SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
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For the month of
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November
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2016
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Commission File Number
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001-36458
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Neovasc Inc.
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(Translation of registrant’s name into English)
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Suite 5138
– 13562 Maycrest Way
Richmond,
British Columbia, Canada V6V 2J7
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(Address of principal executive offices)
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Indicate by check mark whether the registrant files
or will file annual reports under cover of Form 20-F or Form 40-F:
Indicate by check mark if the registrant is submitting
the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):
Indicate by check mark if the registrant is submitting
the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):
DOCUMENTS INCLUDED AS PART OF THIS REPORT
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Document
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1
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Management's
Discussion and Analysis for the three and nine months ended September 30, 2016 and 2015.
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2
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Condensed Interim Consolidated Financial Statements (Unaudited) for the three and nine months ended September 30, 2016 and
2015.
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Canadian Form 52 – 109F2 – Certification of Filings – CEO.
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Canadian Form 52 – 109F2 – Certification of Filings – CFO.
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Documents 1 and 2 of this Report on Form 6-K are
incorporated by reference into the Registration Statement on Form F-10 of the Registrant, which was originally filed with the
Securities and Exchange Commission on May 12, 2016 (File No. 333-211325), and the Registration Statement on Form S-8 of
the Registrant, which was originally filed with the Securities and Exchange Commission on June 24, 2014 (File
No. 333-196986).
Document 1
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Neovasc Inc.
Management’s Discussion and Analysis
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2016 AND 2015
(Expressed in U.S. Dollars)
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MANAGEMENT’S DISCUSSION AND ANALYSIS
This Management’s Discussion and Analysis
of Financial Condition and Results of Operations (“MD&A”) covers the unaudited condensed interim consolidated financial
statements of Neovasc Inc. (the “Company”, “Neovasc”, “we”, “us”, or “our”)
for the three and nine months ended September 30, 2016 and 2015.
This MD&A should be read in conjunction
with the unaudited condensed interim consolidated financial statements and notes thereto for the three and nine months ended September
30, 2016 and 2015 (included as part of Neovasc Inc.’s quarterly filing) as well as the audited consolidated financial statements
and notes thereto and the MD&A for the years ended December 31, 2015 and 2014.
The Company has prepared this MD&A with
reference to National Instrument 51-102 - Continuous Disclosure Obligations of the Canadian Securities Administrators. The Company
is permitted to prepare this MD&A in accordance with the disclosure requirements of Canada, which requirements are different
than those of the United States.
The names Tiara™ (“Tiara”),
Neovasc Reducer™ (“Reducer”) and Peripatch™ (“Peripatch”) are our trademarks; other trademarks,
product names and company names appearing herein are the property of their respective owners.
All financial information is prepared in accordance
with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board
and is expressed in U.S. dollars. The Company presents its financial statements in U.S. dollars.
Additional information about the Company, including
the Company’s consolidated financial statements and Annual Information Form, are available on SEDAR at www.sedar.com and
in the Company’s Annual Report on Form 40-F, which is available on the website of the U.S. Securities and Exchange Commission
at www.sec.gov.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING
STATEMENTS AND RISK FACTORS
This MD&A contains forward-looking statements
within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 and applicable Canadian securities laws. The words
“expect”, “anticipate”, “may”, “will”, “estimate”, “continue”,
“intend”, “believe” and other similar words or expressions are intended to identify such forward-looking
statements. Forward-looking statements in this MD&A include, but are not limited to, statements relating to:
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our ability, in an appeal of the verdict,
to reduce the amount of the $70 million damages award made following a trial in Boston, Massachusetts and $21 million enhanced
damages award following post-trial hearings on certain trade secret claims made by CardiAQ Valve Technologies Inc. (“CardiAQ”)
(see “Contractual Obligations and Contingencies” herein);
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the conduct or possible outcomes of any
actual or threatened legal proceedings, including the Company’s ongoing litigation with CardiAQ and the litigation in the
securities class action styled Grobler v. Neovasc, Inc. et al. (see “Contractual Obligations and Contingencies” herein);
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the amount of estimated additional litigation
expenses required to defend the Company in lawsuits filed by CardiAQ;
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the Company’s expectations with respect
to the length of the appellate process;
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our need for significant additional financing
and our estimates regarding our capital requirements and future revenues, expenses and profitability;
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our ability to continue as a going concern;
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our intention to expand the indications
for which we may market the Tiara (which does not have regulatory approval and is not commercialized) and the Reducer (which has
CE Mark approval for sale in the European Union);
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clinical development of our products, including
the results of current and future clinical trials and studies;
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our intention to apply for CE Mark approval
for the Tiara in the next one to two years;
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our plans to develop and commercialize
products, including the Tiara, and the timing and cost of these development programs;
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our strategy to refocus our business towards
development and commercialization of the Reducer and the Tiara;
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our ability to replace declining revenues
from the tissue business with revenues from the Reducer and the Tiara in a timely manner;
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whether we will receive, and the timing
and costs of obtaining, regulatory approvals;
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the cost of post-market regulation if we
receive necessary regulatory approvals;
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our ability to enroll patients in our clinical
trials, studies and compassionate use cases in Canada, the United States and in Europe;
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our intention to continue directing a significant
portion of our resources into sales expansion;
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the expected decline of consulting services
revenue in the long term as our consulting customers become contract manufacturing customers or cease being customers;
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our ability to get our products approved
for use;
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the benefits and risks of our products
as compared to others;
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our estimates of the size of the potential
markets for our products, including the anticipated market opportunity for the Reducer;
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our potential relationships with distributors
and collaborators with acceptable development, regulatory and commercialization expertise and the benefits to be derived from such
collaborative efforts;
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sources of revenues and anticipated revenues,
including contributions from distributors and other third parties, product sales, license agreements and other collaborative efforts
for the development and commercialization of products;
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our creation of an effective direct sales
and marketing infrastructure for approved products we elect to market and sell directly;
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the rate and degree of market acceptance
of our products;
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the timing and amount of reimbursement
for our products; and
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the impact of foreign currency exchange
rates.
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Forward-looking statements are based on estimates
and assumptions made by the Company in light of its experience and its perception of historical trends, current conditions and
expected future developments, as well as other factors that the Company believes are appropriate in the circumstances. Many factors
could cause the Company's actual results, performance or achievements to differ materially from those expressed or implied by the
forward-looking statements, including, without limitation:
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risks relating to our litigation with CardiAQ,
including the Company’s ability to stay the payment of the awards in the CardiAQ litigation and its ability to successfully
appeal the validity of the awards as well as the rulig on inventorship, which create material uncertainty and which cast substantial
doubt on our ability to continue as a going concern;
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the conduct or possible outcomes of any
actual or threatened legal proceedings, which are inherently uncertain, and which could divert our resources and result in the
payment of significant monetary damages and other remedies;
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the potential impact on the Company’s
business of an adverse decision in the appeal on the question of inventorship even if the Company prevails in its appeal of the
awards;
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the potential changes in circumstance relating
to the Company’s financing requirements, whether as a result of the CardiAQ litigation, unforeseen circumstance or otherwise;
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our ability to raise additional funding;
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the potential benefits of the Reducer and
the Tiara as compared with other products;
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successful enrollment of patients in studies
and trials for the Reducer and the Tiara;
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results of the trials and studies for the
Reducer and the Tiara that meet our expectations;
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our receipt of any required local and institutional
regulatory approvals and the timing and costs of obtaining such approvals;
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European enrollment in our clinical trials,
studies and compassionate use cases and the success of applications in Europe;
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our ability to protect our intellectual
property;
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our retention and hiring of qualified employees
in the future;
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the manufacturing capacity of third-party
manufacturers for our products;
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the competition we face from other companies,
research organizations, academic institutions and government agencies, and the risks such competition pose to our products;
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the success and pricing of other competing
therapies that may become available;
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the confidential information we possess
about patients, customers and core business functions, and the information technologies we use to protect it;
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our ability to establish, maintain and
defend intellectual property rights in our products;
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government legislation in all countries
that we already, or hope to, sell our products in, and its effect on our ability to set prices, enforce patents and obtain product
approvals or reimbursements;
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changes in business strategy or development
plans; and
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general economic and business conditions,
both nationally and in the regions in which we operate.
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Such statements reflect our current views with
respect to future events and are subject to risks and uncertainties and are necessarily based upon a number of estimates and assumptions
that, while considered reasonable by us, are inherently subject to significant business, economic, competitive, political and social
uncertainties and contingencies, many of which, with respect to future events, are subject to change. The material factors and
assumptions used by us to develop such forward-looking statements include, but are not limited to:
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our ability, in an appeal of the verdict,
to reduce the amount of the $70 million damages award and $21 million enhanced damages award and reverse the ruling on inventorship
in connection with our litigation with CardiAQ;
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our ability to continue as a going concern;
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our regulatory and clinical strategies
will continue to be successful;
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our current positive interactions with
regulatory agencies will continue;
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recruitment to clinical trials and studies
will continue;
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the time required to enroll, analyze and
report the results of our clinical studies will be consistent with projected timelines;
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current and future clinical trials and
studies will generate the supporting clinical data necessary to achieve approval of marketing authorization applications;
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the regulatory requirements for approval
of marketing authorization applications will be maintained;
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our current good relationships with our
suppliers and service providers will be maintained;
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our estimates of market size and reports
reviewed by us are accurate;
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our efforts to develop markets and generate
revenue from the Reducer will be successful;
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genericisation of markets for the Tiara
and the Reducer will develop; and
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capital will be available on terms that
are favorable to us.
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By their very nature, forward-looking statements
or information involve known and unknown risks, uncertainties and other factors that may cause our actual results, events or developments,
or industry results, to be materially different from any future results, events or developments expressed or implied by such forward-looking
statements or information. In evaluating these statements, prospective purchasers should specifically consider various factors,
including the risks outlined in the “Risk Factors” section of our Annual Information Form, which is available on SEDAR
at www.sedar.com and in our Annual Report on Form 40-F, which is available on the website of the U.S. Securities and Exchange Commission
at www.sec.gov and the additional risks relating to the litigation with CardiAQ (see “Contractual Obligations and Contingencies”
herein). These factors should be considered carefully, and readers should not place undue reliance on the Company's forward-looking
statements. Should one or more of these risks or uncertainties or a risk that is not currently known to us materialize, or should
assumptions underlying the forward-looking statements prove incorrect, actual results may vary materially from those described
herein. These forward-looking statements are made as of the date of this MD&A and we do not intend, and do not assume any obligation,
to update these forward-looking statements, except as required by law. Investors are cautioned that forward-looking statements
are not guarantees of future performance and investors are cautioned not to put undue reliance on forward-looking statements due
to their inherent uncertainty.
Date: November 14, 2016
OVERVIEW
Description of the Business
Neovasc is a specialty medical device company
that develops, manufactures and markets products for the rapidly growing cardiovascular marketplace. Its products include
the Tiara technology in development for the transcatheter treatment of mitral valve disease and the Reducer for the treatment of
refractory angina.
Neovasc’s
business operations started in March 2002, with the acquisition of Neovasc Medical Inc. (“NMI”) (formerly PM Devices
Inc.). NMI manufactured a line of collagen based surgical patch products. The products are made from chemically treated pericardial
tissue. In 2012, the Company sold the rights to the surgical patch products to LeMaitre Vascular, Inc. (“LeMaitre”),
but retained rights to the underlying tissue technology for all other uses.
In May 2003, Neovasc acquired Angiometrx Inc.
(“ANG”). ANG developed a technology called the Metricath, a catheter-based device that allowed clinicians to measure
artery and stent size and confirm deployment during interventional treatment of coronary and peripheral artery disease. In 2009,
Neovasc ceased all activities related to Metricath and on January 1, 2015 ANG was amalgamated into NMI.
In July 2008, Neovasc acquired two pre-commercial
vascular device companies based in Israel: Neovasc Medical Ltd. (“NML”) and B-Balloon Ltd. (“BBL”). NML
developed and owned intellectual property related to the Reducer, a novel catheter-based treatment for refractory angina, a debilitating
condition resulting from inadequate blood flow to the heart muscle. In 2009, Neovasc ceased all activities related to BBL’s
technologies and is in the process of voluntarily liquidating BBL.
In late 2009, Neovasc started initial activities
to develop novel technologies for the catheter-based treatment of mitral valve disease. Based on the positive results of these
activities, the Company launched a program to develop the Tiara transcatheter mitral valve.
Product Portfolio
Tiara
In the second quarter of 2011, the Company formally
initiated a new project to develop the Tiara, a product for treating mitral valve disease. The Tiara is in preclinical / early
clinical stage development to provide a minimally invasive transcatheter device for the millions of patients who experience mitral
regurgitation as a result of mitral heart valve disease (in 2014 it was estimated that mitral regurgitation affects approximately
4.1 million people in the United States and the European Union). Mitral regurgitation is often severe and can lead to heart failure
and death. Unmet medical need in these patients is high. Currently, a significant percentage of patients with severe mitral regurgitation
are not good candidates for conventional surgical repair or replacement due to frailty or comorbidities. There are approximately
1.7 million patients suffering from significant mitral regurgitation in the United States. Currently there is no transcatheter
mitral valve replacement device approved for use in any market.
Clinical experience to date has been with the
35mm Tiara valve and 40mm Tiara valve. The 45mm Tiara valve is still under development. Additional sizes allow Neovasc to expand
treatment to a broader population of patients.
To date, twenty patients have been implanted
with the Tiara in early feasibility and compassionate use cases and Neovasc believes that early results have been encouraging with
one patient now over 2.5 years post implant and another over 2 years. The Tiara has been successfully implanted in both functional
and degenerative mitral regurgitation patients, as well as patients with pre-existing prosthetic aortic valves and mitral surgical
rings.
The results from these early feasibility and
compassionate use cases have been instrumental in helping to demonstrate the potential of the Tiara as well as refining the implantation
procedure, patient selection criteria and the device itself. Careful patient selection continues to be critical as the Company
and clinical community continue to learn more about treating this population of very sick patients.
While many challenges remain prior to achieving
commercial production (including, but not limited to, positive clinical trial and study results and obtaining regulatory approval
from the relevant authorities), the Company believes the Tiara is being widely recognized as one of the leading devices exploring
this new treatment option for patients who are unable or unsuited to receive an open heart surgical valve replacement or repair.
There are several other transcatheter mitral valve replacement devices in development by third parties; some of which have been
implanted in early feasibility type studies with varying results.
Neovasc believes that there are several unique
attributes of the Tiara that may provide advantages over other approaches to mitral valve replacement. There is no certainty that
the Tiara will successfully proceed through clinical testing and ultimately receive regulatory approval to treat these patients,
nor is it possible to determine at this time if any of the other development stage devices will succeed in obtaining regulatory
approval.
The Tiara valve is made up of two major components:
the leaflets and skirt, which are made from the Company’s Peripatch tissue, and the nitinol frame (to which the leaflets
and skirt are attached), which is manufactured by a well-established specialty manufacturer in the medical device industry. If
this supplier were unable to provide the nitinol frame in the future, it would seriously impact the further development of the
Tiara. The Tiara delivery system is manufactured in-house by the Company using components that are readily available.
Regulatory Status
The Tiara is an early-stage development product
without regulatory approvals in any country. The Company intends to continue to fund development of the product as cash flow allows
and anticipates applying for CE Mark approval in Europe in the next one to two years. As at September 30, 2016 the Company has
spent approximately $35.1 million developing the product and anticipates that it may require an additional $25-30 million as it
moves forward to achieve CE Mark. There is no assurance that European regulatory approval will be granted in the time frame anticipated
by management, or granted at any time in the future. There is no expectation that this product will be revenue-generating in the
near term, although management believes that the product is addressing an important unmet clinical need and that the demand for
the product is high.
On October 9, 2014 Neovasc announced that it
has received conditional investigational device exemption approval from the U.S. Food and Drug Administration (“FDA”)
to initiate the U.S. arm of its TIARA-I study for the Tiara. The TIARA-I study is a multinational, multicenter early feasibility
study being conducted to assess the safety and performance of the Tiara mitral valve system and implantation procedure in high-risk
surgical patients suffering from severe mitral regurgitation. This FDA conditional approval allows clinical investigators to begin
enrolling patients at participating U.S. medical centers once local hospital and related approvals are in place. This is an important
step towards the Tiara becoming one of the first transcatheter mitral valve replacement devices available for treating U.S. patients.
The TIARA-I study will enroll up to 30 patients globally and is being overseen by a multidisciplinary committee of internationally
recognized physicians. The Tiara has also been implanted under compassionate use approvals in Canada and Europe.
Reducer
The Reducer is a treatment for patients with
refractory angina, a painful and debilitating condition that occurs when the coronary arteries deliver an inadequate supply of
blood to the heart muscle, despite treatment with standard revascularization or cardiac drug therapies. It affects approximately
620,000 individuals in the United States who are not eligible for conventional treatments and typically lead severely restricted
lives as a result of their disabling symptoms, and its incidence is growing. The Reducer provides relief of angina symptoms by
altering blood flow in the heart’s venous system, thereby increasing the perfusion of oxygenated blood to ischemic areas
of the heart muscle.
The pain associated with refractory angina can
make it difficult for patients to engage in routine activities, such as walking or climbing stairs. Using a catheter-based procedure,
the Reducer is implanted in the coronary sinus, the major blood vessel that sends de-oxygenated blood from the heart muscle back
to the right atrium of the heart. Pilot clinical studies demonstrate that the Reducer provides significant relief of chest pain
in refractory angina patients. There are thousands of refractory angina patients in the United States who are potential candidates
for the Reducer, either because they cannot be revascularized or because they are otherwise poorly managed using conventional medical
therapies. These patients represent a substantial market opportunity for the Reducer product. If physicians adopt the Reducer for
use in these refractory patients, it is expected that there will be a natural spillover into the broader recurrent angina market,
which represents a substantially larger patient population.
The Reducer is targeting a currently untreatable
patient population. A refractory patient by definition is resistant to other therapies. A patient who has refractory angina is
not a surgical candidate, cannot benefit from existing interventional cardiology therapies and is not receiving adequate relief
from available drug regimens to manage their chest pain. As such there are currently no direct competitors to the Reducer as the
patient will have exhausted all other treatment options before the Reducer is considered. Once the Reducer is established as a
standard of care for the refractory angina patient, Neovasc believes that the Reducer may also be considered for use in the larger
population of recurrent angina patients (patients who are receiving repeat treatments for angina pain) and thus increase its market
potential.
The
Company has completed Coronary Sinus Reducer for Treatment of Refractory Angina clinical trial (“COSIRA”) to assess
the efficacy of the Reducer device. The COSIRA trial’s primary endpoint was a two-class improvement six months after implantation
in patients’ ratings on the Canadian Cardiovascular Society (“CCS”) angina grading scale, a four-class functional
classification that is widely used to characterize the severity of angina symptoms and disability. Only patients with severe angina,
CCS Class 3 or 4, were enrolled in the COSIRA trial. The COSIRA trial analysis showed that the study met the primary endpoint,
with patients receiving the Reducer achieving a statistically significant improvement in CCS scores (two classes or better) compared
to patients receiving a sham control (18 of 52 (34.6%) of the Reducer patients improved
≥
2 CCS classes compared to 8 of 52 (15.4%) of the control patients (p-value
= 0.024)). The analysis also showed that patients treated with the Reducer showed a statistically significant improvement of one
or more CCS classes compared to the sham control patients (37 of 52 (71.2%) of the Reducer patients showed this improvement compared
to 22 of 52 (42.3%) of the control patients (p-value = 0.003)). The COSIRA trial results were published in the New England Journal
of Medicine in February 2015.
The Reducer is an hourglass-shaped, balloon-expandable,
stainless steel, bare metal device, which is implanted in the coronary sinus, creating a restriction in venous outflow from the
myocardium (the muscular layer of the heart wall). It is implanted using conventional percutaneous, or needle puncture, techniques.
The Reducer is provided sterile and pre-loaded on a balloon catheter system. The system is 9 French sheath compatible and operates
over a .035 inch guide wire. The implantation procedure is quick and requires minimal training. Once guide wire access to the coronary
sinus is achieved, implantation typically takes less than 20 minutes.
Following implantation, the Reducer is incorporated
into the endothelial tissue and creates a permanent (but reversible) narrowing in the coronary sinus. The coronary sinus is narrowed
from a typical diameter of 10-12mm to approximately 3mm at the site of implantation. This narrowing slightly elevates the venous
outflow pressure, which restores a more normal ratio of epicardial to endocardial blood flow between the outer and inner layers
of the ischemic areas of the heart muscle. This results in improved perfusion of the endocardium, which helps relieve ischemia
and chest pain. The physiological mechanism behind this effect is well documented in medical literature.
The clinical utility of this approach was demonstrated
by a number of analogous approaches used in the past that achieved positive clinical outcomes for angina patients by constricting
or intermittently blocking the coronary sinus to improve perfusion to the heart muscle. However, these therapies required the use
of highly invasive surgery, or leaving a catheter in the heart for a prolonged period, making them impractical or clinically unacceptable
for use in modern medical practice. The Reducer was developed to deliver this therapy in a safe, simple and effective manner via
a minimally invasive catheter that is consistent with contemporary medical practice.
The Reducer has demonstrated excellent results
in multiple animal studies and in a clinical trial of fifteen patients suffering from chronic refractory angina who were followed
for three years after implantation. The six-month results from this clinical trial were published in the Journal of the American
College of Cardiology and three-year follow-up data was presented at the annual scientific meeting of the American College of Cardiology
in March 2010. In this clinical trial, implantation of the Reducer resulted in significant clinical improvements in stress test
and perfusion measurements, as well as in overall quality of life in the majority of the patients. These improvements were maintained
for the three years of the study. During this period, the Reducer appeared safe and well tolerated in these patients. More recently,
the Company completed the COSIRA trial - a multi-center, double blinded sham controlled study intended to assess the safety and
efficacy of the Reducer in a rigorous, controlled manner. The results of COSIRA trial were positive and are discussed in more detail
below. More recently, additional studies conducted by third parties and showing positive results from Reducer implantations have
been published and presented in medical forums. It is anticipated that as the commercial use of the Reducer continues to expand,
additional third party studies, investigations and presentations will be undertaken. If the results from such third party activities
continue to show positive results from the product they will provide additional data to support expanded adoption of Reducer for
the intended patient population.
Following this positive data from the COSIRA
trial, the Company initiated a pilot launch of the Reducer in select European markets in early 2015. The Company has signed distribution
agreements in a number of European countries as well as Saudi Arabia and has initial sales into these countries. Based on the initial
results from the targeted launch, Neovasc is presently developing an expanded sales plan and strategy for 2017 and beyond. It is
anticipated that sales of the product in the United States would follow obtaining U.S. regulatory approval, if such approval is
granted, as described further below.
Regulatory Status
The Reducer is approved for sale in Europe,
having received CE Mark designation in November 2011. In preparation for product launch, Neovasc has completed development of the
commercial-generation Reducer and the product is currently being transferred to commercial scale manufacture. The Company has completed
the COSIRA trial that is expected to provide data to support broad commercialization of the Reducer product. The COSIRA trial is
a double-blinded, randomized, sham controlled, multi-center trial of 104 patients at eleven clinical investigation sites. The study
completed enrollment in early 2013 and on November 6, 2013, the Company reported topline results for its COSIRA trial assessing
the efficacy and safety of the Reducer. In February 2015, the COSIRA trial results were published in the New England Journal of
Medicine. As discussed above, the data shows that the Reducer achieved its primary endpoint, significantly improving the symptoms
and functioning of patients disabled by previously untreatable refractory angina. The COSIRA trial also confirmed that the Reducer
is safe and well tolerated. The safety and efficacy data from the randomized, controlled COSIRA trial is consistent with results
seen in previous non-randomized pilot studies of the Reducer. Placement of the Reducer is performed using a minimally-invasive
transvenous procedure that is similar to implanting a coronary stent and takes approximately 20 minutes. Neovasc has begun discussions
with the FDA on the development of a randomized investigational device exemption trial in the United States. The Company is currently
evaluating the timing for starting this trial. U.S. marketing approval is expected about two to four years after the clinical trial
begins. There is no assurance that U.S. regulatory approval will be granted in the time frame anticipated by management, or granted
at any time in the future. The cost of the U.S. clinical trial is expected to be $15-20 million.
Tissue Products
Neovasc produces Peripatch, an advanced biological
tissue product that is manufactured from pericardium, which is the protective sac that surrounds the heart of an animal. Neovasc
uses its proprietary processes to convert raw pericardial tissue from animal sources into sheets of implantable tissue that can
be incorporated into third-party medical devices (for example, for use as the material for artificial heart valve leaflets). Peripatch
tissue retains the mechanical characteristics of natural tissue and is readily incorporated into the body without rejection. Peripatch
tissue was originally developed to fabricate artificial heart valves and has a 25-year history of successful implantation for heart
valve and other surgical applications. Peripatch tissue can be manufactured to meet the mechanical and biological characteristics
required for a wide variety of applications, such as heart valve leaflets.
The product line includes Peripatch surgical
patches, which are rectangular patches made from bovine tissue, applied as internal bandages to repair weak or damaged organs or
vessels. On October 31, 2012, Neovasc amended its agreement with LeMaitre allowing LeMaitre to exercise its option to purchase
certain specific rights to Neovasc’s biological vascular surgical patch technology on an accelerated basis. Under the terms
of the amendment, LeMaitre is permitted to use the Peripatch technology for the sole purpose of manufacturing surgical patches
that it markets as its XenoSure™ surgical patch product line. Neovasc ceased manufacturing surgical patches for LeMaitre
in the second quarter of 2015.
The Company also provides a range of custom
Peripatch products to industry customers for incorporation into their own products, such as transcatheter heart valves and other
specialty cardiovascular devices. These include Peripatch tissue fabricated from bovine and porcine sources and offered in a wide
variety of shapes and sizes. Neovasc works closely with its industry customers to develop and supply tissue to meet their specific
needs, such as for transcatheter heart valve leaflets. This often includes providing tissue in custom shapes or molded to three
dimensional configurations. The Company also provides product development and specialized manufacturing services related to Peripatch
tissue-based products such as transcatheter heart valves. The Company actively consults with a range of heart valve programs in
order to refine their products and provide tissue to meet their needs and also provides transcatheter valve prototyping, pilot
manufacture and commercial manufacture services to a range of customers.
Although the generic method of processing tissue
in a way similar to the Peripatch is widely used, the Company’s competitive position stems from its own proprietary process
that is supported by a 25-year implant history for use as a surgical heart valve. A company that establishes its own process will
have to go through a significant and costly series of studies to prove that their process produces tissue that is suitable as a
medical device. The Peripatch product has already met these requirements and has already been validated through many years of successful
use in multiple applications. Neovasc’s customers make the decision to use the Company’s tissue rather than take on
the demanding and lengthy process of developing their own tissue processing operation. As stated elsewhere herein, Neovasc is not
aware of any other company in the world that both provides such tissue and partners with customers to provide specialized heart
valve development and manufacturing services.
The basic Peripatch technology was established
over 25 years ago by a third party that was a predecessor company to NMI, when the material was used to fashion the leaflets and
other components in surgical heart valves. Neovasc’s processing of the material is a trade secret and proprietary to the
Company. However, the use of the product in transcatheter minimally invasive heart valves and other medical devices such as artificial
hearts are new uses for the technology. Appropriate testing is conducted to ensure the appropriateness and durability of the tissue
for a new application before the medical device can be approved for use, and there is some additional risk when applying the technology
to a new product or when amending to, or adding to, the fixation process to meet a new demand, such as for three dimensional shape
setting of the tissue.
The supply of Peripatch products and the associated
product development, consulting and specialized manufacturing services related to Peripatch tissue-based products represents 89%
of the Company’s current revenues.
Regulatory Status
While the Company does not maintain stand-alone
marketing approval for its tissue products, a number of third-party products which incorporate Peripatch tissue are approved for
sale (i.e. such products have obtained regulatory approval, such as a CE Mark or Canadian medical device license) or have pending
approvals in various markets. There is no assurance that further regulatory approvals for third-party products will be obtained.
Additional Products and Third-Party Sales
Neovasc provides consulting and original equipment
manufacturing services to other medical device companies when these services fall within the scope of the Company’s expertise
and capabilities. These activities are substantially focused on providing specialized development and manufacturing services for
industry customers who incorporate the Company’s Peripatch tissue into their vascular device products such as heart valves.
The goal of these activities is to drive near-term revenues as well as support development of a long-term revenue stream through
the ongoing provision of tissue and manufacturing services to customers with commercially successful devices that incorporate Neovasc
tissue. Revenue earned from various contract agreements varies throughout the year depending on customer needs.
Product Development
Product development at the Company is currently
focused on completing commercialization of the Reducer as well as clinical stage and pre-commercialization development work on
the Tiara. The Company may also investigate other potential new internal or external projects that leverage the Company’s
existing technologies, infrastructure and expertise.
Trends,
Risks and Uncertainties
The Company has incurred operating and comprehensive
losses of $29,135,086 and $28,836,990 for the three months ended September 30, 2016 respectively (three months ended September
30, 2015: $7,633,170 and $12,851,490) and operating and comprehensive losses of $123,708,684 and $119,492,946 for the nine months
ended September 30, 2016 respectively (nine months ended September 30, 2015: $19,346,882 and $25,823,566) and has a deficit of
$238,997,397 as at September 30, 2016 compared to a deficit of $115,288,713 as at December 31, 2015. As at September 30, 2016 the
Company had $25,480,683 in cash and cash equivalents (as at December 31, 2015: $55,026,171).
On May 19, 2016, following a trial in Boston,
Massachusetts, a jury awarded $70 million on certain trade secret claims made by CardiAQ. On October 31, 2016, following post-trial
motions in the Federal District Court stemming from the trial jury’s verdict, a judge awarded an additional $21 million in
enhanced damages to the jury’s award. The Company recognized a damages provision in the amount of $70 million as at June
30, 2016 and $91 million as at September 30, 2016. Unless the Company is successful in an appeal of the verdict, or otherwise is
successful in reducing the amount of the $91 million awards, the Company will require significant additional financing in order
to pay the damages and to continue to operate its business. There can be no assurance that the Company will be successful in its
post-trial motions and/or appeal of the verdict or that such financing will be available on favorable terms, or at all.
The Company intends
to continue to vigorously defend itself in the litigation with CardiAQ and so the outcome of these matters, including whether
the Company will be required to pay some or all of the jury award of $70 million and enhanced damages award of $21 million, is
not currently determinable. Interest, costs, and fees may be due on any award granted by the Court. The determination of
the interest due, if any, would be the subject of further rulings from the Court, including rulings on pre-judgment interest.
CardiAQ has estimated such pre-judgment interest at approximately $20.3 million. Neovasc will dispute whether CardiAQ is
entitled to any pre-judgment interest. Similarly, the determination of any attorneys’ fees and the costs of litigation
would be the subject of further rulings from the Court. The amounts of any attorneys’ fees and costs are currently
undeterminable. Litigation is inherently uncertain. Therefore, until these matters have been resolved to their ultimate
conclusion by the appropriate courts, the Company cannot give any assurances as to the outcome. If the Company is unsuccessful
in its defense of these claims, including any appeal of the verdict in the Massachusetts litigation with CardiAQ, or is unable
to settle the claims in a manner satisfactory to the Company, it may be faced with significant monetary damages that could exceed
its resources, the loss of intellectual property rights and damage to its competitive position, which creates material uncertainty
and casts substantial doubt about the Company’s ability to continue as a going concern (see “Contractual Obligations
and Contingencies” herein for a discussion of the CardiAQ litigation and other litigation).
In addition to these litigation matters, the
Company may need to raise additional capital prior to the successful commercialization of its products. There is no certainty that
the Company’s programs will be successfully commercialized or that any required funds will be available to the Company at
the time needed or on terms acceptable to the Company.
Neovasc has a limited operating history, which
makes it difficult to predict how its business will develop or what its future operating results will be. The Company has a history
of operating losses since its inception and will need to generate significantly greater revenues than it has to date to achieve
and maintain profitability. There is no certainty of future profitability, and results of operations in future periods cannot be
predicted based on results of operations in past periods. The securities of the Company should be considered a highly speculative
investment.
Neovasc is subject to risks and uncertainties
associated with operating in the life sciences industry and as a company engaged in significant development, regulatory, production
and commercialization activity. Neovasc cannot anticipate or prevent all of the potential risks to its success, nor predict the
impact of any such risk.
Operating risks include but are not limited
to: risks related to the Company’s litigation with CardiAQ, including the Company’s ability to stay the payment of
the payment of the award in the litigation and its ability to successfully appeal the validity of the awards as well as the ruling
on inventorship, which creates material uncertainty and casts substantial doubt on the Company’s ability to continue as a
going concern; the conduct or possible outcomes of any actual or threatened legal proceedings, which are inherently uncertain and
which could divert our resources and result in the payment of significant damages and other remedies; the potential impact on the
Company’s business of an adverse decision in the appeal on the question of inventorship; the potential changes in circumstances
relating to the Company’s financing requirements, whether as a result of the CardiAQ litigation or otherwise and the continued
availability of capital to finance the Company’s activities; the clinical success of the Tiara; market acceptance of the
Company’s technologies and products; litigation risk associated with the Company’s intellectual property and the Company’s
defense and protection thereof; the Company’s ability to obtain and enforce timely patent protection of its technologies
and products; the Company’s ability to develop, manufacture and commercialize its products cost-effectively and according
to the regulatory standards of numerous governments; the competitive environment and impact of technological change and/or product
obsolescence; the Company’s ability to conduct and complete successful clinical trials; the Company’s ability to garner
regulatory approvals for its products in a timely fashion; the Company’s ability to attract and retain key personnel, effectively
manage growth and smoothly integrate newly acquired businesses or technologies; limitations on third-party reimbursement; instances
of product or third-party liability; dependence on a single supplier for some products; animal disease or other factors affecting
the quality and availability of raw materials; conflicts of interest among the Company’s directors, officers, promoters and
members of management; fluctuations in the values of relative foreign currencies; volatility of the Company’s share price;
fluctuations in quarterly financial results; unanticipated expenses; changes in business strategy; impact of any negative publicity;
general political and economic conditions; and acts of god and other unforeseeable events, natural or human-caused.
On July 5, 2016, the Company received written
notification (the “Notification Letter”) from The NASDAQ Stock Market LLC (“Nasdaq”) notifying the Company
that it is not in compliance with the $1.00 minimum bid price requirement set forth in the Nasdaq Listing Rules. The Company has
been provided 180 calendar days, or until January 3, 2017, to regain compliance with Nasdaq Listing Rules. In the event the Company
does not regain compliance by January 3, 2017, the Company may be eligible for additional time to regain compliance.
The Company intends to monitor the closing bid
price of its common shares between now and January 3, 2017 and intends to cure the deficiency within the prescribed grace period.
There is no certainty that the Company will be able to cure the deficiency. If the Company is unable to cure the deficiency within
the prescribed grace period or any extension to such grace period the Company may be delisted from the Nasdaq. During this grace
period, the Company's common shares will continue to be listed and trade on the Nasdaq.
The Company's business operations are not affected
by the receipt of the Notification Letter. The Company is also listed on the Toronto Stock Exchange and the Notification Letter
does not affect the Company's compliance status with such listing.
These risk factors and others are described
in greater detail in the Company’s Annual Information Form, which is available on SEDAR at www.sedar.com and in the Company’s
Annual Report on Form 40-F, which is available on the website of the U.S. Securities and Exchange Commission at www.sec.gov (see
“Cautionary Note Regarding Forward-Looking Statements” herein).
Foreign
Operations
The majority of the Company’s revenues
are derived from product sales in the United States and Europe, primarily denominated in U.S. dollars and European euros, while
the majority of the Company’s costs are denominated in Canadian dollars. The Company expects that foreign currency denominated
international sales will continue to account for the majority of its revenues. Consequently, a decrease in the value of a relevant
foreign currency in relation to the Canadian dollar will have an adverse effect on the Company’s results of operations, with
lower than expected revenue amounts and gross margins being reported in the Company’s Canadian dollar financial statements.
In addition, any decrease in the value of the U.S. dollar or European euro occurring in between the time a sale is consummated
and the time payment is received by Neovasc will lead to a foreign exchange loss being recognized on the foreign-currency denominated
trade account receivable. The fluctuation of foreign exchange may impose an adverse effect on the Company’s results of operations
and cash flows in the future. Additionally, Neovasc may be materially and adversely affected by increases in duty rates, exchange
or price controls, repatriation restrictions, or other restrictions on foreign currencies. The Company’s international operations
are subject to certain other risks common to international operations, including, without limitation: government regulations; import
restrictions and, in certain jurisdictions, reduced protection for the Company’s intellectual property rights.
Foreign currency translation gains and losses
arising from normal business operations are credited to or charged to operations in the period incurred. To date, Neovasc has not
entered into any foreign exchange forward contracts.
Selected Financial Information
The following discussion should be read in conjunction
with the unaudited condensed interim consolidated financial statements for the three and nine months ended September 30, 2016 and
2015.
DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION
Results for the three months ended September
30, 2016 and 2015 follow:
Losses
The operating losses and comprehensive losses
for the three months ended September 30, 2016 were $29,135,086 and $28,836,990, respectively, or $0.44 basic and diluted loss per
share, as compared with losses of $7,633,170 and $12,851,490, or $0.11 basic and diluted loss per share for the same period in
2015. The $21,501,916 increase in the operating loss incurred for the three months ended September 30, 2016 compared to the same
period in 2015 consists of a $21,000,000 damages provision related to the judge award against the Company in its litigation with
CardiAQ, in a $1,377,935 increase in foreign exchange and unrealized losses, a $125,857 decrease in interest income, a $94,971
increase in selling expenses, a $87,296 increase in tax expenses, partially offset by a $1,086,141 decrease in general and administrative
expenses and a $166,061 decrease in product development and clinical trial expenses. Litigation expenses for the three months ended
September 30, 2016 represent a loss of $0.03 basic and diluted loss per share compared to a loss of $0.04 basic and diluted loss
per share for the same period in 2015. To date, the Company has incurred significant costs in defending itself in lawsuits filed
by CardiAQ. Total litigation expenses since the initial claims were filed in June 2014 are approximately $19.6 million and the
Company expects that it may require an additional $5.0 million to cover additional litigation expenses up to and including appellate
court, if applicable (see “Contractual Obligations and Contingencies” herein).
Revenues
Revenues for the three months ended September
30, 2016 were $3,034,000 compared to revenues of $2,473,687 for the same period in 2015, an increase of 23%. The Company is focusing
its business away from its traditional revenue streams towards development and commercialization of its own products, the Reducer
and the Tiara. The Company started its sales of the Reducer in the first quarter of 2015 as it initiated its focused commercialization
of the product in Europe. The Company ceased its production of surgical patches for LeMaitre (product sales) in the second quarter
of 2015.
Sales of the Reducer for the three months ended
September 30, 2016 were $262,546, compared to $159,394 for the same period in 2015, representing an increase of 65%. The Reducer
has seen steady quarter over quarter revenue growth since its launch in the first quarter of 2015. The success of the commercialization
of the Reducer will be dependent on the amount of internal resources allocated to the product, obtaining appropriate reimbursement
codes in various territories and correctly managing the referrals process.
Product sales for the three months ended September
30, 2016 were $nil, compared to $10,228 for the same period in 2015. Product sales are solely comprised of sales of surgical patches
to LeMaitre. Neovasc ceased manufacturing surgical patches in June 2015.
Contract manufacturing revenues for the three
months ended September 30, 2016 were $1,543,516, compared to $737,336 for the same period in 2015, representing an increase of
109%. The increase in revenue for the three months ended September 30, 2016 compared to the same period in 2015 is primarily due
to the clearing of temporary delay in shipping to a single customer during the period. Shipping had been put on hold in the previous
period which resulted in an increase in inventory and shipments at the start of the period. Such a delay highlights the risk associated
with the concentration of revenue into fewer larger accounts but the Company still anticipates that contract manufacturing will
continue to grow in the long term.
Revenues from consulting services for the three
months ended September 30, 2016 were $1,227,938, compared to $1,566,729 for the same period in 2015, representing a decrease of
22%. The Company anticipates that its consulting services revenue will decline in the long term as its consulting customers continue
to transition to becoming contract manufacturing customers or cease being customers as they move manufacturing in house. To highlight
this trend, the Company reports that a contract with a customer representing approximately 5% of year to date revenue is in the
process of being wound up and will terminate at the end of 2016.
Where possible, the Company updates its charge
out rates and product prices on an annual basis to maintain its margins and reflect increases in the cost of goods sold. Some customer
contracts include a mechanism to calculate the price increase or to limit the maximum increase allowable each year.
Cost of Goods Sold
The cost of goods sold for the three months
ended September 30, 2016 was $2,201,440, compared to $1,573,068 for the same period in 2015. The overall gross margin for the three
months ended September 30, 2016 was 27%, compared to 36% gross margin for the same period in 2015. The decrease in the margin can
be attributed to an increase in the cost of sales for contract manufacturing, and a change in product mix toward lower margin contract
manufacturing product. The Company has also seen its consulting services revenue margins decline as its ability to charge higher
fees for these services has decreased as the transcatheter aortic valve market has matured. In addition, the Company is experiencing
higher cost of goods sold as it has implemented a rigorous commercial stage quality system required to meet the expectations of
its more advanced customers. These increases are not productive improvements and result in an overall downward trend in margins.
Expenses
Total expenses for the three months ended September
30, 2016 were $8,418,400, compared to $9,575,631 for the same period in 2015, representing a decrease of $1,157,231 or 9%. The
decrease in total expenses for the three months ended September 30, 2016 compared to the same period in 2015 reflects a $1,086,141
decrease in general and administrative expenses, a $166,061 decrease in product development and clinical trial expenses, and a
$94,971 increase in sales and marketing expenses as the Company expands its commercialization activities of the Reducer in Europe.
Selling expenses for the three months ended
September 30, 2016 were $208,884, compared to $113,913 for the same period in 2015, representing an increase of $94,971, or 83%.
The increase in selling expenses for the three months ended September 30, 2016 compared to the same period in 2015 reflects an
increase in costs incurred for commercialization activities related to the Reducer. The Company expects to continue to increase
its selling expenses in 2016 as it continues its commercialization of the Reducer in select countries in Europe.
General and administrative expenses for the
three months ended September 30, 2016 were $3,466,825, compared to $4,552,966 for the same period in 2015, representing a decrease
of $1,086,141 or 24%. The decrease in general and administrative expenses for the three months ended September 30, 2016 compared
to the same period in 2015 can be substantially explained by a $923,541 decrease in litigation expenses and a decrease in other
expenses of $162,600.
Product development and clinical trial expenses
for the three months ended September 30, 2016 were $4,742,691, compared to $4,908,752 for the same period in 2015, representing
a decrease of $166,061, or 3%. The decrease in product development and clinical trial expenses for the three months ended September
30, 2016 was due to a $465,210 decrease in other research and development expenses and a $253,761 decrease in share-based payments,
offset by a $498,480 increase in cash-based employee expenses as the Company hired additional staff to advance product development
and a $54,430 increase in depreciation.
The Company’s expenses are subject to
inflation and cost increases. Salaries and wages have increased on average by 4% in the three months ended September 30, 2016 compared
to the same period in 2015. The Company has not seen a material increase in the price of any of the components used in the manufacture
of its products and services.
Other Loss
The other loss for the three months ended September
30, 2016 was $21,461,950, compared to other income of $1,041,842 for the same period in 2015. As at September 30, 2016 the Company
recognized a damages provision of $21 million for enhanced damages on certain trade secret claims made by CardiAQ (see “Contractual
Obligations and Contingencies” herein). In addition, during the three months ended September 30, 2016 the Company had an
increase in foreign exchange and unrealized losses of $1,377,935 and a decrease in interest income of $125,857 compared to the
same period in 2015.
Tax Expense
The tax expense for the three months ended September
30, 2016 was $87,296, compared to $nil for the same period in 2015. Neovasc (US) Inc. was established in 2015 to provide clinical
trial services to Neovasc Medical Inc. The cross border intercompany charges from Neovasc (US) Inc. to Neovasc Medical Inc. created
a taxable profit in Neovasc (US) Inc. and U.S. federal and state taxes were charged.
Results for the nine months ended September
30, 2016 and 2015 follow:
Losses
The operating losses and comprehensive losses
for the nine months ended September 30, 2016 were $123,708,684 and $119,492,946 respectively, or $1.85 basic and diluted loss per
share, as compared with losses of $19,346,882 and $25,823,566, or $0.30 basic and diluted loss per share for the same period in
2015. The $104,469,226 increase in the operating loss incurred for the nine months ended September 30, 2016 compared to the same
period in 2015 consists of a $91 million damages provision related to a jury award of $70 million and enhanced damages of $21 million
against the Company in its litigation with CardiAQ, a $6,306,960 increase in general and administrative expenses (of which $6,649,784
relates to an increase in litigation expenses), a $3,464,718 increase in foreign exchange and unrealized losses, a $1,910,073 increase
in product development and clinical trial expenses, and a $997,018 reduction in gross margin. The damages provision for the nine
months ended September 30, 2016 represent a loss of $1.36 basic and diluted loss per share compared to a loss of $nil basic and
diluted loss per share for the same period in 2015. Litigation expenses for the nine months ended September 30, 2016 represent
a loss of $0.18 basic and diluted loss per share compared to a loss of $0.08 basic and diluted loss per share for the same period
in 2015.
Revenues
Revenues for the nine months ended September
30, 2016 were $6,751,674 compared to revenues of $7,705,894 for the same period in 2015, representing a decrease of 12%.
Sales of the Reducer for the nine months ended
September 30, 2016 were $722,433, compared to $334,399 for the same period in 2015, representing an increase of 116%. The Reducer
has seen steady quarter over quarter revenue growth since in launch in the first quarter of 2015.
Product sales for the nine months ended September
30, 2016 were $nil, compared to $353,736 for the same period in 2015. Product sales are solely comprised of sales of surgical patches
to LeMaitre. Neovasc ceased manufacturing surgical patches in June 2015.
Contract manufacturing revenues for the nine
months ended September 30, 2016 were $2,391,136, compared to $2,273,114 for the same period in 2015, representing an increase of
5%.
Revenues from consulting services for the nine
months ended September 30, 2016 were $3,638,105, compared to $4,744,645 for the same period in 2015, representing a decrease of
23%. The Company anticipates that its consulting services revenue will decline in the long term as its consulting customers continue
to transition to becoming contract manufacturing customers or cease being customers as they move manufacturing in house.
Cost of Goods Sold
The cost of goods sold for the nine months ended
September 30, 2016 was $5,038,792, compared to $4,995,994 for the same period in 2015. The overall gross margin for the nine months
ended September 30, 2016 was 25%, compared to 35% gross margin for the same period in 2015. The decrease in the margins can be
attributed to a change in revenue composition. Consulting service revenue decreased compared to the same period in 2015 and contract
manufacturing sales increased compared to the same period in 2015 which has a lower margin than consulting services.
Expenses
Total expenses for the nine months ended September
30, 2016 were $31,806,772, compared to $23,398,047 for the same period in 2015, representing an increase of $8,408,725 or 36%.
The increase in total expenses for the nine months ended September 30, 2016 compared to the same period in 2015 reflects a $191,692
increase in sales and marketing expenses as the Company expands its commercialization activities of the Reducer in Europe, a $6,306,960
increase in general and administrative expenses (of which $6,649,784 relates to an increase in litigation expenses) and a $1,910,073
increase in product development and clinical trial expenses to advance the Tiara and the Reducer development programs.
Selling expenses for the nine months ended September
30, 2016 were $554,905, compared to $363,213 for the same period in 2015, representing an increase of $191,692, or 53%. The increase
in selling expenses for the nine months ended September 30, 2016 compared to the same period in 2015 reflects an increase in costs
incurred for commercialization activities related to the Reducer.
General and administrative expenses for the
nine months ended September 30, 2016 were $16,721,354, compared to $10,414,394 for the same period in 2015, representing an increase
of $6,306,960, or 161%. The increase in general and administrative expenses for the nine months ended September 30, 2016 compared
to the same period in 2015 can be substantially explained by a $6,649,784 increase in litigation expenses and a decrease of $342,824
in all other expenses.
Product development and clinical trial expenses
for the nine months ended September 30, 2016 were $14,530,513, compared to $12,620,440 for the same period in 2015, representing
an increase of $1,910,073, or 15%. The increase in product development and clinical trial expenses for the nine months ended September
30, 2016 was due to a $1,172,750 increase in cash-based employee expenses as the Company hired additional staff to advance product
development and a $1,524,934 increase in other expenses as the Company invested in its two major new product initiatives, offset
by a $907,116 decrease in share-based payments.
Other Loss
The other loss
for the nine months ended September 30, 2016 was $93,429,404, compared to other income of $1,341,265 for the same period in 2015.
As at September 30, 2016 the Company recognized a damages provision of $91 million after a jury award of $70 million and enhanced
damages award of $21 million on certain trade secret claims made by CardiAQ (see “Contractual Obligations and Contingencies”
herein)
.
In addition, during the nine months ended September
30, 2016 the Company had an increase in foreign exchange and unrealized losses of $3,464,718 and a decrease in interest income
of $308,489 compared to the same period in 2015.
Tax Expense
The tax expense for the nine months ended September 30, 2016 was
$185,390, compared to $nil for the same period in 2015 as a result of cross border intercompany charges from Neovasc (US) Inc.
to Neovasc Medical Inc.
QUARTERLY INFORMATION
The following is a summary of selected unaudited
financial information for the eight fiscal quarters to September 30, 2016:
|
|
|
|
|
|
|
|
September 30,
2016
|
June 30,
2016
|
March 31,
2016
|
December 31,
2015
|
|
REVENUE
|
|
|
|
|
|
Reducer
|
$ 262,546
|
$ 246,122
|
$ 213,765
|
$ 192,013
|
|
Product sales
|
-
|
-
|
-
|
-
|
|
Contract manufacturing
|
1,543,516
|
240,837
|
606,783
|
963,864
|
|
Consulting services
|
1,227,938
|
1,223,973
|
1,186,194
|
1,068,169
|
|
|
3,034,000
|
1,710,932
|
2,006,742
|
2,224,046
|
|
|
|
|
|
|
|
COST OF GOODS SOLD
|
2,201,440
|
1,391,708
|
1,445,644
|
1,942,140
|
|
GROSS PROFIT
|
832,560
|
319,224
|
561,098
|
281,906
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
Selling expenses
|
208,884
|
181,174
|
164,847
|
292,456
|
|
General and administrative expenses
|
3,466,825
|
7,427,124
|
5,827,405
|
3,498,682
|
|
Product development and clinical trials expenses
|
4,742,691
|
5,705,035
|
4,082,787
|
4,560,955
|
|
|
8,418,400
|
13,313,333
|
10,075,039
|
8,352,093
|
|
|
|
|
|
|
|
OPERATING LOSS
|
(7,585,840)
|
(12,994,109)
|
(9,513,941)
|
(8,070,187)
|
|
|
|
|
|
|
|
Other (expense)/income
|
(21,461,950)
|
(70,648,431)
|
(1,319,023)
|
853,930
|
|
Tax expense
|
(87,296)
|
(49,920)
|
(48,174)
|
(167,351)
|
|
LOSS FOR THE PERIOD
|
$ (29,135,086)
|
$ (83,692,460)
|
$ (10,881,138)
|
$ (7,383,608)
|
|
|
|
|
|
|
|
BASIC AND DILUTED LOSS PER SHARE
|
$ (0.44)
|
$ (1.25)
|
$ (0.16)
|
$ (0.11)
|
|
|
|
|
|
|
|
|
September 30,
2015
|
June 30,
2015
|
March 31,
2015
|
December 31,
2014
|
|
REVENUE
|
|
|
|
|
|
Reducer
|
$ 159,394
|
$ 134,607
|
$ 40,398
|
$ -
|
|
Product sales
|
10,228
|
120,097
|
223,411
|
261,972
|
|
Contract manufacturing
|
737,336
|
972,216
|
563,562
|
952,476
|
|
Consulting services
|
1,566,729
|
1,700,464
|
1,477,452
|
1,738,591
|
|
|
2,473,687
|
2,927,384
|
2,304,823
|
2,953,039
|
|
|
|
|
|
|
|
COST OF GOODS SOLD
|
1,573,068
|
1,815,354
|
1,607,572
|
2,344,816
|
|
GROSS PROFIT
|
900,619
|
1,112,030
|
697,251
|
608,223
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
Selling expenses
|
113,913
|
125,478
|
123,822
|
99,348
|
|
General and administrative expenses
|
4,552,966
|
3,535,042
|
2,326,386
|
2,815,008
|
|
Product development and clinical trials expenses
|
4,908,752
|
4,280,295
|
3,431,393
|
4,448,689
|
|
|
9,575,631
|
7,940,815
|
5,881,601
|
7,363,045
|
|
|
|
|
|
|
|
OPERATING LOSS
|
(8,675,012)
|
(6,828,785)
|
(5,184,350)
|
(6,754,822)
|
|
|
|
|
|
|
|
Other income/(expense)
|
1,041,842
|
76,447
|
222,976
|
44,148
|
|
Tax expense
|
-
|
-
|
-
|
-
|
|
LOSS FOR THE PERIOD
|
$ (7,633,170)
|
$ (6,752,338)
|
$ (4,961,374)
|
$ (6,710,674)
|
|
|
|
|
|
|
|
BASIC AND DILUTED LOSS PER SHARE
|
$ (0.11)
|
$ (0.10)
|
$ (0.08)
|
$ (0.12)
|
Revenue has generally been decreasing from quarter-to-quarter
over the last eight quarters. The Company anticipates its overall revenues to be focused on a smaller customer base in 2016. Neovasc
ceased manufacturing all surgical patches in the second quarter of 2015. In the long term the Company expects its consulting services
to decline. Neovasc expects its consulting service customers to transition to become contract manufacturing customers and the Company
is not actively looking for new customers as available research and development staff and resources are being diverted to the Tiara
development program. The Company anticipates that it will be able to replace and grow total revenue from the commercialization
of the Reducer in the mid- to long-term.
Selling expenses are expected to generally increase
quarter-over-quarter as the Company initiates a focused commercialization of the Reducer in select countries in Europe. General
and administrative expense reached a peak in the second quarter of 2016 mainly due to litigation expenses of $5,793,271. Product
development and clinical trial activities have seen quarter over quarter increases and decreases depending on the activities conducted
in that quarter to develop the Tiara and the Reducer and we expect these expenses to increase in the coming quarters and beyond.
USE OF PROCEEDS
On March 26, 2014, the Company closed a bought
deal equity financing underwritten by Cormark Securities Inc., which placed 4,192,000 common shares of Neovasc at a price of C$6.00
per common share, for gross cash proceeds to the Company of C$25,152,000.
The following table sets out a comparison of
how the Company used the proceeds following the closing date against the intended use of proceeds from the bought deal, including
an explanation of any variances and the impact of any variance on the ability of the Company to achieve its business objectives
and milestones.
|
|
Proposed Use of net Proceeds
|
actual Use of net Proceeds
|
|
|
March 26, 2014 Bought Deal
|
Use of Proceeds
|
Remaining to be Spent
|
|
Tiara Development Costs
|
$12,114,900
|
$12,114,900
|
$-
|
|
Reducer Development Costs
|
$6,730,500
|
$5,984,262
|
$746,238
|
|
Additional Proceeds
|
$3,271,336
|
$3,271,336
|
$-
|
|
Total
|
$22,116,736
|
$21,370,498
|
$746,238
|
The actual proceeds net of share issuance costs
from March 26, 2014 financing were $22,116,736. The additional proceeds were used for working capital items and to fund the expansion
of our clean rooms and office space. The approximate expenditures from proceeds of the bought deal equity financing from March
26, 2014 to September 30, 2016 were $21,370,000, of which approximately $12,115,000 was spent on Tiara development costs, approximately
$5,984,000 was spent on Reducer development costs and approximately $3,271,000 was spent on litigation expenses, working capital
items and investment in property, plant and equipment funded from the additional proceeds.
On February 3, 2015, the Company closed an underwritten
public offering, which placed 10,415,000 common shares of Neovasc from treasury at a price of $7.19 per common share for aggregate
gross proceeds of approximately $74,883,850 to the Company. The February 2015 offering also included the sale of 1,660,000 Neovasc
common shares on the same terms by certain directors, officers and employees of Neovasc. The Company did not receive any proceeds
from the sale of the 1,660,000 Neovasc common shares.
The following table sets out a comparison of
how the Company used the proceeds following the closing date against the intended use of proceeds from the public offering, including
an explanation of any variances and the impact of any variance on the ability of the Company to achieve its business objectives
and milestones.
|
|
Proposed Use of net Proceeds
|
actual Use of net Proceeds
|
|
|
February 3, 2015 Underwritten Public Offering
|
Use of Proceeds
|
Remaining to be Spent
|
|
Tiara Development Costs
|
$35,000,000
|
$16,054,883
|
$18,945,117
|
|
Reducer Development Costs
|
$10,000,000
|
-
|
$10,000,000
|
|
Additional Proceeds
|
$24,879,210
|
$29,089,882
|
($4,210,672)
|
|
Total
|
$69,879,210
|
$45,144,765
|
$24,734,445
|
The actual proceeds net of share issuance costs
from the February 3, 2015 financing to the Company were $69,879,210. From February 3, 2015 to September 30, 2016 the Company spent
approximately $45,145,000 of the proceeds. Approximately $18,945,000 was spent on Tiara development costs and approximately $29,090,000
was spent on litigation expenses, working capital items and investment in property, plant and equipment funded from the additional
proceeds. We have incurred approximately $18.2 million expenses since the February 2015 financing in connection with the litigation
with CardiAQ. Such expenses have exceeded the Company’s estimates at the time of the financing and account for the significant
depletion of the additional proceeds generated in the financing. The additional proceeds from the February 2015 financing have
been fully depleted and that we have started using proceeds originally intended for development costs of the Tiara and the Reducer
programs. The Company may be forced to limit the scope of its development programs or may require significant additional financing
in order to pay for the proposed development programs and to continue to operate its business. There can be no assurance that such
financing will be available on favorable terms, or at all. A reduction in the scope of the development programs may cause
a reduction in anticipated future revenues of the Company or in other ways harm the Company’s competitive position in the
future. This may have a material adverse effect on the Company’s business. The Company may also have to pay all or part of
the $91 million damages claims in connection with the litigation with CardiAQ from the proceeds of the February 2015 financing
and there may be limited proceeds remaining to further the development programs. As such, there is a substantial doubt about the
Company’s ability to continue as a going concern (see “Contractual Obligations and Contingencies” herein).
DISCUSSION OF LIQUIDITY AND CAPITAL RESOURCES
Neovasc finances its operations and capital
expenditures with cash generated from operations, lines of credit and equity financings. As at September 30, 2016 the Company had
cash and cash equivalents of $25,480,683 compared to cash and cash equivalents of $55,026,171 as at December 31, 2015. The Company’s
working capital, excluding the $91 million damages provision in connection with the litigation with CardiAQ, is $27,470,257 as
at September 30, 2016 compared to $54,274,867 as at December 31, 2015. Unless the Company is successful in an appeal of the verdict,
or otherwise is successful in reducing the amount of the $91 million award, the Company will require significant additional financing
in order to pay the damages and to continue to operate its business. There can be no assurance that such financing will be available
on favorable terms, or at all.
The Company intends to continue to vigorously
defend itself in the litigation during the post-trial motion timetable as stipulated by the Court and so the outcome of these matters,
including whether the Company will be required to pay some or all of the jury award of $70 million and enhanced damages award of
$21 million, is not currently determinable. Litigation is inherently uncertain. Therefore, until these matters have been resolved
to their ultimate conclusion by the appropriate courts, the Company cannot give any assurances as to the outcome. If the Company
is unsuccessful in its defense of these claims, including any appeal of the verdict in the Massachusetts litigation with CardiAQ,
or is unable to settle the claims in a manner satisfactory to the Company, it may be faced with significant monetary damages that
could exceed its resources, the loss of intellectual property rights and damage to its competitive position. These circumstances
indicate the existence of material uncertainty and cast substantial doubt about the Company’s ability to continue as a going
concern.
Results for the three months ended September
30, 2016 and 2015 follow:
Cash used in operating activities for the three
months ended September 30, 2016 was $11,117,649, compared to $6,916,065 for the same period in 2015. Cash expenditures on litigation
(litigation expenses less change in accounts payable related to litigation) were $4,309,062 and within accounts payable there was
$975,644 of litigation expenses incurred but not paid for in connection with the litigation with CardiAQ that will be paid in the
following quarter. Cash expenditures on research and development and clinical trials (expenses less share based payments and depreciation)
were $4,321,501 as the Company furthered the development of the Tiara and the Reducer and cash expenditures on general and administrative
expenses were $3,250,436. Inventory decreased by $510,269 during the period due to increased sales and corresponding shipments
occurring close the end of the period.
For the three months ended September 30, 2016
net cash applied to investing activities was $15,174 compared to net cash received from investing activities of $5,719,144 for
the same period in 2015. The Company invested $15,174 in property, plant and equipment, compared to $467,512 for the same period
in 2015. The major work on the clean rooms and facilities is substantially complete but the Company continues to invest capital
to expand its clean room, chemical laboratory and manufacturing facilities and research and development capabilities. In the three
months ended September 30, 2015, the Company received cash inflows from the liquidation of investments of $6,186,656.
For the three months ended September 30, 2016
net cash provided by financing activities was $nil from the exercise of options, compared to $8,583 cash outflows for the same
period in 2015.
Results for the nine months ended September
30, 2016 and 2015 follow:
Cash used in operating activities for the nine
months ended September 30, 2016 was $33,071,315, compared to $15,571,161 for the same period in 2015. Cash expenditures on litigation
(litigation expenses less change in accounts payable related to litigation) were $11,998,338 and within accounts payable there
was $975,644 of litigation expenses incurred but not paid for in connection with the litigation with CardiAQ that will be paid
in the following quarter. Cash expenditures on research and development and clinical trials (expenses less share based payments
and depreciation) were $13,296,070 as the Company furthered the development of the Tiara and the Reducer, cash expenditures on
general and administrative expenses were $4,272,766 and there was a $2,698,350 loss on foreign exchange. The increase in expenditures
between the nine months ended September 30, 2016 and the same period in 2015 can be explained by a $5,532,659 increase in expenditures
in connection with the litigation with CardiAQ, and a $2,697,654 increase in expenditures on research and development and clinical
trials as we move forward with our development and clinical programs for the Tiara and the Reducer, a $995,128 reduction in contribution
from gross margin as our revenue and margins declined and a $3,464,718 increase in foreign exchange losses.
For the nine months ended September 30, 2016
net cash applied to investing activities was $546,709 compared to net cash received from investing activities of $7,587,846 for
the same period in 2015. The Company invested $546,709 in property, plant and equipment, compared to $1,734,646 for the same period
in 2015. The major work on the clean rooms and facilities started in 2015 is substantially complete. In the nine months ended September
30, 2015, the Company received proceeds from maturing guaranteed investment certificates of $9,322,492.
For the nine months ended September 30, 2016
net cash provided by financing activities was $75,192 from the exercise of options, compared to net cash provided by financing
activities of $70,629,970 for the same period in 2015. In the nine months ended September 30, 2015, the Company received net proceeds
from an underwritten public offering of $69,879,210, received proceeds of $915,124 from the exercise of options and paid off its
long term debt in full.
The majority of the revenue and expenses of
the Company are incurred in the parent and in one of its subsidiaries, NMI, both of which are Canadian companies. There were no
significant restrictions on the transfer of funds between these entities and during the three and nine months ended September 30,
2016 and the Company had no complications in transferring funds to and from its subsidiaries in Israel and the United States.
Approximately 62% of the Company’s cash
and cash equivalents as at September 30, 2016 were denominated in Canadian dollars. The Company is exposed to foreign currency
fluctuations on $9,606,802 of its cash and cash equivalents held in U.S. dollars and European euros.
SUBSEQUENT EVENTS
In the District of Massachusetts lawsuit brought
by CardiAQ, and on October 31, 2016, Judge Allison D. Burroughs issued an order regarding patent inventorship and various post-trial
motions.
The Court ruled in favor of CardiAQ on the issue
of inventorship of Neovasc’s ‘964 Patent. There are no monetary awards associated with these matters and no damages
award has been recognized. Unless the Company is successful at appeal two individuals employed by Cardiaq will be added as inventors
to a Neovasc patent. The Company intends to vigorously defend itself in this matter and so the outcome is inherently uncertain.
The Court upheld the jury’s verdict and
$70 million award against Neovasc, and awarded $21 million in enhanced damages to that award. When the Company assesses that it
is probable that a present obligation exists at the end of the reporting period and that the possibility of an outflow of economic
resources embodying economic benefits is probable, a provision is recognized. The Company has made a damages provision for $91
million as at September 30, 2016. The Company intends to continue to vigorously defend itself in the litigation with CardiAQ and
so the outcome of these matters is inherently uncertain.
The Court denied CardiAQ’s motion for
an injunction that would have shut down the development of Tiara, thus allowing the Company to continue development and commercialization
of Tiara. However, the Court issued an injunction requiring Neovasc to certify, by November 7, 2016, destruction of information
that CardiAQ sent to Neovasc during the parties’ 2009-2010 business relationship, destruction of any related work product
that incorporates such information, and return of any related CardiAQ prototypes.
The Court denied Neovasc’s motions for
a new trial.
Upon entry of a judgment by the trial court, Neovasc will immediately
seek to stay the judgment, and thereby the payment of the $70 million damages award and the $21 million enhancement to that award,
until after an appeal of the basis for that award and enhancement is complete. The Company will appeal the validity of the
award, the ruling on inventorship, and related issues stemming from the trial court verdict and October 31 order. The appellate
process may take up to a year to complete. In addition, following entry of a judgment, there may be additional motion practice
regarding issues such as interest.
OUTSTANDING SHARE DATA
As at November 14, 2016, the Company had 66,866,345
common voting shares issued and outstanding. Further, the following securities are convertible into common shares of the Company:
7,976,482 stock options with a weighted average price of C$3.95. The fully diluted share capital of the Company at November 14,
2016 is 74,842,827.
CONTRACTUAL OBLIGATIONS
AND CONTINGENCIES
Contingencies
Litigation with CardiAQ
On June 6, 2014, Neovasc was named in a lawsuit
filed by CardiAQ in the U.S. District Court for the District of Massachusetts concerning intellectual property rights ownership,
unfair trade practices and breach of contract relating to Neovasc’s transcatheter mitral valve technology, including the
Tiara.
On June 23, 2014, CardiAQ also filed a complaint
against Neovasc in Germany requesting that Neovasc assign its right to one of its European patent applications to CardiAQ. On July
7, 2014, the Company was made aware through a press release issued by CardiAQ of a stay in proceedings for Neovasc’s European
patent application that is the subject of the German lawsuit. This stay of proceedings was granted without an opportunity for Neovasc
to respond to CardiAQ’s allegations. The Company requested that the stay be lifted, but the request was denied by the European
patent office pending resolution of the German lawsuit. Neovasc filed its response to the German lawsuit in December
2014. The court in Munich is expected to render its decision after a hearing which has been deferred by the court and is currently
scheduled for December 14, 2016.
On April 25, 2016, the Court granted Neovasc’s
motion for summary judgment on CardiAQ’s claim for fraud.
On May 19, 2016, following a trial in Boston,
Massachusetts, a jury found in favor of CardiAQ, on CardiAQ's claims for relief for breach of contract, breach of the duty of honesty
in contractual performance, and three of CardiAQ's six asserted trade secrets. The jury also issued advisory findings in favor
of CardiAQ regarding its causes of action under Massachusetts Gen. Law. Ch. 93A and patent inventorship. The Company recognized
a damages provision of $70 million as at June 30, 2016 and $91 million as at September 30, 2016. The Company intends to continue
to vigorously defend itself in the litigation with CardiAQ and so the outcome of these matters is inherently uncertain. Interest,
costs, and fees may be due on any award granted by the Court. The determination of the interest due, if any, would be the
subject of further rulings from the Court, including rulings on pre-judgment interest. CardiAQ has estimated such pre-judgment
interest at approximately $20.3 million. Neovasc will dispute whether CardiAQ is entitled to any pre-judgment interest.
Similarly, the determination of any attorneys’ fees and the costs of litigation would be the subject of further rulings from
the Court. The amounts of any attorneys’ fees and costs are currently undeterminable.
On May 27, 2016, the Court granted Neovasc’s
motion for judgment as a matter of law on the Massachusetts Gen. Law. Ch. 93A claim.
In the cause of action relating to patent inventorship,
CardiAQ claimed that two individuals should be added as inventors to a Neovasc patent and no judgment has yet been made. The matter
of inventorship has no monetary award attached to it. The Court decided the patent inventorship claim, as well as post-trial motions,
following briefing completed in August 2016 and following a hearing on these motions.
On October 31, 2016, the Court issued an order
regarding patent inventorship, injunctive relief, enhanced damages, and motions for a new trial. Following that order, the Court
will issue a final judgment.
As at September 30, 2016 the Company had approximately
$25.5 million in cash and cash equivalents. Unless the Company is successful in post-trial motions and/or an appeal of the verdict,
or otherwise is successful in reducing the amount of the $70 million award and enhanced damages award of $21 million, the Company
will require significant additional financing in order to pay the damages and to continue to operate its business. There can be
no assurance that such financing will be available on favorable terms, or at all.
The Company intends to continue to vigorously
defend itself in the litigation with CardiAQ and so the outcome of these matters, including whether the Company will be required
to pay some or all of the jury award of $70 million and enhanced damages award of $21 million, is not currently determinable. Litigation
is inherently uncertain. Therefore, until these matters have been resolved to their ultimate conclusion by the appropriate courts,
the Company cannot give any assurances as to the outcome. If the Company is unsuccessful in its defense of these claims, including
any appeal of the verdict in the Massachusetts litigation with CardiAQ, or is unable to settle the claims in a manner satisfactory
to the Company, it may be faced with significant monetary damages that could exceed its resources, the loss of intellectual property
rights and damage to its competitive position. These circumstances indicate the existence of material uncertainty and cast substantial
doubt about the Company’s ability to continue as a going concern.
In addition, the Company’s litigation
with CardiAQ has been, and is expected to continue to be, costly and time-consuming and could divert the attention of management
and key personnel from the Company’s business operations. If the Company is unsuccessful in its defense of these claims,
including any appeal of the verdict in the Massachusetts litigation with CardiAQ, or is unable to settle the claims in a manner
satisfactory to the Company, it may be faced with significant monetary damages that could exceed its resources, the loss of intellectual
property rights and damage to its competitive position, which creates material uncertainty and casts substantial doubt about the
Company’s ability to continue as a going concern.
Securities Class Action Lawsuit
On June 6, 2016, an alleged purchaser of Neovasc
common shares filed a lawsuit, on behalf of a putative class of purchasers of Neovasc securities, against Neovasc (as well as against
Chief Executive Officer, Alexei Marko, and Chief Financial Officer, Christopher Clark) in the United States District Court for
the District of Massachusetts concerning alleged violations of the United States securities laws. The case is styled as
Sergio
Grobler, individually and on behalf of all others similarly situated v. Neovasc Inc., Alexei Marko, and Christopher Clark
,
Case No. 1:16-cv-11038-RGS. The complaint filed in the lawsuit, which principally bases the plaintiff’s claims on the Company’s
prior disclosures regarding the lawsuit filed by CardiAQ in the United States District Court for the District of Massachusetts,
does not specify the amount of damages sought. Further, as of the present time, no class action has been certified by the court
to proceed.
The Company and its officers intend to vigorously
defend themselves in the litigation and so the outcome of this matter is not currently determinable. Litigation is inherently uncertain.
Therefore, until this matter has been resolved to its ultimate conclusion by the appropriate court, the Company cannot give any
assurances as to the outcome. In addition, the litigation is expected to be costly and time-consuming and could divert the attention
of management and key personnel from the Company’s business operations. If the Company is unsuccessful in its defense of
these claims, or is unable to settle the claims in a manner satisfactory to the Company, it may be faced with significant monetary
damages that could exceed its resources, which would have a material adverse effect on the Company’s business.
Contractual obligations
The following table summarizes our contractual obligations as at
September 30, 2016:
|
|
Payments due by Period
|
|
Contractual Obligations
|
Total
|
Less than 1 year
|
2-3 years
|
4-5 years
|
|
|
Operating leases
|
$ 594,693
|
$ 217,305
|
$ 263,702
|
$ 113,686
|
|
|
|
|
|
|
|
|
|
OFF
BALANCE SHEET ARRANGEMENTS
The Company has no off balance sheet arrangements.
Related
Party Transactions
There were no ongoing contractual commitments
and transactions with related parties during the three months ended September 30, 2016 and 2015, other than those as described
elsewhere herein and those compensation based payments disclosed in Note 17 of the unaudited condensed interim consolidated financial
statements for the three and nine months ended September 30, 2016 and 2015.
PROPOSED TRANSACTIONS
The Company is not party to any transaction
requiring additional disclosure.
Critical Accounting Estimates
and management judgment
The preparation
of unaudited condensed interim consolidated financial statements in conformity with IFRS requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at the date of the unaudited condensed interim consolidated
financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from
those estimates.
Estimates
and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in
which the estimates are revised and in any future periods affected.
Significant
areas requiring the use of estimates relate to the determination of the net realizable value of inventory (obsolescence provisions),
allowance for doubtful accounts receivable, impairment of non-financial assets, useful lives of depreciable assets and expected
life, volatility and forfeiture rates for share-based payments.
Inventories
The Company
estimates the net realizable values of inventories, taking into account the most reliable evidence available at each reporting
date. The future realization of these inventories may be affected by future technology or other market-driven changes that may
reduce future selling prices.
Allowance for doubtful accounts receivable
The Company
provides for bad debts by setting aside accounts receivable past due more than 121 days. Actual collectability of customer balances
can vary from the Company’s estimation.
Impairment of long-lived assets
In assessing
impairment, the Company estimates the recoverable amount of each asset or cash generating unit based on expected future cash flows
and uses an interest rate to discount them. Estimation uncertainty relates to assumptions about future operating results and the
determination of a suitable discount rate.
Useful lives of depreciable assets
The Company
reviews its estimate of the useful lives of depreciable assets at each reporting date, based on the expected utilization of the
assets.
Share-based payment
The Company
measures the cost of equity-settled transactions by reference to the fair value of the equity instruments at the date at which
they are granted. Estimating fair value for share-based payment transactions requires determining the most appropriate valuation
model, which is dependent on the terms and conditions of the grant. This estimate also requires determining the most appropriate
inputs to the valuation model including the expected life of the share option, volatility and forfeiture rates and making assumptions
about them.
Determination of functional currency
The Company
determines its functional currency based on the primary economic environment in which it operates. IAS 21 The Effects of Changes
in Foreign Exchange Rates outlines a number of factors to apply in determining the functional currency, which is subject to significant
judgment by management. Management uses a number of factors to determine the primary economic environment in which the Company
operates; it is normally the one in which it primarily generates and expends cash. As the Company is still a development stage
entity, it considers the currency in which it expends cash on its research and development activities to be a key element in this
assessment.
Determination of presentation currency
The Company
has elected to adopt the U.S. dollar as its presentation currency, effective from the annual statements of the Company for the
year ended December 31, 2015, to better reflect its business and to improve comparability of its financial information with other
publicly traded businesses in the life sciences industry. Prior period financial statements and all comparative financial information
contained herein have been recast to reflect the Company’s results as if they had been historically presented in U.S. dollars.
Deferred tax assets
Deferred tax
assets are recognized in respect of tax losses and other temporary differences to the extent probable that there will be taxable
income available against which the losses can be utilized. Judgment is required to determine the amount of deferred tax assets
that can be recognized based on estimates of future taxable income.
Contingent Liabilities
Contingent
liabilities are assessed continually to determine whether an outflow of resources embodying economic benefits has become probable.
If it becomes probable that an outflow of future economic benefits will be required for an item previously dealt with as a contingent
liability, a provision is recognized in the financial statements of the period in which the change in probability occurs.
Changes
in Accounting Policies including Initial Adoption
During the three months ended September 30,
2016 there have been no changes in accounting policies. The Company has not adopted any new accounting policies during the three
months ended September 30, 2016.
financial instruments
The Company’s financial instruments include
its cash and cash equivalents, accounts receivable, and accounts payable and accrued liabilities. The carrying amounts of cash
and cash equivalents, accounts receivable, accounts payable and accrued liabilities are considered a reasonable approximation of
fair value due to their short term nature.
The Company’s cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities denominated in foreign currency may be subject to foreign exchange
risk. The majority of the Company’s accounts receivable are denominated in U.S. dollars and European Euros. The majority
of the Company’s accounts payable and accrues liabilities are denominated in U.S. dollars and Canadian dollars. Any change
in the foreign exchange between these currencies and the Canadian dollar may result in a change in net income for the Company.
Management has considered the stability of the foreign currencies and the impact a change in the exchange rate may have on future
earnings. The Company does not hedge its foreign exchange risk.
The Company’s cash and cash equivalents,
accounts receivable may be subject to credit risk. The Company’s accounts receivable are due from entities to which the Company
sells products. The Company monitors its debtors’ payment history and performance. The Company does not require collateral
from its customers as security for trade accounts receivable but may require certain customers to pay in advance of any work being
performed or product being shipped. The Company’ cash and cash equivalents are held in banks that may become unstable or
insolvent. The Company minimizes its risk to cash and cash equivalents by dealing with Canadian chartered banks.
Disclosure
Controls and Internal controls over financial reporting
Disclosure
controls and procedures (“DC&P”) are designed to provide reasonable assurance that all material information is
gathered and reported to senior management, including the Company's Chief Executive Officer and Chief Financial Officer (the “Certifying
Officers”), on a timely basis so that appropriate decisions can be made regarding public disclosure within the required time
periods specified under applicable Canadian securities laws. The Certifying Officers are responsible for establishing and monitoring
the Company's DC&P. The internal control over financial reporting (“ICFR”) is designed to provide reasonable assurance
that such financial information is reliable and complete. The Certifying Officers are also responsible for establishing and maintaining
adequate ICFR for the Company.
As at September
30, 2016, management of the Company, with the participation of the Certifying Officers, evaluated the effectiveness of the Company's
DC&P and ICFR as required by Canadian securities laws. Based on that evaluation, the Certifying Officers have concluded that,
as of the end of the period covered by this MD&A, the DC&P were effective to provide reasonable assurance that material
information relating to the Company was made known to senior management by others and information required to be disclosed by the
Company in its annual filings, interim filings (as such terms are defined under National Instrument 52-109 - Certification of Disclosure
in Issuers' Annual and Interim Filings) or other reports filed or submitted by it under securities legislation were recorded, processed,
summarized and reported within the time periods specified in securities legislation. The Certifying Officers have evaluated the
effectiveness of the Company’s ICFR as at September 30, 2016 and have concluded that such ICFR is effective. The Certifying
Officers have also concluded that, as of the end of the period covered by this MD&A, the ICFR provides reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with IFRS. To design its ICFR, the Company used the 2013 Internal Control - Integrated Framework (COSO Framework) published by
the Committee of Sponsoring Organizations of the Treadway Commission. Due to inherent limitations, ICFR reporting may not prevent
or detect misstatements. In addition, projections of any evaluation relating to the effectiveness in future periods are subject
to the risk that controls may become inadequate as a result of changes in conditions, or that the degree of compliance with policies
and procedures may deteriorate. Because the Company is an “emerging growth company” as defined in the U.S. Jumpstart
Our Business Startups Act of 2012, the Company will not be required to comply with the auditor attestation requirements of the
U.S. Sarbanes-Oxley Act of 2002 for as long as the Company remains an “emerging growth company”, which may be for as
long as five years following its initial registration in the United States.
There have
been no material changes in our DC&P and ICFR during the three months ended September 30, 2016, that have materially affected,
or are reasonably likely to affect our internal control over financial reporting.
aDDITIONAL INFORMATION
Additional information about the Company, including
the Company’s consolidated financial statements and Annual Information Form, are available on SEDAR at www.sedar.com and
in the Company’s Annual Report on Form 40-F, which is available on the website of the U.S. Securities and Exchange Commission
at www.sec.gov.
Document 2
Neovasc Inc.
CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2016 AND 2015
(Expressed in U.S. dollars)
CONTENTS
|
|
|
|
|
Page
|
|
|
|
|
Condensed Interim Consolidated Statements of Financial Position
|
1
|
|
|
|
|
Condensed Interim Consolidated Statements of Loss and Comprehensive Loss
|
2
|
|
|
|
|
Condensed Interim Consolidated Statements of Changes in Equity
|
3
|
|
|
|
|
Condensed Interim Consolidated Statements of Cash Flows
|
4
|
|
|
|
|
Notes to the Condensed Interim Consolidated Financial Statements
|
5 - 18
|
NEOVASC INC
.
Condensed Interim Consolidated Statements of Financial Position
(Expressed in U.S. dollars) (Unaudited)
|
|
|
September 30,
|
December 31,
|
|
|
Notes
|
2016
|
2015
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
Current assets
|
|
|
|
|
Cash and cash equivalents
|
6
|
$ 25,480,683
|
$ 55,026,171
|
|
Accounts receivable
|
7
|
2,979,007
|
1,736,941
|
|
Inventory
|
8
|
1,058,741
|
598,136
|
|
Prepaid expenses and other assets
|
|
401,969
|
146,590
|
|
Total current assets
|
|
29,920,400
|
57,507,838
|
|
|
|
|
|
|
Non-current assets
|
|
|
|
|
Property, plant and equipment
|
9
|
3,918,622
|
3,720,556
|
|
Total non-current assets
|
|
3,918,622
|
3,720,556
|
|
|
|
|
|
|
Total assets
|
|
$ 33,839,022
|
$ 61,228,394
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
Liabilities
|
|
|
|
|
Current liabilities
|
|
|
|
|
Accounts payable and accrued liabilities
|
10
|
$ 2,450,143
|
$ 3,232,971
|
|
Damages provision
|
18
|
91,000,000
|
-
|
|
Total current liabilities and total liabilities
|
|
93,450,143
|
3,232,971
|
|
|
|
|
|
|
Equity
|
|
|
|
|
Share capital
|
11
|
161,658,013
|
161,505,037
|
|
Contributed surplus
|
11
|
22,302,536
|
20,569,110
|
|
Accumulated other comprehensive loss
|
|
(4,574,273)
|
(8,790,011)
|
|
Deficit
|
|
(238,997,397)
|
(115,288,713)
|
|
Total equity
|
|
(59,611,121)
|
57,995,423
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$ 33,839,022
|
$ 61,228,394
|
Going Concern and Uncertainty (see Note 1)
Contingent Liabilities (see Note 18)
Subsequent Events (see Note 19)
See Accompanying Notes to the Condensed Interim
Consolidated Financial Statements
NEOVASC INC.
Condensed Interim Consolidated Statements of Loss and Comprehensive
Loss
For the three and nine months ended
September 30,
(Expressed in U.S. dollars) (Unaudited)
|
|
|
Three months ended
September 30,
|
Nine months ended
September 30,
|
|
|
Notes
|
2016
|
2015
|
2016
|
2015
|
|
|
|
|
|
|
|
|
REVENUE
|
|
|
|
|
|
|
Reducer
|
|
$ 262,546
|
$ 159,394
|
$ 722,433
|
$ 334,399
|
|
Product sales
|
|
-
|
10,228
|
-
|
353,736
|
|
Contract manufacturing
|
|
1,543,516
|
737,336
|
2,391,136
|
2,273,114
|
|
Consulting services
|
|
1,227,938
|
1,566,729
|
3,638,105
|
4,744,645
|
|
|
12
|
3,034,000
|
2,473,687
|
6,751,674
|
7,705,894
|
|
|
|
|
|
|
|
|
COST OF GOODS SOLD
|
14
|
2,201,440
|
1,573,068
|
5,038,792
|
4,995,994
|
|
GROSS PROFIT
|
|
832,560
|
900,619
|
1,712,882
|
2,709,900
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
Selling expenses
|
14
|
208,884
|
113,913
|
554,905
|
363,213
|
|
General and administrative expenses
|
14
|
3,466,825
|
4,552,966
|
16,721,354
|
10,414,394
|
|
Product development and clinical trials expenses
|
14
|
4,742,691
|
4,908,752
|
14,530,513
|
12,620,440
|
|
|
|
8,418,400
|
9,575,631
|
31,806,772
|
23,398,047
|
|
|
|
|
|
|
|
|
OPERATING LOSS
|
|
(7,585,840)
|
(8,675,012)
|
(30,093,890)
|
(20,688,147)
|
|
|
|
|
|
|
|
|
OTHER (EXPENSE)/INCOME
|
|
|
|
|
|
|
Interest income
|
|
25,723
|
151,580
|
161,522
|
470,011
|
|
Interest expense
|
|
-
|
-
|
-
|
(2,538)
|
|
Damages provision
|
18
|
(21,000,000)
|
-
|
(91,000,000)
|
-
|
|
Gain/(loss) on foreign exchange
|
|
88,584
|
890,262
|
(2,014,669)
|
873,792
|
|
Unrealized loss on damages provision
|
|
(576,257)
|
-
|
(576,257)
|
-
|
|
|
|
(21,461,950)
|
1,041,842
|
(93,429,404)
|
1,341,265
|
|
LOSS BEFORE TAX
|
|
(29,047,790)
|
(7,633,170)
|
(123,523,294)
|
(19,346,882)
|
|
|
|
|
|
|
|
|
Tax expense
|
|
(87,296)
|
-
|
(185,390)
|
-
|
|
|
|
|
|
|
|
|
LOSS FOR THE PERIOD
|
|
$ (29,135,086)
|
$ (7,633,170)
|
$(123,708,684)
|
$(19,346,882)
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME/(EXPENSE) FOR THE PERIOD
|
|
|
|
|
|
|
Exchange difference on translation
|
|
(278,161)
|
(5,218,320)
|
3,639,481
|
(6,476,684)
|
|
Unrealized loss on damages provision
|
|
576,257
|
-
|
576,257
|
-
|
|
|
|
|
|
|
|
|
LOSS AND COMPREHENSIVE LOSS FOR THE PERIOD
|
|
$ (28,836,990)
|
$(12,851,490)
|
$ (119,492,946)
|
$(25,823,566)
|
|
|
|
|
|
|
|
|
LOSS PER SHARE
|
|
|
|
|
|
|
Basic and diluted loss per share
|
16
|
$ (0.44)
|
$ (0.11)
|
$ (1.85)
|
$ (0.30)
|
See Accompanying Notes to the Condensed Interim
Consolidated Financial Statements
NEOVASC INC.
Condensed Interim Consolidated Statements of Changes in Equity
(Expressed in U.S. dollars) (Unaudited)
|
|
Notes
|
Share
Capital
|
Contributed
Surplus
|
Accumulated Other Comprehensive Loss
|
Deficit
|
Total Equity
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2015
|
|
$ 89,357,061
|
$ 17,632,809
|
$ (403,806)
|
$ (88,558,223)
|
$ 18,027,841
|
|
|
|
|
|
|
|
|
|
Issue of share capital pursuant to an underwritten public offering
|
11(b)(i)
|
74,883,850
|
-
|
-
|
-
|
74,883,850
|
|
Share issue costs
|
11(b)(i)
|
(5,004,640)
|
-
|
-
|
-
|
(5,004,640)
|
|
Issue of share capital on exercise of options
|
|
1,936,421
|
(1,021,297)
|
-
|
-
|
915,124
|
|
Share-based payments
|
|
-
|
3,197,828
|
-
|
-
|
3,197,828
|
|
Transaction with owners during the period
|
|
71,815,631
|
2,176,531
|
-
|
-
|
73,992,162
|
|
|
|
|
|
|
|
|
|
Loss for the period
|
|
-
|
-
|
-
|
(19,346,882)
|
(19,346,882)
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss for the period
|
|
-
|
-
|
(6,476,684)
|
-
|
(6,476,684)
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2015
|
|
$ 161,172,692
|
$ 19,809,340
|
$ (6,880,490)
|
$ (107,905,105)
|
$ 66,196,437
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2016
|
|
$ 161,505,037
|
$ 20,569,110
|
$ (8,790,011)
|
$ (115,288,713)
|
$ 57,995,423
|
|
|
|
|
|
|
|
|
|
Issue of share capital on exercise of options
|
|
152,976
|
(77,784)
|
-
|
-
|
75,192
|
|
Share-based payments
|
|
-
|
1,811,210
|
-
|
-
|
1,811,210
|
|
Transaction with owners during the period
|
|
152,976
|
1,733,426
|
-
|
-
|
1,886,402
|
|
|
|
|
|
|
|
|
|
Loss for the period
|
|
-
|
-
|
-
|
(123,708,684)
|
(123,708,684)
|
|
|
|
|
|
|
|
|
|
Other comprehensive income for the period
|
|
-
|
-
|
4,215,738
|
-
|
4,215,738
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2016
|
|
$ 161,658,013
|
$ 22,302,536
|
$ (4,574,273)
|
$ (238,997,397)
|
$ (59,611,121)
|
See Accompanying Notes to the Condensed Interim
Consolidated Financial Statements
NEOVASC INC.
Condensed Interim Consolidated Statements of Cash Flows
For the three and nine months ended
September 30,
(Expressed in U.S. dollars) (Unaudited)
|
|
|
Three months ended
September 30,
|
Nine months ended
September 30,
|
|
|
Notes
|
2016
|
2015
|
2016
|
2015
|
|
|
|
|
|
|
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
Loss for the period
|
|
$
(29,135,086)
|
$ (7,633,170)
|
$(123,708,684)
|
$ (19,346,882)
|
|
Adjustments for:
|
|
|
|
|
|
|
Depreciation
|
14
|
215,108
|
133,157
|
562,088
|
337,484
|
|
Share-based payments
|
14
|
580,221
|
877,434
|
1,811,210
|
3,197,828
|
|
Damages provision
|
18
|
21,000,000
|
-
|
91,000,000
|
-
|
|
Accounts receivable write down
|
|
697
|
-
|
5,556
|
-
|
|
Interest income
|
|
(25,723)
|
(151,580)
|
(161,522)
|
(502,498)
|
|
Interest expense
|
|
-
|
-
|
-
|
2,538
|
|
|
|
(7,364,783)
|
(6,774,159)
|
(30,491,352)
|
(16,311,530)
|
|
|
|
|
|
|
|
|
Net change in non-cash working capital items:
|
|
|
|
|
|
|
Accounts receivable
|
|
(980,522)
|
(427,432)
|
(1,154,457)
|
(234,323)
|
|
Inventory
|
|
510,269
|
(241,663)
|
(409,886)
|
(262,433)
|
|
Prepaid expenses and other assets
|
|
20,642
|
161,823
|
(234,565)
|
(22,441)
|
|
Accounts payable and accrued liabilities
|
|
(3,326,228)
|
101,286
|
(940,349)
|
776,126
|
|
|
|
(3,775,839)
|
(405,986)
|
(2,739,257)
|
256,929
|
|
|
|
|
|
|
|
|
Interest paid and received:
|
|
|
|
|
|
|
Interest received
|
|
22,974
|
264,080
|
159,294
|
485,978
|
|
Interest paid
|
|
-
|
-
|
-
|
(2,538)
|
|
|
|
22,974
|
264,080
|
159,294
|
483,440
|
|
|
|
|
|
|
|
|
Net cash applied to operating activities
|
|
(11,117,648)
|
(6,916,065)
|
(33,071,315)
|
(15,571,161)
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITES
|
|
|
|
|
|
|
Redemption of guaranteed investment certificates
|
|
-
|
6,186,656
|
-
|
9,322,492
|
|
Purchase of property, plant and equipment
|
9
|
(15,174)
|
(467,512)
|
(546,709)
|
(1,734,646)
|
|
Net cash (applied to)/received from investing activities
|
|
(15,174)
|
5,719,144
|
(546,709)
|
7,587,846
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
Repayment of long-term debt
|
|
-
|
-
|
-
|
(164,364)
|
|
Proceeds from share issue pursuant to an underwritten public offering, net of share issue costs
|
11
|
-
|
-
|
-
|
69,879,210
|
|
Proceeds from exercise of options
|
11
|
-
|
8,583
|
75,192
|
915,124
|
|
Net cash received from financing activities
|
|
-
|
8,583
|
75,192
|
70,629,970
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
|
(11,132,822)
|
(1,188,338)
|
(33,542,832)
|
62,646,655
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
|
Beginning of the period
|
|
36,277,793
|
68,669,545
|
55,026,171
|
5,193,561
|
|
Exchange difference on cash and cash equivalents
|
|
335,712
|
(4,692,523)
|
3,997,344
|
(5,051,532)
|
|
End of the period
|
|
$ 25,480,683
|
$ 62,788,684
|
$ 25,480,683
|
$ 62,788,684
|
|
|
|
|
|
|
|
|
Represented by:
|
|
|
|
|
|
|
Cash
|
6
|
14,390,173
|
12,939,671
|
14,390,173
|
12,939,671
|
|
Cashable high interest savings accounts
|
6
|
11,090,510
|
25,957,813
|
11,090,510
|
25,957,813
|
|
Cashable guaranteed investment certificates
|
6
|
-
|
23,891,200
|
-
|
23,891,200
|
|
|
|
$ 25,480,683
|
$ 62,788,684
|
$ 25,480,683
|
$ 62,788,684
|
See Accompanying Notes to the Condensed Interim
Consolidated Financial Statements
NEOVASC INC.
Notes to the Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2016 and 2015
(Expressed in U.S. dollars) (Unaudited)
|
|
1.
|
INCORPORATION AND NATURE OF BUSINESS
|
Neovasc Inc. (“Neovasc”
or the “Company”) is a limited liability company incorporated and domiciled in Canada. The Company was incorporated
as Medical Ventures Corp. under the Company Act (British Columbia) on November 2, 2000 and was continued under the Canada Business
Corporations Act on April 19, 2002. On July 1, 2008, the Company changed its name to Neovasc Inc.
Neovasc is the parent company. The
condensed interim consolidated financial statements of the Company as at September 30, 2016 and 2015 and for the three and nine
months ended September 30, 2016 and 2015 comprise the Company and its subsidiaries, all of which are wholly owned. The Company’s
principal place of business is located at Suite 5138 - 13562 Maycrest Way, Richmond, British Columbia, V6V 2J7 and the Company’s
registered office is located at Suite 2600 - 595 Burrard Street, Vancouver, British Columbia, V7X 1L3, Canada. The Company's shares
are listed on the Toronto Stock Exchange (TSX:NVC) and the Nasdaq Capital Market (NASDAQ:NVCN).
On July 5, 2016 the Company received
written notification (the "Notification Letter") from The NASDAQ Stock Market LLC ("Nasdaq") notifying the
Company that it is not in compliance with the $1.00 minimum bid price requirement set forth in the Nasdaq Listing Rules. The Company
has been provided 180 calendar days, or until January 3, 2017, to regain compliance with Nasdaq Listing Rules. In the event the
Company does not regain compliance by January 3, 2017, the Company may be eligible for additional time to regain compliance.
The Company intends to monitor the
closing bid price of its common shares between now and January 3, 2017 and intends to cure the deficiency within the prescribed
grace period or, if necessary, apply for additional time to regain compliance. During this time, the Company's common shares will
continue to be listed and trade on the Nasdaq.
The Company's business operations are
not affected by the receipt of the Notification Letter. The Company is also listed on the Toronto Stock Exchange and the Notification
Letter does not affect the Company's compliance status with such listing.
Neovasc is a specialty medical device
company that develops, manufactures and markets products for the rapidly growing cardiovascular marketplace. Its products
include the Tiara™ for the transcatheter treatment of mitral valve disease and the Neovasc Reducer™ for the treatment
of refractory angina.
|
|
(b)
|
Going Concern and Uncertainty
|
As at September 30, 2016, the Company
had $25,480,683 in cash and cash equivalents. On May 19, 2016, following a trial in Boston, Massachusetts, a jury awarded $70 million
on certain trade secret claims made by CardiAQ Valve Technologies, Inc. (“CardiAQ”) and on October 31, 2016 during
post-trial motions the judge awarded $21 million in enhanced damages on those claims (see Notes 18 and 19). Unless the Company
is successful in staying the $70 million damages award and $21 million enhanced damages award and/or an appeal of the verdict,
or otherwise is successful in reducing the amount of these awards, the Company will require significant additional financing in
order to pay the damages and to continue to operate its business. There can be no assurance that such financing will be available
on favorable terms, or at all.
The Company intends to continue to
vigorously defend itself in the litigation during the stay proceedings and appeal process and so the outcome of these matters,
including whether the Company will be required to pay some or all of the $70 million damages award and $21 million enhanced damages
award is not currently determinable. Litigation is inherently uncertain. Therefore, until these matters have been resolved to their
ultimate conclusion by the appropriate courts, the Company cannot give any assurances as to the outcome. If the Company is unsuccessful
in its defense of these claims, including any appeal of the verdict in the Massachusetts litigation, or is unable to settle the
claims in a manner satisfactory to the Company, it may be faced with significant monetary damages that could exceed its resources,
the loss of intellectual property rights and damage to its competitive position. These circumstances indicate the existence of
material uncertainty and cast substantial doubt about the Company’s ability to continue as a going concern.
These condensed interim consolidated
financial statements do not reflect adjustments that would be necessary if the going concern assumption were not appropriate. Should
the Company be unable to reduce the amount of the award or obtain significant additional financing, material adjustments may be
necessary to these condensed interim consolidated financial statements should such adverse events impair the Company’s ability
to continue as a going concern.
NEOVASC INC.
Notes to the Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2016 and 2015
(Expressed in U.S. dollars) (Unaudited)
|
|
(a)
|
Statement of compliance with IFRS
|
These condensed interim consolidated
financial statements are prepared in accordance with International Accounting Standard (“IAS”) 34 Interim Financial
Reporting, as issued by the International Accounting Standards Board (“IASB”). These condensed interim consolidated
financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year
ended December 31, 2015 and the accompanying notes included in those financial statements. For a full description of accounting
policies, refer to the Company’s audited consolidated financial statements for the year ended December 31, 2015. The results
for the three and nine months ended September 30, 2016 may not be indicative of the results that may be expected for the full year
or any other period.
|
|
(b)
|
Basis of consolidation
|
The condensed interim consolidated
financial statements include the financial statements of the Company and its wholly-owned subsidiaries, Neovasc Medical Inc., Neovasc
Tiara Inc., Neovasc (US) Inc., Neovasc Medical Ltd. and B-Balloon Ltd. (which is in the process of being voluntarily liquidated).
All intercompany balances and transactions have been eliminated upon consolidation.
|
|
(c)
|
Presentation of financial statements
|
The Company has elected to present
the 'Statement of Comprehensive Income' in a single statement.
|
|
(d)
|
Significant Judgments and estimates
|
The Company’s management makes
judgments in its process of applying the Company’s accounting policies in the preparation of its condensed interim consolidated
financial statements. In addition, the preparation of the financial data requires that the Company’s management makes assumptions
and estimates of the impacts of uncertain future events on the carrying amounts of the Company’s assets and liabilities at
the end of the reporting period, and the reported amounts of revenues and expenses during the reporting period. Actual results
may differ from those estimates as the estimation process is inherently uncertain. Estimates are reviewed on an ongoing basis based
on historical experience and other factors that are considered to be relevant under the circumstances. Revisions to estimates and
the resulting impacts on the carrying amounts of the Company’s assets and liabilities are accounted for prospectively. In
preparing the Company’s condensed interim consolidated financial statements for the three and nine months ended September
30, 2016, the Company applied the critical judgments and estimates disclosed in Note 2 of its audited consolidated financial statements
for the year ended December 31, 2015.
|
|
3.
|
SIGNIFICANT ACCOUNTING POLICIES
|
The condensed interim consolidated
financial statements have been prepared in accordance with the accounting policies adopted in the Company’s most recent audited
consolidated financial statements for the year ended December 31, 2015.
The Company’s objectives, when
managing capital, are to safeguard cash as well as maintain financial liquidity and flexibility in order to preserve its ability
to meet financial obligations and deploy capital to grow its business. In the definition of capital, the Company includes equity
and long-term debt. There has been no change in the definition since the prior period.
The Company’s financial strategy
is designed to maintain a flexible capital structure consistent with the objectives stated above and to respond to business growth
opportunities and changes in economic conditions. In order to maintain or adjust its capital structure, the Company may issue new
shares, or new debt (secured, unsecured, convertible and/or other types of available debt instruments). The capital of the Company
is comprised of:
|
|
|
September 30,
2016
|
December 31, 2015
|
|
|
|
|
|
|
Equity
|
|
$ (59,611,121)
|
$ 57,995,423
|
As at September 30, 2016, the Company
is in a negative equity position. The Company has recognized a damages provision of $91 million after a jury awarded $70 million
damages on May 19, 2016 and during post-trial motions the judge awarded $21 million enhanced damages on October 31, 2016 on certain
trade secret claims made by CardiAQ in May 2016 (see Notes 18 and 19). For the three and nine months ended September 30, 2016 and
2015 there were no changes in the Company’s capital management policy.
NEOVASC INC.
Notes to the Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2016 and 2015
(Expressed in U.S. dollars) (Unaudited)
|
|
5.
|
FINANCIAL RISK MANAGEMENT
|
The carrying amounts of financial assets
and financial liabilities in each category are as follows:
|
|
Note
|
September 30,
2016
|
December 31,
2015
|
|
Financial assets
|
|
|
|
|
Cash and cash equivalents
|
6
|
$ 25,480,683
|
$ 55,026,171
|
|
Accounts receivable
|
7
|
2,979,007
|
1,736,941
|
|
|
|
$ 28,459,690
|
$ 56,763,112
|
|
Fianancial liabilities
|
|
|
|
|
Accounts payable and accrued liabilities
|
10
|
$ 2,450,143
|
$ 3,232,971
|
|
|
|
$ 2,450,143
|
$ 3,232,971
|
|
|
|
|
|
The carrying amounts of cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities are considered a reasonable approximation of fair value
due to their short term nature.
|
|
(a)
|
Foreign exchange risk
|
The majority of the Company’s
revenues are derived from product sales in the United States and Europe (“EU”), primarily denominated in U.S. and EU
currencies. Management has considered the stability of the foreign currency and the impact a change in the exchange rate may have
on future earnings during the forecasting process. U.S. and EU currency represents approximately 53% and 47% of the revenue for
nine months ended September 30, 2016 (for the year ended December 31, 2015: 58% and 42% respectively). A 10% change in the foreign
exchange rates for U.S. and EU currencies will result in a change in revenues of approximately $540,000 and $135,000 respectively
for the nine months ended September 30, 2016. A 10% change in the foreign exchange rates for the U.S. and EU currencies for foreign
currency denominated accounts receivable will impact net income as at September 30, 2016 by approximately $209,000 and $45,000
respectively (as at December 31, 2015: $84,000 and $60,000), and a similar change for foreign currency denominated accounts payable
will impact net income by approximately $105,000 and $11,000 respectively as at September 30, 2016 (as at December 31, 2015: $164,000
and $24,000). The Company does not hedge its foreign exchange risk.
The Company receives interest on its
investment in high interest savings accounts (“HISAs”) at variable interest rates. A 1% change in the interest rate
on the investment in HISAs will impact net income as at September 30, 2016 by approximately $111,000 (December 31, 2015: $255,000).
The Company is not exposed to cash flow interest rate risk on fixed rate cash balances, fixed rate guaranteed investment certificates
and short term accounts receivable without interest.
As at September 30, 2016, the Company
had $25,480,683 in cash and cash equivalents as compared to cash and cash equivalents of $55,026,171 at December 31, 2015. The
cash used in operations during the nine months ended September 30, 2016 was $33,542,833. As at September 30, 2016, the Company
had a working capital deficit of $42,529,743 as compared to a working capital surplus of $54,274,867 at December 31, 2015. The
Company has recognized a damages provision of $91 million after a jury awarded $70 million and during post-trial motions the judge
awarded $21 million enhanced damages on certain trade secret claims made by CardiAQ (see Notes 18 and 19). Unless the Company is
successful in post-trial motions and/or an appeal of the verdict, or otherwise is successful in reducing the amount of these awards,
the Company will require significant additional financing in order to pay the damages and to continue to operate its business.
There can be no assurance that such financing will be available on favorable terms, or at all. Further to this and in the
longer term, the Company is dependent on the profitable commercialization of its products or obtaining additional debt or equity
financing to fund ongoing operations until profitability is achieved. The Company monitors its cash flow on a monthly basis and
compares actual performance to the budget for the period.
As at September 30, 2016 and December
31, 2015, all the Company’s non-derivative financial liabilities have maturities (including interest payments where applicable)
within 6 months.
NEOVASC INC.
Notes to the Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2016 and 2015
(Expressed in U.S. dollars) (Unaudited)
|
|
5.
|
FINANCIAL RISK MANAGEMENT (continued)
|
Credit risk arises from the possibility
that the entities to which the Company sells products may experience financial difficulty and be unable to fulfill their contractual
obligations. This risk is mitigated by proactive credit management policies that include regular monitoring of the debtor’s
payment history and performance. The Company does not require collateral from its customers as security for trade accounts receivable
but may require certain customers to pay in advance of any work being performed or product being shipped.
The maximum exposure, if all of the
Company’s customers were to default at the same time is the full carrying value of the trade accounts receivable as at September
30, 2016: $2,607,696 (as at December 31, 2015: $1,393,533). As at September 30, 2016, the Company had $1,366,878 (as at December
31, 2015: $91,813) of trade accounts receivable that was overdue, according to the customers’ credit terms. During the nine
months ended September 30, 2016 the Company wrote down $5,556 of accounts receivable owed by customers (nine months ended September
30, 2015: $nil).
The Company may also have credit risk
related to its cash and cash equivalents, and investments with a maximum exposure of $25,480,683 as at September 30, 2016 (as at
December 31, 2015: $55,026,171). The Company minimizes its risk to cash and cash equivalents by dealing with Canadian chartered
banks.
|
|
6.
|
CASH AND CASH EQUIVALENTS
|
|
|
|
September 30,
2016
|
December 31, 2015
|
|
Cash held in:
|
|
|
|
|
Canadian dollars
|
|
$ 11,060,099
|
$ 635,614
|
|
U.S. dollars
|
|
2,783,142
|
7,104,699
|
|
Euros
|
|
546,932
|
120,415
|
|
Cashable Canadian dollar high interest savings accounts (“HISAs”)
|
|
4,813,782
|
8,738,088
|
|
Cashable U.S. dollar high interest savings accounts
|
|
6,276,728
|
16,752,355
|
|
Cashable Canadian dollar guaranteed investment certificate (“GICs”)
|
|
-
|
21,675,000
|
|
|
|
$ 25,480,683
|
$ 55,026,171
|
The HISAs and GICs were held in major
Canadian Chartered Banks. The HISAs are fully cashable at any time and have a variable interest rate. The GICs were fully cashable
within 90 days and had fixed interest rates.
|
|
|
September 30,
2016
|
December 31, 2015
|
|
|
|
|
|
|
Trade receivables
|
|
$ 2,607,696
|
$ 1,393,533
|
|
Other receivables
|
|
371,311
|
343,408
|
|
|
|
$ 2,979,007
|
$ 1,736,941
|
All amounts are short-term. The aging
analysis of receivables is as follows:
|
|
|
September 30,
2016
|
December 31, 2015
|
|
|
|
|
|
|
Not past due
|
|
$ 1,240,817
|
$ 1,301,720
|
|
Past due 0 - 30 days
|
|
783,471
|
89,643
|
|
31 - 60 days
|
|
577,984
|
1,846
|
|
60 - 90 days
|
|
5,423
|
324
|
|
|
|
$ 2,607,696
|
$ 1,393,533
|
All of the Company's trade and other
receivables have been reviewed for impairment. During the nine months ended September 30, 2016, the Company wrote down $5,556 accounts
receivable (nine months ended September 30, 2015: $nil).
There was an allowance for doubtful
accounts of $161,585 as at September 30, 2016 (December 31, 2015: $nil). Balances overdue more than 120 days are provided for in
the allowance for doubtful accounts.
NEOVASC INC.
Notes to the Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2016 and 2015
(Expressed in U.S. dollars) (Unaudited)
|
|
|
September 30,
2016
|
December 31, 2015
|
|
|
|
|
|
|
Raw materials
|
|
$ 632,652
|
$ 492,785
|
|
Work in progress
|
|
302,311
|
88,856
|
|
Finished goods
|
|
123,778
|
16,495
|
|
|
|
$ 1,058,741
|
$ 598,136
|
During the nine months
ended September 30, 2016 and 2015 the Company did not write down any obsolete inventory.
NEOVASC INC.
Notes to the Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2016 and 2015
(Expressed in U.S. dollars) (Unaudited)
|
|
9.
|
PROPERTY, PLANT AND EQUIPMENT
|
|
|
Land
|
Building
|
Leasehold improvements
|
Production
equipment
|
Computer hardware
|
Computer software
|
Office equipment
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
COST
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2015
|
$ 178,734
|
$1,741,422
|
$ 35,428
|
$1,318,982
|
$ 457,713
|
$ 297,553
|
$ 304,226
|
$4,334,058
|
|
Additions during the year
|
253,198
|
805,810
|
93,361
|
833,690
|
52,914
|
80,455
|
23,700
|
2,143,128
|
|
Cumulative translation adjustment
|
(57,166)
|
(346,428)
|
(10,780)
|
(281,957)
|
(79,537)
|
(51,650)
|
(51,681)
|
(879,199)
|
|
Balance as at December 31, 2015
|
$ 374,766
|
$2,200,804
|
$ 118,009
|
$1,870,715
|
$ 431,090
|
$ 326,358
|
$ 276,245
|
$5,597,987
|
|
|
|
|
|
|
|
|
|
|
|
Additions
during the period
|
-
|
92,063
|
-
|
299,226
|
28,767
|
126,653
|
-
|
546,709
|
|
Cumulative translation adjustment
|
20,696
|
125,239
|
6,517
|
104,211
|
25,156
|
22,355
|
15,256
|
319,430
|
|
Balance as at September 30, 2016
|
$ 395,462
|
$2,418,106
|
$ 124,526
|
$2,274,152
|
$ 485,013
|
$ 475,366
|
$ 291,501
|
$6,464,126
|
|
|
|
|
|
|
|
|
|
|
|
ACCUMULATED DEPRECIATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2015
|
$ -
|
$ 343,295
|
$ 958
|
$ 694,265
|
$ 222,154
|
$ 279,427
|
$ 140,688
|
$1,680,787
|
|
Depreciation for the year
|
-
|
51,010
|
34,119
|
270,231
|
78,158
|
36,817
|
33,374
|
503,709
|
|
Cumulative translation adjustment
|
-
|
(59,066)
|
(2,062)
|
(130,469)
|
(42,706)
|
(47,318)
|
(25,444)
|
(307,065)
|
|
Balance as at December 31, 2015
|
$ -
|
$ 335,239
|
$ 33,015
|
$ 834,027
|
$ 257,606
|
$ 268,926
|
$ 148,618
|
$1,877,431
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation for the period
|
-
|
60,304
|
38,291
|
291,733
|
46,180
|
105,525
|
20,055
|
562,088
|
|
Cumulative translation adjustment
|
-
|
19,612
|
2,102
|
46,895
|
14,505
|
14,517
|
8,354
|
105,985
|
|
Balance as at September 30, 2016
|
$ -
|
$ 415,156
|
$ 73,408
|
$1,172,655
|
$ 318,291
|
$ 388,968
|
$ 177,027
|
$2,545,504
|
|
|
|
|
|
|
|
|
|
|
|
CARRYING AMOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at December 31, 2015
|
$ 374,766
|
$1,865,565
|
$ 84,994
|
$1,036,688
|
$ 173,484
|
$ 57,432
|
$ 127,627
|
$3,720,556
|
|
As at September 30, 2016
|
$ 395,462
|
$2,002,951
|
$ 51,118
|
$1,101,497
|
$ 166,722
|
$ 86,398
|
$ 114,474
|
$3,918,622
|
NEOVASC INC.
Notes to the Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2016 and 2015
(Expressed in U.S. dollars) (Unaudited)
|
|
10.
|
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
|
|
|
|
September 30,
2016
|
December 31, 2015
|
|
|
|
|
|
|
Trade payables
|
|
$ 1,589,755
|
$ 2,515,815
|
|
Accrued vacation
|
|
248,033
|
167,604
|
|
Accrued liabilities
|
|
507,104
|
221,167
|
|
Tax payable
|
|
12,158
|
155,169
|
|
Other payables
|
|
93,093
|
173,216
|
|
|
|
$ 2,450,143
|
$ 3,232,971
|
All common shares are equally eligible
to receive dividends and the repayment of capital and represent one vote at shareholders’ meetings.
All preferred shares have no voting
rights at shareholders’ meetings but on liquidation, winding-up or other distribution of the Company’s assets are entitled
to participate in priority to common shares. There are no preferred shares issued and outstanding.
Unlimited number of common shares without
par value.
Unlimited number of preferred shares
without par value.
|
|
(b)
|
Issued and outstanding
|
|
|
Common Shares
|
Contributed
|
|
|
Number
|
Amount
|
Surplus
|
|
|
|
|
|
|
Balance, January 1, 2015
|
53,842,344
|
$ 89,357,061
|
$ 17,632,809
|
|
Issued for cash pursuant to an underwritten
public offering (i)
|
10,415,000
|
74,883,850
|
-
|
|
Share issue costs (i)
|
-
|
(5,004,640)
|
-
|
|
Issued for cash on exercise of options
|
2,507,603
|
2,268,766
|
(1,177,864)
|
|
Share-based payments
|
-
|
-
|
4,114,165
|
|
Balance, December 31, 2015
|
66,764,947
|
$161,505,037
|
$ 20,569,110
|
|
Issued for cash on exercise of options
|
101,398
|
152,976
|
(77,784)
|
|
Share-based payments
|
-
|
-
|
1,811,210
|
|
Balance, September 30, 2016
|
66,866,345
|
$161,658,013
|
$ 22,302,536
|
|
|
(i)
|
On February 3, 2015, the Company closed an underwritten public offering of 12,075,000 common shares
of the Company (of which 10,415,000 common shares were issued from treasury) at a price per share of $7.19 for aggregate gross
proceeds of $74,883,850 for the Company and $11,935,400 for the selling security holders (including some directors, officers and
employees). The share issue costs incurred by the Company were $5,004,640.
|
NEOVASC INC.
Notes to the Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2016 and 2015
(Expressed in U.S. dollars) (Unaudited)
11. SHARE
CAPITAL (continued)
The Company adopted an equity-settled
stock option plan under which the directors of the Company may grant options to purchase common shares to directors, officers,
employees and service providers (the “optionees”) of the Company on terms that the directors of the Company may determine
within the limitations set forth in the stock option plan. Effective June 18, 2014, at the Annual General Meeting (“AGM”),
the board of directors and shareholders of the Company approved an amendment to the Company's incentive stock option plan to increase
the number of options available for grant under the plan to 10,515,860, representing approximately 20% of the number of common
shares of the Company outstanding on May 16, 2014.
Options under the Company’s stock
option plan granted to directors, officers and employees vest immediately on the grant date, unless a vesting schedule is specified
by the board. The directors of the Company have discretion within the limitations set forth in the stock option plan to determine
other vesting terms on options granted to directors, officers, employees and others. The minimum exercise price of a stock option
cannot be less than the applicable market price of the common shares on the date of the grant and the options have a maximum life
of ten years from the date of grant. The Company also assumed options from the acquisition of Neovasc Medical Ltd. and B-Balloon
Ltd which were not issued under the Company’s stock option plan. The following table summarizes stock option activity for
the respective periods as follows:
|
|
|
Weighted average
|
Average remaining
|
|
|
Number of options
|
exercise
price
|
contractual life (years)
|
|
Options outstanding, January 1, 2015
|
9,346,389
|
C$ 2.37
|
2.19
|
|
Granted
|
1,423,677
|
8.57
|
|
|
Exercised
|
(2,507,603)
|
0.53
|
|
|
Forfeited
|
(127,760)
|
8.46
|
|
|
Options outstanding, December 31, 2015
|
8,134,703
|
C$ 3.92
|
2.22
|
|
Options exercisable, December 31, 2015
|
6,491,040
|
C$ 3.15
|
1.78
|
|
|
|
|
|
|
Granted
|
170,061
|
C$ 4.90
|
|
|
Exercised
|
(101,398)
|
1.00
|
|
|
Forfeited
|
(119,025)
|
5.92
|
|
|
Options outstanding, September 30, 2016
|
8,084,341
|
C$ 3.94
|
1.53
|
|
Options exercisable, September 30, 2016
|
6,749,548
|
C$ 3.37
|
1.14
|
The following table lists the options
outstanding at September 30, 2016 by exercise price:
|
Exercise price
|
Options
outstanding
|
Weighted average remaining term (yrs)
|
Options
exercisable
|
Weighted average remaining term (yrs)
|
|
C$0.01
|
79,482
|
1.30
|
79,482
|
1.30
|
|
C$0.02-1.99
|
3,509,900
|
0.00
|
3,509,900
|
0.00
|
|
C$2.00-4.99
|
1,092,867
|
1.87
|
854,666
|
1.58
|
|
C$5.00-6.99
|
2,474,545
|
2.89
|
1,875,582
|
2.66
|
|
C$7.00-9.99
|
441,000
|
3.63
|
175,900
|
3.52
|
|
C$10.00-13.00
|
486,547
|
3.47
|
254,019
|
3.46
|
|
|
8,084,341
|
|
6,749,548
|
|
The following table lists the options
outstanding at December 31, 2015 by exercise price:
|
Exercise price
|
Options
outstanding
|
Weighted average remaining term (yrs)
|
Options
exercisable
|
Weighted average remaining term (yrs)
|
|
C$0.01
|
86,280
|
2.06
|
86,280
|
2.06
|
|
C$0.02-1.99
|
3,608,500
|
0.68
|
3,570,700
|
0.61
|
|
C$2.00-4.99
|
982,606
|
2.27
|
775,804
|
2.25
|
|
C$5.00-6.99
|
2,550,570
|
3.62
|
1,806,347
|
3.40
|
|
C$7.00-9.99
|
373,000
|
4.58
|
77,000
|
4.58
|
|
C$10.00-13.00
|
533,747
|
4.23
|
174,909
|
4.21
|
|
|
8,134,703
|
|
6,491,040
|
|
NEOVASC INC.
Notes to the Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2016 and 2015
(Expressed in U.S. dollars) (Unaudited)
11. SHARE
CAPITAL (continued)
|
|
(c)
|
Stock options (continued)
|
The weighted average share price at
the date of exercise for share options exercised for the nine months ended September 30, 2016 was $3.55 (nine months ended September
30, 2015: $7.33). During the nine months ended September 30, 2016, the Company recorded $1,811,210 as compensation expense for
share-based compensation awarded to eligible optionees (nine months ended September 30, 2015: $3,197,828). The Company used the
Black-Scholes Option Pricing Model to estimate the fair value of the options at each measurement date using the following weighted
average assumptions:
|
|
|
2016
|
2015
|
|
Weighted average fair value
|
C$ 3.02
|
C$ 4.85
|
|
Dividend yield
|
Nil
|
nil
|
|
Volatility
|
77%
|
76%
|
|
Risk-free interest rate
|
0.75%
|
0.75%
|
|
Expected life
|
5 years
|
5 years
|
|
Forfeiture rate
|
1%
|
1%
|
|
|
|
|
|
The Company’s operations are
in one business segment; the development, manufacture and marketing of medical devices. Each of the Company’s product lines
has similar characteristics, customers, distribution and marketing strategies, and are subject to similar regulatory requirements.
Substantially all of the Company’s long-lived assets are located in Canada. The Company carries on business in Canada. The
Company earns revenue from sales to customers in the following geographic locations:
|
|
For the three months ended
September 30,
|
For the nine months ended
September 30,
|
|
|
2016
|
2015
|
2016
|
2015
|
|
|
|
|
|
|
|
REVENUE
|
|
|
|
|
|
United States
|
$1,716,550
|
$1,115,944
|
$3,158,949
|
$3,620,573
|
|
Europe
|
1,261,681
|
1,308,634
|
3,264,187
|
3,925,541
|
|
Rest of the World
|
55,669
|
49,109
|
328,539
|
159,780
|
|
|
$3,034,000
|
$2,473,687
|
$6,751,674
|
$7,705,894
|
|
|
|
|
|
|
Sales to the Company’s four largest
customers accounted for approximately 34%, 32%, 16% and 3% of the Company’s sales for the nine months ended September 30,
2016. Sales to the Company’s four largest customers accounted for approximately 29%, 26%, 18% and 16% of the Company’s
sales for the nine months ended September 30, 2015.
|
|
13.
|
EMPLOYEE BENEFITS EXPENSE
|
|
|
For the three months ended
September 30,
|
For the nine months ended
September 30,
|
|
|
2016
|
2015
|
2016
|
2015
|
|
|
|
|
|
|
|
Salaries and wages
|
$ 2,512,333
|
$ 2,195,738
|
$
7,541,996
|
$ 6,300,101
|
|
Pension plan and employment insurance
|
134,330
|
120,428
|
473,960
|
408,881
|
|
Contribution to defined contribution pension plan
|
55,224
|
60,098
|
161,254
|
128,752
|
|
Health benefits
|
195,294
|
241,926
|
690,296
|
581,673
|
|
Cash-based employee expenses
|
2,897,181
|
2,618,190
|
8,867,506
|
7,419,407
|
|
Share-based payments
|
580,222
|
877,434
|
1,811,210
|
3,197,828
|
|
Total employee expenses
|
$ 3,477,402
|
$ 3,495,624
|
$10,678,716
|
$10,617,237
|
NEOVASC INC.
Notes to the Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2016 and 2015
(Expressed in U.S. dollars) (Unaudited)
|
|
14.
|
DEPRECIATION, SHARE-BASED PAYMENTS, EMPLOYEE AND OTHER EXPENSES
|
|
|
For the three months ended
September 30,
|
For the nine months ended
September 30,
|
|
|
2016
|
2015
|
2016
|
2015
|
|
|
|
|
|
|
|
COST OF GOODS SOLD
|
|
|
|
|
|
Depreciation
|
$ 59,020
|
$ 43,242
|
$ 167,345
|
$ 115,396
|
|
Share-based payments
|
64,710
|
65,177
|
143,139
|
193,198
|
|
Cash-based employee expenses
|
558,250
|
924,482
|
2,076,565
|
2,334,270
|
|
Other expenses
|
1,519,460
|
540,167
|
2,651,743
|
2,353,130
|
|
|
2,201,440
|
1,573,068
|
5,038,792
|
4,995,994
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
Selling expenses
|
|
|
|
|
|
Share-based payments
|
$ 34,021
|
$ 10,397
|
$ 118,059
|
$ 31,179
|
|
Cash-based employee expenses
|
27,771
|
-
|
82,783
|
-
|
|
Other expenses
|
147,092
|
103,516
|
354,063
|
332,034
|
|
|
208,884
|
113,913
|
554,905
|
363,213
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
|
|
|
Depreciation
|
35,095
|
23,352
|
105,511
|
52,391
|
|
Share-based payments
|
181,294
|
247,903
|
604,831
|
1,121,124
|
|
Cash-based employee expenses
|
668,532
|
549,560
|
1,982,620
|
1,532,349
|
|
Litigation expenses
|
1,908,115
|
2,831,656
|
11,738,246
|
5,088,462
|
|
Other expenses
|
673,789
|
900,495
|
2,290,146
|
2,620,068
|
|
|
3,466,825
|
4,552,966
|
16,721,354
|
10,414,394
|
|
|
|
|
|
|
|
Product development and clinical trials expenses
|
|
|
|
|
|
Depreciation
|
120,993
|
66,563
|
289,232
|
169,697
|
|
Share-based payments
|
300,196
|
553,957
|
945,181
|
1,852,327
|
|
Cash-based employee expenses
|
1,642,628
|
1,144,148
|
4,725,538
|
3,552,788
|
|
Other expenses
|
2,678,874
|
3,144,084
|
8,570,562
|
7,045,628
|
|
|
4,742,691
|
4,908,752
|
14,530,513
|
12,620,440
|
|
|
|
|
|
|
|
TOTAL EXPENSES
|
$
8,418,400
|
$
9,575,631
|
$31,806,772
|
$23,398,047
|
|
|
|
|
|
|
|
Depreciation per Statements of Cash Flows
|
$ 215,108
|
$ 133,157
|
$ 562,088
|
$ 337,484
|
|
|
|
|
|
|
|
Share-based payments per Statements of Cash Flows
|
$ 580,221
|
$ 877,434
|
$
1,811,210
|
$ 3,197,828
|
|
|
|
|
|
|
|
Cash-based employee expenses (see Note 13)
|
$ 2,897,181
|
$
2,618,190
|
$
8,867,506
|
$ 7,419,407
|
|
|
|
|
|
|
Litigation expenses are legal and other expenses incurred
in litigation matters during the period. It does not include any damages provision estimated by management (see Note18).
NEOVASC INC.
Notes to the Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2016 and 2015
(Expressed in U.S. dollars) (Unaudited)
The Company entered into an agreement
for additional office space in August 2013. The agreement does not contain any contingent rent clauses, renewal or purchase options
or escalation clauses. The term of the lease is 24 months commencing on August 1, 2013. This lease was renegotiated in September
2014. The term of the lease is 24 months commencing on August 1, 2015.
The Company entered into an agreement
for additional office space in September 2014. The agreement does not contain any contingent rent clauses, renewal or purchase
options or escalation clauses. The term of the lease is 36 months commencing on October 1, 2014.
The Company entered into an agreement
for additional office space in September 2014. The agreement does not contain any contingent rent clauses, renewal or purchase
options or escalation clauses. The original term of the lease is 66 months commencing on September 1, 2014. Additional office space
was added in July 2015. The term of the combined lease is 59 months commencing on July 1, 2015.
The Company entered into an agreement
for additional office space in May 2015. The agreement does not contain any contingent rent clauses, renewal or purchase options
or escalation clauses. The term of the lease is 32 months commencing on May 1, 2015.
The future minimum
operating lease payments due over the next five years are as follows:
|
|
|
As at September 30,
|
|
|
|
2016
|
2015
|
|
|
|
|
|
|
Year 1
|
|
$ 217,305
|
$ 208,973
|
|
Year 2
|
|
186,178
|
210,174
|
|
Year 3
|
|
77,524
|
105,677
|
|
Year 4
|
|
79,849
|
74,567
|
|
Year 5
|
|
33,837
|
63,662
|
|
|
|
$ 594,693
|
$ 663,053
|
Lease payments recognized as an expense
during the three and nine months ended September 30, 2016 amount to $88,265 and $290,008 (three and nine months ended September
30, 2015: $72,107 and $184,775).
Both the basic and diluted loss per
share have been calculated using the loss attributable to shareholders of the Company as the numerator. The weighted average number
of common shares outstanding used for basic loss per share for the three and nine months ended September 30, 2016 amounted to 66,866,345
and 66,846,982 shares (three and nine months ended September 30, 2015: 66,551,759 and 64,983,986 shares).
|
|
For the three months ended
September 30,
|
For the nine months ended
September 30,
|
|
|
2016
|
2015
|
2016
|
2015
|
|
|
|
|
|
|
|
Weighted average number of common shares
|
66,866,345
|
66,551,759
|
66,846,982
|
64,983,986
|
|
Loss for the period
|
$(29,135,086)
|
$ (7,633,170)
|
$(123,708,684)
|
$(19,346,882)
|
|
Basic loss per share
|
$ (0.44)
|
$ (0.11)
|
$ (1.85)
|
$ (0.30)
|
As the Company is currently operating
at a loss no dilutive potential ordinary shares have been identified as the conversion would lead to a decrease in loss per share.
NEOVASC INC.
Notes to the Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2016 and 2015
(Expressed in U.S. dollars) (Unaudited)
|
|
17.
|
RELATED PARTY TRANSACTIONS
|
The Company’s key management
personnel include members of the board of directors and executive officers. The Company provides salaries or cash compensation,
and other non-cash benefits to directors and executive officers.
|
|
For the three months ended
September 30,
|
For the nine months ended
September 30,
|
|
|
2016
|
2015
|
2016
|
2015
|
|
Short-term employee benefits
|
|
|
|
|
|
Employee salaries and bonuses
|
$
309,247
|
$
293,557
|
$
913,593
|
$1,009,589
|
|
Directors fees
|
67,815
|
69,073
|
180,544
|
220,047
|
|
Social security and medical care costs
|
6,031
|
7,505
|
28,809
|
29,064
|
|
|
383,093
|
370,135
|
1,122,946
|
1,258,700
|
|
Post-employment benefits
|
|
|
|
|
|
Contributions to defined contribution pension plan
|
3,996
|
5,338
|
11,713
|
26,330
|
|
Share-based payments
|
53,349
|
101,166
|
201,582
|
1,133,381
|
|
Total key management remuneration
|
$
440,438
|
$
476,639
|
$1,336,241
|
$2,418,411
|
|
|
18.
|
CONTINGENT LIABILITIES
|
Litigation expenses are legal and other
expenses incurred in litigation matters during the period. The legal costs associated with defending legal claims in the current
period include a lawsuit filed by CardiAQ in the U.S. District Court for the District of Massachusetts concerning intellectual
property rights ownership, unfair trade practices and a breach of contract relating to Neovasc’s transcatheter mitral valve
technology, including the Tiara device, a complaint filed by CardiAQ against Neovasc in Germany requesting that Neovasc assign
its right to one of its European patent applications to CardiAQ and a class action suit alleging securities fraud filed in the
United States District Court for the District of Massachusetts against the Company.
Litigation with CardiAQ
On June 6, 2014, Neovasc was named
in a lawsuit filed by CardiAQ in the U.S. District Court for the District of Massachusetts concerning intellectual property rights
ownership, unfair trade practices and breach of contract relating to Neovasc’s transcatheter mitral valve technology, including
the Tiara.
On June 23, 2014, CardiAQ also filed
a complaint against Neovasc in Germany requesting that Neovasc assign its right to one of its European patent applications to CardiAQ.
The Court in Munich is expected to render its decision after a hearing, which has been deferred by the Court and is currently scheduled
for December 14, 2016. There are no monetary awards associated with these matters and no damages award has been recognized.
On April 25, 2016, the Court granted
Neovasc’s motion for summary judgment on CardiAQ’s claim for fraud.
On May 19, 2016, following a trial
in Boston, Massachusetts, a jury found in favor of CardiAQ and awarded $70 million on the trade secret claim for relief, and no
damages on the contractual claims for relief. When the Company assesses that it is probable that a present obligation exists at
the end of the reporting period and that the possibility of an outflow of economic resources embodying economic benefits is probable,
a provision is recognized. The Company recognized a damages provision of $70 million as at June 30, 2016 and $91 million as at
September 30, 2016 (see Note 19 Subsequent Events). The Company intends to continue to vigorously defend itself in the litigation
with CardiAQ and so the outcome of these matters is inherently uncertain. Interest, costs, and fees may be due on any award granted
by the Court. The determination of the interest due, if any, would be the subject of further rulings from the Court, including
rulings on pre-judgment interest. CardiAQ has estimated such pre-judgment interest at approximately $20.3 million.
Neovasc will dispute whether CardiAQ is entitled to any pre-judgment interest. Similarly, the determination of any attorneys’
fees and the costs of litigation would be the subject of further rulings from the Court. The amounts of any attorneys’
fees and costs are currently undeterminable. When the Company assesses that it is more likely that no present obligation
exists at the end of the reporting period and that the possibility of an outflow of economic resources embodying economic benefits
is possible, but not probable, no provision is recognized and contingent liability disclosure is required. The Company has
applied the disclosure exemption and not provided contingent liability disclosure in relation to any interest, costs,
or fees that may be due as it may seriously prejudice the Company’s position in these matters.
On May 27, 2016, the Court granted
Neovasc’s motion for judgment as a matter of law on the Massachusetts Gen. Law. Ch. 93A claim. When the Company assesses
that it is more likely that no present obligation exists at the end of the reporting period and that the possibility of an outflow
of economic resources embodying economic benefits is remote, no provision is recognized and no contingent liability disclosure
is required.
NEOVASC INC.
Notes to the Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2016 and 2015
(Expressed in U.S. dollars) (Unaudited)
18. CONTINGENT
LIABILITIES (continued)
In the cause of action relating to
patent inventorship, CardiAQ claimed that two individuals should be added as inventors to a Neovasc patent and no judgment has
yet been made. There are no monetary awards associated with these matters and no damages award has been recognized. The Court decided
the patent inventorship claim, as well as post-trial motions, following briefing completed in August 2016 and following a hearing
on these motions.
On October 31, the Court issued an
order regarding patent inventorship, injunctive relief, enhanced damages, and motions for a new trial. Following that order, the
Court will issue a final judgment (see Note 19 Subsequent Events).
Securities Class Action Lawsuit
On June 6, 2016, an alleged purchaser
of Neovasc common shares filed a lawsuit, on behalf of a putative class of purchasers of Neovasc securities, against Neovasc (as
well as against Chief Executive Officer, Alexei Marko, and Chief Financial Officer, Christopher Clark) in the United States District
Court for the District of Massachusetts concerning alleged violations of the United States securities laws. The case is styled
as
Sergio Grobler, individually and on behalf of all others similarly situated v. Neovasc Inc., Alexei Marko, and Christopher
Clark
, Case No. 1:16-cv-11038-RGS. The complaint filed in the lawsuit, which principally bases the plaintiff’s claims
on the Company’s prior disclosures regarding the lawsuit filed by CardiAQ in the United States District Court for the District
of Massachusetts, does not specify the amount of damages sought. Further, as of November 10, 2016, no class action has been certified
by the Court to proceed. The Company and its officers intend to vigorously defend themselves in the litigation and so the outcome
of this matter is inherently uncertain. The outcome of this matter is not currently determinable nor is it possible to accurately
predict the outcome or quantum of these proceedings to the Company at this time. Until this matter has been resolved by the appropriate
courts, the Company cannot give any assurances as to such outcome. When the Company assesses that it is more likely that no present
obligation exists at the end of the reporting period and that the possibility of an outflow of economic resources embodying economic
benefits is remote, no provision is recognized and no contingent liability disclosure is required.
In the District of Massachusetts lawsuit
brought by CardiAQ, and on October 31, 2016, Judge Allison D. Burroughs issued an order regarding patent inventorship and various
post-trial motions.
The Court ruled in favor of CardiAQ
on the issue of inventorship of Neovasc’s ‘964 Patent. There are no monetary awards associated with these matters
and no damages award has been recognized. The Company will appeal this decision of the Court. Unless the Company is successful
at appeal two individuals employed by Cardiaq will be added as inventors to Neovasc’s ‘964 patent. The Company intends
to vigorously defend itself in this matter and so the outcome is inherently uncertain.
The Court upheld the jury’s verdict
and $70 million award against Neovasc, and awarded $21 million in enhanced damages to that award. When the Company assesses that
it is probable that a present obligation exists at the end of the reporting period and that the possibility of an outflow of economic
resources embodying economic benefits is probable, a provision is recognized. The Company recognized a damages provision of $70
million as at June 30, 2016 and $91 million as at September 30, 2016 (see Note 18). The Company will appeal this decision of the
Court. The Company intends to continue to vigorously defend itself in the litigation with CardiAQ and so the outcome of these matters
is inherently uncertain.
The Court denied CardiAQ’s motion
for an injunction that would have shut down the development of Tiara, thus allowing the Company to continue development and commercialization
of Tiara. However, the Court issued an injunction requiring Neovasc to certify, by November 7, 2016, destruction of information
that CardiAQ sent to Neovasc during the parties’ 2009-2010 business relationship, destruction of any related work product
that incorporates such information, and return of any related CardiAQ prototypes. The Company has filed a certification of compliance
with this injunction and has requested the Court’s guidance on one matter in the injunctive order regarding storage of archival
backups.
The Court denied Neovasc’s motions
for a new trial.
Upon entry of a judgment by the trial
court, Neovasc will immediately seek to stay the judgment, and thereby the payment of the $70 million damages award and the $21
million enhanced damages to that award, until after an appeal of the basis for that award and enhancement is complete. The
Company will appeal the validity of the award, the ruling on inventorship, and related issues stemming from the trial court verdict
and October 31 order. The appellate process may take up to a year to complete. In addition, following entry of a judgment,
there may be additional motion practice regarding issues such as interest, attorney’s fees and costs.
NEOVASC INC.
Notes to the Condensed Interim Consolidated Financial Statements
For the three and nine months ended September 30, 2016 and 2015
(Expressed in U.S. dollars) (Unaudited)
|
|
20.
|
AUTHORIZATION OF FINANCIAL STATEMENTS
|
The condensed interim consolidated
financial statements for the three and nine months ended September 30, 2016 (including comparatives) were approved by the audit
committee on behalf of the board of directors on November 10, 2016.
(signed)
Alexei Marko
______________________________________
Alexei Marko, Director
(signed)
Steve Rubin
______________________________________
Steve Rubin, Director
Document
3
Form 52-109F2
Certification of Interim Filings
Full Certificate
I, Alexei Marko, Chief Executive Officer
of Neovasc Inc., certify the following:
|
|
1.
|
Review:
I have reviewed the interim financial report and interim MD&A (together,
the “interim filings”) of Neovasc Inc. (the “issuer”) for the interim period ended September 30, 2016.
|
|
|
2.
|
No misrepresentations:
Based on my knowledge, having exercised reasonable diligence,
the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated
or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to
the period covered by the interim filings.
|
|
|
3.
|
Fair presentation:
Based on my knowledge, having exercised reasonable diligence,
the interim financial report together with the other financial information included in the interim filings fairly present in all
material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods
presented in the interim filings.
|
|
|
4.
|
Responsibility:
The issuer’s other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR),
as those terms are defined in National Instrument 52-109
Certification of Disclosure in Issuers’ Annual and Interim Filings,
for the issuer.
|
|
|
5.
|
Design:
Subject to the limitations, if any, described in paragraphs 5.2 and 5.3,
the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings
|
|
|
(a)
|
designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance
that
|
|
|
(i)
|
material information relating to the issuer is made known to us by others, particularly during
the period in which the interim filings are being prepared; and
|
|
|
(ii)
|
information required to be disclosed by the issuer in its annual filings, interim filings or other
reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods
specified in securities legislation; and
|
|
|
(b)
|
designed ICFR, or caused it 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 the issuer’s GAAP.
|
|
|
5.1
|
Control framework:
The control framework the issuer’s other certifying officer(s)
and I used to design the issuer’s ICFR is the COSO framework.
|
|
|
5.2
|
ICFR - material weakness relating to design:
N/A.
|
|
|
5.3
|
Limitation on scope of design:
N/A.
|
|
|
6.
|
Reporting changes in ICFR:
The issuer has disclosed in its interim MD&A any change
in the issuer’s ICFR that occurred during the period beginning on July 1, 2016 and ended on Septmeber 30, 2016 that has materially
affected, or is reasonably likely to materially affect, the issuer’s ICFR.
|
Date: November 14, 2016
(signed)
Alexei Marko
_______________________
Alexei Marko
Chief Executive Officer
Document
4
Form 52-109F2
Certification of Interim Filings
Full Certificate
I, Chris Clark, Chief Financial Officer
of Neovasc Inc., certify the following:
|
|
1.
|
Review:
I have reviewed the interim financial report and interim MD&A (together,
the “interim filings”) of Neovasc Inc. (the “issuer”) for the interim period ended September 30, 2016.
|
|
|
2.
|
No misrepresentations:
Based on my knowledge, having exercised reasonable diligence,
the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated
or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to
the period covered by the interim filings.
|
|
|
3.
|
Fair presentation:
Based on my knowledge, having exercised reasonable diligence,
the interim financial report together with the other financial information included in the interim filings fairly present in all
material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods
presented in the interim filings.
|
|
|
4.
|
Responsibility:
The issuer’s other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR),
as those terms are defined in National Instrument 52-109
Certification of Disclosure in Issuers’ Annual and Interim Filings,
for the issuer.
|
|
|
5.
|
Design:
Subject to the limitations, if any, described in paragraphs 5.2 and 5.3,
the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings
|
|
|
(a)
|
designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance
that
|
|
|
(i)
|
material information relating to the issuer is made known to us by others, particularly during
the period in which the interim filings are being prepared; and
|
|
|
(ii)
|
information required to be disclosed by the issuer in its annual filings, interim filings or other
reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods
specified in securities legislation; and
|
|
|
(b)
|
designed ICFR, or caused it 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 the issuer’s GAAP.
|
|
|
5.1
|
Control framework:
The control framework the issuer’s other certifying officer(s)
and I used to design the issuer’s ICFR is the COSO framework.
|
|
|
5.2
|
ICFR - material weakness relating to design:
N/A.
|
|
|
5.3
|
Limitation on scope of design:
N/A.
|
|
|
6.
|
Reporting changes in ICFR:
The issuer has disclosed in its interim MD&A any change
in the issuer’s ICFR that occurred during the period beginning on July 1, 2016 and ended on September 30, 2016 that has materially
affected, or is reasonably likely to materially affect, the issuer’s ICFR.
|
Date: November 14, 2016
(signed)
Chris Clark
_______________________
Chris Clark
Chief Financial Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
Neovasc Inc.
|
|
|
(Registrant)
|
|
|
|
|
Date:
November 14,
2016
|
By:
|
/s/
Chris Clark
|
|
|
Name:
|
Chris Clark
|
|
|
Title:
|
Chief Financial Officer
|
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