Financial Instruments and Concentration of Credit Risk

9 Months Ended

Sep. 30, 2014

Financial Instruments and Concentration of Credit Risk

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.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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