Quarterly Report (10-q)

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Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended September 30, 2014

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

Commission File No. 0-17082

QLT INC.

(Exact name of registrant as specified in its charter)


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

250 - 887 Great Northern Way, Vancouver, B.C., Canada		V5T 4T5
(Address of principal executive offices)		(Zip code)

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

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

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

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

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

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

QLT INC.

QUARTERLY REPORT ON FORM 10-Q

September 30, 2014

TABLE OF CONTENTS


ITEM		PAGE

	PART I—FINANCIAL INFORMATION

1.	FINANCIAL STATEMENTS		3
	Unaudited Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013		3
	Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2014 and September 30, 2013		4
	Unaudited Condensed Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2014 and September 30, 2013		5
	Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three and nine months ended September 30, 2014 and year ended December 31, 2013		6
	Notes to Unaudited Condensed Consolidated Financial Statements		7
2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		19
3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		28
4.	CONTROLS AND PROCEDURES		28

	PART II—OTHER INFORMATION

1.	LEGAL PROCEEDINGS		29
1A.	RISK FACTORS		29
6.	EXHIBITS		30

PART I—FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

QLT Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS


(Unaudited)	September 30, 2014			December 31, 2013
(In thousands of U.S. dollars except share amounts)

ASSETS

Current assets

Cash and cash equivalents	$	137,828		$	118,521

Accounts receivable, net of allowances for doubtful accounts (Notes 4)		4,440			4,590

Contingent consideration - current (Note 3)		—			36,582

Income taxes receivable		68			77

Deferred income tax assets - current		—			191

Prepaid and other assets		787			1,863


Total current assets		143,123			161,824

Property, plant and equipment		1,211			1,866

Deferred income tax assets - non-current		—			177


Total assets		144,334			163,867



LIABILITIES

Current liabilities

Accounts payable	$	2,405		$	2,609

Accrued liabilities (Note 5)		1,283			1,498

Accrued restructuring charges (Note 8)		—			130


Total current liabilities		3,688			4,237

Uncertain tax position liabilities		398			1,846


Total liabilities		4,086			6,083


SHAREHOLDERS’ EQUITY

Share capital (Note 7)

Authorized

500,000,000 common shares without par value

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

Issued and outstanding

Common shares	$	466,979		$	466,229

September 30, 2014 – 51,185,922 shares

December 31, 2013 – 51,081,878 shares

Additional paid-in capital		97,590			95,844

Accumulated deficit		(527,290	)		(507,258	)

Accumulated other comprehensive income		102,969			102,969


Total shareholders’ equity		140,248			157,784


Total shareholders’ equity and liabilities	$	144,334		$	163,867

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

QLT Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)


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

Expenses

Research and development	$	2,792		$	5,243		$	11,684		$	13,715

Selling, general and administrative		2,388			1,676			8,642			5,568

Depreciation		222			230			680			717

Restructuring charges (Note 8)		—			354			744			1,847


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


Operating loss		(5,402	)		(7,503	)		(21,750	)		(21,847	)

Investment and other (expenses) income

Net foreign exchange losses		—			(54	)		(74	)		(36	)

Interest income		27			39			80			175

Fair value change in contingent consideration (Note 3)		—			71			1,466			1,904

Other		17			64			115			100


		44			120			1,587			2,143


Loss from continuing operations before income taxes		(5,358	)		(7,383	)		(20,163	)		(19,704	)

Recovery of (provision for) income taxes (Note 9)		432			(109	)		194			(434	)


Loss from continuing operations		(4,926	)		(7,492	)		(19,969	)		(20,138	)


(Loss) income from discontinued operations, net of income taxes (Note 10)		(6	)		96			(63	)		116


Net loss and comprehensive loss		(4,932	)	$	(7,396	)	$	(20,032	)	$	(20,022	)



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

Continuing operations	$	(0.10	)	$	(0.15	)	$	(0.39	)	$	(0.40	)

Discontinued operations		(0.00	)		0.00			(0.00	)		0.00


Net loss per common share	$	(0.10	)	$	(0.14	)	$	(0.39	)	$	(0.39	)



Weighted average number of common shares outstanding (in thousands)

Basic and diluted		51,151			51,082			51,105			50,851

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

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


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

Cash used in operating activities

Net loss and comprehensive loss	$	(4,932	)	$	(7,396	)	$	(20,032	)	$	(20,022	)

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

Depreciation		222			230			680			717

Stock-based compensation and restricted stock based compensation		179			137			1,150			279

Unrealized foreign exchange losses		(11	)		69			83			204

Deferred income taxes		(416	)		108			(179	)		566

Recovery on assets held for sale		—			(37	)		—			(212	)

Gain on sale of discontinued operations (Note 10)		—			—			—			(743	)

Gain on sale of long-lived assets		—			(4	)		—			(4	)

Fair value change in contingent consideration (Note 3)		—			761			—			1,249

Changes in non-cash operating assets and liabilities

Accounts receivable		4			(47	)		124			2,158

Prepaid and other assets		228			690			1,077			(264	)

Accounts payable		(1,415	)		486			(172	)		(2,003	)

Income taxes receivable / payable		—			204			9			146

Accrued liabilities		84			203			(181	)		(1,158	)

Accrued restructuring charges		—			(436	)		(130	)		(1,633	)

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


Cash provided by investing activities

Net proceeds from sale of long-lived assets		—			30			—			239

Net proceeds from sale of discontinued operations (Note 10)		—			7,502			—			8,252

Purchase of property, plant and equipment		—			(129	)		(25	)		(129	)

Proceeds from contingent consideration (Note 3)		5,544			8,483			36,582			25,035

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


Cash used in financing activities

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

Cash distribution paid to common shareholders (Note 7)		—			—			—			(200,000	)

Issuance of common shares		509			—			509			8,317

		509			—			509			(205,762	)


Effect of exchange rate changes on cash and cash equivalents		(101	)		52			(188	)		(213	)


Net increase (decrease) in cash and cash equivalents		(105	)		10,906			19,307			(193,298	)

Cash and cash equivalents, beginning of period		137,933			103,180			118,521			307,384


Cash and cash equivalents, end of period	$	137,828		$	114,086		$	137,828		$	114,086



Supplementary cash flow information:

Income taxes paid	$	—		$	—		$	1		$	1

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

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

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

Balance at January 1, 2013		51,589,405		$	471,712		$	296,024		$	(482,387	)	$	102,969	$	388,318

Exercise of stock options, for cash, at prices ranging from CAD $2.44 to CAD $7.23 per share		1,183,952			9,978			(2,761	)		—			—		7,217

Stock-based compensation		—			—			567			—			—		567

Restricted stock based compensation		—			—			32			—			—		32

Common share repurchase (Note 7(b))		(1,691,479	)		(15,461	)		1,982			—			—		(13,479	)

Cash distribution to common shareholders at $3.92 per share (Note 7(a))		—			—			(200,000	)		—			—		(200,000	)

Net loss and comprehensive loss		—			—			—			(24,871	)		—		(24,871	)


Balance at December 31, 2013		51,081,878		$	466,229		$	95,844		$	(507,258	)	$	102,969	$	157,784

Stock-based compensation		—		$	—			538			—		$	—		538

Restricted stock compensation		—			—			14			—		$	—		14

Net loss and comprehensive loss		—		$	—						(6,462	)	$	—		(6,462	)


Balance at March 31, 2014		51,081,878			466,229			96,396			(513,720	)		102,969	$	151,874

Stock-based compensation		—			—			404			—			—		404

Restricted stock compensation		—			—			15			—			—		15

Net loss and comprehensive loss		—			—			—			(8,638	)		—		(8,638	)


Balance at June 30, 2014		51,081,878			466,229			96,815			(522,358	)		102,969		143,655

Exercise of stock options, for cash, at prices ranging from CAD $4.54 to CAD $5.38 per share		104,044			750			(241	)		—			—		509

Uncertain tax position liability recovery (Note 9)								837								837

Stock-based compensation		—			—			165			—			—		165

Restricted stock compensation		—			—			14			—			—		14

Net loss and comprehensive loss		—			—			—		$	(4,932	)		—		(4,932	)


Balance at September 30, 2014		51,185,922			466,979			97,590			(527,290	)		102,969		140,248

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

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

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Business

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

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

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

CONDENSED SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

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

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

Principles of Consolidation

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

Use of Estimates

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

Segment Information

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

Discontinued Operations and Assets Held for Sale

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

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

Stock-Based Compensation

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

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

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

Income Taxes

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

Contingent Consideration

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

Net (Loss) Income Per Common Share

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

Fair Value of Financial Assets and Liabilities

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

Recently Adopted Accounting Standards

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

Recently Issued Accounting Standards

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

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

TERMINATED MERGER TRANSACTION WITH AUXILIUM

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

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

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

CONTINGENT CONSIDERATION

Related to the Sale of QLT USA, Inc.

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

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

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

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

Related to the Sale of Visudyne

On September 24, 2012, we completed the sale of our Visudyne business to Valeant. Pursuant to the Valeant Agreement, we received a payment of $112.5 million at closing, of which $7.5 million (previously held in escrow) was released to us on September 26, 2013. These funds were held in escrow for one year following the closing date to satisfy any potential indemnification claims that Valeant may have had. Subject to the achievement of certain future milestones, we are also eligible to receive the following additional consideration: (i) a milestone payment of $5.0 million if receipt of the registration required for commercial sale of the 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.

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

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

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

ACCOUNTS RECEIVABLE


(In thousands of U.S. dollars)	September 30, 2014		December 31, 2013

Accounts receivable - Laser Earn-Out Payment ^(a)		4,000		4,000

Accounts receivable - Other		440		590


	$	4,440	$	4,590

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

ACCRUED LIABILITIES


(In thousands of U.S. dollars)	September 30, 2014		December 31, 2013

Compensation	$	868	$	1,211

Directors’ Deferred Share Units compensation (“DSU”)		390		265

Other		25		22


	$	1,283	$	1,498

FOREIGN EXCHANGE FACILITY

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

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

SHARE CAPITAL

(a)	Cash Distribution

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

(b)	Share Repurchase Program

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

(c)	Stock Options

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

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

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


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

Research and development	$	98	$	77	$	682	$	171

Selling, general and administrative		67		45		425		90

Discontinued operations		—		—		—		3


Stock-based compensation expense before income taxes		165		122		1,107		264

Related income tax benefits		—		—		—		—


Stock-based compensation, net of income taxes	$	165	$	122	$	1,107	$	264

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


	September 30, 2014

Unrecognized estimated compensation costs (in thousands of U.S. dollars)	$	1,256

Expected weighted average period of recognition of compensation cost (in months)		36

Expected remaining weighted average period of compensation cost to be recognized (in years)		1.75

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


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

Intrinsic value of stock options exercised	$	53	$	—	$	53	$	2,142

Cash from exercise of stock options		556		—		556		7,217

(d)	Deferred Share Units

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

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


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

Research and development	$	(10	)	$	22	$	43	$	33

Selling, general and administrative		(16	)		37		102		56


Deferred share unit compensation expense	$	(26	)	$	59	$	145	$	89

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

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

(e)	Restricted Stock Units

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

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


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

Research and development	$	5	$	6	$	16	$	6

Selling, general and administrative		9		9		27		9


Restricted stock unit compensation expense	$	14	$	15	$	43	$	15

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

RESTRUCTURING CHARGE

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

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

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


(In thousands of U. S. dollars)	Employee Termination Costs⁽¹⁾			Asset Write-downs			Contract Termination Costs⁽²⁾			Other			Total

Balance at January 1, 2013	$	1,354		$	—		$	579		$	—		$	1,933

Restructuring charge		1,542			—			266			223			2,031

Cash payments		(2,880	)		—			(942	)		(223	)		(4,045	)

Discontinued operations		114			(304	)		97			—			(93	)

Non-cash portion					304			—			—			304


Balance at December 31, 2013		130			—			—			—			130

Restructuring charge		494			—			78			—			572

Foreign exchange		(5	)		—			—			—			(5	)

Cash payments		(9	)		—			(78	)		—			(87	)


Balance at March 31, 2014		610			—			—			—			610

Restructuring charge		172			—			—			—			172

Cash payments		(782	)		—			—			—			(782	)


Balance at June 30, 2014	$	—		$	—		$	—		$	—		$	—


Balance at September 30, 2014	$	—		$	—		$	—		$	—		$	—

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

⁽²⁾	Costs include lease costs related to excess office space and certain property, plant and equipment.

INCOME TAXES

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

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

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

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

10.

DISCONTINUED OPERATIONS

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

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

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


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

Recovery on assets held for sale ⁽¹⁾		—			37		—			212

Operating pre-tax loss		(6	)		83		(63	)		(391	)

Gain on sale of discontinued operations ⁽²⁾		—			—		—			743


Pre-tax (loss) income		(6	)		83		(63	)		352


Provision for income taxes		—			13		—			(236	)


Net (loss) income from discontinued operations	$	(6	)	$	96	$	(63	)	$	116

⁽¹⁾	Relates to recoveries on equipment that was previously written down in connection with the sale of our PPDS Technology to Mati.

⁽²⁾	Relates to the 2013 revenue recognition of funds received from Mati at the end of 2012, which were initially recorded as deferred income, for the 90-day option to acquire assets related to our former PPDS Technology.

11.

FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK

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

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


	As at September 30, 2014
(In thousands of U.S. dollars)	Level 1		Level 2		Level 3		Total

Assets:

Cash and cash equivalents	$	137,828	$	—	$	—	$	137,828

Accounts receivable - Laser Earn-Out Payment⁽¹⁾		—		—		4,000		4,000


Total	$	137,828	$	—	$	4,000	$	141,828


	As at December 31, 2013
(In thousands of U.S. dollars)	Level 1		Level 2		Level 3		Total

Assets:

Cash and cash equivalents	$	118,521	$	—	$	—	$	118,521

Accounts receivable - Laser Earn-Out Payment⁽¹⁾		—		—		4,000	$	4,000

Contingent consideration⁽²⁾		—		—		36,582	$	36,582


Total	$	118,521	$	—	$	40,582	$	159,103

⁽¹⁾	In 2014, the estimated $4.0 million fair value of the Laser Earn-Out Payment was reclassified from contingent consideration to accounts receivable. For additional discussion, refer to Note 3 – Contingent Consideration.

⁽²⁾

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

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


	Level 3
(In thousands of U.S. dollars)	Related to Sale of QLT USA			Related to Sale of Visudyne			Total

Balance at January 1, 2013	$	71,195		$	5,214		$	76,409

Transfer to Accounts Receivable		—			(3,956	)		(3,956	)

Settlements		(38,693	)		—			(38,693	)

Fair value change in contingent consideration		4,080			(1,258	)		2,822


Balance at December 31, 2013		36,582			—			36,582

Transfer to Accounts Receivable		(9,989	)		—			(9,989	)

Settlements		(28,059	)		—			(28,059	)

Fair value change in contingent consideration		1,466			—			1,466


Balance at March 31, 2014		—			—			—


Balance at June 30, 2014		—			—			—


Balance at September 30, 2014	$	—		$	—		$	—

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

12.

NET LOSS PER SHARE

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


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

Numerator:

Loss from continuing operations	$	(4,926	)	$	(7,492	)	$	(19,969	)	$	(20,138	)

Income from discontinued operations, net of income taxes		(6	)		96			(63	)		116


Net loss	$	(4,932	)	$	(7,396	)	$	(20,032	)	$	(20,022	)



Denominator: (thousands)

Weighted average common shares outstanding		51,151			51,082			51,105			50,851

Basic and diluted net loss per common share

Continuing operations	$	(0.10	)	$	(0.15	)	$	(0.39	)	$	(0.40	)

Discontinued operations		(0.00	)		0.00			(0.00	)		0.00


Net loss per common share	$	(0.10	)	$	(0.14	)	$	(0.39	)	$	(0.39	)

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

13.

SUBSEQUENT EVENTS

Termination Fees

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

Appointment of Interim Chief Executive Officer

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

ITEM 2.

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

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

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

Note regarding Trademarks

The following words used in this Report are trademarks:

•

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

•

Visudyne^® is a registered trademark of Novartis AG.

•

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

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

Overview

Strategic Restructuring

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

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

Terminated Merger Transaction with Auxilium Pharmaceuticals, Inc.

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

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

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

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

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

Appointment of Interim Chief Executive Officer

Sales of Assets and Discontinued Operations

Eligard^®

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

Visudyne

In September 2012, in connection with the strategic restructuring, we sold our only commercial product, Visudyne, to Valeant. Pursuant to the asset purchase agreement between the Company and Valeant (the “Valeant Agreement”), we sold all of our assets related to our Visudyne business, including the 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.

Punctal Plug Delivery Program

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

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

Research and Development

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

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

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

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

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

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

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

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

RESULTS OF OPERATIONS

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


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

Net loss and comprehensive loss	$	(4,932	)	$	(7,396	)	$	(20,032	)	$	(20,022	)

Basic and diluted net loss per common share	$	(0.10	)	$	(0.14	)	$	(0.39	)	$	(0.39	)

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

Costs and Expenses

Research and Development

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

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

Selling, General and Administrative Expenses

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

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

Restructuring Charges

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

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

Investment and Other Income

Net Foreign Exchange Gains (Losses)

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

Fair Value Change in Contingent Consideration

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

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

Income Taxes

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

LIQUIDITY AND CAPITAL RESOURCES

General

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

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

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

Sources and Uses of Cash

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

Cash Used in Operating Activities

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

•

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

•

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

•

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

•

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

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

•

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

•

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

•

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

•

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

Cash Provided by Investing Activities

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

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

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

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

Cash Used in Financing Activities

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

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

Interest and Foreign Exchange Rates

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

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

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

Contractual Obligations

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

Off-Balance Sheet Arrangements

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

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

Outstanding Share Data

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

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

•

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

•

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

•

our ability to maintain adequate internal controls over financial reporting;

•

our ability to retain or attract key employees;

•

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

•

the anticipated timing of regulatory submissions for product candidates;

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

our ability to effectively market and sell any future products;

•

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

•

unanticipated future operating results.

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

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

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

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

Changes in Internal Control over Financial Reporting

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

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

PART II—OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

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

ITEM 1A.

RISK FACTORS

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

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

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

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

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

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

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

ITEM 6.

EXHIBITS

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

SIGNATURES

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



	QLT Inc. (Registrant)

Date: October 28, 2014	By:	/s/ Dr. Geoffrey F. Cox
		Dr. Geoffrey F. Cox
		Interim Chief Executive Officer
		(Principal Executive Officer)

Date: October 28, 2014	By:	/s/ Sukhi Jagpal
		Sukhi Jagpal
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

EXHIBIT INDEX


Exhibit Number			Description

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

	10.2	*	Form of employee stock option grant to Geoffrey F. Cox

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

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

	32.1	*	Section 1350 Certification of the Chief Executive Officer.

	32.2	*	Section 1350 Certification of the Chief Financial Officer.

	101.*		The following financial statements from the QLT Inc. Quarterly Report on Form 10Q for the quarter ended September 30, 2014, formatted in Extensible Business Reporting Language (“XBRL”): • unaudited condensed consolidated balance sheets; • unaudited condensed consolidated statements of operations and comprehensive loss; • unaudited condensed consolidated statements of cash flows; • unaudited condensed consolidated statements of changes in shareholders’ equity; and • notes to unaudited condensed consolidated financial statements.

*	Filed herewith

EXHIBIT 10.1

EMPLOYMENT AGREEMENT

This Employment Agreement made effective as of October 23, 2014 (the “Effective Date”).

BETWEEN:

QLT INC., having an address of 887 Great Northern Way, Suite 250, Vancouver, British Columbia, V5T 4T5, Canada.

(“QLT” or the “Company”)

AND:

GEOFFREY F. COX

(“Dr. Cox”)

WHEREAS:

A.	QLT has offered to Dr. Cox employment with QLT as Interim Chief Executive Officer.

B.	QLT and Dr. Cox have agreed to enter into this Agreement setting out the terms and conditions of Dr. Cox’s employment with QLT.

NOW THEREFORE in consideration of the compensation to be paid under this Agreement by QLT to Dr. Cox, the promises made by each party to the other as set out in this Agreement and other good and valuable consideration, the receipt and sufficiency of which the parties acknowledge and agree, QLT and Dr. Cox agree as follows:

1.	POSITION AND DUTIES

1.1

Position and Term – Effective October 23, 2014 (the “Commencement Date”), QLT will employ Dr. Cox in the position of Interim Chief Executive Officer and Dr. Cox agrees to be employed by QLT in that position, subject to the terms and conditions of this Agreement. Dr. Cox’s employment will terminate 6 months after the Commencement Date, unless earlier terminated as provided for below or extended by mutual agreement in writing. A condition of Dr. Cox’s employment and continued employment is that he seek, obtain, and maintain the right to work in Canada in this position. QLT will pay the costs associated with obtaining a permit to work in Canada. If Dr. Cox is not able to secure the right to work in Canada by October 23, 2014, then QLT may in its discretion delay the Commencement Date as it considers appropriate; provided, however, that if Dr. Cox is not able to secure the right to work in Canada by November 15, 2014, either party may notify the other that this Agreement is terminated with no obligation on either party to the other, except that if Dr. Cox has commenced employment then QLT will make the payments to Dr. Cox specified in Section 3.1 but only for the period from the date employment commenced to the date that either party provides such notice and Dr. Cox will be bound by Section 6 of this Agreement. Dr. Cox’s employment is also subject to the completion of satisfactory background checks and police clearances. Employment hereunder is in addition to Dr. Cox’s continuing services as a member of the Board of Directors of the Company (“Board”) (which service is separate from this Agreement, except that he will not receive any director’s fees while he is employed under this Agreement).


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1.2	Duties, Reporting and Efforts – In the performance of his duties, Dr. Cox will:

(a)

Overall Responsibilities – As Interim Chief Executive Officer, have responsibility commensurate with the position of Chief Executive Officer and with a focus on the Company achieving its strategic objectives, increasing shareholder value and maintaining the integrity of QLT’s internal controls and reporting systems.

(b)

Report – Report, as and when required, to the Board of Directors of QLT (the “Board”).

(c)

Best Efforts and Compliance with Policies, etc. – Use his best efforts, industry and knowledge to carry out the duties and functions of Interim Chief Executive Officer and comply with all of QLT’s rules, regulations, policies (including QLT’s Code of Ethics and Code of Exemplary Conduct) and procedures, as established from time to time and to endeavor to ensure that QLT is at all times in compliance with applicable provincial, state, federal and other governing statutes, policies and regulations. Dr. Cox confirms that he is not now nor has in the past been debarred by the United States Food and Drug Administration under the Food, Drug and Cosmetic Act or under the Generic Drug Enforcement Act and he has never been convicted under the Food, Drug and Cosmetic Act or under the Generic Drug Enforcement Act, or under any other federal law for conduct relating to the development or approval of a drug product and/or relating to a drug product. In the event that Dr. Cox is, or learns that he will be (i) debarred under the Food, Drug and Cosmetic Act or under the Generic Drug Enforcement Act, or (ii) convicted under the Food, Drug and Cosmetic Act or under the Generic Drug Enforcement Act or under any other federal law for conduct relating to the development or approval of a drug product and/or relating to a drug product, he will immediately notify QLT in writing.

(d)

Working Day and Location – Devote his attention and energies to the business and affairs of QLT and his duties as Interim Chief Executive Officer, working such hours, both at work in person and remotely, as are necessary to perform the position in a timely and effective manner. Dr. Cox will commute on a regular basis from his home in Boston to Vancouver. Dr. Cox may be in QLT’s Vancouver office less than 5 days per week but despite this he will work on a full-time basis. Dr. Cox may continue to serve on other boards of directors, including the boards of directors of Biota Pharmaceuticals Inc., Lakewood-Amedex LLC and the Massachusetts Biotechnology Council, provided that these services do not conflict with any obligation to QLT and do not materially interfere with Dr. Cox’s obligations under this Agreement.

2.	COMPENSATION

2.1	Compensation – In return for his services under this Agreement, effective as of the Commencement Date, QLT agrees to pay or otherwise provide the following total compensation to Dr. Cox:

(a)

Base Salary – A monthly amount of USD $40,000.00 payable semi-monthly in arrears (the “Base Salary”). QLT will, in a manner that it determines in its discretion, convert the Base Salary for each pay period into the then equivalent amount of Canadian dollars for payment to Dr. Cox in Canadian dollars through the QLT payroll system.

(b)

Benefit Plans – Effective as of the Commencement Date, coverage for Dr. Cox and his eligible dependents under the benefit plans provided by/through QLT to its non-Canadian resident employees, subject to:

Each plan’s terms for eligibility;

II.

Dr. Cox taking the necessary steps to ensure effective enrollment or registration under each plan; and

III.

Customary deductions of employee contributions for the premiums of each plan.


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As at the date of this Agreement, the employee benefit plans provided by/through QLT to its non-Canadian employees are provided through the CANUS plan offered by Great West Life Assurance Company and for Dr. Cox will currently include life insurance, dependent life insurance, vision-care insurance, health insurance, dental insurance, out-of-country travel coverage, and short and long term disability insurance and will provide coverage for Dr. Cox while in Canada. For clarity, these benefits will not include accidental death and dismemberment insurance. QLT and Dr. Cox agree that employee benefit plans provided by/through QLT to its non-Canadian employees may change from time to time. In the event of any increases in plan premiums during Dr. Cox’s employment, QLT will pay any such increase in premium. The choice of plan and coverage terms will always be at the sole discretion of QLT and Great West Life Assurance Company and may change at any time, and therefore QLT does not guarantee the scope or amount of coverage Dr. Cox may receive as part of his health and life insurance coverage. In addition, this coverage is not intended to replace his existing coverage. To the extent Dr. Cox’s existing health and life insurance coverage provides him with benefits not provided under Great West Life Assurance Company’s CANUS plan or other health and life coverage which may be provided by QLT at any time, Dr. Cox may wish to obtain additional coverage at his expense.

(c)

Expense Reimbursement – Reimbursement, in accordance with QLT’s Policy and Procedures on QLink (as amended from time to time), of all reasonable business expenses, including accommodation and/or travel expenses incurred by Dr. Cox, subject to his maintaining proper accounts and providing documentation for these expenses upon request. Collectively, these expenses and payments are the “Expenses”.

(d)

Vacation – Two weeks of paid vacation for a 6 month employment term (equivalent to four weeks of paid vacation per year) and if the term is extended by mutual agreement then the equivalent of four weeks of vacation per calendar year, which may be increased from time to time in accordance with QLT’s vacation policy for executive level employees. As per the Company’s Policy and Procedures on QLink (as amended from time to time), unless agreed to in writing by the Company if the term is extended then:

All vacation must be taken within the calendar year in which it is earned by Dr. Cox; and

II.

Vacation entitlement will not be cumulative from calendar year to calendar year; except that Dr. Cox may carry forward 150 hours of vacation from the calendar year in which it is earned to the following calendar year.

(e)

Stock Option Grant – Subject to Board approval, QLT will grant to Dr. Cox options to purchase 150,000 common shares of QLT at a price equal to the closing price of QLT’s common shares on the Toronto Stock Exchange on the later of (i) the Commencement Date or (ii) the date that such grant is approved by the Board of Directors (the “Options”). The Options will vest over 6 months, in equal monthly amounts, starting one month after the Commencement Date. The Options will have a ten year term from the date of grant and be subject to the terms and conditions set out in QLT’s current Stock Option Plan and the applicable stock option agreement.

(f)

Stock Option Plan – Dr. Cox will be eligible to receive from time to time additional stock option grants under any stock option plan offered by QLT to its employees, in accordance with the terms of the plan in effect at the time of the stock option offer(s). Grants of options are discretionary and subject to the approval of the Board of Directors.

(g)

Legal Consultation – Reimbursement for reasonable expenses to a maximum of USD $10,000.00 for independent legal counsel regarding Dr. Cox entering into an employment agreement with QLT.


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(h)

Tax Consultation – Reimbursement for reasonable expenses to a maximum of USD $5,000.00 for each calendar year of his employment for an independent tax consultation regarding the Canadian tax implications of Dr. Cox’s employment status in Canada and/or preparation of his Canadian tax return.

(i)

Commuting Expenses – Reimbursement of his reasonable expenses related to commuting between Dr. Cox’s home in Boston and Vancouver, the cost of hotel accommodation in Vancouver, and related commuting expenses (“Commuting Expenses”). As the reimbursement of these costs may be a taxable benefit, the amount of the reimbursement for the Commuting Expenses will be grossed-up to provide Dr. Cox with sufficient funds to pay the applicable taxes on the Commuting Expenses amount. Commuting Expenses are subject to statutory deductions and the reimbursement of Commuting Expenses is in addition to Dr. Cox’s eligible expenses pursuant to QLT’s Travel Policy and Section 2.1(c) above.

(j)

Indemnity – Dr. Cox will be entitled to full indemnification, including advancement of expenses (if applicable), in accordance with and to the fullest extent permitted under any indemnity agreements previously entered into between Dr. Cox and QLT, QLT’s articles, applicable law and any rights Dr. Cox may have to claim coverage under QLT’s past, current or future director and/or officer insurance policies, in all cases with respect to existing or future claims that may be brought by third parties. The provisions of this paragraph will survive termination of this Agreement for any reason.

2.2

Tax Equalization – QLT will provide Dr. Cox with a tax equalization payment in an amount sufficient to compensate him, after giving effect to all taxes payable in respect of such tax equalization payments, for the amount by which the combined Canadian federal and provincial income tax and any Canadian social security health insurance or similar taxes (collectively, “Canadian Taxes”) and U.S. federal, state and local income tax and any FICA, Medicare or similar U.S. taxes (collectively “U.S. Taxes”) he is required to pay on his Base Salary and other entitlements under paragraphs 2.1(b), (c), (d), (e), (f), (g), (h), and (i), and any cash compensation owing to him upon termination of his employment, that exceeds the U.S. Tax he would have been required to pay on such amounts if his employment had been performed wholly in the state of Massachusetts and limited to his Base Salary and entitlements under paragraphs 2.1(d), (e), (f), and (i), net of all available credits and deductions. Such payments will be made on an estimated basis not less frequently than monthly during the term and trued up within 30 days after the actual amounts are determined for any applicable tax periods. QLT will pay all reasonable costs and professional fees related to calculating this equalization payment. QLT reserves the discretion to establish a reasonable process for determining the tax equalization calculation.

If Dr. Cox establishes his primary residence in Canada, the obligation of QLT under this paragraph will cease provided that there will be a pro-rated adjustment for any partial year.

3.	RESIGNATION

3.1

Resignation – Dr. Cox may resign from his employment with QLT by giving QLT 30 days’ prior written notice (the “Resignation Notice”) of the effective date of his resignation. On receiving a Resignation Notice, QLT may elect to require Dr. Cox to leave the premises forthwith. In any event QLT will make the following payments to Dr. Cox:

(a)

Base Salary – Base Salary owing to Dr. Cox for any prior periods as well as for the period which is the shorter of (i) the 30-day notice period and (ii) either the period to the expiry of the original 6 month term or, if applicable, to the expiry of the then current extended term (the “Resignation Period”).

(b)

Benefits – Except as set out below in this subparagraph 3.1(b), for the Resignation Period, all employee benefit plan coverage enjoyed by Dr. Cox and his eligible dependents immediately prior to the date of his Resignation Notice. Dr. Cox acknowledges and agrees that any short and long term


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disability plans and out-of-country travel coverage (other than benefits that accrued thereunder on or prior to the Last Day) provided through QLT will not be continued beyond the last day that Dr. Cox is actively employed by QLT. The remaining benefits will cease on the last day that Dr. Cox is employed by QLT (the “Last Day”).

(c)

Expense Reimbursement – Reimbursement (in accordance with QLT’s Policy and Procedures on QLink, as amended from time to time) of all reasonable Expenses and Commuting Expenses incurred by Dr. Cox prior to his Last Day, subject to the expense reimbursement provisions set out in subparagraph 2.1(c) and (i), and tax consultation and tax return preparation expenses incurred in accordance with subparagraph 2.1(h).

(d)

Vacation Pay – Payment in respect of accrued but unpaid vacation pay owing to Dr. Cox as at the expiry of the Resignation Period.

(e)

Tax Equalization – Within 30 days of the date that it can be determined, QLT will pay to Dr. Cox any remaining tax equalization payments owing to Dr. Cox in accordance with Section 2.2 or, in the event that the reconciliation results in Dr. Cox owing money to QLT, Dr. Cox will make such payment to QLT.

3.2	Others – In the event of resignation of Dr. Cox as set out in paragraph 3.1, the parties agree:

(a)

Stock Option Plan – Dr. Cox’s participation in any stock option plan offered by QLT to its employees will be in accordance with the terms of the plan in effect at the time of the stock option grant(s) to Dr. Cox and the applicable stock option agreement applicable to such grants.

4.	TERMINATION

4.1

Termination for Cause – QLT reserves the right to terminate Dr. Cox’s employment at any time for any reason. Should Dr. Cox be terminated for “Cause”, he will not be entitled to any advance notice of termination or pay in lieu thereof. If Dr. Cox is refused permission to work in Canada, or permission expires or is revoked at any time before or during Dr. Cox’s employment with QLT, QLT will have the right to terminate Dr. Cox’s employment and to treat such termination as a termination for “Cause”.

“Cause” the occurrence of any of the following events: (i) willful refusal by Dr. Cox to follow a lawful direction of the Board of Directors of QLT, provided the direction is not materially inconsistent with the duties or responsibilities of the Executive’s position as Chief Executive Officer of the Company, which refusal continues after the Board of Directors has again given the direction in writing, (ii) willful misconduct or reckless disregard by Dr. Cox of his duties or with respect to the interest or material property of the Company, (iii) any act by Dr. Cox of fraud against QLT or significant dishonesty to QLT, (iv) commission by Dr. Cox of a felony as reasonably determined by at least a majority of the members of the Board of Directors of QLT, or (v) a material breach of this Agreement by Dr. Cox or other conduct that constitutes just cause at common law, provided that the nature of such breach or conduct shall be set forth with reasonable particularity in a written notice to Dr. Cox who shall have twenty (20) days following delivery of such notice to cure such alleged breach or conduct, provided that such breach or conduct is, in the reasonable discretion of the Board of Directors, susceptible to a cure.

4.2

Termination Other than for Cause – QLT reserves the right to terminate Dr. Cox’s employment at any time prior to the expiry of the 6 month term of this Agreement or any extended term without reason or Cause. However, if (a) QLT terminates Dr. Cox’s employment for any reason other than for Cause then, except in the case of Dr. Cox becoming completely disabled (which is provided for in paragraph 4.6) and subject to the provisions set forth below (including but not limited to Section 4.8), Dr. Cox will be entitled to receive notice, pay and/or benefits (or any combination of notice, pay and/or benefits) as more particularly set out in paragraph 4.3.


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4.3

Severance Pay – In the event QLT terminates Dr. Cox’s employment as set out in paragraph 4.2, Dr. Cox will be entitled to payment of an amount equal to the Base Salary for the balance of the 6 month term (the “Severance Pay”). All benefit coverage would cease effective the Last Day. Dr. Cox acknowledges and agrees that Severance Pay is in respect of Base Salary only and, subject to any applicable minimum employment standards legislation requirements, may be paid on a semi-monthly or monthly basis, at QLT’s discretion.

(a)

Other Compensation – QLT will provide the following additional compensation:

QLT will reimburse (in accordance with QLT’s Policy and Procedures on QLink, as amended from time to time) Dr. Cox for all Expenses and Commuting Expenses properly and reasonably incurred by Dr. Cox on or prior to his Last Day, subject to the expense reimbursement provisions set out in subparagraph 2.1(c) and (i), and tax consultation and tax return preparation expenses incurred in accordance with subparagraph 2.1(h).

II.

Payment in respect of accrued but unpaid vacation pay owing to Dr. Cox to his Last Day.

III.

Payment in respect of any remaining tax equalization payments owing to Dr. Cox to his Last Day in accordance with Section 2.2 or, in the event that the reconciliation results in Dr. Cox owing money to QLT, Dr. Cox will make such payment to QLT.

IV.

Dr. Cox’s participation in any stock option plan offered by QLT to its employees will be in accordance with the terms of the plan in effect at the time of the stock option grant(s) to Dr. Cox and the applicable stock option agreement applicable to such grants provided that if Dr. Cox is terminated on or before 6 months after the Commencement Date or in the event of a change of control as defined in the applicable stock option agreement followed by the termination of his employment then the remaining unvested Options will vest and be exercisable in accordance with the Stock Option Plan and the applicable stock option agreement. If at the time of termination Dr. Cox is no longer a member of the Board (i.e. no service relationship with QLT remains), all vested options will expire within 90 days of the termination date.

4.4	Acknowledgement – Dr. Cox acknowledges and agrees that in the event QLT terminates Dr. Cox’s employment as set out in paragraph 4.2, except for the provisions of this Agreement which expressly survive termination of Employment and except for:

(a)

The Severance Pay; and

(b)

The other compensation set out in subparagraph 4.3(a);

QLT will have no further obligations, statutory or otherwise, to Dr. Cox in respect of this Agreement and Dr. Cox’s employment under this Agreement.

4.5

Release – In order to receive the payments and entitlements set out in Section 4.3 of this Agreement Dr. Cox must sign and deliver to QLT a release in the form set out in Schedule A to this Agreement within 30 days of the date of termination. If Dr. Cox does not sign and deliver the release, Dr. Cox will be entitled to only the minimum notice or compensation in lieu of notice, and other entitlements, required by the British Columbia Employment Standards Act.

4.6	Termination Due to Inability to Act

(a)

Termination – QLT may immediately terminate this Agreement by giving written notice to Dr. Cox if he becomes completely disabled (defined below) to the extent that he cannot perform his duties under this Agreement either


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For a period exceeding two consecutive months, or

II.

For a period of two months (not necessarily consecutive) occurring during any 3 month period,

and no other reasonable accommodation can be reached between QLT and Dr. Cox.

(b)

Payments – In the event of termination of Dr. Cox’s employment with QLT pursuant to the provisions of this paragraph 4.6, QLT agrees to pay to Dr. Cox Severance Pay as set out in paragraph 4.3.

(c)

Definition – The term “completely disabled” as used in this paragraph 4.6 will mean the inability of Dr. Cox to perform the essential functions of his position under this Agreement by reason of any incapacity, physical or mental, which the Board, based upon medical advice or an opinion provided by a licensed physician reasonably acceptable to the Board, determines to keep Dr. Cox from satisfactorily performing any and all essential functions of his position for QLT during the foreseeable future.

4.7

Death – Except as set out below, effective the date of death (the “Date of Death”) of Dr. Cox, this Agreement and both parties’ rights and obligations under this Agreement will terminate without further notice or action by either party. Within 30 days after the Date of Death (and the automatic concurrent termination of this Agreement), QLT will pay the following amounts to Dr. Cox’s estate:

(a)

Base Salary – Base Salary owing to Dr. Cox up to his Date of Death.

(b)

Payment in Lieu of Benefits – In lieu of employee benefit coverage for his eligible dependents after his Date of Death, a payment in the amount of 10% of the Base Salary for the period from the date of death to the expiry of the term or, if applicable, the end of the then current extended term.

(c)

Expense Reimbursement – Reimbursement (in accordance with QLT’s Policy and Procedures on QLink, as amended from time to time) of all reasonable Expenses and Commuting Expenses incurred by Dr. Cox prior to his Date of Death, subject to the expense reimbursement provisions set out in subparagraphs 2.1(c) and (i), and tax consultation and tax return preparation expenses incurred in accordance with subparagraph 2.1(h).

(d)

Vacation Pay – Payment in respect of accrued but unpaid vacation pay owing to Dr. Cox to his Date of Death.

(e)

Tax Equalization – Within 30 days of the date that it can be determined, payment in respect of any remaining tax equalization payments owing to Dr. Cox to his Date of Death in accordance with Section 2.2 or, in the event that the reconciliation results in Dr. Cox owing money to QLT, Dr. Cox will make such payment to QLT.

After his Date of Death, Dr. Cox’s participation and/or entitlement under any stock option plan offered by QLT to its employees will be in accordance with the terms of the plan in effect at the time of the stock option grant(s) to Dr. Cox and the applicable stock option agreement applicable to such stock options.

4.8

Termination by Expiry of the Term – If the employment of Dr. Cox is not terminated, or extended by agreement in writing, prior to 6 months from the Commencement Date as set out above, then his employment will terminate on the date that is 6 months from the Commencement Date, in which case the following will apply:

(a)

Base Salary – QLT will pay Dr. Cox the Base Salary owing to Dr. Cox up to the Last Day.


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(b)

Expense Reimbursement – Reimbursement (in accordance with QLT’s Policy and Procedures on QLink, as amended from time to time) of all reasonable Expenses and Commuting Expenses incurred by Dr. Cox prior to the Last Day, subject to the expense reimbursement provisions set out in subparagraphs 2.1(c) and (i), and tax consultation and tax return preparation expenses incurred in accordance with subparagraph 2.1(h).

(c)

Vacation Pay – Payment in respect of accrued but unpaid vacation pay owing to Dr. Cox to his Last Day.

(d)

Tax Equalization – Within 30 days of the date that it can be determined, payment in respect of the tax equalization payment owing to Dr. Cox to his Last Day in accordance with Section 2.2 or, in the event that the reconciliation results in Dr. Cox owing money to QLT, Dr. Cox will make such payment to QLT.

(e)

Stock Options – After the Last Day, Dr. Cox’s participation and/or entitlement under any stock option plan offered by QLT to its employees will be in accordance with the terms of the plan in effect at the time of the stock option grant(s) to Dr. Cox and the applicable stock option agreement applicable to such stock options.

(f)

QLT will have no further obligations, statutory or otherwise, to Dr. Cox in respect of this Agreement and Dr. Cox’s employment under this Agreement.

4.9

Benefits – Despite the foregoing, in respect of any termination of the employment of Dr. Cox, all benefits will cease on the Last Day provided that all or part of the benefit coverage (including short and long term disability and out-of-country travel coverage) will cease prior to the Last Day if Dr. Cox is no longer actively employed by QLT or if expressly provided in the plans and policies provided or established by QLT from time to time.

4.10

Transition Services – Following the termination of the employment of Dr. Cox by QLT and at the request of QLT, Dr. Cox will perform duties and responsibilities for QLT as reasonably requested by QLT related to his departure and/or the transition to a new Chief Executive Officer during the period in respect of which Dr. Cox receives Severance Pay. Dr. Cox will not be entitled to any additional compensation for such transition services as the compensation paid to Dr. Cox under this Agreement will constitute full compensation for such services. The parties may agree to terms should transition services be required for any additional period. The parties understand that Dr. Cox may commence new employment or other work after his employment with QLT ceases and will reasonably cooperate with each other with respect to the scheduling of such duties and responsibilities.

5.	CONFLICT OF INTEREST

5.1

Avoid Conflict of Interest – During the term of his employment with QLT, Dr. Cox agrees to conduct himself at all times so as to avoid any real or apparent conflict of interest with the activities, policies, operations and interests of QLT. To avoid improper appearances, Dr. Cox agrees that he will not accept any financial compensation of any kind, nor any special discount or loan from persons, corporations or organizations having dealings or potential dealings with QLT, either as a customer or a supplier or a co-venturer. QLT and Dr. Cox acknowledge and agree that from time to time the Board may consent in writing to activities by Dr. Cox which might otherwise appear to be a real or apparent conflict of interest.

5.2

No Financial Advantage – During the term of his employment with QLT, Dr. Cox agrees that neither he nor any members of his immediate family will take financial advantage of or benefit financially from information that is obtained in the course of his employment related duties and responsibilities unless the information is generally available to the public.


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5.3	Comply with Policies – During the term of his employment with QLT, Dr. Cox agrees to comply with all written policies issued by QLT dealing with conflicts of interest.

5.4	Breach Equals Cause – Dr. Cox acknowledges and agrees that breach by him of the provisions of this Section 5 continuing, if applicable, after the cure period referred to in Section 4.1, will be Cause for immediate termination by QLT of his employment with QLT.

6.	CONFIDENTIALITY

6.1

Information Held in Trust – Dr. Cox acknowledges and agrees that all business and trade secrets, confidential information and knowledge which Dr. Cox acquires during his employment with QLT relating to the business and affairs of QLT, its affiliates or subsidiaries or to technology, systems, programs, ideas, products or services which have been or are being developed or utilized by QLT, its affiliates or subsidiaries or in which QLT, its affiliates or subsidiaries are or may become interested and which QLT treats and maintains as confidential (and is not otherwise known or in the public domain) (collectively, “Confidential Information”), will for all purposes and at all times, both during the term of Dr. Cox’s employment with QLT and at all times thereafter, be held by Dr. Cox in trust and used by Dr. Cox only for the exclusive benefit of QLT.

6.2	Non Disclosure – Dr. Cox acknowledges and agrees that both during the term of his employment with QLT and at all times thereafter, without the express or implied consent of QLT, Dr. Cox will not:

(a)

Disclose – Disclose to any company, firm or person, other than QLT and its employees, consultants, advisers, directors and officers, any Confidential Information, except to the extent protected by an obligation or agreement of confidentiality; or

(b)

Use – Use any Confidential Information that he may acquire for his own purposes or for any purposes, other than those of QLT.

6.3	Intellectual Property Rights

(a)

Disclose Inventions – Dr. Cox agrees to promptly disclose to QLT any and all ideas, developments, designs, articles, inventions, improvements, discoveries, machines, appliances, processes, methods, products or the like that Dr. Cox may invent, conceive, create, design, develop, prepare, author, produce or reduce to practice, either solely or jointly with others, in the course of his employment with QLT that specifically relate to the then business of QLT (collectively, “Inventions”).

(b)

Inventions are QLT Property – All Inventions and all other product of the work of Dr. Cox for QLT will at all times and for all purposes be the property of, and are hereby assigned by Dr. Cox to, QLT for QLT to use, alter, vary, adapt and exploit as it will see fit, and will be acquired or held by Dr. Cox in a fiduciary capacity solely for the benefit of QLT.

(c)

Additional Requirements – Dr. Cox agrees to:

Treat all information with respect to Inventions as Confidential Information.

II.

Keep complete and accurate records of Inventions, which records will be the property of QLT and copies of which records will be maintained at the premises of QLT.

III.

Execute all assignments and other documents required and reasonably requested by QLT to assign and transfer to QLT (or such other persons as QLT may direct) all right, title and interest in and to the Inventions and all other product of the work of Dr. Cox for QLT, and all writings, drawings, diagrams, photographs, pictures, plans, manuals, software and other materials,


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goodwill and ideas relating thereto, including, but not limited to, all rights to acquire in the name of QLT or its nominee(s) patents, registration of copyrights, design patents and registrations, trademarks and other forms of protection that may be available.

IV.

Execute all documents and do all acts reasonably requested by QLT to give effect to this provision.

6.4

Records – Dr. Cox agrees that all records or copies of records concerning QLT’s activities, business interests or investigations made or received by him during his employment with QLT are and will remain the property of QLT. He further agrees to keep such records or copies in the custody of QLT and subject to its control, and to surrender the same at the termination of his employment or at any time during his employment at QLT’s request.

6.5

No Use of Former Employer’s Materials and Information – Dr. Cox certifies that he has not brought to QLT and will not use while performing his employment duties for QLT any materials or documents of any former employer which are not generally available to the public, except if the right to use the materials or documents has been duly licensed to QLT by the former employer. Dr. Cox certifies, warrants, and represents that his performance of all provisions of this Agreement will not breach any agreement or other obligation to keep in confidence proprietary or confidential information known to him before or after the commencement of employment with QLT. Dr. Cox will not disclose to QLT, use in the performance of his work for QLT, or induce QLT to use, any Inventions (as defined above), confidential or proprietary information, or other material or documents belonging to any previous employer or to any other party in violation of any obligation of confidentiality to such party or in violation of such party’s proprietary rights; including without limitation whether any products or services of such previous employer or other person actually incorporated, used, or were designed or modified based upon such information, and even if such information constitutes negative know-how.

7.	POST-EMPLOYMENT RESTRICTIONS

7.1

Non-Compete – Dr. Cox agrees that, by virtue of his senior position with QLT, he possesses and will possess strategic sensitive information concerning the business of QLT, its affiliates and subsidiaries. As a result, and in consideration of the payments to be made by QLT to Dr. Cox under this Agreement, without the prior written consent of QLT, for a period of 9 months following termination of his employment with QLT for any reason (by resignation or otherwise), as measured from his Last Day, Dr. Cox will not:

(a)

Participate in a Competitive Business – Directly or indirectly, own, manage, operate, join, control or participate in the ownership, management, operation or control of, or be a director or an employee of, or a consultant to, any business, firm or corporation that, as a part of conducting its business, is in any way competitive with QLT or any of its affiliates or subsidiaries with respect to:

the development and/or commercialization and/or marketing of pharmaceutical products that are directly competitive with QLT’s or its subsidiaries’ then current product candidates or any other products then being commercialized by or on behalf of QLT or its affiliates or subsidiaries which individually have worldwide annual net sales of U.S.$50 million or more in the calendar year preceding Dr. Cox’s Last Day, or

II.

the development and/or commercialization and/or marketing of pharmaceutical products for treating ophthalmic indications associated with endogenous retinyl deficiencies in the eye,

anywhere in Canada, the United States or Europe.


		Page 10		initials

(b)

Solicit on Behalf of a Competitive Business – Directly or indirectly call upon or solicit any QLT employee or QLT customer or known prospective customer of QLT on behalf of any business, firm or corporation that, as part of conducting its business, is in any way competitive with QLT with respect to:

II.

the development and/or commercialization and/or marketing of pharmaceutical products for treating ophthalmic indications associated with endogenous retinyl deficiencies in the eye,

anywhere in Canada, the United States or Europe.

(c)

Solicit Employees – Directly or indirectly solicit any individual to leave the employment of QLT or any of its affiliates or subsidiaries for any reason or interfere in any other manner with the employment relationship existing between QLT, its affiliates or subsidiaries and its current or prospective employees.

(d)

Solicit Customers – Directly or indirectly induce or attempt to induce any customer, supplier, distributor, licensee or other business relation of QLT or its affiliates or subsidiaries to cease doing business with QLT, its affiliates or subsidiaries or in any way interfere with the existing business relationship between any such customer, supplier, distributor, licensee or other business relation and QLT or its affiliates or subsidiaries.

7.2	Minority Share Interests Allowed – The parties agree that nothing contained in paragraph 7.1 is intended to prohibit Dr. Cox from owning less than 5% of the issued and outstanding stock of any company whose stock or shares are traded publicly on a recognized exchange.

8.	REMEDIES

8.1	Irreparable Damage – Dr. Cox acknowledges and agrees that:

(a)

Breach – Any breach of provisions of Sections 6 and 7 of this Agreement could cause irreparable damage to QLT; and

(b)

Consequences of Breach – In the event of a breach of any provision of this Agreement by Dr. Cox, QLT will have, in addition to any and all other remedies at law or in equity, the right to an injunction, specific performance or other equitable relief to prevent any violation by him of any of the provisions of this Agreement including, without limitation, the provisions of Sections 6 and 7.

8.2

Injunction – In the event of any dispute under Sections 6 and/or 7, Dr. Cox agrees that QLT will be entitled, without showing actual damages, to a temporary or permanent injunction restraining his conduct, pending a determination of such dispute and that no bond or other security will be required from QLT in connection therewith.

8.3

Additional Remedies – Dr. Cox acknowledges and agrees that the remedies of QLT specified in this Agreement are in addition to, and not in substitution for, any other rights and remedies of QLT at law or in equity and that all such rights and remedies are cumulative and not alternative or exclusive of any other rights or remedies and that QLT may have recourse to any one or more of its available rights and remedies as it will see fit.


		Page 11		initials

9.	GENERAL MATTERS

9.1

Tax Withheld – The parties acknowledge and agree that certain payments to be made by QLT to Dr. Cox under this Agreement will be subject to QLT’s withholding of applicable withholding taxes and that the payments are currently taxable benefits for Canadian income tax purposes and may also be taxable benefits for U.S. income tax purposes, unless express exemptions exist.

9.2	Independent Legal Advice – Dr. Cox acknowledges that he has obtained or had the opportunity to obtain independent legal advice with respect to this Agreement and all of its terms and conditions.

9.3	Binding Agreement – The parties agree that this Agreement will inure to the benefit of and be binding upon each of them and their respective heirs, executors, successors and assigns.

9.4

Governing Law – The parties agree that this Agreement will be governed by and interpreted in accordance with the laws of the Province of British Columbia and the laws of Canada applicable to this Agreement. All disputes arising under this Agreement will be referred to the Courts of the Province of British Columbia, which will have exclusive jurisdiction, unless there is mutual agreement to the contrary.

9.5	Notice – The parties agree that any notice or other communication required to be given under this Agreement will be in writing and will be delivered personally or by facsimile transmission to the addresses set forth on page 1 of this Agreement to the attention of the following persons:

(a)

If to QLT – Attention: Chairman, Fax No. (604) 707-7001,

with a copy to:

QLT Inc.

887 Great Northern Way, Suite 250

Vancouver, British Columbia

Attention: Principal Legal Officer

Fax No.: (604) 873-0816

(b)

If to Dr. Cox – To the address for Dr. Cox specified on page 1 of this Agreement;

or to such other addresses and persons as may from time to time be notified in writing by the parties. Any notice delivered personally will be deemed to have been given and received at the time of delivery. Any notice delivered by facsimile transmission will be deemed to have been given and received on the next business day following the date of transmission.

9.6	Survival of Terms

(a)

Dr. Cox’s Obligations – Dr. Cox acknowledges and agrees that his representations, warranties, covenants, agreements, obligations and liabilities under any and all of Sections 6, 7, 8 and 9 of this Agreement will survive any termination of this Agreement.

(b)

Company’s Obligations – QLT acknowledges and agrees that its representations, warranties, covenants, agreements, obligations and liabilities under any and all of Sections 2, 3, 4 and 9 of this Agreement will survive any termination of this Agreement.

9.7

Waiver – The parties agree that any waiver of any breach or default under this Agreement will only be effective if in writing signed by the party against whom the waiver is sought to be enforced, and no waiver will be implied by indulgence, delay or other act, omission or conduct. Any waiver will only apply to the specific matter waived and only in the specific instance in which it is waived.


		Page 12		initials

9.8

Entire Agreement – The parties agree that the provisions contained in this Agreement and any stock option agreements entered into between QLT and Dr. Cox constitute the entire agreement between QLT and Dr. Cox with respect to the subject matters hereof and thereof, and supersede all previous communications, understandings and agreements (whether verbal or written) between QLT and Dr. Cox regarding the subject matters hereof and thereof. To the extent that there is any conflict between the provisions of this Agreement and any stock option agreements, between QLT and Dr. Cox, the following provisions will apply:

(a)

Stock Options – If the conflict is with respect to an entitlement or obligation with respect to stock options of QLT, the provisions of the stock option agreements will govern (unless the parties otherwise mutually agree).

(b)

Other – In the event of any other conflict, the provisions of this Agreement will govern (unless the parties otherwise mutually agree).

9.9

Severability of Provisions – If any provision of this Agreement as applied to either party or to any circumstance is adjudged by a court of competent jurisdiction to be void or unenforceable for any reason, the invalidity of that provision will in no way affect (to the maximum extent permissible by law):

(a)

The application of that provision under circumstances different from those adjudicated by the court;

(b)

The application of any other provision of this Agreement; or

(c)

The enforceability or invalidity of this Agreement as a whole.

If any provision of this Agreement becomes or is deemed invalid, illegal or unenforceable in any jurisdiction by reason of the scope, extent or duration of its coverage, then the provision will be deemed amended to the extent necessary to conform to applicable law so as to be valid and enforceable or, if the provision cannot be so amended without materially altering the intention of the parties, then such provision will be stricken and the remainder of this Agreement will continue in full force and effect.

9.10	Captions – The parties agree that the captions appearing in this Agreement have been inserted for reference and as a matter of convenience and in no way define, limit or enlarge the scope or meaning of this Agreement or any provision.

9.11	Amendments – Any amendment to this Agreement will only be effective if the amendment is in writing and is signed by QLT and Dr. Cox.

9.12

Employment Standards – In the event that the minimum standards in the Employment Standards Act (B.C.) as they exist from time to time or any other applicable employment standards legislation are more favorable to Dr. Cox in any respect than provided for herein, including but not limited to the provisions in respect of notice of termination, the provisions of the Employment Standards Act shall apply.


		Page 13		initials

IN WITNESS WHEREOF the parties have executed this Agreement as of the day and year first written above.

QLT INC.


		Page 14		initials

SCHEDULE A

FINAL RELEASE

IN CONSIDERATION OF the payments made to me by QLT Inc. (hereinafter called “QLT”) pursuant to paragraph 4.3 of the Employment Agreement dated the 23rd day of October, 2014 between the undersigned and QLT (the “Employment Agreement”), effective the date of this Release, I, Geoffrey F. Cox of do hereby remise, release and forever discharge QLT, having a place of business at 887 Great Northern Way, Suite 250 in the City of Vancouver, Province of British Columbia, V5T 4T5, its officers, directors, servants, employees and agents, and their heirs, executors, administrators, successors and assigns, as the case may be, of and from any and all manner of actions, causes of action, suits, contracts, claims, damages, costs and expenses of any nature or kind whatsoever, whether in law or in equity, which as against QLT or such persons as aforesaid or any of them, I have ever had, now have, or at any time hereafter I or my personal representatives can, shall or may have, by reason of or arising out of my employment with QLT and/or the subsequent termination of my employment with QLT on or about , 20 , or in any other way connected with my employment with QLT and more specifically, without limiting the generality of the foregoing, any and all claims for damages for termination of my employment, constructive termination of my employment, loss of position, loss of status, loss of future job opportunity, loss of opportunity to enhance my reputation, the timing of the termination and the manner in which it was effected, loss of bonuses, loss of shares and/or share options, loss of benefits, including life insurance and short and long-term disability benefit coverage, and any other type of damages arising from the above. Notwithstanding the foregoing, nothing in this Release will act to remise, release or discharge QLT from obligations, if any, which QLT may have to me by reason of or relating to my service on the Board of Directors of QLT, under Section 4.3 of the Employment Agreement, pursuant to paragraph 2.1(j) of the Employment Agreement or any indemnity agreements previously entered into between me and QLT or from any rights I may have to claim coverage under QLT’s past, current or future director and/or officer insurance policies, in either case with respect to existing or future claims that may be brought by third parties.

IT IS UNDERSTOOD AND AGREED that this Release includes any and all claims arising under the Employment Standards Act, Human Rights Code, or other applicable legislation and that the consideration provided includes any amount that I may be entitled to under such legislation.

IT IS FURTHER UNDERSTOOD AND AGREED that this Release is subject to compliance by QLT with its obligations under paragraph 4.3 of the Employment Agreement.


		Page 15		initials

IT IS FURTHER UNDERSTOOD AND AGREED that this is a compromise and is not to be construed as an admission of liability on the part of QLT. The terms of this Release set out the entire agreement between QLT and me with respect to the matters described herein and are intended to be contractual and not a mere recital.

IT IS FURTHER UNDERSTOOD AND AGREED that I will keep the contents of this settlement and all communication relating thereto confidential except to Revenue Canada and the U.S. Internal Revenue Service or as is required to obtain legal and tax advice, or to enforce my rights hereunder in a court of law, as is required by law.

IT IS FURTHER UNDERSTOOD AND AGREED that the consideration described herein was voluntarily accepted by me for the purpose of making a full and final settlement of all claims described above and that prior to agreeing to the settlement, I was advised by QLT of my right to receive independent legal advice.

IN WITNESS WHEREOF this Release has been executed effective the day of , 20 .



SIGNED, SEALED AND DELIVERED	)
By Geoffrey F. Cox in the presence of:	)
	)

Signature of Witness
	)
	)	Dr. Geoffrey F. Cox
Name of Witness	)
	)
	)
Address	)
	)
	)
	)
Occupation	)


		Page 16		initials

EXHIBIT 10.2

LOGO

October , 2014

To: Geoff Cox

Personal and Confidential

Re:	Notification of Grant

I am pleased to inform you that in recognition of your contribution to the Company, the Board of Directors of QLT Inc. (the “Company”) has granted to you an Option to purchase 150,000 Common Shares (the “Optioned Shares”) at the Option Exercise Price of Cdn $x.xx per Optioned Share, effective October , 2014 (the “Grant Date”). The Option to acquire the Optioned Shares will expire ten years from the Grant Date, on October , 2024 (the “Expiry Date”). The terms and conditions which govern the Option are set out in three places: (1) in this letter (the “Notification Letter”), (2) in the attached schedule which sets out general terms and conditions relating to the Option (the “General Terms”), and (3) in the QLT 2000 Incentive Stock Plan, as amended and restated effective April 25, 2013 (the “Plan”). Capitalized terms used but not defined in this Notification Letter have the meanings given to such terms in the Plan.

We encourage you to review a copy of the Company’s Proxy Statement for the Annual General and Special Meeting of Shareholders held on June 14, 2013 (the “Proxy Statement”), which sets out a summary of the Plan and the amendments made to the Plan effective April 25, 2013, and a copy of the Plan Prospectus. The Proxy Statement, the Plan and Plan Prospectus are available for reference on QLink. You may also obtain a copy of any of these documents by contacting the Company’s legal department at (604) 707-7363.

Anyone exercising options or trading in QLT stock must comply with the QLT Trading Policy. A copy of the Trading Policy has been previously provided to you, and you are subject to it. The QLT Trading Policy is also available for your reference on QLink.

By signing this Notification Letter where indicated, you and the Company agree that the Option is granted under and governed by the terms and conditions of this Notification Letter, the General Terms and the Plan, all of which together constitute the Award Agreement between you and the Company relating to the Option.

Please confirm receipt of this Notification Letter by signing and returning this Notification Letter to the Human Resources department, attention Frank Ott, as soon as possible. You may retain a copy for your personal records.

In the event that you do not return a copy of this Notification Letter signed by you to the person indicated above, you will be deemed to have accepted the Option and agreed to the terms of the Award Agreement upon the exercise by you of the Option in respect of any one or more Optioned Shares.

Yours truly,

QLT Inc.



Jeffrey Meckler
Director

Accepted and agreed to:				Date:

GENERAL TERMS AND CONDITIONS

STOCK OPTION GRANTS TO EMPLOYEES

1.	Defined Terms. All capitalized terms which are not defined in the Notification Letter or below have the meaning given to them in the Plan.

2.	Term. Subject to the terms and conditions of the Plan, Section 5 of these General Terms and Conditions, and this Section 2, the Option will terminate on the earlier of:

(a)

The date on which the Option is exercised with respect to all of the Optioned Shares; and

(b)

5:00 p.m. (Vancouver time) on the Expiry Date.

If the end of the term of the Option falls within, or within two business days after the end of, a “black out” or similar period imposed under any insider trading policy or similar policy of the Company (but not, for greater certainty, a restrictive period resulting from the Company or its insiders being the subject of a cease trade order of a securities regulatory authority), the end of the term of the Option will be the tenth business day after the earlier of the end of such black out period and, provided the black out period has ended, the Expiry Date.

Vesting. Subject to the terms and conditions of the Award Agreement, the Option will vest and become exercisable in 6 equal monthly instalments on the monthly anniversary of the Grant Date (each monthly anniversary, a “Vesting Date”), provided that, if the number of Optioned Shares is not equally divisible by 6, at each Vesting Date the cumulative number of Optioned Shares vested will be rounded to the nearest whole number.

4.	Exercise of Options.

(a)

Exercise Notice. The Grantee may exercise the Option in respect of vested Optioned Shares by giving written notice of exercise (the “Exercise Notice”) signed and dated by the Grantee (and not postdated), stating that the Grantee elects to exercise his or her rights to purchase Optioned Shares under the Option and specifying the number of Optioned Shares in respect of which the Option is being exercised and specifying the Option Exercise Price to be paid therefor.

(b)

Delivery and Payment. The Grantee shall deliver the Exercise Notice to the Company at its principal office at 887 Great Northern Way, Suite 250, Vancouver, British Columbia, Canada, V5T 4T5 (or at such other address as the principal office of the Company may be located at the time of exercise) addressed to the attention of the Secretary or assistant secretary (if any) of the Company (or a designee notified in writing from time to time by the Company) and be accompanied by full payment (payable at par in Vancouver, British Columbia) in any combination of the following (subject to all applicable laws):

(i)

cash, bank draft or certified cheque;

(ii)

if and so long as the Common Shares are listed on an Exchange, delivery of a properly executed Exercise Notice, together with irrevocable instructions, to

(A)

a brokerage firm designated by the Company to deliver promptly to the Company the aggregate amount of sale or loan proceeds to pay the Option Exercise Price and any withholding tax obligations that may arise in connection with the exercise, and

(B)

the Company to deliver the certificates for such purchased shares directly to such brokerage firm,

all in accordance with the regulations of any relevant regulatory authorities;

(iii)

with prior written consent of the Company and subject to Section 13.3 of the Plan, written instructions from the Grantee to the Company to effect a net settlement of Optioned Shares under the Option having a value equal to the Option Exercise Price of any Option and/or the withholding taxes due with respect to the exercise of the Option; and

(c)

Certificate. As soon as practicable after any exercise of the Option, a certificate or certificates representing the Common Shares of which the Option is exercised will be delivered by the Company to the Grantee or to the Grantee’s designated brokered firm, as applicable.

Rules Upon Retirement, Death, Disability or Termination. The Option will terminate on the earlier of the expiry of the Option under Section 2 of these General Terms and Conditions and the 90th day (effective following the close of trading on the Exchange, if such day is a trading day) after the date of the Grantee’s Termination of Service as an employee and/or director, as applicable, of the Company or its Affiliates, provided that:

(a)

Retirement. If the Grantee ceases to be an employee of the Company or any Affiliate by reason of retirement (the date of retirement or cessation herein being called the “retirement date”) and:

(i)

the Grantee:

(A)

has worked on behalf of the Company or any Affiliate for at least 20 years, or

(B)

is at least 60 years of age and has worked continuously on behalf of the Company or any Affiliate for at least five years,

then all Optioned Shares of the Grantee will become immediately vested and will be exercisable on and after the retirement date until the expiry of the Option; or

(ii)

the Grantee has received the consent of the Committee at or after an earlier age and upon completion of that number of years of service as the Committee may specify, then all Optioned Shares of the Grantee will become immediately vested and will be exercisable on and after the retirement date, during a period ending on the earlier of:

(A)

the 90^th day after the retirement date, and

(B)

the expiry of the Option,

unless otherwise determined by the Committee and approved by the Exchange (if applicable).

(b)

Death. If the Grantee dies while the Option is otherwise exercisable, unless otherwise determined by the Committee and approved by the Exchange (if applicable), all Optioned Shares of the Grantee will become immediately vested and will be exercisable by the legal personal representatives of the estate of the Grantee during a period ending on the earlier of:

(i)

the date that is 12 months following the date of death, and

(ii)

the expiry of the Option.

(c)

Disability. If the Committee determines, in its sole discretion, that the continuous service of the Grantee as an officer or employee of the Company or any Affiliate has been interrupted or terminated as a result of the Grantee’s complete disability, as determined by the Committee, in its sole discretion, (but no interruption or termination will be deemed to have occurred in the case of sick leave or any other leave of absence approved of by the Board, provided that either such leave is for a period of not more than 90 days or reemployment upon the expiration of such leave is provided or guaranteed by contract or law), unless otherwise determined by the Committee and approved by the Exchange (if applicable), the Optioned Shares will become immediately vested and will be exercisable by the Grantee (or in the case of a Grantee who is legally incapacitated, by his or her guardians or legal representatives) during the period ending on the earlier of:

(i)

12 months following the date of such termination, and

(ii)

the expiry of the Option.

(d)

Termination.

(i)

If the Grantee is terminated by the Company (which, for greater certainty, excludes a resignation of the Grantee) as an employee of the Company or any Affiliate other than for cause (the date of the Termination of Service herein being called the “Termination Date”), unless otherwise determined by the Committee and approved by the Exchange (if applicable), the previously unvested Optioned Shares of the Granteee will become immediately vested and all of the Optioned Shares which have vested will be exercisable on and after the termination date, for the period ending on the earlier of:

(A)

90 days following the later of the termination date and the date that the Grantee otherwise ceases to be an employee or director of the Company or any Affiliate, or

(B)

the expiry of the Option.

(ii)

If the Grantee is terminated by the Company as an employee of the Company or any Affiliate for cause, unless otherwise determined by the Committee and approved by the Exchange (if applicable), the Option will expire automatically on the date of the Grantee’s Termination of Service as an employee of the Company or any Affiliate.

6.	Change in Control.

(a)

Definitions. For the purposes of this Section, “Change in Control” means any of the following events:

(i)

Merger. A merger, consolidation, reorganization or arrangement involving the Company, other than a merger, consolidation, reorganization or arrangement in which stockholders of the Company immediately prior to such merger, consolidation, reorganization or arrangement own, directly or indirectly, securities possessing at least 50% of the total combined voting power of the outstanding voting securities of the corporation resulting from such merger, consolidation, reorganization or arrangement in substantially the same proportion as their ownership of such voting securities immediately prior to such merger, consolidation, reorganization or arrangement;

(ii)

Tender Offer. The acquisition, directly or indirectly, by any person or group of persons acting jointly or in concert (other than the Company or a person that directly or indirectly controls, is controlled by, or is under common control with, the Company) of beneficial ownership of securities possessing more than 50% of the total combined voting power of the Company’s outstanding securities pursuant to a tender offer (which for greater certainty, includes a takeover bid) made directly to the Company’s stockholders;

(iii)

Sale. The sale, transfer or other disposition of all or substantially all of the assets of the Company other than a sale, transfer or other disposition to an Affiliate of the Company or to an entity in which stockholders of the Company immediately prior to such sale, transfer or other disposition own, directly or indirectly, securities possessing at least 50% of the total combined voting power of the outstanding voting securities of the purchasing entity in substantially the same proportion as their ownership of such voting securities immediately prior to sale, transfer or other disposition; or

(iv)

Board Change. A change in the composition of the Board over a period of 24 consecutive months or less such that a majority of the Board members ceases to be comprised of individuals who either have been:

(A)

Board members continuously since the beginning of such period, or

(B)

appointed or nominated for election as Board members during such period by at least a majority of the Board members described in subsection (A) above who were still in office at the time the Board approved such appointment or nomination.

(b)

Acceleration. Effective immediately upon the occurrence of a Change in Control followed by the Grantee’s termination by the Company (which, for greater certainty, excludes a resignation of the Grantee) as an employee of the Company or any Affiliate other than for cause, any portion of the Option of the Grantee that is unvested will, unless otherwise determined by the Committee and approved by the Exchange (if applicable), become immediately vested and will be exercisable on and after the date of the Change of Control until the earlier of:

(i)

90 days following the later of the termination date and the date that the Grantee otherwise ceases to be an employee or director of the Company or any Affiliate, or

(ii)

the expiry of the Option.

7.	Conditions to Exercise. Notwithstanding any of the provisions of the Award Agreement, the Company’s obligation to issue Common Shares to the Grantee upon exercise of the Option is subject to the following:

(a)

Qualification. Completion of registration or other qualification of the Common Shares or obtaining approval of such governmental authority as the Company determines is necessary or advisable in connection with the authorization, issuance or sale of the Common Shares;

(b)

Listing. The admission of the Common Shares to listing or quotation on the Exchange; and

(c)

Undertakings. The receipt by the Company from the Grantee of such representations, agreements and undertakings, including as to future dealings in the Common Shares, as the Company or its counsel determines are necessary or advisable in order to safeguard against the violation of securities laws of any jurisdiction.

Adjustments. In the event that there is any material change in the Common Shares resulting from subdivisions, consolidations, substitutions or reclassifications of the Common Shares, the payment of stock dividends by the Company (other than dividends in the ordinary course) or other relevant changes in the capital of the Company or from a proposed merger, amalgamation or other corporate arrangement or reorganization involving the exchange or replacement of Common Shares for those in another corporation, appropriate adjustments in the number of Optioned Shares and the Option Exercise Price will be conclusively determined by the Committee.

Further Adjustments. Subject to Sections 6 and 8, if, because of a merger, amalgamation or other corporate arrangement or reorganization, the exchange or replacement of Common Shares for those in another corporation is imminent, the Board may, in a fair and equitable manner, determine the manner in which all unexercised or unvested options granted under this Option will be treated including, without limitation, requiring the acceleration of the time for the exercise and/or vesting of the option rights by the Grantee and of the time for the fulfilment of any conditions or restrictions on exercise or vesting. All determinations of the Board under this Section will be final, binding and conclusive for all purposes subject to the approval of the Exchange, if applicable.

10.

Tax. The Grantee is solely responsible for the payment of any applicable taxes arising from the grant, vesting, settlement or exercise of the Option and any payment is to be in a manner satisfactory to the Company. Notwithstanding the foregoing, the Company will have the right to withhold from any amount payable to a Grantee, either under the Plan or otherwise, such amount as may be necessary to enable the Company to comply with the applicable requirements of any federal, provincial, state, local or foreign law, or any administrative policy of any applicable tax authority, relating to the withholding of tax or any other required deductions with respect to the Option (the “Withholding Obligations”). The Company may require the Grantee, as a condition to the exercise or settlement of the Option, to make such arrangements as the Company may require so that the Company can satisfy applicable Withholding Obligations, including, without limitation, requiring the Grantee to (i) remit the amount of any such Withholding Obligations to the Company in advance; (ii) reimburse the Company for any such Withholding Obligations; (iii) deliver written instructions contemplated in Section 4(b)(iii) hereof, to effect a net settlement of Common Shares under an Option in an amount required to satisfy any such Withholding Obligations; or (iv) pursuant to Section 4(b)(ii) hereof, cause such broker to withhold from the proceeds realized from such transaction the amount required to satisfy any such Withholding Obligations and to remit such amount directly to the Company.

11.

Black Out Periods. The Grantee acknowledges and agrees that the Award Agreement and the grant of the Option to the Grantee is subject to the Grantee’s agreement to at all times comply with the Company’s policies with respect to black out periods, as more particularly set out in the Company’s Trading Policy, as amended from time to time.

12.	No Rights as Shareholder. The Grantee will not have any rights as a Shareholder with respect to any of the Optioned Shares underlying the Option until such time as the Grantee becomes the record owner of such Optioned Shares.

13.	No Effect on Employment. Nothing in the Award Agreement will:

(a)

Continue Employment. Confer upon the Grantee any right to continue in the employ of or under contract with the Company or any Affiliate or affect in any way the right of the Company or any Affiliate to terminate his or her employment at any time.

(b)

Extend Employment. Be construed to constitute an agreement, or an expression of intent, on the part of the Company or any Affiliate to extend the employment of the Grantee beyond the time that he or she would normally be retired pursuant to the provisions of any present or future retirement plan or policy of the Company or any Affiliate, or beyond the time at which he or she would otherwise be retired pursuant to the provisions of any contract of employment with the Company or any Affiliate.

14.	Enurement. The Award Agreement shall enure to the benefit of and be binding upon the parties to the Award Agreement and upon the successors or assigns of the Company and upon the executors, administrators and legal personal representatives of the Grantee.

15.	Further Assurances. Each of the parties to the Award Agreement will do such further acts and execute such further documents as may required to give effect to and carry out the intent of the Award Agreement.

16.	Non-Assignable. The Option is personal to the Grantee and may not be assigned or transferred in whole or in part, except by will or by the operation of the laws of devolution or distribution and descent.

17.	Amendments. Any amendments to the Award Agreement must be in writing duly executed by the parties and will (if required) be subject to the approval of the applicable regulatory authorities.

18.	Time of the Essence. Time is of the essence of the Award Agreement.

19.	Governing Law. The Award Agreement shall be governed, construed and enforced according to the laws of the Province of British Columbia and is subject to the exclusive jurisdiction of the courts of the Province of British Columbia.

20.

Interpretation of the Award Agreement and the Plan. If any question or dispute arises as to the interpretation of the Award Agreement, the question or dispute will be determined by the Committee and such determination will be final, conclusive and binding for all purposes on both the Company and the Grantee.

21.	Conflict Between these General Terms and Conditions and the Plan. If there is any conflict between these General Terms and the Plan, the Plan, as amended from time to time, will govern.

These General Terms and Conditions are dated for reference: October 17, 2014

EXHIBIT 31.1

CERTIFICATION

I, Dr. Geoffrey F. Cox, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of QLT Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed, under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 28, 2014

/s/ Dr. Geoffrey F. Cox

Dr. Geoffrey F. Cox

Interim Chief Executive Officer

(Principal Executive Officer)

EXHIBIT 31.2

CERTIFICATION

I, Sukhi Jagpal, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of QLT Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 28, 2014

/s/ Sukhi Jagpal

Sukhi Jagpal

Chief Financial Officer

(Principal Financial and Accounting Officer)

EXHIBIT 32.1

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of QLT Inc. (the “Company”) for the quarterly period ended September 30, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Dr. Geoffrey F. Cox, Interim Chief Executive Officer and acting principal executive officer certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at and for the periods indicated.

Dated: October 28, 2014

/s/ Dr. Geoffrey F. Cox

Dr. Geoffrey F. Cox

Interim Chief Executive Officer

(Principal Executive Officer)

EXHIBIT 32.2

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of QLT Inc. (the “Company”) for the quarterly period ended September 30, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Sukhi Jagpal, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at and for the periods indicated.

Dated: October 28, 2014

/s/ Sukhi Jagpal

Sukhi Jagpal

Chief Financial Officer

(Principal Financial and Accounting Officer)

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