Plan (the Plan) to increase the number of shares of the Companys common stock, without par value, available for grant under the Plan from 7,800,000 to 11,800,000 and to make certain other
amendments to the Plan. The amendment and restatement of the Plan was subject to shareholder approval, which was obtained on June 14, 2013. On July 29, 2013, the Company filed a registration statement to register the issuance of up to
4,000,000 additional common shares that may be issued under the Plan as a result of the amendment to the Plan.
We use the Black-Scholes
option pricing model to estimate the value of the options at each grant date. The Black-Scholes option pricing model was developed for use in estimating the value of traded options that have no vesting restrictions and are fully transferable. In
addition, option pricing models require the input of highly subjective assumptions, including the expected stock price volatility. We project expected volatility and expected life of our stock options based upon historical and other economic data
trended into future years. The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected life of our stock options. There were no stock options granted during the three and six months ended June 30,
2014 and 2013.
The impact on our results of operations of recording stock-based compensation for the three and six months ended
June 30, 2014 and June 30, 2013 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
Six months ended
|
|
|
|
|
|
June 30,
|
|
|
|
|
June 30,
|
|
|
|
(In thousands of U.S. dollars)
|
|
2014
|
|
|
|
|
2013
|
|
|
2014
|
|
|
|
|
2013
|
|
|
|
Research and development
|
|
$
|
249
|
|
|
|
|
$
|
64
|
|
|
$
|
584
|
|
|
|
|
$
|
94
|
|
Selling, general and administrative
|
|
|
155
|
|
|
|
|
|
30
|
|
|
|
358
|
|
|
|
|
|
45
|
|
Discontinued operations
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
3
|
|
|
|
Stock-based compensation expense before income taxes
|
|
|
404
|
|
|
|
|
|
94
|
|
|
|
942
|
|
|
|
|
|
142
|
|
Related income tax benefits
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
Stock-based compensation, net of income taxes
|
|
$
|
404
|
|
|
|
|
$
|
94
|
|
|
$
|
942
|
|
|
|
|
$
|
142
|
|
|
|
13
As at June 30, 2014, 704,680 stock options were exercisable (December 31, 2013
257,332) and 700,852 stock options were unvested (December 31, 2013 1,150,197). As at June 30, 2014, the total estimated unrecognized compensation cost related to unvested stock options and the expected weighted average periods over
which such costs are expected to be recognized is as follows:
|
|
|
|
|
|
|
June 30, 2014
|
|
|
|
Unrecognized estimated compensation costs (in thousands of U.S. dollars)
|
|
$
|
1,360
|
|
|
|
Expected weighted average period of recognition of compensation cost (in months)
|
|
|
36
|
|
|
|
Expected remaining weighted average period of compensation cost to be recognized (in years)
|
|
|
2.0
|
|
|
|
We issue new common shares upon exercise of stock options. The intrinsic values of stock options exercised and
the related cash from exercise of stock options during the three and six months ended June 30, 2014 and June 30, 2013 were follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
Six months ended
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
(In thousands of U.S. dollars)
|
|
2014
|
|
|
|
2013
|
|
|
2014
|
|
|
|
2013
|
|
|
|
Intrinsic value of stock options exercised
|
|
-
|
|
$
|
|
|
806
|
|
|
-
|
|
$
|
|
|
2,142
|
|
Cash from exercise of stock options
|
|
-
|
|
|
|
|
3,556
|
|
|
-
|
|
|
|
|
7,217
|
|
|
|
DSUs have only been issued to our directors. DSUs vest in thirty-six
(36) successive and equal monthly installments beginning on the first day of the first month after the date of grant. A vested DSU can only be settled by conversion to cash (i.e. no share is issued), and is automatically converted after the
director ceases to be member of the Board unless the director is removed from the Board for just cause.
The impact on our results of
operations of recording DSU compensation expense for the three and six months ended June 30, 2014 and June 30, 2013 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
Six months ended
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
(In thousands of U.S. dollars)
|
|
2014
|
|
|
|
|
2013
|
|
|
2014
|
|
|
|
|
2013
|
|
|
|
Research and development
|
|
$
|
28
|
|
|
|
|
$
|
9
|
|
|
$
|
53
|
|
|
|
|
$
|
33
|
|
Selling, general and administrative
|
|
|
63
|
|
|
|
|
|
21
|
|
|
|
118
|
|
|
|
|
|
76
|
|
|
|
Deferred share unit compensation expense
|
|
$
|
91
|
|
|
|
|
$
|
30
|
|
|
$
|
171
|
|
|
|
|
$
|
109
|
|
|
|
No cash payments were made under the DSU Plan during the three and six months ended June 30, 2014 and
June 30, 2013.
As at June 30, 2014, 72,722 DSUs were vested (December 31, 2013 47,056) and 81,278 DSUs were unvested
(December 31, 2013 106,944).
(e)
|
Restricted Stock Units
|
RSUs vest in three (3) successive and equal yearly installments
on the date of each of the first three annual general meetings of the Company held after the date of grant. Upon vesting, each RSU represents the right to receive one common share of the Company.
14
The impact on our results of operations of recording RSU compensation expense for the three and
six months ended June 30, 2014 and June 30, 2013 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
Six months ended
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
(In thousands of U.S. dollars)
|
|
2014
|
|
|
|
|
2013
|
|
|
2014
|
|
|
|
|
2013
|
|
|
|
Research and development
|
|
$
|
6
|
|
|
|
|
$
|
-
|
|
|
$
|
11
|
|
|
|
|
$
|
-
|
|
Selling, general and administrative
|
|
|
9
|
|
|
|
|
|
-
|
|
|
|
18
|
|
|
|
|
|
-
|
|
|
|
Restricted stock unit compensation expense
|
|
$
|
15
|
|
|
|
|
$
|
-
|
|
|
$
|
29
|
|
|
|
|
$
|
-
|
|
|
|
As at June 30, 2014, nil RSUs were vested (December 31, 2013 nil) and 42,000 RSUs were unvested
(December 31, 2013 42,000). In addition, the total estimated unrecognized compensation cost related to RSUs was $0.1 million (December 31, 2013 $0.2 million) and the weighted average period over which such costs are expected to be
recognized is 2.04 years (December 31, 2013 2.54 years).
In July 2012 we restructured our operations in order to focus our resources on our clinical development programs related to
our synthetic retinoid, QLT091001, for the treatment of certain inherited retinal diseases. Following the sale of Visudyne to Valeant, we further reduced our workforce to better align the Companys resources with our corporate objectives.
Approximately 180 employees have been affected by the restructuring to date. Severance and support provisions were made to assist these employees with outplacement. During the three and six months ended June 30, 2014, we recorded charges of
$0.2 million and $0.7 million (three months ended June 30, 2013 $0.7 million, six months ended June 30, 2013 - $1.5 million), respectively, related to this restructuring. The cumulative cost of the restructuring to date is $19.6
million (December 31, 2013 $18.9 million).
Effective December 18, 2013, we entered into a letter agreement with Alexander R.
Lussow, the Companys Senior Vice President, Business Development and Commercial Operations, in which we, among other things, agreed to terminate him on either March 31, 2014, April 30, 2014 or May 31, 2014, at the
Companys discretion. Effective May 31, 2014, Alexander R. Lussows employment with QLT was terminated. The cost of his severance and termination benefits was $0.8 million, which was fully paid out on May 30, 2014.
The details of our restructuring accrual and activity are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands of U. S. dollars)
|
|
Employee
Termination
Costs
(1)
|
|
|
Asset Write-
downs
|
|
|
Contract
Termination
Costs
(2)
|
|
|
Other
|
|
|
Total
|
|
|
|
Balance at January 1, 2013
|
|
$
|
1,354
|
|
|
$
|
-
|
|
|
$
|
579
|
|
|
$
|
-
|
|
|
$
|
1,933
|
|
Restructuring charge
|
|
|
1,542
|
|
|
|
-
|
|
|
|
266
|
|
|
|
223
|
|
|
|
2,031
|
|
Foreign exchange
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cash payments
|
|
|
(2,880
|
)
|
|
|
-
|
|
|
|
(942
|
)
|
|
|
(223
|
)
|
|
|
(4,045)
|
|
Discontinued operations
|
|
|
114
|
|
|
|
(304
|
)
|
|
|
97
|
|
|
|
-
|
|
|
|
(93)
|
|
Non-cash portion
|
|
|
|
|
|
|
304
|
|
|
|
-
|
|
|
|
-
|
|
|
|
304
|
|
|
|
Balance at December 31, 2013
|
|
|
130
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
130
|
|
Restructuring charge
|
|
|
494
|
|
|
|
-
|
|
|
|
78
|
|
|
|
-
|
|
|
|
572
|
|
Foreign exchange
|
|
|
(5
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5)
|
|
Cash payments
|
|
|
(9
|
)
|
|
|
-
|
|
|
|
(78
|
)
|
|
|
-
|
|
|
|
(87)
|
|
|
|
Balance at March 31, 2014
|
|
$
|
610
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
610
|
|
Restructuring charge
|
|
|
172
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
172
|
|
Cash payments
|
|
|
(782
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(782)
|
|
|
|
Balance at June 30, 2014
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
(1)
|
Costs include severance, termination benefits, and outplacement support.
|
(2)
|
Costs include lease costs related to excess office space and certain property, plant and equipment.
|
15
During the three months ended June 30, 2014 and June 30, 2013, the provision for income taxes was a negligible
amount and $0.1 million, respectively. The provision for the three months ended June 30, 2013 primarily relates to the gain on the fair value change of our Eligard related contingent consideration. The provisions also reflected that we had
insufficient evidence to support current or future realization of the tax benefits associated with our development expenditures.
During
the six months ended June 30, 2014 and June 30, 2013, the provision for income taxes was $0.2 million and $0.3 million, respectively. The provision in each period primarily relates to the gain on the fair value change of our Eligard
related contingent consideration. The provisions also reflected that we have insufficient evidence to support current or future realization of the tax benefits associated with our development expenditures.
During the six months ended June 30, 2014, our net deferred tax asset was reduced to nil as a result of the fair value change, which was
primarily due to the receipt of the $17.0 million Sanofi Prepayment and the reclassification of the remaining Eligard related contingent consideration to accounts receivable. Refer to Note 3
Contingent Consideration
for more
information.
As insufficient evidence exists to support current or future realization of the tax benefits associated with the vast
majority of our current and prior period operating expenditures, the benefit of certain tax assets was not recognized during the three and six months ended June 30, 2014 and June 30, 2013.
10.
|
DISCONTINUED OPERATIONS
|
On September 24, 2012, we completed the sale of our Visudyne business to Valeant pursuant to the Valeant Agreement.
Under the terms of the Valeant Agreement, we received a payment of $112.5 million at closing and are also eligible to receive certain other contingent consideration, which is described under Note 3
Contingent Consideration.
On April 3, 2013, we completed the sale of our PPDS Technology to Mati pursuant to the terms of an asset purchase agreement (the
Mati Agreement). On December 24, 2012, we entered into an exclusive option agreement with Mati, under which we granted Mati a 90-day option to acquire assets related to our PPDS technology in exchange for $0.5 million. Upon receipt
of this payment, we recorded it as deferred income and recognized the $0.5 million rateably into income over the 90 day option term in accordance with our obligation to maintain the related intellectual property during that period. In accordance
with the terms of the Mati Agreement, we received an additional payment of approximately $0.8 million upon closing. Under the Mati Agreement, we are eligible to receive future potential payments upon completion of certain product development and
commercialization milestones that could reach $19.5 million (or exceed that amount if more than two products are commercialized), a low single digit royalty on world-wide net sales of all products using or developed from the PPDS Technology and a
fee on payments received by Mati in respect of the PPDS Technology other than net sales. Under the terms of the Mati Agreement, we do not have any significant ongoing involvement in the operations or cash flows related to the PPDS Technology other
than minor transition services which we agreed to provide. The activities related to transition services were complete as at September 30, 2013.
16
The operating results related to our PPDS Technology and Visudyne business have been excluded
from continuing operations and reported as discontinued operations for all periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
Six months ended
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
(In thousands of U.S. dollars)
|
|
2014
|
|
|
|
|
2013
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
Recovery on assets held for sale
(1)
|
|
|
-
|
|
|
|
|
22
|
|
|
-
|
|
|
|
175
|
|
|
|
|
|
|
|
Operating pre-tax loss
|
|
|
(57)
|
|
|
|
|
(281)
|
|
|
(57)
|
|
|
|
(474)
|
|
|
|
|
|
|
|
Gain on sale of discontinued operations
(2)
|
|
|
-
|
|
|
|
|
287
|
|
|
-
|
|
|
|
743
|
|
|
|
Pre-tax (loss) income
|
|
|
(57)
|
|
|
|
|
6
|
|
|
(57)
|
|
|
|
269
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
-
|
|
|
|
|
(176)
|
|
|
-
|
|
|
|
(249)
|
|
|
|
|
Net (loss) income from discontinued operations
|
|
|
(57)
|
|
|
$
|
|
(170)
|
|
|
(57)
|
|
|
$
|
20
|
|
|
|
(1)
|
Relates to recoveries on equipment that was previously written down in connection with the sale of our PPDS Technology to Mati.
|
(2)
|
Relates to the 2013 revenue recognition of funds received from Mati at the end of 2012, which were initially recorded as deferred income, for the 90-day option to acquire assets related to our former PPDS Technology.
|
11.
|
FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
|
We have various financial instruments that must be measured under the fair value standard including cash and cash
equivalents, accounts receivable, contingent consideration and, from time to time, forward currency contracts. Our financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy.
The following tables provide information about our assets and liabilities that are measured at fair value on a recurring basis at
June 30, 2014 and December 31, 2013 and indicate the fair value hierarchy of the valuation techniques we utilized to determine such fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at June 30, 2014
|
|
|
|
(In thousands of U.S. dollars)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
137,933
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
137,933
|
|
|
|
|
|
|
Accounts receivable - Laser Earn-Out Payment
(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
4,000
|
|
|
|
4,000
|
|
|
|
Total
|
|
$
|
137,933
|
|
|
$
|
-
|
|
|
$
|
4,000
|
|
|
$
|
141,933
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at December 31, 2013
|
|
|
|
(In thousands of U.S. dollars)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
118,521
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
118,521
|
|
|
|
|
|
|
Accounts receivable Laser Earn-Out Payment
(1)
|
|
|
|
|
|
|
|
|
|
|
4,000
|
|
|
|
4,000
|
|
|
|
|
|
|
Contingent consideration
(2)
|
|
|
|
|
|
|
|
|
|
|
36,582
|
|
|
|
36,582
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
118,521
|
|
|
$
|
|
|
|
$
|
40,582
|
|
|
$
|
159,103
|
|
|
|
(1)
|
In 2014, the estimated $4.0 million fair value of the Laser Earn-Out Payment was reclassified from contingent consideration to accounts receivable.
For additional discussion, refer to Note 3
Contingent Consideration.
|
(2)
|
To estimate the fair value of contingent consideration we use a discounted cash flow model based on estimated timing and amount of future cash
flows. As at December 31, 2013, we discounted the future cash flows using a cost of capital rate of 9% for the contingent consideration related to Eligard. The cost of capital rate was selected based on available market and industry
information. Future cash flows were estimated by utilizing external market research to estimate market size, to which we applied market share, pricing and foreign exchange assumptions based on historical sales data, expected competition and current
exchange rates.
|
The following table represents a reconciliation of our contingent consideration assets measured and
recorded at fair value on a recurring basis, using significant unobservable inputs (Level 3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3
|
|
|
|
(In thousands of U.S. dollars)
|
|
Related to Sale of
QLT USA
|
|
|
Related to Sale of
Visudyne
|
|
|
Total
|
|
|
|
|
|
|
|
Balance at January 1, 2013
|
|
$
|
71,195
|
|
|
$
|
5,214
|
|
|
$
|
76,409
|
|
|
|
|
|
Transfer to Accounts Receivable
|
|
|
-
|
|
|
|
(3,956)
|
|
|
|
(3,956)
|
|
|
|
|
|
Settlements
|
|
|
(38,693)
|
|
|
|
-
|
|
|
|
(38,693)
|
|
|
|
|
|
Fair value change in contingent consideration
|
|
|
4,080
|
|
|
|
(1,258)
|
|
|
|
2,822
|
|
|
|
|
|
|
|
Balance at December 31, 2013
|
|
|
36,582
|
|
|
|
-
|
|
|
|
36,582
|
|
|
|
|
|
Transfer to Accounts Receivable (Note 3)
|
|
|
(9,989)
|
|
|
|
-
|
|
|
|
(9,989)
|
|
|
|
|
|
Settlements
|
|
|
(28,059)
|
|
|
|
-
|
|
|
|
(28,059)
|
|
|
|
|
|
Fair value change in contingent consideration
|
|
|
1,466
|
|
|
|
-
|
|
|
|
1,466
|
|
|
|
Balance at March 31, 2014 and June 30, 2014
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
As at June 30, 2014 and December 31, 2013 we had no outstanding forward foreign currency contracts.
Other financial instruments that may be subject to credit risk include our cash and cash equivalents, accounts receivable and contingent consideration. To limit our credit exposure, we deposit our cash and cash equivalents with high quality
financial institutions in accordance with our treasury policy goal to preserve capital and maintain liquidity. Our treasury policy limits investments to certain money market securities issued by governments, financial institutions and corporations
with investment-grade credit ratings, and places restrictions on maturities and concentration by issuer.
18
The following table sets out the computation of basic and diluted net (loss) income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
|
|
(In thousands of U.S. dollars, except share and per share data)
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(8,581
|
)
|
|
$
|
(6,029
|
)
|
|
$
|
(15,043
|
)
|
|
$
|
(12,646
|
)
|
|
|
|
|
|
Income from discontinued operations, net of income taxes
|
|
|
(57
|
)
|
|
|
(170
|
)
|
|
|
(57
|
)
|
|
|
20
|
|
|
|
Net loss
|
|
$
|
(8,638
|
)
|
|
$
|
(6,199
|
)
|
|
$
|
(15,100
|
)
|
|
$
|
(12,626
|
)
|
|
|
Denominator: (thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
51,082
|
|
|
|
50,883
|
|
|
|
51,082
|
|
|
|
50,736
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Diluted weighted average common shares outstanding
|
|
|
51,082
|
|
|
|
50,883
|
|
|
|
51,082
|
|
|
|
50,736
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.17
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
(0.25
|
)
|
|
|
|
|
|
Discontinued operations
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
|
|
0.00
|
|
|
|
Net loss per common share
|
|
$
|
(0.17
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
(0.25
|
)
|
|
|
For the three months ended June 30, 2014, 1,405,532 stock options and 42,000 RSUs (three months ended
June 30, 2013114,549 stock options and nil RSUs) were excluded from the calculation of diluted net loss per common share because their effect was anti-dilutive.
For the six months ended June 30, 2014, 1,405,532 stock options and 42,000 RSUs (six months ended June 30, 2013114,549 stock
options and nil RSUs) were excluded from the calculation of diluted net loss per common share because their effect was anti-dilutive.
19
ITEM 2.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The following information should be read in conjunction with the accompanying unaudited interim condensed consolidated financial statements
and notes thereto, which are prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP) and our audited consolidated financial statements and notes thereto included as part of our Annual Report
on Form 10-K, as amended on Form 10-K/A, for the year ended December 31, 2013 (our 2013 Annual Report).
All of the following amounts are
expressed in U.S. dollars unless otherwise indicated.
Note regarding Trademarks
The following words used in this Report are trademarks:
|
|
|
Eligard
®
is a registered trademark of Sanofi S.A.
|
|
|
|
Visudyne
®
is a registered trademark of Novartis AG.
|
|
|
|
Qcellus is a trademark of Valeant Pharmaceuticals International, Inc.
|
Any words used in
this Report that are trademarks but are not referred to above are the property of their respective owners.
Overview
Strategic Restructuring
QLT is a
biotechnology company dedicated to the development and commercialization of innovative ocular products that address the unmet medical needs of patients and clinicians worldwide. On July 9, 2012, as a result of a comprehensive business and
portfolio review by our Board of Directors (the Board), we announced a new corporate strategy and plans to restructure our operations in order to concentrate our resources on our clinical development programs related to our synthetic
retinoid, QLT091001, for the treatment of certain inherited retinal diseases. In connection with the strategic restructuring of the Company, over the course of 2012 and 2013 we completed the sale of our Visudyne
®
business to Valeant Pharmaceuticals International, Inc. (Valeant) and the sale of our punctal plug drug delivery system (PPDS) to Mati Therapeutics Inc.
(Mati), and, as a result, significantly reduced our workforce by approximately 180 employees. Our remaining employees have been focused on the development of QLT091001.
In 2013, the Company met with the U.S. Food and Drug Administration (FDA) and the European Medicines Agency (EMA),
including an end-of-phase II meeting with the FDA, in order to progress QLT091001 for the treatment of certain inherited retinal diseases toward pivotal trials. We also initiated a Phase IIa trial of QLT091001 for the treatment of impaired dark
adaptation (IDA) to investigate the safety and efficacy of the drug in a larger patient population.
Proposed Merger Transaction with Auxilium
Pharmaceuticals, Inc.
In parallel with our continued development efforts on QLT091001, in November 2013 we announced that we
commenced a review of strategic alternatives for the Company and engaged Credit Suisse to act as our financial advisor.
On June 25,
2014, QLT entered into an Agreement and Plan of Merger (the Merger Agreement) among QLT, Auxilium Pharmaceuticals, Inc., a Delaware corporation (Auxilium), QLT Holding Corp., a Delaware corporation and a wholly owned
subsidiary of QLT (HoldCo), and QLT Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of HoldCo (AcquireCo). The Merger Agreement provides for a business combination whereby AcquireCo will be merged with
and into Auxilium (the Merger). As a result of the Merger, the separate corporate existence of AcquireCo will cease and Auxilium will continue as the surviving corporation. On the date of the closing of the Merger, Auxilium will become
an indirect wholly owned subsidiary of QLT (the Combined Company) and Auxilium stockholders will own approximately 76% of the outstanding common shares of the Combined Company on a fully diluted basis. While QLT is the legal acquirer,
QLT will in substance be the accounting acquiree and the reverse acquisition guidance under Accounting Standards Codification (ASC) No. 805
Business Combinations
is expected to apply.
While the Merger has been unanimously approved by the Boards of Directors of Auxilium, QLT, HoldCo and AcquireCo, the transaction is still
subject to various conditions and approvals which are described below. In addition, the Merger Agreement provides that the Combined Companys Board of Directors, upon completion of the Merger, shall consist of seven individuals designated by
the Auxilium Board of Directors prior to the Merger and two individuals designated by the QLT Board of Directors and acceptable to Auxilium.
20
Upon consummation of the Merger, each outstanding share of Auxilium common stock, other than
shares owned by Auxilium, QLT, HoldCo or AcquireCo, will be converted into the right to receive 3.1359 QLT common shares (the Equity Exchange Ratio), subject to the adjustment described as follows:
If at or immediately after the effective time of the Merger, QLT receives aggregate cash consideration pursuant to any sale, license,
sublicense or similar transaction related to its proprietary synthetic retinoid product in development known as QLT091001, which is:
(a) less than $25 million but equal to or greater than $20 million then, the Equity Exchange Ratio shall be increased by 0.0192;
(b) less than $20 million but equal to or greater than $15 million, then the Equity Exchange Ratio shall be increased by 0.0385;
(c) less than $15 million but equal to or greater than $10 million, then the Equity Exchange Ratio shall be increased by 0.0577;
(d) less than $10 million but equal to or greater than $5 million, then the Equity Exchange Ratio shall be increased by 0.0770;
or
(e) less than $5 million, or in the event that no such transaction is consummated at or immediately after the effective time of
the Merger, then the Equity Exchange Ratio shall be increased by 0.0962.
Upon completion of the Merger and assuming no increase in the
Equity Exchange Ratio, current QLT stockholders will own approximately 24% of the outstanding common shares of the Combined Company on a fully diluted basis and current Auxilium stockholders will own approximately 76% of the outstanding common
shares of the Combined Company on a fully diluted basis, subject to certain adjustments.
The completion of the Merger is subject to the
approval of stockholders of Auxilium and QLT. In addition, the Merger is subject to other customary closing conditions, including, among others, (i) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, which has occurred as at the date of the filing of this Form 10-Q, (ii) the declaration by the Securities and Exchange Commission (SEC) of the effectiveness of the Registration
Statement on Form S-4 filed with the SEC on August 4, 2014, (iii) the approval of the listing on NASDAQ of the common shares of the Combined Company to be issued in connection with the Merger, (iv) the receipt by QLT of notice from
the Toronto Stock Exchange (TSX) approving the delisting of QLTs shares from the TSX effective as of the consummation of the Merger and (v) the receipt by Auxilium of all necessary third party and lender consents or amendments
as may be required under certain Auxilium debt instruments, or consummation of a suitable refinancing of some or all of certain Auxilium debt. To ensure that Auxilium has sufficient proceeds available to refinance its senior secured credit facility
if those financial investors currently holding participations in Auxiliums senior secured credit facility do not consent to the Merger, or impose conditions to their respective consents on terms that Auxilium determines are unfavorable,
Auxilium has entered into a commitment letter for a $225 million loan facility with Deutsche Bank AG New York Branch and Deutsche Bank Securities, Inc. (the DB Facility).
Each partys obligation to close the Merger is also subject to the continued (i) accuracy of the representations and warranties made
and (b) compliance with the covenants agreed to by the other party to the Merger Agreement, in each case, subject to certain materiality standards as set forth in the Merger Agreement. Furthermore, each partys obligation to close the
Merger is subject to the absence of certain legal restraints and the absence of any Material Adverse Effect (as defined in the Merger Agreement) on the other party since the date of the Merger Agreement.
Auxiliums obligation to close the Merger is also subject to additional closing conditions, including (i) receipt by Auxilium of an
opinion of counsel stating that Section 7874 of the United States Internal Revenue Code, as amended (the Code) (or any other U.S. tax law), regulations promulgated thereunder, and official interpretations thereof as set forth in
published guidance should not apply in such a manner so as to cause QLT to be treated as a domestic corporation for U.S. federal income tax purposes from and after the closing date of the Merger, provided that such opinion may only take into account
the law in effect on the earlier of the date of the Merger and October 31, 2014 and (ii) on or before October 31, 2014, there shall have been no change in applicable law (whether or not such change in law is yet effective) with
respect to Section 7874 of the Code (or any other U.S. tax law), or official interpretation thereof as set forth in published guidance by the IRS (other than news releases) (whether or not such change in official interpretation is yet
effective), and there shall have been no bills that would implement such a change passed by the United States House of Representatives and the United States Senate and for which the time period for the President of the United States to sign or veto
such bills has not yet elapsed, in each case, that, once effective, in the opinion of nationally recognized U.S. tax counsel, would cause QLT to be treated as a United States domestic corporation for U.S. federal income tax purposes.
Auxilium and QLT have each agreed to customary representations, warranties and covenants in the Merger Agreement. Among them, both Auxilium
and QLT have agreed (i) to conduct their respective businesses in the ordinary course during the period between the execution of the Merger Agreement and the closing of the Merger and (ii) not to solicit alternative transactions or, except
under limited circumstances to permit Auxiliums and QLTs respective Boards of Directors to comply with their respective fiduciary duties, participate in any discussions or negotiations or furnish to third parties any information with
respect thereto. In the event that QLT receives an alternative acquisition proposal, Auxilium has the right to match the alternative acquisition proposal upon the terms and subject to the conditions set forth in the Merger Agreement.
21
The Merger Agreement contains certain termination provisions for both Auxilium and QLT, including
in the event that the Merger is not consummated by December 31, 2014, or if the requisite stockholder approvals are not received. The Merger Agreement further provides that, upon termination of the Merger Agreement under specified
circumstances, including termination of the Merger Agreement by Auxilium or QLT as a result of an adverse change in the recommendation of the other partys board of directors, Auxilium may be required to pay QLT a termination fee of
$28.4 million or QLT may be required to pay Auxilium a termination fee of $14.2 million. Auxilium is also required to pay such fee if all joint closing conditions and all other closing conditions in favor of Auxilium are satisfied except
for the closing condition that Auxilium has obtained, and has delivered to QLT, all necessary third party and lender consents or amendments as may be required under certain Auxilium debt instruments, or shall have consummated a suitable refinancing
of some or all of certain Auxilium debt instruments substantially on terms and conditions set forth in the DB Facility.
During the
three and six months ended June 30, 2014, QLT incurred consulting and transaction fees of $2.5 million and $3.2 million, respectively. These transaction fees have been reflected as part of the Selling, General and Administrative expenses on the
condensed consolidated statements of operations and comprehensive loss. Under the terms of our financial advisory services agreement with Credit Suisse, the arrangement provides for a significant completion fee, which is contingent and payable to
Credit Suisse upon the successful closing and completion of the Merger.
Sales of Assets and Discontinued Operations
Eligard
®
On October 1, 2009, we divested the Eligard line of products to TOLMAR Holding, Inc. (Tolmar) as part of the sale of all of
the shares of our U.S. subsidiary, QLT USA, Inc. (QLT USA). Pursuant to the stock purchase agreement dated October 1, 2009 (the 2009 Stock Purchase Agreement), we are entitled to future consideration payable quarterly in
amounts equal to 80% of the royalties paid under the license with Sanofi Synthelabo Inc. (Sanofi) for the commercial marketing of Eligard in the U.S. and Canada (the Sanofi License), and the license with MediGene
Aktiengesellschaft, which, effective March 1, 2011, was assigned to Astellas Pharma Europe Ltd., for the commercial marketing of Eligard in Europe (the Astellas License). We are entitled to these quarterly payments until the earlier
of our receipt of $200.0 million or October 1, 2024.
Effective March 17, 2014, QLT entered into a consent and amendment
agreement (the Consent and Amendment Agreement) to the 2009 Stock Purchase Agreement with Tolmar, under which Tolmar obtained our consent to consummate certain transactions that would affect the Sanofi License described above. Pursuant
to the terms of the Consent and Amendment Agreement, in exchange for our consent, we received $17.0 million (the Sanofi Prepayment) on March 17, 2014 as pre-payment and full satisfaction of the remaining contingent consideration
owing with respect to potential royalties under the Sanofi License. Among other things, Tolmar and its parent corporation, Dodley International Ltd (Dodley), also guaranteed payment of the remaining contingent consideration owing under
the 2009 Stock Purchase Agreement with respect to the Astellas License on or before November 30, 2014.
As of June 30, 2014, we
received an aggregate of $194.5 million of contingent consideration. Given that Tolmar and Dodley have guaranteed payment of the remaining contingent consideration balance on or before November 30, 2014, the $5.5 million face value of the
remaining payment has been reflected in accounts receivable on the condensed consolidated balance sheet as at June 30, 2014.
Visudyne
In September 2012, in connection with the strategic restructuring, we sold our only commercial product, Visudyne, to Valeant. Pursuant to the
asset purchase agreement between the Company and Valeant (the Valeant Agreement), we sold all of our assets related to our Visudyne business, including the Qcellus
TM
laser then under
development by us, for $112.5 million in upfront consideration, contingent payments up to $20.0 million, and a royalty on net sales of new indications for Visudyne, if any should be approved. We are entitled to the contingent payments upon
the achievement of certain milestones, including: (i) $5.0 million if receipt of the registration required for commercial sale of the Qcellus lasers in the United States (the Laser Registration) is obtained by December 31,
2013, $2.5 million if the Laser Registration is obtained after December 31, 2013 but before January 1, 2015 and $0 if the Laser Registration is obtained thereafter (the Laser Earn-Out Payment) and (ii) up to
$5.0 million in each calendar year commencing January 1, 2013 (up to a maximum of $15.0 million in the aggregate) for annual net royalties exceeding $8.5 million received by Valeant under the license agreement with Novartis
Pharma AG, which we transferred to Valeant in connection with the sale, or from other third-party sales of Visudyne outside of the United States.
On September 26, 2013, the FDA approved the premarket approval application supplement for the Qcellus laser and on October 10, 2013,
we invoiced Valeant for the $5.0 million Laser Earn-Out Payment. Valeant has disputed payment on the basis that it believes the Laser Earn-Out Payment remains contingent upon receipt of additional governmental authorizations with respect to the
Qcellus laser. While we believe that the Laser Earn-Out Payment is currently due and payable by Valeant, the outcome of any dispute is uncertain and we may have difficulty collecting the Laser Earn-Out Payment in full.
22
Punctal Plug Delivery Program
On April 3, 2013, we completed the sale of our punctal plug drug delivery system technology (the PPDS Technology) to Mati, a
development company founded by Robert L. Butchofsky, our former President and Chief Executive Officer. Mr. Butchofskys employment with QLT was terminated on August 2, 2012 as part of the strategic restructuring described above.
Under the terms of our asset purchase agreement with Mati (the Mati Agreement), we are eligible to receive potential payments upon the satisfaction of certain product development and commercialization milestones that could reach
$19.5 million (or exceed that amount if more than two products are commercialized), a low single digit royalty on world-wide net sales of all products using or developed from the PPDS Technology and a fee on payments received by Mati in respect
of the PPDS Technology other than net sales.
Research and Development
QLTs research and development efforts are currently focused solely on QLT091001.
QLT091001 orphan drug program for the treatment of Leber Congenital Amaurosis and Retinitis Pigmentosa.
QLT is currently evaluating QLT091001 for
the treatment of Leber Congenital Amaurosis (LCA) and Retinitis Pigmentosa (RP). Results from QLTs initial Phase Ib clinical proof-of-concept study in patients with LCA and RP were reported for the 14 subject
cohort of LCA patients in 2011 and for the 18 subject cohort of early-onset RP patients in March 2012. QLT also reported positive preliminary results from the Phase Ib retreatment study in these subjects on February 27, 2014 and expects to
report final clinical data in the third quarter of 2014. QLT believes it has gained further insight into QLT091001 from the analysis of these preliminary results and recently made submissions to the FDA to further refine its proposed pivotal trial
design for the orphan drug program.
QLT091001 has received orphan drug designations for the treatment of LCA (due to inherited mutations in
lecithin:retinol acyltransferase (
LRAT
) or retinal pigment epithelium protein 65 (
RPE65
) genes) and RP (all mutations) by the FDA, and for the treatment of LCA and RP (all mutations) by the EMA. The FDA has also
formally acknowledged that the orphan drug designations granted by the FDA on QLT091001 for the treatment of LCA (due to inherited mutations in
LRAT
or
RPE65
genes) and RP (all mutations) also cover QLT091001 for
the treatment of Inherited Retinal Disease caused by
LRAT
or
RPE65
mutations (IRD), including severe early childhood onset retinal dystrophy (SECORD), which disease/condition QLT believes subsumes
both LCA due to inherited mutations in
LRAT
or
RPE65
genes and RP. The drug has also been granted two Fast Track designations by the FDA for the treatment of LCA and RP due to inherited mutations in
the
LRAT
and
RPE65
genes. QLT continues its dialogue with the regulatory authorities in the U.S. and EU related to pivotal trial design, indication, protocol requirements and development plans to determine whether
future clinical trials could pursue the IRD indication (subsuming both LCA and RP patients at once), or separate LCA or RP indications.
QLT has begun a
compassionate use program for QLT091001 on a named-patient basis. Under the compassionate use program, QLT091001 may be made available to patients who participated in QLTs Phase Ib clinical trial of QLT091001 for the treatment of LCA and
RP. The program commenced in Ireland and participation for other patients will be determined on a case-by-case basis in accordance with applicable regulatory laws. Compassionate use programs provide experimental therapeutics to patients
with serious or life-threatening diseases that cannot be treated satisfactorily with authorized therapies prior to final FDA, EMA or other applicable regulatory approval.
Given the ultra orphan nature of its indications under investigation, QLT has also been working toward establishing a central patient registry
either independently or in conjunction with one or more third parties to identify and characterize patient status and then follow disease progression to track the natural history of the disease.
In May 2011, the United States Patent and Trademark Office issued Patent No. 7,951,841, a key patent related to this program, covering
various methods of use of QLT091001 in the treatment of diseases associated with an endogenous 11-cis-retinal deficiency, expiring on July 27, 2027, including the period of patent term adjustment. Outside of the US, counterpart patents and
patent applications to US Patent No. 7,951,841 with varying scope of protection are pending or have been granted, including European Patent No. 1765322 which was granted on November 6, 2013 and subsequently validated into national
patents in 35 European countries, all of which are set to expire in 2025.
Study in RP subjects with autosomal dominant RPE65 mutation
. RP is
genetically heterogeneous and can be inherited in an autosomal recessive (AR), autosomal dominant (AD), or X-linked manner, with rare digenic and mitochondrial forms. Previously, all reported mutations in
RPE65
were associated with recessive
RP or LCA. Recently, however, a dominant-acting mutation in RPE65 was reported. In order to investigate the safety, tolerability and efficacy of oral QLT091001 as a novel treatment for RP subjects with an autosomal dominant mutation in
RPE65
,
an open-label, Phase 1b, proof-of-concept study was initiated. This study evaluates the safety and treatment effects of a single course (once-daily for seven days) of oral 40 mg/m2 QLT091001 in five RP subjects with an autosomal dominant mutation in
RPE65
. Dosing of subjects has been completed and patient follow up is ongoing. We expect that an analysis of the data from the trial will be available in the second half of 2014.
23
QLT091001 for the treatment of Impaired Dark Adaptation.
In late 2013, we initiated a
Phase IIa proof-of-concept randomized, multi-center, parallel-group, placebo-controlled trial of QLT091001 in adult subjects with Impaired Dark Adaptation (IDA), a condition that results in decreased ability to recover visual sensitivity
in the dark after exposure to bright lights. The trial is designed to evaluate the safety profile and effects of QLT091001 on impaired dark adaptation time, glare recovery time and low luminance low contrast best corrected visual acuity. We expect
that an analysis of the data from the trial will be completed in the second half of 2014.
24
RESULTS OF OPERATIONS
The following table sets out our net losses from operations for the three and six months ended June 30, 2014 and 2013:
|
|
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|
|
|
|
|
|
|
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|
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|
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|
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|
|
Three months ended
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Six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
(In thousands of U.S. dollars, except per share data)
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
Net loss and comprehensive loss
|
|
$
|
(8,638
|
)
|
|
$
|
(6,199
|
)
|
|
$
|
(15,100
|
)
|
|
$
|
(12,626
|
)
|
Basic and diluted net loss per common share
|
|
$
|
(0.17
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
(0.25
|
)
|
Detailed discussion and analysis of our results of operations are as follows:
Costs and Expenses
Research and Development
During the three months ended June 30, 2014, research and development (R&D) expenditures from continuing
operations were $4.1 million compared to $4.4 million for the same period in 2013. The $0.3 million (7%) decrease was primarily due to savings realized in 2014 related to the continuing impact of our 2012 workforce reduction and lower R&D
costs incurred in 2014 related to our LCA and RP Phase Ib retreatment study, which was substantially completed in 2013. These savings were partially offset by costs incurred in 2014 in connection with the IDA study and preparatory activities for the
QLT091001 pivotal trial, as well as higher stock based compensation expense associated with stock options granted in July and November of 2013 for incentive and retention purposes.
During the six months ended June 30, 2014, R&D expenditures were $8.9 million compared to $8.5 million for the same period in 2013.
The $0.4 million (5%) increase was primarily due to costs incurred in 2014 in connection with our toxicity studies, IDA study, preparatory activities for the QLT091001pivotal trial and higher stock based compensation expense associated with
stock options granted in 2013 as described above. These cost increases were partially offset by lower R&D costs related to our LCA and RP Phase Ib retreatment study and net overall savings realized in 2014 related to our 2012 workforce reduction
and other restructuring activities.
Selling, General and Administrative Expenses
During the three months ended June 30, 2014, selling, general and administrative (SG&A), expenditures were $4.1 million
compared to $1.8 million for the same period in 2013. The net $2.3 million increase (128%) in SG&A expenses was primarily due to $2.5 million of consulting and transaction fees incurred in connection with the evaluation of strategic
alternatives and the resulting proposed Merger with Auxilium described above. These costs were partially offset by net overall savings realized in 2014 related to the continuing impact of our 2012 workforce reduction and other restructuring
activities.
During the six months ended June 30, 2014, SG&A expenditures were $6.3 million compared to $3.9 million for the same
period in 2013. The $2.4 million (62%) increase was primarily due to $3.2 million of consulting and transaction fees incurred in connection with the evaluation of strategic alternatives and the resulting proposed Merger with Auxilium described
above and higher stock based compensation expense associated with stock options granted in 2013 for incentive and retention purposes. These costs were partially offset by net overall savings realized in 2014 related to our 2012 workforce reduction
and other restructuring activities.
Throughout the remainder of 2014, we expect to incur further significant consulting and transaction
fees in connection with the proposed Merger with Auxilum. This includes a significant fee, which is contingent and payable to Credit Suisse (our financial advisor) upon the successful closing and completion of the Merger.
Restructuring Charges
During the
three and six months ended June 30, 2014, we recorded restructuring charges of $0.2 million and $0.7 million, respectively, which primarily relates to severance and termination benefits recorded during these periods in connection with the
May 31, 2014 termination of our Senior Vice President of Business Development and Commercial Operations, Alexander R. Lussow. Effective December 18, 2013, we entered into a letter agreement with Dr. Lussow, in which we, among other
things, agreed to terminate him on either March 31, 2014, April 30, 2014, or May 31, 2014, at QLTs discretion. The cumulative total cost of Dr. Lussows severance and termination benefits was $0.8 million, which
was fully paid out on May 31, 2014.
During the three and six months ended June 30, 2013, we recorded restructuring charges of
$0.7 million and $1.5 million, respectively, related to severance and termination benefits and contract termination costs related to our ongoing 2012 restructuring activities.
25
Investment and Other Income
Net Foreign Exchange Gains (Losses)
For the three and six months ended June 30, 2014 and 2013, net foreign exchange gains (losses) comprised gains and losses from the impact
of foreign exchange fluctuations on our monetary assets and liabilities that are denominated in currencies other than the U.S. dollar (principally the Canadian dollar). See
Liquidity and Capital Resources Interest and Foreign Exchange
Rates
below.
Fair Value Change in Contingent Consideration
During the three months ended June 30, 2014, the fair value change in contingent consideration decreased to nil compared to the $1.0
million fair value gain recorded during the three months ended June 30, 2013. The decline in the fair value gain is primarily due to the remaining contingent consideration owed to us under the 2009 Stock Purchase Agreement being reflected at
face value in accounts receivable. The remaining contingent consideration balance was reclassified to accounts receivable as at March 31, 2014 given that payment is guaranteed by Tolmar and Dodley on or before November 30, 2014.
During the six months ended June 30, 2014, we recorded fair value gains on our contingent consideration of $1.5 million, compared to fair
value gains of $1.8 million for the same period in 2013. The $0.3 million decrease in our fair value gains is primarily due to the $17.0 million Sanofi Prepayment received on March 17, 2014 and the guarantee of payment of the remaining
contingent consideration balance by Tolmar and Dodley on or before November 30, 2014. For more detailed information, refer to the discussion under the
Sales of Assets and Discontinued Operations Eligard
section above.
Income Taxes
During the three
months ended June 30, 2014 and 2013, the provision for income taxes was a negligible amount and $0.1 million, respectively. The provision for the three months ended June 30, 2013 primarily relates to the gain on the fair value change of
our Eligard related contingent consideration. The provisions also reflected that we had insufficient evidence to support current or future realization of the tax benefits associated with our development expenditures.
During the six months ended June 30, 2014 and 2013, the provision for income taxes was $0.2 million and $0.3 million, respectively. The
provision in each period primarily relates to the gain on the fair value change of our Eligard related contingent consideration. The provisions also reflected that we have insufficient evidence to support current or future realization of the tax
benefits associated with our development expenditures.
During the six months ended June 30, 2014, our net deferred tax asset was
reduced to nil as a result of the fair value change, which was primarily due to the receipt of the $17.0 million Sanofi Prepayment and the reclassification of the remaining Eligard related contingent consideration to accounts receivable. Refer to
Note 3
Contingent Consideration
in the condensed consolidated financial statements for the three and six months ended June 30, 2014 for more information.
As insufficient evidence exists to support current or future realization of the tax benefits associated with the vast majority of our current
and prior period operating expenditures, the benefit of certain tax assets was not recognized during the three and six months ended June 30, 2014 and June 30, 2013.
As of June 30, 2014, we had a valuation allowance against specifically identified tax assets. The valuation allowance is reviewed
periodically and if managements assessment of the more likely than not criterion for accounting purposes changes, the valuation allowance is adjusted accordingly.
26
LIQUIDITY AND CAPITAL RESOURCES
General
As at June 30, 2014, our
cash resources, working capital, cash from divestitures, and other available financing resources are sufficient to service current product research and development needs, operating requirements, liability requirements, milestone payments,
restructuring and change in control obligations, and future consulting and transaction fees we expect to incur in connection with the proposed Merger with Auxilium.
However, factors that may affect our future capital availability or requirements may include: expenses incurred in connection with the
proposed Merger with Auxilium, returns of capital to shareholders, including future share repurchases; the status of competitors and their intellectual property rights; receipt of royalties owing to us under the terms of the 2009 Stock Purchase
Agreement and related Consent and Amendment Agreement with Tolmar; levels of future sales of Visudyne and receipt of certain earn-out payments and future contingent consideration under the Valeant Agreement; levels of any future payments under the
Mati Agreement; the progress of our R&D programs, including preclinical and clinical testing; the timing and cost of obtaining regulatory approvals; the levels of resources that we devote to the development of manufacturing and other support
capabilities; technological advances; the cost of filing, prosecuting and enforcing our patent claims and other intellectual property rights; pre-launch costs related to commercializing our products in development; acquisition and licensing
activities; milestone payments and receipts; our ability to establish collaborative arrangements with other organizations; and the pursuit of future financial and/or strategic alternatives.
There is no guarantee that our future liquidity and capital resources will be sufficient to service our operating needs and financial
obligations. In this event, our business could be materially and adversely affected and the Company would be required to seek other financing alternatives.
Sources and Uses of Cash
We finance
operations, product development and capital expenditures primarily through existing cash, sales of assets and contingent consideration received.
Cash Used in Operating Activities
During the three months ended June 30, 2014, we used $6.5 million of cash in operations compared to $6.4 million for the same period in
2013. The $0.1 million negative cash flow variance was primarily attributable to the following:
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A positive operating cash flow variance of $1.0 million from lower spending on restructuring costs; and
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|
A negative operating cash flow variance from a $1.1 million decrease in other income.
|
During
the six months ended June 30, 2014, we used $11.5 million of cash in operations compared to $15.7 million for the same period in 2013. The $4.2 million positive cash flow variance was primarily attributable to the following:
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|
A positive operating cash flow variance from lower operational spending of $2.9 million related to the continuing savings from our 2012 restructuring initiatives;
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|
A positive operating cash flow variance of $1.8 million from lower spending on restructuring costs; and
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A negative operating cash flow variance from a $0.5 million decrease in other income.
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Cash Provided by
Investing Activities
During the three months ended June 30, 2014, cash flow provided by investing activities primarily
consisted of $4.4 million of consideration received in connection with our previous sale of QLT USA (see the
Sale of Assets and Discontinued OperationsEligard
section above for additional information).
During the three months ended June 30, 2013, cash flows provided by investing activities primarily consisted of $7.0 million of
contingent consideration received in connection with our previous sale QLT USA; and $0.8 million of proceeds related to our sale of our PPDS Technology (see the
Sale of Assets and Discontinued OperationsPunctal Plug Delivery
Program
section above for additional information).
During the six months ended June 30, 2014, cash flows provided by
investing activities primarily consisted of $31.0 million of contingent consideration received in connection with our previous sale of QLT USA.
During the six months ended June 30, 2013, cash flows provided by investing activities consisted of $16.6 million of contingent
consideration received in connection with our previous sale of QLT USA, $0.8 million of proceeds related to our sale of our PPDS Technology, and $0.2 million of proceeds from the sale of certain assets and property, plant and equipment, that was
previously designated as held-for-sale.
27
Cash Used in Financing Activities
During the three and six months ended June 30, 2014, there were no cash flows related to financing activities.
During the three months ended June 30, 2013, cash used in financing activities included the $200.0 million Cash Distribution to
shareholders, which was partially offset by $3.6 million of cash received in connection with the issuance of common shares related to the exercise of stock options.
During the six months ended June 30, 2013, cash flows used in financing activities included the $200.0 million Cash Distribution to
shareholders, $14.1 million of cash used to repurchase common shares, including share repurchase costs, 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 June 30, 2014, we had $137.9 million in cash and cash
equivalents and our cash equivalents had an average remaining maturity of approximately 14 days. If market interest rates were to increase immediately and uniformly by one hundred basis points from levels at June 30, 2014, the fair value of the
cash equivalents would decline by an immaterial amount due to the short remaining maturity period.
The functional currency of QLT Inc.
and its U.S. subsidiaries is the U.S. dollar and, therefore, our U.S. dollar-denominated cash and cash equivalents holdings do not result in foreign currency gains or losses in operations. To the extent that QLT Inc. holds a portion of its monetary
assets and liabilities in Canadian dollars, we are subject to translation gains and losses. These translation gains and losses are included in operations for the period.
At June 30, 2014, we had no outstanding forward foreign currency contracts and no collateral was pledged for security.
Contractual Obligations
As of
June 30, 2014, our material contractual obligations consist of our clinical and development agreements. We currently have a two year operating lease commitment, which commenced on September 1, 2013, for approximately 20,000 square feet of
office and laboratory space.
Off-Balance Sheet Arrangements
In connection with the sale of assets and businesses, we provide indemnities related to certain matters, including product liability, patent
infringement, and contract breach and misrepresentation. We also provide other indemnities to parties under the clinical trial, license, service, manufacturing, supply and other agreements that we enter into in the normal course of our business. If
the indemnified party were to make a successful claim pursuant to the terms of the indemnification, we would be required to reimburse the loss. These indemnities are generally subject to certain threshold amounts, specified claims periods and other
restrictions and limitations.
Except as described above and the contractual arrangements described in the
Contractual Obligations
section above, we do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future impact on our financial condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources.
Outstanding Share Data
On April 25, 2013, the Companys board of directors amended and restated the QLT 2000 Incentive Stock Plan (the Plan) to
increase the number of shares of the Companys common stock, without par value, available for grant under the Plan from 7,800,000 to 11,800,000 and to make certain other amendments to the Plan, including to permit the granting of restricted
stock units (RSUs) under the Plan. The amendment and restatement of the Plan was subject to shareholder approval, which was obtained on June 14, 2013. On July 29, 2013, the Company filed a registration statement to register the
issuance of up to an additional 4,000,000 common shares that may be issued under the Plan as a result of the amendment to the Plan.
As of
August 1, 2014, there were 51,081,878 common shares issued and outstanding, which totaled $466.2 million in share capital. As of August 1, 2014, we had 1,405,532 stock options outstanding of which 734,386 were exercisable at a weighted
average exercise price of CAD $5.21 per share. Each stock option is exercisable for one common share. As of August 1, 2014, we had 42,000 RSUs outstanding, none of which are vested. Upon vesting, each RSU represents the right to receive one common
share of the Company. As of August 1, 2014, we had 154,000 deferred stock units outstanding of which 81,278 are vested. The cash value of the deferred stock units outstanding as at August 1, 2014 is $0.9 million.
28
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the periods presented. Significant estimates include but
are not limited to accounts receivable valuation provisions, contingent consideration measured at fair value, allocation of overhead expenses to research and development, stock-based compensation, restructuring costs, and provisions for taxes, tax
assets and liabilities. Actual results may differ from estimates made by management. Please refer to our Critical Accounting Policies and Estimates included as part of our 2013 Annual Report.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Report contains forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 and
forward looking information within the meaning of the Canadian securities legislation which are based on our current expectations and projections. Words such as anticipate, project, potential,
goal, believe, expect, forecast, outlook, plan, intend, estimate, should, may, assume, continue and
variations of such words or similar expressions are intended to identify our forward-looking statements and forward-looking information. Such statements involve known and unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of QLT to be materially different from the results of operations or plans expressed or implied by such forward-looking statements and forward-looking information. Many such risks, uncertainties and other factors
are taken into account as part of our assumptions underlying the forward-looking statements and forward-looking information.
The
following factors, among others, including those described under Item 1A.
Risk Factors
in our 2013 Annual Report, as amended in Item 1A. Risk Factors in Part II of this Report, could cause our future results to differ
materially from those expressed in the forward-looking statements and forward-looking information:
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the failure to receive, on a timely basis or otherwise, the required approvals by Auxilium stockholders and QLT shareholders and government or
regulatory agencies (including the terms of such approvals);
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the risk that a condition to closing of the Merger may not be satisfied;
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|
the risk that the proposed Merger with Auxilium may not be consummated despite the parties efforts or consummation may be unduly delayed,
thereby resulting in potential disruptions to Auxiliums and QLTs respective businesses and relationships, which may negatively impact the share prices and the future business and financial results of Auxilium and
QLT;
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|
the ability of Auxilium to obtain consents of lenders and hedge counterparties or to obtain refinancing in connection with the proposed Merger;
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whether the Combined Company will be able to realize the expected benefits of the proposed Merger such as efficiencies, cost savings, tax benefits,
enhanced cash management flexibility, growth potential, market profile and financial strength;
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whether the Combined Companys profitability will increase;
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whether the Combined Company is positioned to achieve growth, sustained or otherwise;
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whether or when the businesses of Auxilium and QLT can be integrated, the benefits of such integration will be realized and the expenses related to
such integration will be higher than anticipated;
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whether the Combined Company will have the ability to maintain a competitive global cash management and a competitive worldwide effective corporate
tax rate;
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whether or when the proposed Merger will be accretive;
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the impact of legislative, regulatory, competitive and technological changes, including changes in tax laws or interpretations that could increase
the Combined Companys consolidated tax liabilities, including, if the transaction is consummated, changes in tax laws that would result in the Combined Company being treated as a domestic corporation for U.S. federal income tax purposes;
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the market price of the Combined Companys common shares after the merger may be affected by factors different from those currently affecting
the shares of Auxilium or QLT;
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the Merger is expected to cause significant dilution to the Combined Companys earnings per share, which may negatively affect the market
price of the Combined Companys common shares;
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the adverse impact that business uncertainty pending the effective time of the Merger could have on the ability of Auxilium, QLT and, subsequently,
the Combined Company to attract, retain and motivate key personnel until the effective time of the Merger;
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unanticipated negative effects of our strategic restructuring in 2012, including our significant reduction in workforce and disposition of our
Visudyne business and PPDS Technology;
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our ability to maintain adequate internal controls over financial reporting;
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our ability to retain or attract key employees;
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|
the anticipated timing, cost and progress of the development of our technology and clinical trials including the anticipated timing to commence
pivotal trials of QLT091001;
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the anticipated timing of regulatory submissions for product candidates;
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|
the anticipated timing for receipt of, and our ability to maintain, regulatory approvals for product candidates;
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our ability to successfully develop and commercialize our synthetic retinoid program;
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29
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whether Auxilium pursues or obtains a potential partnering agreement to maximize the value of our synthetic retinoid program;
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|
the increase in the fixed equity exchange ratio in the event that a retinoid transaction is not consummated based on the contemplated economic
terms, or the cash proceeds received in connection with such a transaction are less than $25 million at or immediately after the closing of the Merger;
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existing governmental laws and regulations and changes in, or the failure to comply with, governmental laws and regulations;
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|
the scope, validity and enforceability of our and third party intellectual property rights;
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|
the anticipated timing for receipt of, and our ability to obtain and maintain, orphan drug designations for our synthetic retinoid;
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|
receipt of the full Laser Earn-Out Payment, which is currently subject to a dispute with Valeant, and receipt of all or part of the other
contingent consideration pursuant to the Valeant Agreement, which is based on future sales of Visudyne outside of the United States and sales attributable to any new indications for Visudyne;
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receipt of all or part of the contingent consideration pursuant to the asset purchase agreement with Mati based on Matis successful
development and sales of products based on our PPDS Technology;
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our ability to effectively market and sell any future products;
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changes in estimates of prior years tax items and results of tax audits by tax authorities; and
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unanticipated future operating results.
|
Although we believe that the assumptions underlying the forward-looking statements and forward-looking information contained herein are
reasonable, any of the assumptions could be inaccurate, and therefore such statements and information included in this Quarterly Report may not prove to be accurate. In light of the significant uncertainties inherent in the forward-looking
statements and forward-looking information included herein, the inclusion of such statements and information should not be regarded as a representation by us or any other person that the results or conditions described in such statements and
information or our objectives and plans will be achieved. Any forward-looking statement and forward-looking information speaks only as of the date on which it is made. Except to fulfill our obligations under the applicable securities laws, we
undertake no obligation to update any such statement or information to reflect events or circumstances occurring after the date on which it is made.
30