On August 9, 2016 QLT Inc. (NASDAQ:QLTI) (TSX:QLT) ("QLT" or the "Company") reported financial results today for the second quarter ended June 30, 2016 (Press release, QLT, AUG 9, 2016, View Source;p=RssLanding&cat=news&id=2194329 [SID:1234514572]). Unless otherwise specified, all amounts are reported in U.S. dollars and in accordance with U.S. GAAP.
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2016 SECOND QUARTER FINANCIAL RESULTS
Operating Expenses/Income
During the second quarter of 2016, research and development ("R&D") expenditures were $2.9 million compared to $3.4 million for the same period in 2015. The $0.5 million (15%) decrease was primarily due to lower stock based compensation, lower salary and overhead costs related to R&D headcount attrition, the foreign exchange impact of the weak Canadian dollar and downsizing of our lease space. Stock-based compensation expense was significantly lower in the current period relative to the prior period due to the impact of the June 2015 accelerated vesting of all outstanding stock options in connection with the investment in and subsequent distribution of the Aralez Shares (defined below) and execution of the InSite Merger Agreement (defined below). The cost decreases described above were partially offset by an increase in costs related to preparatory activities for our planned Phase III pivotal trial for QLT091001.
During the second quarter of 2016, we incurred $3.2 million of consulting and advisory fees related to our exploration of strategic alternatives and pursuit of the merger transaction with Aegerion Pharmaceuticals, Inc. ("Aegerion") described below. In comparison, we incurred $4.7 million of similar costs in 2015 related to our pursuit of a merger transaction with InSite Vision Incorporated ("InSite") and the Aralez Distribution (defined below). The agreement and plan of merger with InSite (the "InSite Merger Agreement") was terminated by InSite on September 15, 2015.
Excluding the strategic consulting and advisory fees discussed above, during the second quarter of 2016, selling, general and administrative ("SG&A") expenditures were $1.3 million compared to $2.4 million for the same period in 2015. The $1.1 million (46%) decrease was primarily related to lower stock-based compensation expense during the period due to the accelerated vesting described above, lower fees paid for director compensation and lower general operating costs related to the downsizing of our lease space. These costs savings were partially offset by a lower amount of overhead being allocated to R&D expense due to R&D headcount attrition.
Other Expenses/Income
On April 5, 2016, QLT effected a distribution of 4,799,619 common shares (the "Aralez Shares") of Aralez Pharmaceuticals Inc. ("Aralez"), which had a fair value of $19.3 million, and $15.0 million of cash to its shareholders of record as of February 16, 2016 (the "Aralez Distribution").
During the three and six months ended June 30, 2016, QLT recognized a $2.3 million fair value gain and $10.7 million fair value loss, respectively, related to the change in the value of the Aralez Shares held by QLT from the February 5, 2016 acquisition date to the April 5, 2016 distribution date.
Operating Loss and Net Loss per Share
The operating loss for the second quarter of 2016 was $7.4 million, compared to $10.7 million for the same period in 2015. As described above under "Operating Expenses/Income", the net $3.3 million change in our operating loss was primarily due to lower strategic consulting and advisory fees, significantly lower stock-based compensation expense and lower overhead costs.
Net loss per common share was $0.10 in the second quarter of 2016, compared to a net loss per common share of $0.21 for the same quarter in 2015. The change in our loss per common share was primarily due to the same factors described above.
Cash and Cash Equivalents
As at June 30, 2016, the Company’s consolidated cash and cash equivalents were $79.9 million compared to $141.8 million at December 31, 2015. The $61.9 million decrease was primarily due to: (i) the $45.0 million investment in Aralez, which was subsequently distributed to QLT’s shareholders via the Aralez Distribution described above, (ii) $5.4 million of strategic consulting and advisory fees related to the Aralez Distribution, the proposed Merger (as defined below) with Aegerion, and exploration of other strategic alternatives, (iii) $3.0 million advanced to Aegerion pursuant to the terms of the Loan Agreement (defined below) with Aegerion, and (iv) cash used in operating activities during the period.
Passive Foreign Investment Company
The Company believes that it was classified as a Passive Foreign Investment Company ("PFIC") for 2008 through 2015, and that it may be classified as a PFIC in 2016, which could have adverse tax consequences for U.S. shareholders. Please refer to our 2015 Annual Report on Form 10-K (as amended by the Form 10-K/A filed on April 29, 2016) for additional information.
Strategic Transactions
On June 14, 2016, QLT and Aegerion entered into an agreement and plan of merger (the "Merger Agreement") pursuant to which a wholly owned indirect subsidiary of QLT will be merged with and into Aegerion, with Aegerion surviving as a wholly owned indirect subsidiary of QLT (the "Merger"). On the closing of the Merger, each outstanding share of Aegerion common stock will be exchanged for 1.0256 (the "Exchange Ratio") QLT common shares, subject to potential downward adjustment in the event either the DOJ/SEC Investigations (as defined below) or the Class Action Lawsuit (as defined below) are settled for amounts in excess of the Negotiated Thresholds (as defined below) prior to the closing of the Merger. The Merger is currently expected to close before the end of 2016 and is subject to various closing conditions, including receipt of the approvals of the QLT and Aegerion shareholders.
If Aegerion does not settle either its Department of Justice or Securities and Exchange Commission investigations (the "DOJ/SEC Investigations") or its pending shareholder class action lawsuit (the "Class Action Lawsuit") prior to the closing of the Merger, QLT shareholders will receive warrants (the "Warrants"), which will become exercisable to purchase a certain number of QLT common shares for a purchase price of $0.01 in the event that (i) the DOJ/SEC Investigations are resolved for amounts in excess of $40 million, or (ii) the Class Action Lawsuit is settled for an amount that exceeds the amount, if any, available under Aegerion’s insurance coverage (the $40 million in respect of the DOJ/SEC Investigations and the available insurance coverage in respect of the Class Action Lawsuit being the "Negotiated Thresholds").
QLT plans to change its name upon closing of the Merger to Novelion Therapeutics Inc. ("Novelion") and its common shares will continue to trade on the NASDAQ Global Select Market and the Toronto Stock Exchange. Assuming no adjustment to the Exchange Ratio, QLT shareholders, including the Investors in the Private Placement (as defined and described below), are expected to own approximately 67% of the outstanding Novelion common shares following the Merger.
Concurrent with signing the Merger Agreement, QLT and Aegerion entered into a loan and security agreement (the "Loan Agreement") under which QLT has agreed to provide Aegerion with a term loan facility to support working capital needs for an aggregate principal amount not to exceed $15 million, subject to various terms and conditions. As at August 8, 2016, $3.0 million is outstanding under the Loan Agreement.
On June 14, 2016, QLT entered into a unit subscription agreement (the "Unit Subscription Agreement’) with certain investors party thereto (the "Investors") pursuant to which QLT will issue units to such investors for an aggregate subscription price of $21.8 million (the "Private Placement"). Each unit consists of one QLT common share and one Warrant, as described above. The Private Placement, which is contemplated to occur immediately prior to, and is conditional on the closing of, the Merger, is intended to provide QLT with additional capital to support future operations and business development initiatives. The completion of at least $17.5 million of the Private Placement is a condition to the closing of the Merger.
QLT Inc. – Financial Highlights
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
(In thousands of U.S. dollars except share and per share information)
Three months ended Six months ended
June 30, June 30,
2016 2015 2016 2015
Expenses
Research and development $ 2,929 $ 3,404 $ 5,919 $ 5,612
Selling, general and administrative 4,451 7,154 10,349 10,773
Depreciation 23 179 61 367
7,403 10,737 16,329 16,752
Operating loss (7,403 ) (10,737 ) (16,329 ) (16,752 )
Other (expense) income
Net foreign exchange (losses) gains (31 ) (60 ) (108 ) 38
Interest income 54 51 129 83
Fair value gain (loss) on investment 2,256 – (10,704 ) –
Other 9 – 9 (2 )
2,288 (9 ) (10,674 ) 119
Loss before income taxes (5,115 ) (10,746 ) (27,003 ) (16,633 )
Provision for income taxes (5 ) (5 ) (11 ) (14 )
Net loss and comprehensive loss $ (5,120 ) $ (10,751 ) $ (27,014 ) $ (16,647 )
Basic and diluted net loss per common share
Net loss per common share $ (0.10 ) $ (0.21 ) $ (0.51 ) $ (0.32 )
Weighted average number of common shares outstanding (thousands)
Basic and diluted 52,829 51,779 52,829 51,508
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands of U.S. dollars) June 30, 2016 December 31, 2015
ASSETS
Current assets
Cash and cash equivalents $ 79,943 $ 141,824
Accounts receivable, net of allowances for doubtful accounts 359 287
Loan receivable 3,011 -
Income taxes receivable 14 14
Prepaid and other assets 668 611
Total current assets 83,995 142,736
Accounts receivable 2,000 2,000
Property, plant and equipment 467 430
Total assets $ 86,462 $ 145,166
LIABILITIES
Current liabilities
Accounts payable $ 5,219 $ 1,656
Accrued liabilities 800 1,827
Total current liabilities 6,019 3,483
Uncertain tax position liabilities 376 342
Total liabilities 6,395 3,825
SHAREHOLDERS’ EQUITY
Share capital
Authorized
500,000,000 common shares without par value
5,000,000 first preference shares without par value, issuable in series
Issued and outstanding common shares $ 475,333 $ 475,333
June 30, 2016 – 52,829,398 shares
December 31, 2015 – 52,829,398 shares
Additional paid-in capital 63,117 97,377
Accumulated deficit (561,352 ) (534,338 )
Accumulated other comprehensive income 102,969 102,969
Total shareholders’ equity 80,067 141,341
Total shareholders’ equity and liabilities $ 86,462 $ 145,166