| Strategic Transactions | 2. STRATEGIC TRANSACTIONS Following the October 8, 2014 termination of
the Auxilium Agreement and Plan of Merger (as defined and described
under Note 3 – Terminated Merger Transaction with
Auxilium
Merger Transaction with InSite Vision Incorporated On June 8, 2015, QLT and InSite Vision
Incorporated (“InSite”) entered into an Agreement and
Plan of Merger, as amended and restated as of July 16, 2015
(the “Merger Agreement”). The Merger Agreement
contemplates a business combination whereby Isotope Acquisition
Corp. (“Merger Sub”), a Delaware corporation and an
indirect and wholly owned subsidiary of QLT, will be merged with
and into InSite, after which the separate corporate existence of
Merger Sub will cease and InSite will emerge as the surviving
corporation to become an indirect wholly owned subsidiary of QLT
(the “Merger”). QLT will be the legal and accounting
acquirer and the acquisition method of accounting under ASC
No. 805 – Business Combinations Upon consummation of the Merger, each share of
InSite common stock owned immediately prior to the Merger will be
converted into the right to receive 0.048 (the “Exchange
Ratio”) of a validly issued, fully paid and non-assessable
common share of QLT. Following the completion of the Merger,
current QLT stockholders are expected to own approximately 88.5%
and current InSite stockholders are expected to own approximately
11.5% of the combined company (the “ Combined
Company”). While the Merger has been unanimously approved by
the Boards of Directors of QLT, InSite and Merger Sub, completion
of the Merger is subject to customary closing conditions, including
among other things, (i) the adoption of the Merger Agreement
by InSite’s stockholders, (ii) the absence of any legal
restraints or prohibitions on the consummation of the Merger,
(iii) the effectiveness of the registration statement on Form
S-4, which was filed with the SEC on July 29, 2015, and
(iv) the approval of the listing of the QLT common shares to
be issued in the Merger on the NASDAQ and Toronto Stock Exchange
(the “TSX”), subject to official notice of issuance. In
addition, QLT and InSite’s respective obligations to complete
the Merger are subject to other specified conditions, including,
(a) with respect to QLT’s obligations (i) the U.S.
Food and Drug Administration (the “FDA”) not having
issued a written communication refusing to file the new drug
application (“NDA”) with respect to BromSite™
(the “BromSite NDA”) for review by August 10,
2015, which is the 60th day following the FDA’s receipt of
the BromSite NDA, and (ii) the FDA not having asserted a
deficiency that is reasonably likely to require one or more
additional clinical studies with respect to BromSite by
August 24, 2015, which is the 74th day following the
FDA’s receipt of the BromSite NDA, (b) with respect to
InSite’s obligations, QLT not having taken any action that
would reasonably be expected to cause QLT to be treated as a
“domestic corporation” within the meaning of the
Internal Revenue Code of 1986 as a result of the Merger, and
(c) with respect to the respective obligations of QLT and
InSite (i) subject to the standards set forth in the Merger
Agreement, the accuracy of the representations and warranties of
the other party, (ii) compliance of the other party with its
covenants under the Merger Agreement in all material respects, and
(iii) no events having occurred that would have a material
adverse effect on the other party. The Merger is expected to close
in the second half of 2015. Under the terms of the Merger Agreement, QLT is
subject to certain interim operating covenants until the closing
date of the Merger. These covenants include, but are not limited
to, restrictions on QLT’s ability to change, recapitalize or
reorganize its capital stock, grant additional equity instruments
and awards, and incur, create or assume additional indebtedness. In
addition, QLT is precluded from establishing a record date for the
Aralez Distribution (as defined below) that is earlier than the
completion of the Merger or termination of the Merger
Agreement. In light of InSite’s lack of financial
resources, on June 8, 2015, QLT granted InSite a secured line
of credit (the “Secured Note”) for up to $9.9 million
to fund continuing operations through to the completion of the
Merger and subject to certain conditions and restrictions. The
Secured Note bears interest at 12% per annum and may increase
to 14% per annum under certain conditions specified in the
Secured Note Agreement (the “Secured Note Agreement”).
The Secured Note is secured by a first priority security interest
in substantially all of InSite’s assets. The outstanding
principal balance together with all accrued and unpaid interest
will become due and payable in a lump sum on the earliest of:
(i) the day following the closing of the Merger, and
(ii) 12 months following the termination of the Merger
Agreement, provided that InSite’s obligation to repay those
amounts will accelerate and become due and payable on the
occurrence of any event of default under the Secured Note or on the
termination of the Merger Agreement under certain circumstances. As
at June 30, 2015, $3.5 million was outstanding under the
Secured Note. In the event that the Merger is not completed, the
InSite stockholders will not receive any consideration for their
shares of InSite common stock and QLT and Insite will remain
independent public companies listed on their respective stock
exchanges. Pursuant to the terms of the Merger Agreement, in
addition to repayment of the amounts owing under the Secured Note,
under specified circumstances InSite may be required to pay QLT a
termination fee of $1.17 million.
Aralez Investment and Distribution On June 8, 2015, QLT entered into a Share
Subscription Agreement (the “Aralez Share Subscription
Agreement”) with, among other parties, Aguono Limited, a
private limited company incorporated in Ireland that will be
re-registered as a public limited company and renamed Aralez
Pharmaceuticals plc (“Aralez”). Aralez will be the
holding company resulting from the pending merger transaction
between Tribute Pharmaceuticals Canada, Inc.
(“Tribute”) and POZEN Inc. (“Pozen”), which
was announced on June 8, 2015. The Aralez shares are expected
to trade on the NASDAQ and TSX. The Aralez Share Subscription Agreement provides
that, among other things, subject to the terms and conditions set
forth therein, Aralez will issue and sell to QLT fully paid and
non-assessable ordinary shares of Aralez for an aggregate purchase
price of $45.0 million at a price per share of $7.20. QLT intends,
following the purchase of the Aralez shares and closing of the
proposed Merger, to effect a special election distribution to each
of its shareholders, payable, at the election of each such
shareholder, in either Aralez shares or cash, subject to possible
pro-ration reflecting a maximum cash component of $15.0 million
(the “Aralez Distribution”). The Aralez Distribution
would be effected only following the completion of the issuance of
Aralez Shares to QLT and the formal approval by the QLT Board of
Directors of the Aralez Distribution, including the establishment
of a record date for such purposes. If the merger between Tribute
and Pozen is not consummated, and accordingly Aralez Shares are not
issued to QLT, then the QLT Board of Directors plans to consider
other methods to effect the return of capital to shareholders.
Convertible Notes On June 8, 2015, QLT announced that,
subsequent to the completion of the Merger and following the
purchase of the Aralez shares described above, the Company intends
to return an additional $25.0 million of capital to QLT
shareholders by way of the issuance of convertible notes (the
“Convertible Notes”), which are redeemable for cash, or
at the sole discretion of the holder, convertible into QLT common
shares within a 21 month term starting from the third month
following issuance. The conversion price of the Convertible Notes
would be equal to the volume-weighted average price of QLT common
shares for the ten trading days following a record date to be set
by the Board for the issuance of the Convertible Notes, plus a 35%
premium. Concurrently with the issuance of the Convertible Notes,
QLT would irrevocably and unconditionally place $25.0 million in
trust with a trustee, to be held for and on behalf of the QLT
shareholders, to fund any redemptions or conversions of the
Convertible Notes. The Convertible Notes would be issued only
following the time that the Board formally approves the terms of
the Convertible Notes, their issuance and establishes a record date
for such purposes. The Aralez Distribution and the issuance of the
Convertible Notes may include a reduction of paid-up capital on
QLT’s common shares, reorganization of QLT’s capital or
other alternatives, all of which are subject to various conditions,
including, among other things, QLT obtaining shareholder approval
by special resolution at an annual general and special meeting of
QLT shareholders currently anticipated to be held in the second
half of 2015. If the required QLT shareholder approval is not
obtained or if the other conditions are not met, it is currently
anticipated that the Company will effect the Aralez Distribution
and the issuance of the Convertible Notes by way of a dividend in
kind.
Private Placement On June 8, 2015, QLT entered into a Share
Purchase and Registration Rights Agreement (the “Share
Purchase and Registration Rights Agreement”) with Broadfin
Healthcare Master Fund, Ltd, JW Partners, LP, JW Opportunities
Fund, LLC, and EcoR1 Capital Fund, LP (the “QLT
Investors”). The Share Purchase and Registration Rights
Agreement provides that, among other things, subject to the terms
and conditions set forth therein, QLT will issue and sell to each
investor a certain number of QLT common shares for an aggregate
purchase price of $20.0 million (the “Private
Placement”). The Private Placement is expected to occur after
the completion of the Merger, the Aralez Distribution and issuance
of the Convertible Notes. Following completion of the Private
Placement, the former stockholders of InSite would own
approximately 9.3% of the outstanding QLT common shares, the
pre-Merger shareholders of QLT would own approximately 75.1% of the
outstanding QLT common shares and the QLT Investors would own
approximately 15.6% of the outstanding QLT common shares. During the three and six months ended June 30,
2015, we incurred $4.7 million and $6.7 million, of consulting and
advisory fees, respectively, related to our exploration and pursuit
of the strategic transactions discussed above. In addition, all of
these consulting and advisory fees have been reflected in Selling,
General and Administrative expenses on the consolidated statements
of operations and comprehensive (loss) income. |
