Exhibit 4.2

 



 

Neovasc Inc.

CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE YEARS ENDED

DECEMBER 31, 2013 AND 2012

 

(Expressed in Canadian dollars)

 











 

CONTENTS

 

	
 
    	
Page
    
	
 
    	
 
    
	
Independent   Auditor’s Report
    	
1 – 2
    
	
 
    	
 
    
	
Consolidated   Statements of Financial Position
    	
3
    
	
 
    	
 
    
	
Consolidated   Statements of Comprehensive Loss
    	
4
    
	
 
    	
 
    
	
Consolidated   Statements of Changes in Equity
    	
5
    
	
 
    	
 
    
	
Consolidated   Statements of Cash Flows
    	
6
    
	
 
    	
 
    
	
Notes   to the Consolidated Financial Statements
    	
7 – 25
    


 











 



 

Independent Auditor’s Report

 

	
 
    	
Grant Thornton LLP
    
	
 
    	
Suite 1600, Grant Thornton Place
    
	
 
    	
333 Seymour Street
    
	
 
    	
Vancouver, BC
    
	
 
    	
V6B 0A4
    
	
 
    	
 
    
	
 
    	
T +1 604 687 2711
    
	
 
    	
F +1 604 685 6569
    
	
 
    	
www.GrantThornton.ca
    


 

To the Shareholders of
 Neovasc Inc.

 

We have audited the accompanying consolidated financial statements of Neovasc Inc., which comprise the consolidated statements of financial position as at December 31, 2013 and December 31, 2012, and the consolidated statements of comprehensive loss, consolidated statements of changes in equity, and consolidated statements of cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information.

 

Management’s responsibility for the financial statements

 

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditor’s responsibility

 

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

 

1











 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

Opinion

 

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Neovasc Inc. as at December 31, 2013 and December 31, 2012, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards.

 

	
Vancouver,   Canada
    	
 
    
	
April 15,   2014
    	
Chartered   Accountants
    


 

2











 

NEOVASC INC.

Consolidated Statements of Financial Position

(Expressed in Canadian dollars)

 

	
 
    	
 
    	
Notes
    	
 
    	
December 31,
   2013
    	
 
    	
December 31,
   2012
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
ASSETS
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Current assets
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Cash and cash equivalents
    	
 
    	
6
    	
 
    	
$
    	
3,403,472
    	
 
    	
$
    	
5,861,120
    	
 
    
	
Accounts receivable
    	
 
    	
7
    	
 
    	
1,289,933
    	
 
    	
1,248,271
    	
 
    
	
Inventory
    	
 
    	
8
    	
 
    	
484,811
    	
 
    	
191,942
    	
 
    
	
Prepaid expenses and other assets
    	
 
    	
 
    	
 
    	
28,266
    	
 
    	
29,891
    	
 
    
	
Total current assets
    	
 
    	
 
    	
 
    	
5,206,482
    	
 
    	
7,331,224
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Non-current assets
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Property, plant and equipment
    	
 
    	
9
    	
 
    	
2,236,900
    	
 
    	
1,467,372
    	
 
    
	
Total non-current assets
    	
 
    	
 
    	
 
    	
2,236,900
    	
 
    	
1,467,372
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Total assets
    	
 
    	
 
    	
 
    	
$
    	
7,443,382
    	
 
    	
$
    	
8,798,596
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
LIABILITIES AND EQUITY
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Liabilities
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Current liabilities
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Accounts payable and accrued liabilities
    	
 
    	
10
    	
 
    	
$
    	
1,577,158
    	
 
    	
$
    	
1,067,283
    	
 
    
	
Current portion of long-term debt
    	
 
    	
11
    	
 
    	
43,548
    	
 
    	
42,540
    	
 
    
	
Total current liabilities
    	
 
    	
 
    	
 
    	
1,620,706
    	
 
    	
1,109,823
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Non-current liabilities
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Long-term debt
    	
 
    	
11
    	
 
    	
200,084
    	
 
    	
241,083
    	
 
    
	
Total non-current liabilities
    	
 
    	
 
    	
 
    	
200,084
    	
 
    	
241,083
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Total liabilities
    	
 
    	
 
    	
 
    	
1,820,790
    	
 
    	
1,350,906
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Equity
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Share capital
    	
 
    	
13
    	
 
    	
73,411,391
    	
 
    	
70,421,185
    	
 
    
	
Contributed surplus
    	
 
    	
13
    	
 
    	
10,305,204
    	
 
    	
8,370,258
    	
 
    
	
Deficit
    	
 
    	
 
    	
 
    	
(78,094,003
    	
)
    	
(71,343,753
    	
)
    
	
Total equity
    	
 
    	
 
    	
 
    	
5,622,592
    	
 
    	
7,447,690
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Total liabilities and equity
    	
 
    	
 
    	
 
    	
$
    	
7,443,382
    	
 
    	
$
    	
8,798,596
    	
 
    


 

SUBSEQUENT EVENTS (see Note 21)

 

See Accompanying Notes to the Consolidated Financial Statements

 

3









 

NEOVASC INC.

Consolidated Statements of Comprehensive Loss

For the years ended December 31,

(Expressed in Canadian dollars)

 

	
 
    	
 
    	
Notes
    	
 
    	
2013
    	
 
    	
2012
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
REVENUE
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Product sales
    	
 
    	
 
    	
 
    	
$
    	
2,694,977
    	
 
    	
$
    	
3,264,851
    	
 
    
	
Contract manufacturing
    	
 
    	
 
    	
 
    	
1,776,893
    	
 
    	
2,005,058
    	
 
    
	
Consulting services
    	
 
    	
 
    	
 
    	
7,275,766
    	
 
    	
2,549,245
    	
 
    
	
 
    	
 
    	
14
    	
 
    	
11,747,636
    	
 
    	
7,819,154
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
COST OF GOODS SOLD
    	
 
    	
16
    	
 
    	
7,083,877
    	
 
    	
4,640,302
    	
 
    
	
GROSS PROFIT
    	
 
    	
 
    	
 
    	
4,663,759
    	
 
    	
3,178,852
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
EXPENSES
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Selling expenses
    	
 
    	
16
    	
 
    	
78,475
    	
 
    	
169,073
    	
 
    
	
General and administrative expenses
    	
 
    	
16
    	
 
    	
4,846,935
    	
 
    	
3,957,950
    	
 
    
	
Product development and clinical trials expenses
    	
 
    	
16
    	
 
    	
6,847,318
    	
 
    	
3,980,056
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
11,772,728
    	
 
    	
8,107,079
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
OPERATING LOSS
    	
 
    	
 
    	
 
    	
(7,108,969
    	
)
    	
(4,928,227
    	
)
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
OTHER INCOME/(EXPENSE)
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Interest income
    	
 
    	
 
    	
 
    	
11,450
    	
 
    	
28,646
    	
 
    
	
Interest expense
    	
 
    	
 
    	
 
    	
(9,150
    	
)
    	
(10,553
    	
)
    
	
Gain on sale of license
    	
 
    	
18
    	
 
    	
—
    	
 
    	
4,598,160
    	
 
    
	
Gain/(loss) on foreign exchange
    	
 
    	
 
    	
 
    	
356,419
    	
 
    	
(39,394
    	
)
    
	
 
    	
 
    	
 
    	
 
    	
358,719
    	
 
    	
4,576,859
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
LOSS AND COMPREHENSIVE LOSS FOR   THE YEAR
    	
 
    	
 
    	
 
    	
$
    	
(6,750,250
    	
)
    	
$
    	
(351,368
    	
)
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
LOSS PER SHARE
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Basic and diluted loss per share
    	
 
    	
19
    	
 
    	
$
    	
(0.14
    	
)
    	
$
    	
(0.01
    	
)
    


 

See Accompanying Notes to the Consolidated Financial Statements

 

4











 

NEOVASC INC.

Consolidated Statements of Changes in Equity

(Expressed in Canadian dollars)

 

	
 
    	
 
    	
Notes
    	
 
    	
Share
   Capital
    	
 
    	
Contributed
   Surplus
    	
 
    	
Deficit
    	
 
    	
Total Equity
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Balance at January 1, 2012
    	
 
    	
 
    	
 
    	
$
    	
70,220,381
    	
 
    	
$
    	
6,158,434
    	
 
    	
$
    	
(70,992,385
    	
)
    	
$
    	
5,386,430
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Issue of share capital on exercise of warrants
    	
 
    	
13(b)(i)
    	
 
    	
31,250
    	
 
    	
—
    	
 
    	
—
    	
 
    	
31,250
    	
 
    
	
Issue of share capital on exercise of options
    	
 
    	
13(b)
    	
 
    	
169,554
    	
 
    	
(154,009
    	
)
    	
—
    	
 
    	
15,545
    	
 
    
	
Share-based payments
    	
 
    	
13(b)
    	
 
    	
—
    	
 
    	
2,365,833
    	
 
    	
—
    	
 
    	
2,365,833
    	
 
    
	
Transaction with owners during   the year
    	
 
    	
 
    	
 
    	
200,804
    	
 
    	
2,211,824
    	
 
    	
—
    	
 
    	
2,412,628
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Loss and comprehensive loss for   the year
    	
 
    	
 
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(351,368
    	
)
    	
(351,368
    	
)
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Balance at December 31,   2012
    	
 
    	
 
    	
 
    	
$
    	
70,421,185
    	
 
    	
$
    	
8,370,258
    	
 
    	
$
    	
(71,343,753
    	
)
    	
$
    	
7,447,690
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Issue of share capital on exercise of warrants
    	
 
    	
13(b)(ii)
    	
 
    	
2,919,062
    	
 
    	
—
    	
 
    	
—
    	
 
    	
2,919,062
    	
 
    
	
Issue of share capital on exercise of options
    	
 
    	
13(b)
    	
 
    	
71,144
    	
 
    	
(28,434
    	
)
    	
—
    	
 
    	
42,710
    	
 
    
	
Share-based payments
    	
 
    	
13(b)
    	
 
    	
—
    	
 
    	
1,963,380
    	
 
    	
—
    	
 
    	
1,963,380
    	
 
    
	
Transaction with owners during   the year
    	
 
    	
 
    	
 
    	
2,990,206
    	
 
    	
1,934,946
    	
 
    	
—
    	
 
    	
4,925,152
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Loss and comprehensive loss for   the year
    	
 
    	
 
    	
 
    	
—
    	
 
    	
—
    	
 
    	
(6,750,250
    	
)
    	
(6,750,250
    	
)
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Balance at December 31,   2013
    	
 
    	
 
    	
 
    	
$
    	
73,411,391
    	
 
    	
$
    	
10,305,204
    	
 
    	
$
    	
(78,094,003
    	
)
    	
$
    	
5,622,592
    	
 
    


 

See Accompanying Notes to the Consolidated Financial Statements

 

5











 

NEOVASC INC.

Consolidated Statements of Cash Flows

For the years ended December 31,

(Expressed in Canadian dollars)

 

	
 
    	
 
    	
Notes
    	
 
    	
2013
    	
 
    	
2012
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
OPERATING ACTIVITIES
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Loss for the year
    	
 
    	
 
    	
 
    	
$
    	
(6,750,250
    	
)
    	
$
    	
(351,368
    	
)
    
	
Adjustments for:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Depreciation
    	
 
    	
16
    	
 
    	
271,660
    	
 
    	
135,865
    	
 
    
	
Share-based payments
    	
 
    	
16
    	
 
    	
1,963,380
    	
 
    	
2,365,833
    	
 
    
	
Gain on sale of license
    	
 
    	
 
    	
 
    	
—
    	
 
    	
(4,598,160
    	
)
    
	
Interest income
    	
 
    	
 
    	
 
    	
(11,450
    	
)
    	
(28,646
    	
)
    
	
Interest expense
    	
 
    	
 
    	
 
    	
9,150
    	
 
    	
10,553
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
(4,517,510
    	
)
    	
(2,465,923
    	
)
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Net change in non-cash working capital items:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Accounts receivable
    	
 
    	
 
    	
 
    	
(386,524
    	
)
    	
(167,729
    	
)
    
	
Inventory
    	
 
    	
 
    	
 
    	
(292,869
    	
)
    	
108,831
    	
 
    
	
Prepaid expenses and other assets
    	
 
    	
 
    	
 
    	
1,625
    	
 
    	
(6,519
    	
)
    
	
Accounts payable and accrued liabilities
    	
 
    	
 
    	
 
    	
509,875
    	
 
    	
475,807
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
(167,893
    	
)
    	
410,390
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Interest paid and received:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Interest received
    	
 
    	
 
    	
 
    	
11,450
    	
 
    	
28,646
    	
 
    
	
Interest paid
    	
 
    	
 
    	
 
    	
(9,150
    	
)
    	
(10,553
    	
)
    
	
 
    	
 
    	
 
    	
 
    	
2,300
    	
 
    	
18,093
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
(4,683,103
    	
)
    	
(2,037,440
    	
)
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
INVESTING ACTIVITES
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Decrease in investments in guaranteed investment   certificates
    	
 
    	
 
    	
 
    	
—
    	
 
    	
1,504,290
    	
 
    
	
Proceeds from sale of license
    	
 
    	
7
    	
 
    	
344,862
    	
 
    	
4,253,298
    	
 
    
	
Purchase of property, plant and equipment
    	
 
    	
9
    	
 
    	
(1,041,188
    	
)
    	
(312,586
    	
)
    
	
 
    	
 
    	
 
    	
 
    	
(696,326
    	
)
    	
5,445,002
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
FINANCING ACTIVITIES
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Decrease in restricted cash & cash   equivalents
    	
 
    	
 
    	
 
    	
—
    	
 
    	
40,840
    	
 
    
	
Repayment of long-term debt
    	
 
    	
 
    	
 
    	
(39,991
    	
)
    	
(38,587
    	
)
    
	
Proceeds from exercise of warrants
    	
 
    	
13
    	
 
    	
2,919,062
    	
 
    	
31,250
    	
 
    
	
Proceeds from exercise of options
    	
 
    	
13
    	
 
    	
42,710
    	
 
    	
15,545
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
2,921,781
    	
 
    	
49,048
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
NET CHANGE IN CASH AND CASH   EQUIVALENTS
    	
 
    	
 
    	
 
    	
(2,457,648
    	
)
    	
3,456,610
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
CASH AND CASH EQUIVALENTS
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Beginning of the year
    	
 
    	
 
    	
 
    	
5,861,120
    	
 
    	
2,404,510
    	
 
    
	
End of the year
    	
 
    	
 
    	
 
    	
$
    	
3,403,472
    	
 
    	
$
    	
5,861,120
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Represented by:
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Cash
    	
 
    	
6
    	
 
    	
3,403,472
    	
 
    	
5,861,120
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
$
    	
3,403,472
    	
 
    	
$
    	
5,861,120
    	
 
    


 

See Accompanying Notes to the Consolidated Financial Statements

 

6











 

NEOVASC INC.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2013 and 2012

(Expressed in Canadian dollars)

 

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 consolidated financial statements of the Company as at December 31, 2013 and December 31, 2012 and for the years ended December 31, 2013 and 2012 comprise the Company and its subsidiaries, all of which are wholly owned.  The Company’s principal place of business is located at Suite 2135 — 13700 Mayfield Place, Richmond, British Columbia, V6V 2EY 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 TSX Venture Exchange.

 

Neovasc is a specialty medical device company that develops, manufactures and markets products for the rapidly growing cardiovascular marketplace.  Its products include the TiaraTM technology in development for the transcatheter treatment of mitral valve disease, the Neovasc ReducerTM for the treatment of refractory angina and a line of advanced biological tissue products called PeripatchTM that are used as key components in third-party medical products including transcatheter heart valves.

 

2.              BASIS OF PREPARATION

 

(a)         Statement of compliance with IFRS

 

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”).

 

(b)         Basis of measurement

 

The Company’s consolidated financial statements have been prepared on the historical cost basis except as explained in the accounting policies set out in Note 3.

 

(c)          Basis of consolidation

 

The consolidated financial statements include the financial statements of the Company and its wholly-owned subsidiaries, Neovasc Medical Inc., Angiometrx Inc., Neovasc Tiara Inc., Neovasc Medical Ltd., B-Balloon Ltd. and Neovasc (US) Inc.  All intercompany balances and transactions have been eliminated upon consolidation.

 

(d)         Presentation of financial statements

 

The Company has elected to present the ‘Statement of Comprehensive Income’ in a single statement.

 

7











 

NEOVASC INC.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2013 and 2012

(Expressed in Canadian dollars)

 

2.              BASIS OF PREPARATION (continued)

 

(e)          Use of estimates and management judgment

 

The preparation of 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 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.

 

8









 

NEOVASC INC.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2013 and 2012

(Expressed in Canadian dollars)

 

3.              SIGNIFICANT ACCOUNTING POLICIES

 

The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements.

 

(a)         Foreign currency translation

 

The functional currency of Neovasc and each of its subsidiaries is the Canadian dollar.  The presentation currency of the consolidated financial statements is the Canadian dollar.

 

Foreign currency denominated monetary assets and liabilities are translated into Canadian dollars at the period end rate of exchange.  Foreign currency denominated non-monetary assets and liabilities are translated at the historical rates of exchange in effect on the date the asset was acquired or liability incurred.  Foreign currency denominated revenues and expenses are translated at the rate of exchange on the date on which such transactions occur.  Foreign currency gains or losses arising on the settlement of foreign-currency denominated monetary assets and liabilities are recognized in profit or loss in the period in which they arise.

 

(b)         Financial instruments

 

Financial assets and financial liabilities are recognized on the Company’s consolidated statement of financial position when the Company becomes party to the contractual provisions of the instrument.  Financial assets are de-recognized when the contractual rights to the cash flows from the financial asset expire or when the contractual rights to those assets are transferred.  Financial liabilities are de-recognized when the obligation specified in the contract is discharged, cancelled or expired.

 

The Company classifies its cash and cash equivalents and accounts receivable as loans and receivables.  Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market.  Such assets are recognized initially at fair value plus any directly attributable transaction costs.  Subsequent to initial recognition loans and receivables are measured at amortized cost using the effective interest method.

 

The Company classifies its long-term debt and accounts payable and accrued liabilities as other financial liabilities.  These financial liabilities are recognized initially at fair value plus any directly attributable transaction costs.  Subsequent to initial recognition, these financial liabilities are measured at amortized cost using the effective interest method.

 

(c)          Cash and cash equivalents

 

Cash and cash equivalents include cash on hand and short-term, highly liquid investments that are readily convertible to known amounts of cash within 90 days of purchase.

 

(d)         Investments

 

Investments include investments in high interest savings accounts (“HISAs”) and guaranteed investment certificates (“GICs”) that are readily convertible to known amounts of cash after 90 days of purchase.

 

(e)          Inventory

 

Inventory is valued at the lower of cost and net realizable value for finished goods, work in progress and raw materials.  Cost is determined on a first-in, first-out basis.  Cost of finished goods and work in progress includes direct material and labor costs and an allocation of manufacturing overhead and applicable shipping and handling costs.  In determining net realizable value, the Company considers factors such as obsolescence, future demand for inventory and contractual arrangements with customers.

 

9











 

NEOVASC INC.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2013 and 2012

(Expressed in Canadian dollars)

 

3.                  SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(f)           Property, plant and equipment

 

Items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses.

 

As no finite useful life for land can be determined, related carrying amounts are not depreciated.

 

Depreciation of property, plant and equipment is recognized in profit or loss over the estimated useful lives using the following rates and methods:

 

	
Building
    	
4%   declining balance
    
	
Production   equipment
    	
30%   declining balance
    
	
Computer   hardware
    	
30%   declining balance
    
	
Computer   software
    	
100%   declining balance
    
	
Office   equipment
    	
20%   declining balance
    
	
Leasehold   improvements
    	
amortized   over the life of the lease
    


 

Gains or losses arising on the disposal of property, plant and equipment are determined as the difference between the disposal proceeds and the carrying amount of the assets and are recognized in profit or loss.

 

(g)         Impairment of assets

 

Financial assets (including accounts receivable)

 

The Company reviews its accounts receivable at least at each reporting date to determine whether there is objective evidence that it is impaired.

 

The Company considers evidence of impairment for accounts receivable when the amounts are past due or when other objective information is received that a specific counterparty may default.  Accounts receivable that are not considered to be individually impaired are reviewed for impairment in groups, using historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management’s judgment as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical trends.

 

An impairment loss is calculated as the difference between an asset’s carrying amount and the present value of the estimated future cash flows discounted at the asset’s original effective interest rate.  Losses are recognized in profit or loss and reflected in an allowance account against receivables.  When subsequent events cause the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss.

 

Non-financial assets

 

The carrying amounts of the Company’s non-financial assets, other than inventories are reviewed at each reporting date to determine whether there is any indication of impairment.  If any such indication exists, then the asset’s recoverable amount is estimated.

 

The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs of disposal.  In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.  For the purpose of impairment testing, if it is not possible to estimate the recoverable amount of an individual asset, the asset is included in the cash-generating unit to which it belongs and the recoverable amount of the cash-generating unit is estimated.  As a result, some assets are tested individually for impairment and some are tested at the cash-generating unit level.  A cash-generating unit is the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets.

 

An impairment loss is recognized if the carrying amount of an asset or its cash-generating unit exceeds its estimated recoverable amount.  Impairment losses are recognized in profit or loss.  Impairment losses recognized in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amounts of the other assets in the unit on a pro-rata basis.

 

10











 

NEOVASC INC.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2013 and 2012

(Expressed in Canadian dollars)

 

3.                  SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(h)         Employee benefits

 

The Company provides short-term employee benefits and post-employment benefits to current employees.  The short-term employee benefits includes wages, salaries, social security contributions, paid annual leave, paid sick leave and medical care.  Short-term employee benefits obligations are measured on an undiscounted basis and are expensed as the related service is provided.

 

The Company provides post-employment benefits through defined contribution plans, including contributions to the Canadian Pension Plan and individual Registered Retirement Savings Plans of qualified employees.  Contributions to defined contribution pension plans are recognized as an employee benefit expense in the years during which services are rendered by employees.

 

(i)            Revenue recognition

 

The Company earns revenue from three sources: product sales, contract manufacturing and consulting services.  Revenues from these three sources are recognized as follows:

 

Revenue from the sale of goods is recognized when the Company has transferred to the buyer the significant risks and rewards of ownership of the goods, the Company retains neither continuing managerial involvement nor effective control over the goods sold, the amount of revenue can be measured reliably, it is probable that the economic benefits associated with the transaction will flow to the Company and the costs incurred or to be incurred in respect of the transaction can be measured reliably.

 

For consulting services, revenue is recognized when the amount of revenue can be measured reliably, it is probable that the economic benefits associated with the transaction will flow to the Company and the stage of completion and the costs incurred or to be incurred in respect of the transaction can be measure reliably.

 

Product sales and Contract manufacturing

 

For product sales and contract manufacturing, these criteria are met upon shipment of product.

 

Consulting services

 

For consulting services, these criteria are met as the services are delivered under the terms of the related consulting services contract.

 

(j)            Research and development

 

The Company is engaged in research and development.  Research costs are expensed as incurred.  Development costs are expensed in the period incurred, unless they meet the criteria for capitalization.  The criteria include that development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and the Company intends to and has sufficient resources to complete development and to use or sell the asset.  Other development expenditure is recognized in profit or loss as incurred.  Management reviews the applicable criteria on a regular basis and if the criteria are no longer met, any remaining unamortized balance is written off as a charge to profit or loss.  Research and development costs are reduced by any scientific research and experimental development tax credits to which the Company is entitled.

 

(k)         Government assistance

 

Government assistance, consisting of grants and scientific research and experimental development tax credits, is recorded as a reduction of either the related expense or the cost of the asset to which it relates.  The assistance is recorded in the accounts when reasonable assurance exists that the Company has complied with the terms and conditions of the assistance program and when there is reasonable assurance that the assistance will be realized.

 

(l)   Interest income and interest expense

 

Commencing on October 1, 2013, Interest income comprises interest income on the cash in the bank at an interest rate of 0.25% (2012: no interest on cash in bank) and interest income from the receivables from LeMaitre for the sales of license.  Interest income is recognized in profit or loss, using the effective interest method.

 

Interest expense comprises interest expense on the long-term debt.  Interest expense is recognized in profit or loss using the effective interest method.

 

11











 

NEOVASC INC.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2013 and 2012

(Expressed in Canadian dollars)

 

3.                  SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(m)     Operating lease

 

Leases where the Company does not assume substantially all the risks and rewards of ownership are classified as operating leases. Payments on operating lease are recognized as an expense on a straight-line basis over the lease term. Associated costs, such as maintenance and insurance, are expensed as incurred.

 

(n)  Income taxes

 

Tax expense represents current tax and deferred tax.  Tax is recognized in profit or loss except to the extent it relates to items recognized in other comprehensive income or directly in equity.  Current tax is based on the taxable profits for the year, and is calculated using tax rates that have been enacted or substantively enacted by the reporting date.

 

Deferred tax is recognized, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their respective carrying amounts in the consolidated financial statements.  However, deferred tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction, other than a business combination, that at the time of the transaction affects neither the accounting profit nor taxable profit.  Deferred tax assets are recognized to the extent that it is probable that the future taxable profit will be available against which the deductible temporary differences and the carry forward of unused tax credits and unused tax losses can be utilized.

 

Deferred tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the reporting date and are expected to apply when the related deferred tax asset is realized or the deferred tax liability settled.

 

(o)         Equity

 

Share capital represents the value of shares that have been issued.  Any transaction costs associated with the issuing of shares are deducted from share capital.

 

From time to time the Company issues units consisting of common shares and common share purchase warrants.  The Company estimates the fair value of the common shares based on their market price on the date of the issuance of the units.  The residual difference, if any, between the unit price and the fair value of each common share represents the fair value attributable to each warrant.  Any transaction costs associated with the issuance of units are apportioned between the common shares and warrants based on their relative fair values.

 

Professional, consulting, regulatory fees and other costs that are directly attributable to financing transactions are deferred until such time as the transactions are completed.  Share issue costs are charged to share capital when the related shares are issued.  Costs relating to financing transactions that are abandoned are charged to profit and loss.

 

Contributed surplus includes the fair value of vested stock options (see Note 3(p)).

 

Deficit includes all current and prior period losses.

 

(p)         Share-based payments

 

The Company has an equity-settled share-based stock option plan.  The Company grants stock options to buy common shares of the Company to directors, officers, employees and consultants (see Note 13(c)).

 

The fair value of the stock options awarded to employees, directors, officers and service providers is measured at grant date, using the Black-Scholes Option Pricing Model with assumptions for risk-free interest rates, dividend yields, volatility factors of the expected market price of the Company’s common shares and an expected life of the options.  The fair value of the options is recognized as an employee expense, with a corresponding increase in equity, over the period that the employees unconditionally become entitled to the options.  The amount recognized as expense is adjusted to reflect the number of stock options expected to vest.

 

For stock options with non-vesting conditions, the grant date fair value of the options is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes.

 

12











 

NEOVASC INC.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2013 and 2012

(Expressed in Canadian dollars)

 

3.                  SIGNIFICANT ACCOUNTING POLICIES (continued)

 

(q)         Loss per share

 

Loss per share is computed using the weighted average number of common shares outstanding during the year.  Diluted loss per share is computed using the weighted average number of common shares outstanding during the year on a diluted basis using the treasury stock method.

 

(r)          Operating segment

 

The Company operates its business in one segment.  The Company reports information about revenues from customers for products sales, contract manufacturing and consulting services, from geographical areas, and from major customers (see Note 14).

 

(s)           Future accounting pronouncements

 

The Company has reviewed and new revised accounting pronouncements that have been issued but are not yet effective. The Company has not early adopted any of these standards and has not reviewed their impact on its consolidated financial statements:

 

IFRS 9 Financial Instruments will replace IAS 39 Financial Instruments: Recognition and Measurement, and is currently being developed in stages by the IASB.  The IASB has decided to delay implementation until a date to be determined.  The new standard replaces the current multiple classification and measurement models for financial assets and liabilities with a single model that has only two classification categories: amortized cost and fair value.  IFRS 9 has also been amended not to require the restatement of comparative period financial statements for the initial application of the classification and measuring requirements of IFRS 9, but instead requires modified disclosures on transition to IFRS 9.

 

IAS 32 Financial Instruments: Presentation was intended to help address inconsistencies when applying the offsetting criteria and clarify for financial statement users the effect of offsetting arrangements on an entity’s financial position.

 

IAS 36 Recoverable Amount Disclosures for Non-Financial Assets addresses the disclosure information around recoverable amount of impaired assets if that amount is based on fair value less costs of disposal.

 

IFRIC 21 Levies is an interpretation of IAS 37 Provisions, Contingent Liabilities and Contingent Assets. This IFRIC clarifies that an entity recognizes a liability for a levy opposed by governments, other than income taxes, when the activity that triggers payment of the levy occurs.

 

4.            MANAGING CAPITAL

 

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:

 

	
 
    	
 
    	
December 31,
   2013
    	
 
    	
December 31,
   2012
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Equity
    	
 
    	
$
    	
5,622,592
    	
 
    	
$
    	
7,447,690
    	
 
    
	
Long-term debt
    	
 
    	
243,632
    	
 
    	
283,623
    	
 
    
	
 
    	
 
    	
$
    	
5,866,224
    	
 
    	
$
    	
7,731,313
    	
 
    


 

The Company is subject to certain financial covenants in connection with its long-term debt, including a requirement to limit the amount of total debt in relation to total equity by a ratio of less than or equal to 1:1.  As at December 31, 2013 and 2012, the Company was in compliance with all financial covenants associated with its long-term debt.

 

For the years ended December 31, 2013 and 2012 there were no changes in the Company’s capital management policy.

 

13











 

NEOVASC INC.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2013 and 2012

(Expressed in Canadian dollars)

 

5.              FINANCIAL RISK MANAGEMENT

 

Categories of financial assets and financial liabilities

 

The carrying amounts of financial assets and financial liabilities in each category are as follows:

 

	
 
    	
 
    	
Note
    	
 
    	
December 31,
   2013
    	
 
    	
December 31,
   2012
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Financial assets
    	
 
    	
 
    	
 
    	
Loans and receivables
    	
 
    
	
Cash and cash   equivalents
    	
 
    	
6
    	
 
    	
$
    	
3,403,473
    	
 
    	
$
    	
5,861,120
    	
 
    
	
Accounts receivable
    	
 
    	
7
    	
 
    	
1,289,933
    	
 
    	
1,248,271
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
$
    	
4,693,405
    	
 
    	
$
    	
7,109,391
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Financial liabilities
    	
 
    	
 
    	
 
    	
Other liabilities
    	
 
    
	
Accounts payable and   accrued liabilities
    	
 
    	
10
    	
 
    	
$
    	
1,577,158
    	
 
    	
$
    	
1,067,283
    	
 
    
	
Long-term debt
    	
 
    	
11
    	
 
    	
243,632
    	
 
    	
283,623
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
$
    	
1,820,790
    	
 
    	
$
    	
1,350,906
    	
 
    


 

The estimated fair value of the long-term debt is $222,072 and has been estimated using a present value technique by discounting cash flows using interest rate of 3.5%, and is considered a level 2 fair value measurement.

 

The carrying amount of cash and cash equivalents, accounts receivable, and accounts payable and accrued liabilities is considered a reasonable approximation of fair value.

 

(a)         Foreign exchange risk

 

The majority of the Company’s revenues are derived from product sales in the United States and Europe, primarily denominated in United States and European Union 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.  United States and European Union currency represents approximately 43% and 51% of the revenue for year ended December 31, 2013 (2012: 65% and 31% respectively).  A 5% change in the foreign exchange rates for United States and European Union currencies will result in a change in revenues of approximately $250,000 and $300,000 respectively for the year ended December 31, 2013.  A 5% change in the foreign exchange rates for the United States and European Union currencies for foreign currency denominated accounts receivable will impact net income by approximately $18,000 and $44,000 respectively, and a similar change for foreign currency denominated accounts payable will impact net income by approximately $17,000 and $22,000 respectively as at December 31, 2013. The Company does not hedge its foreign exchange risk.

 

(b)         Interest rate risk

 

The Company makes fixed repayments on its long-term debt (see Note 11).  Included in the repayments is an interest payment with an interest rate floating at prime rate plus 0.500% per annum.  Management has considered the risks to cash flows from this variable interest portion and considers it unlikely that the interest rates will increase sufficiently to exceed the fixed monthly payment due on the bank loan.  A 1% change in the interest rate on the bank loan will impact net income for the year ended December 31, 2013 by approximately $2,430 (2012: $2,860) and inversely change the amount of principal repaid by the same amount.

 

The Company receives interest on its cash in the bank at an interest rate of 0.25%. A 1% change in the interest rate on the cash in the bank will impact net income for the year ended December 31, 2013 by approximately $54 (2012: $nil).

 

The Company is not exposed to cash flow interest rate risk on fixed rate cash balances and short term accounts receivable without interest.

 

14











 

NEOVASC INC.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2013 and 2012

(Expressed in Canadian dollars)

 

5.              FINANCIAL RISK MANAGEMENT (continued)

 

(c)          Liquidity risk

 

As at December 31, 2013, the Company had $3,403,472 cash.  The cash used in operations during the year ended December 31, 2013 was $4,683,103.

 

As at December 31, 2013, the Company had working capital of $3,585,776 as compared to working capital of $6,221,401 at December 31, 2012.

 

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 $6.00 per common share, for gross cash proceeds to the Company of $25,152,000 (see Note 21).

 

The Company monitors its cash flow on the monthly basis and compares actual performance to the budget for the fiscal year.  The Company believes it has sufficient funds for the next 12 months but further into the future 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.

 

As at December 31, 2013 and 2012, the Company’s non-derivative financial liabilities have maturities (including interest payments where applicable) as summarized below:

 

	
 
    	
 
    	
Current
    	
 
    	
Non-current
    	
 
    
	
 
    	
 
    	
Within 6
   months
    	
 
    	
6 to 12
   months
    	
 
    	
1 to 5
   years
    	
 
    	
later than
   5 years
    	
 
    
	
December 31, 2013
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Accounts payable and   accrued liabilities
    	
 
    	
$
    	
1,577,158
    	
 
    	
$
    	
—
    	
 
    	
$
    	
—
    	
 
    	
$
    	
—
    	
 
    
	
Long-term debt
    	
 
    	
21,525
    	
 
    	
22,023
    	
 
    	
186,022
    	
 
    	
14,063
    	
 
    
	
 
    	
 
    	
$
    	
1,598,683
    	
 
    	
$
    	
22,023
    	
 
    	
$
    	
186,022
    	
 
    	
$
    	
14,063
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
December 31,2012
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Accounts payable and   accrued liabilities
    	
 
    	
$
    	
1,067,283
    	
 
    	
$
    	
—
    	
 
    	
$
    	
—
    	
 
    	
$
    	
—
    	
 
    
	
Long-term debt
    	
 
    	
21,004
    	
 
    	
21,536
    	
 
    	
181,908
    	
 
    	
59,175
    	
 
    
	
 
    	
 
    	
$
    	
1,088,287
    	
 
    	
$
    	
21,536
    	
 
    	
$
    	
181,908
    	
 
    	
$
    	
59,175
    	
 
    


 

(d)         Credit risk

 

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 at December 31, 2013: $1,237,996 (December 31, 2012: $844,850).

 

As at December 31, 2013, the Company had $29,354 (December 31, 2012: $8,706) of trade accounts receivable that was overdue, according to the customers’ credit terms.  During the years ended December 31, 2013 and 2012 the Company did not write down any accounts receivable owed by customers.

 

The Company may also have credit risk related to its cash and cash equivalents with a maximum exposure of $3,403,472 (December 31, 2012: $5,861,120). The Company minimizes its risk to cash and cash equivalents by dealing with Canadian chartered banks.

 

15











 

NEOVASC INC.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2013 and 2012

(Expressed in Canadian dollars)

 

6.   CASH AND CASH EQUIVALENTS 

	
 
    	
 
    	
December 31,
   2013
    	
 
    	
December 31,
   2012
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Canadian dollars
    	
 
    	
$
    	
2,481,367
    	
 
    	
$
    	
293,409
    	
 
    
	
United States dollars
    	
 
    	
288,201
    	
 
    	
5,287,649
    	
 
    
	
European euros
    	
 
    	
633,904
    	
 
    	
280,062
    	
 
    
	
 
    	
 
    	
$
    	
3,403,472
    	
 
    	
$
    	
5,861,120
    	
 
    


 

7.   ACCOUNTS RECEIVABLE  

 

	
 
    	
 
    	
December 31,
   2013
    	
 
    	
December 31,
   2012
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Trade receivables
    	
 
    	
$
    	
1,237,996
    	
 
    	
$
    	
844,850
    	
 
    
	
Allowance for doubtful accounts
    	
 
    	
—
    	
 
    	
—
    	
 
    
	
Net trade receivables
    	
 
    	
1,237,996
    	
 
    	
844,850
    	
 
    
	
Receivable from LeMaitre
    	
 
    	
—
    	
 
    	
344,862
    	
 
    
	
Other receivables
    	
 
    	
51,937
    	
 
    	
58,559
    	
 
    
	
 
    	
 
    	
$
    	
1,289,933
    	
 
    	
$
    	
1,248,271
    	
 
    


 

At December 31, 2013, the Receivable from LeMaitre Vascular Inc. (“LeMaitre”) has been collected in full. (see Note 18).

 

All amounts are short-term. The net carrying value of trade receivables is considered a reasonable approximation of fair value. The aging analysis of receivables is as follows:

 

	
 
    	
 
    	
December 31,
   2013
    	
 
    	
December 31,
   2012
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Not   past due
    	
 
    	
$
    	
1,208,642
    	
 
    	
$
    	
836,144
    	
 
    
	
Past   due 0 - 30 days
    	
 
    	
29,354
    	
 
    	
—
    	
 
    
	
Past   due 31 - 60 days
    	
 
    	
—
    	
 
    	
8,706
    	
 
    
	
 
    	
 
    	
$
    	
1,237,996
    	
 
    	
$
    	
844,850
    	
 
    


 

All of the Company’s trade and other receivables have been reviewed for impairment.  No impairment was found.  The movement in the allowance for doubtful accounts is as follows:

 

	
 
    	
 
    	
December 31,
   2013
    	
 
    	
December 31,
   2012
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Balance January 1,
    	
 
    	
$
    	
—
    	
 
    	
$
    	
3,868
    	
 
    
	
Amounts recorded during   period
    	
 
    	
—
    	
 
    	
(3,868
    	
)
    
	
 
    	
 
    	
$
    	
—
    	
 
    	
$
    	
—
    	
 
    


 

8.              INVENTORY

 

	
 
    	
 
    	
December 31,
   2013
    	
 
    	
December 31,
   2012
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Raw materials
    	
 
    	
$
    	
140,983
    	
 
    	
$
    	
95,061
    	
 
    
	
Work in progress
    	
 
    	
304,241
    	
 
    	
49,567
    	
 
    
	
Finished goods
    	
 
    	
39,587
    	
 
    	
47,314
    	
 
    
	
 
    	
 
    	
$
    	
484,811
    	
 
    	
$
    	
191,942
    	
 
    


 

During the year ended December 31, 2013 $3,621,833 (2012: $3,234,927) of inventory was expensed in cost of goods sold, and $693,621 (2012: $227,986) of inventory was used in internal development projects and expensed in product development and clinical trial expenses.  All the inventories are pledged as security for the long-term debt of the Company (see Note 11).

 

During the years ended December 31, 2013 and 2012 the company did not write down any obsolete inventory.

 

16










 

NEOVASC INC.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2013 and 2012

(Expressed in Canadian dollars)

 

9.                                      PROPERTY, PLANT AND EQUIPMENT

 

	
 
    	
 
    	
Land
    	
 
    	
Building
    	
 
    	
Leasehold
   Improvements
    	
 
    	
Production
    equipment
    	
 
    	
Computer
   hardware
    	
 
    	
Computer
   software
    	
 
    	
Office
   equipment
    	
 
    	
Total
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
COST
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Balance at   January 1, 2012
    	
 
    	
$
    	
207,347
    	
 
    	
$
    	
1,175,978
    	
 
    	
$
    	
—
    	
 
    	
$
    	
567,312
    	
 
    	
$
    	
177,193
    	
 
    	
$
    	
241,818
    	
 
    	
$
    	
162,024
    	
 
    	
$
    	
2,531,672
    	
 
    
	
Additions
    	
 
    	
—
    	
 
    	
123,664
    	
 
    	
—
    	
 
    	
111,049
    	
 
    	
39,918
    	
 
    	
29,846
    	
 
    	
8,109
    	
 
    	
312,586
    	
 
    
	
Balance at December 31, 2012
    	
 
    	
$
    	
207,347
    	
 
    	
$
    	
1,299,642
    	
 
    	
$
    	
—
    	
 
    	
$
    	
678,361
    	
 
    	
$
    	
217,111
    	
 
    	
$
    	
271,664
    	
 
    	
$
    	
170,133
    	
 
    	
$
    	
2,844,258
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Additions
    	
 
    	
—
    	
 
    	
327,363
    	
 
    	
76,958
    	
 
    	
448,295
    	
 
    	
101,279
    	
 
    	
37,013
    	
 
    	
50,280
    	
 
    	
1,041,188
    	
 
    
	
Balance at December 31, 2013
    	
 
    	
$
    	
207,347
    	
 
    	
$
    	
1,627,005
    	
 
    	
$
    	
76,958
    	
 
    	
$
    	
1,126,656
    	
 
    	
$
    	
318,390
    	
 
    	
$
    	
308,677
    	
 
    	
$
    	
220,413
    	
 
    	
$
    	
3,885,446
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
ACCUMULATED DEPRECIATION
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Balance at   January 1, 2012
    	
 
    	
$
    	
—
    	
 
    	
$
    	
261,310
    	
 
    	
$
    	
—
    	
 
    	
$
    	
474,739
    	
 
    	
$
    	
148,400
    	
 
    	
$
    	
223,596
    	
 
    	
$
    	
132,976
    	
 
    	
$
    	
1,241,021
    	
 
    
	
Depreciation for the   year
    	
 
    	
—
    	
 
    	
39,743
    	
 
    	
—
    	
 
    	
34,811
    	
 
    	
12,821
    	
 
    	
42,029
    	
 
    	
6,461
    	
 
    	
135,865
    	
 
    
	
Balance at December 31, 2012
    	
 
    	
$
    	
—
    	
 
    	
$
    	
301,053
    	
 
    	
$
    	
—
    	
 
    	
$
    	
509,550
    	
 
    	
$
    	
161,221
    	
 
    	
$
    	
265,625
    	
 
    	
$
    	
139,437
    	
 
    	
$
    	
1,376,886
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Depreciation for the   year
    	
 
    	
—
    	
 
    	
45,835
    	
 
    	
31,107
    	
 
    	
115,024
    	
 
    	
34,393
    	
 
    	
33,023
    	
 
    	
12,278
    	
 
    	
271,660
    	
 
    
	
Balance at December 31, 2013
    	
 
    	
$
    	
—
    	
 
    	
$
    	
346,888
    	
 
    	
$
    	
31,107
    	
 
    	
$
    	
624,574
    	
 
    	
$
    	
195,614
    	
 
    	
$
    	
298,648
    	
 
    	
$
    	
151,715
    	
 
    	
$
    	
1,648,546
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
CARRYING AMOUNTS
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
At December 31,   2012
    	
 
    	
$
    	
207,347
    	
 
    	
$
    	
998,589
    	
 
    	
$
    	
—
    	
 
    	
$
    	
168,811
    	
 
    	
$
    	
55,890
    	
 
    	
$
    	
6,039
    	
 
    	
$
    	
30,696
    	
 
    	
$
    	
1,467,372
    	
 
    
	
At December 31,   2013
    	
 
    	
$
    	
207,347
    	
 
    	
$
    	
1,280,117
    	
 
    	
$
    	
45,851
    	
 
    	
$
    	
502,082
    	
 
    	
$
    	
122,776
    	
 
    	
$
    	
10,029
    	
 
    	
$
    	
68,698
    	
 
    	
$
    	
2,236,900
    	
 
    


 

As at December 31, 2012, all property, plant and equipment were pledged as security for the long-term debt of the Company (see Note 11).

 

17




 

 






 

NEOVASC INC.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2013 and 2012

(Expressed in Canadian dollars)

 

10.       ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

	
 
    	
 
    	
December 31,
   2013
    	
 
    	
December 31,
   2012
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Trade payables
    	
 
    	
$
    	
1,218,890
    	
 
    	
$
    	
646,042
    	
 
    
	
Accrued vacation
    	
 
    	
248,334
    	
 
    	
151,011
    	
 
    
	
Accrued liabilities
    	
 
    	
84,130
    	
 
    	
252,807
    	
 
    
	
Other payables
    	
 
    	
25,804
    	
 
    	
17,423
    	
 
    
	
 
    	
 
    	
$
    	
1,577,158
    	
 
    	
$
    	
1,067,283
    	
 
    


 

All amounts are short-term.  The net carrying value of trade payables is considered a reasonable approximation of fair value.

 

11.       LONG-TERM DEBT

 

	
 
    	
 
    	
December 31,
   2013
    	
 
    	
December 31,
   2012
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Bank installment loan
    	
 
    	
$
    	
243,632
    	
 
    	
$
    	
283,623
    	
 
    
	
Less current portion
    	
 
    	
(43,548
    	
)
    	
(42,540
    	
)
    
	
 
    	
 
    	
$
    	
200,084
    	
 
    	
$
    	
241,083
    	
 
    


 

Repayments consist of 180 regular blended payments of $4,095 each month, including interest and principal, commencing on September 1, 2007 and ending on or before August 1, 2022.  The loan agreement as amended on July 18, 2012, is collateralized by a first charge over the Company’s land and buildings and a general security agreement over all personal property of the business now owned and all personal property acquired in the future.  The liquid security agreement of US$40,000 to be held in cash was removed in the 2012 loan agreement.  The loan bears interest at prime plus 0.500% per annum.

 

Principal maturities in the next five years and thereafter are approximately as follows:

 

	
 
    	
 
    	
December 31,
   2013
    	
 
    	
December 31,
   2012
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Year 1
    	
 
    	
$
    	
43,548
    	
 
    	
$
    	
42,540
    	
 
    
	
Year 2
    	
 
    	
44,846
    	
 
    	
43,855
    	
 
    
	
Year 3
    	
 
    	
45,935
    	
 
    	
44,919
    	
 
    
	
Year 4
    	
 
    	
47,049
    	
 
    	
46,009
    	
 
    
	
Year 5
    	
 
    	
48,191
    	
 
    	
47,125
    	
 
    
	
Thereafter
    	
 
    	
14,063
    	
 
    	
59,175
    	
 
    
	
 
    	
 
    	
$
    	
243,632
    	
 
    	
$
    	
283,623
    	
 
    


 

More information about the Company’s exposure to interest rate and liquidity risk is given in Notes 5(b) and 5(c).

 

18











 

NEOVASC INC.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2013 and 2012

(Expressed in Canadian dollars)

 

12.       INCOME TAXES

 

The relationship between the expected tax expense based on the combined federal and provincial income tax rate in Canada and the reported tax expense in the consolidated statement of comprehensive income can be reconciled as follows:

 

	
 
    	
 
    	
For the years ended
   December 31,
    	
 
    
	
 
    	
 
    	
2013
    	
 
    	
2012
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Loss before income taxes
    	
 
    	
$
    	
(6,750,250
    	
)
    	
$
    	
(351,368
    	
)
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Statutory tax rate
    	
 
    	
25.50
    	
%
    	
25.0
    	
%
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Recovery of income taxes based on the combined   Canadian federal and provincial statutory rates
    	
 
    	
(1,721,383
    	
)
    	
(87,842
    	
)
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Share-based remuneration
    	
 
    	
505,570
    	
 
    	
591,458
    	
 
    
	
Foreign exchange adjustment
    	
 
    	
(63,320
    	
)
    	
7,712
    	
 
    
	
Non-Taxable differences
    	
 
    	
—
    	
 
    	
(575,121
    	
)
    
	
Other differences
    	
 
    	
—
    	
 
    	
48,924
    	
 
    
	
Other permanent differences
    	
 
    	
45,000
    	
 
    	
—
    	
 
    
	
Unrecognized deferred tax benefits
    	
 
    	
1,234,133
    	
 
    	
14,924
    	
 
    
	
Income tax expense
    	
 
    	
$
    	
—
    	
 
    	
$
    	
—
    	
 
    


 

The Company recorded no deferred tax assets in the consolidated statement of financial position.  The unrecognized deferred tax assets include tax losses, research and development pools and differences between the carrying amount and the tax basis of the following items:

 

	
 
    	
 
    	
For the years ended
   December 31,
    	
 
    
	
 
    	
 
    	
2013
    	
 
    	
2012
    	
 
    
	
Deferred tax assets
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Investment tax credits
    	
 
    	
$
    	
2,816,200
    	
 
    	
$
    	
2,330,768
    	
 
    
	
Capital assets
    	
 
    	
283,632
    	
 
    	
363,667
    	
 
    
	
Share issue expenses
    	
 
    	
5,789
    	
 
    	
10,006
    	
 
    
	
Non-capital loss carry   forwards
    	
 
    	
12,260,798
    	
 
    	
10,720,634
    	
 
    
	
Research and development   expenditures
    	
 
    	
2,254,184
    	
 
    	
1,770,412
    	
 
    
	
 
    	
 
    	
$
    	
17,620,603
    	
 
    	
$
    	
15,195,487
    	
 
    


 

As at December 31, 2013, the Company has approximately $8,700,000 of research and development expenditures available to reduce income taxes in the future periods, with no expiry date.  The Company has loss carry forward balances for income tax purposes of approximately $27,000,000 that are available to reduce income taxes in the future periods, if any, expiring at various times through to the year 2033.  The Company also has investment tax credits of approximately $3,500,000 available to reduce income taxes in the future periods, if any, expiring at various times through to the year 2033.

 

19











 

NEOVASC INC.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2013 and 2012

(Expressed in Canadian dollars)

 

13.       SHARE CAPITAL

 

All common shares are equally eligible to receive dividends and the repayment of capital and represent one vote at the shareholders’ meeting.

 

All preferred shares have no voting rights at the shareholder’s meeting 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.

 

(a)         Authorized

 

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, 2012
    	
 
    	
45,712,649
    	
 
    	
$
    	
70,220,381
    	
 
    	
$
    	
6,158,434
    	
 
    
	
Issued for cash on   exercise of warrants (i)
    	
 
    	
25,000
    	
 
    	
31,250
    	
 
    	
 
    	
 
    
	
Issued for cash on   exercise of options
    	
 
    	
89,391
    	
 
    	
169,554
    	
 
    	
(154,009
    	
)
    
	
Share-based payments
    	
 
    	
 
    	
 
    	
 
    	
 
    	
2,365,833
    	
 
    
	
Balance, December 31, 2012
    	
 
    	
45,827,040
    	
 
    	
$
    	
70,421,185
    	
 
    	
$
    	
8,370,258
    	
 
    
	
Issued for cash on   exercise of warrants (ii)
    	
 
    	
2,335,250
    	
 
    	
2,919,062
    	
 
    	
 
    	
 
    
	
Issued for cash on   exercise of options
    	
 
    	
52,790
    	
 
    	
71,144
    	
 
    	
(28,434
    	
)
    
	
Share-based payments
    	
 
    	
 
    	
 
    	
 
    	
 
    	
1,963,380
    	
 
    
	
Balance, December 31, 2013
    	
 
    	
48,215,080
    	
 
    	
$
    	
73,411,391
    	
 
    	
$
    	
10,305,204
    	
 
    


 




(i)                                     In 2012, the Company issued 25,000 common shares upon the exercise of warrants issued as part of the Company’s August 2011 financing.  Proceeds received from the exercise of the 25,000 warrants amounted to $31,250.

 

(ii)                                  In 2013 the Company issued 2,335,250 common shares, upon the exercise of warrants issued as part of the Company’s August 2011 financing.  Proceeds received from the exercise of the 2,335,250 warrants amounted to $2,919,062.

 

20











 

NEOVASC INC.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2013 and 2012

(Expressed in Canadian dollars)

 

13.  SHARE CAPITAL (continued)

 

(c)          Stock options

 

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, 2013, 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 9,171,596, representing approximately 20% of the number of common shares of the Company outstanding on February 18, 2013.

 

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 are not the part of 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, 2012
    	
 
    	
6,295,038
    	
 
    	
$
    	
0.46
    	
 
    	
4.04
    	
 
    
	
Granted
    	
 
    	
1,609,850
    	
 
    	
1.44
    	
 
    	
 
    	
 
    
	
Exercised
    	
 
    	
(89,391
    	
)
    	
0.17
    	
 
    	
 
    	
 
    
	
Forfeited
    	
 
    	
(46,000
    	
)
    	
0.89
    	
 
    	
 
    	
 
    
	
Expired
    	
 
    	
(1,710
    	
)
    	
0.20
    	
 
    	
 
    	
 
    
	
Options outstanding,   December 31, 2012
    	
 
    	
7,767,787
    	
 
    	
$
    	
0.85
    	
 
    	
2.91
    	
 
    
	
Granted
    	
 
    	
1,084,006
    	
 
    	
2.43
    	
 
    	
 
    	
 
    
	
Exercised
    	
 
    	
(52,790
    	
)
    	
0.81
    	
 
    	
 
    	
 
    
	
Forfeited
    	
 
    	
(3,348
    	
)
    	
1.63
    	
 
    	
 
    	
 
    
	
Expired
    	
 
    	
(10,735
    	
)
    	
0.01
    	
 
    	
 
    	
 
    
	
Options outstanding,   December 31, 2013
    	
 
    	
8,784,920
    	
 
    	
$
    	
1.04
    	
 
    	
2.20
    	
 
    
	
Options exercisable,   December 31, 2013
    	
 
    	
7,699,603
    	
 
    	
$
    	
0.97
    	
 
    	
2.07
    	
 
    


 

The following table lists the options outstanding at December 31, 2013 by exercise price:

 

	
Exercise price
    	
 
    	
Options
   outstanding
    	
 
    	
Weighted average
   remaining term (yrs)
    	
 
    	
Options
   exercisable
    	
 
    	
Weighted average
   remaining term (yrs)
    	
 
    
	
$
    	
  0.01
    	
 
    	
505,089
    	
 
    	
3.26
    	
 
    	
505,089
    	
 
    	
3.26
    	
 
    
	
$
    	
  0.20-0.40
    	
 
    	
2,326,725
    	
 
    	
0.98
    	
 
    	
2,169,200
    	
 
    	
0.97
    	
 
    
	
$
    	
  0.97-1.45
    	
 
    	
4,871,100
    	
 
    	
2.25
    	
 
    	
4,407,313
    	
 
    	
2.01
    	
 
    
	
$
    	
   2.00-4.25
    	
 
    	
1,082,006
    	
 
    	
4.28
    	
 
    	
618,001
    	
 
    	
4.20
    	
 
    
	
 
    	
 
    	
8,784,920
    	
 
    	
 
    	
 
    	
7,699,603
    	
 
    	
 
    	
 
    


 

21











 

NEOVASC INC.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2013 and 2012

(Expressed in Canadian dollars)

 

13.  SHARE CAPITAL (continued)

 

(c)          Stock options (continued)

 

The weighted average share price at the date of exercise for share options exercised for the year ended December 31, 2013 was $0.81 (2012: $0.17).  During the year ended December 31, 2013, the Company recorded $1,963,380 as compensation expense for share-based compensation awarded to eligible optionees (2012: $2,365,833).  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:

 

	
 
    	
 
    	
2013
    	
 
    	
2012
    	
 
    
	
Weighted average fair value
    	
 
    	
$
    	
2.26
    	
 
    	
$
    	
1.30
    	
 
    
	
Dividend yield
    	
 
    	
nil
    	
 
    	
nil
    	
 
    
	
Volatility
    	
 
    	
140
    	
%
    	
144
    	
%
    
	
Risk-free interest rate
    	
 
    	
1.25
    	
%
    	
1.50
    	
%
    
	
Expected life
    	
 
    	
5 years
    	
 
    	
5 years
    	
 
    
								


 

(d)         Warrants

 

	
 
    	
 
    	
Number of
   warrants
    	
 
    
	
 
    	
 
    	
 
    	
 
    
	
Balance, January 1, 2012
    	
 
    	
2,360,250
    	
 
    
	
Exercised (i)
    	
 
    	
(25,000
    	
)
    
	
Balance, December 31, 2012
    	
 
    	
2,335,250
    	
 
    
	
Exercised (ii)
    	
 
    	
(2,335,250
    	
)
    
	
Balance, December 31, 2013
    	
 
    	
—
    	
 
    


 




(i)             In 2012, 25,000 warrants issued as part of the Company’s August 2011 financing (see Note 13(b)(i)) were exercised.  Proceeds received from the exercise of the 25,000 warrants amounted to $31,250.

 

(ii)          In 2013 the Company issued 2,335,250 common shares, upon the exercise of warrants issued as part of the Company’s August 2011 financing (see Note 13(b)(ii).  Proceeds received from the exercise of the 2,335,250 warrants amounted to $2,919,062.

 

There were no performance conditions attached to the warrants and all the warrants vested upon issuance.

 

14.      SEGMENT INFORMATION

 

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 years ended
   December 31,
    	
 
    
	
 
    	
 
    	
2013
    	
 
    	
2012
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
REVENUE
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
United States
    	
 
    	
$
    	
3,273,946
    	
 
    	
$
    	
4,039,667
    	
 
    
	
Europe
    	
 
    	
8,136,300
    	
 
    	
3,665,049
    	
 
    
	
Israel
    	
 
    	
337,390
    	
 
    	
103,181
    	
 
    
	
Canada
    	
 
    	
—
    	
 
    	
11,257
    	
 
    
	
 
    	
 
    	
$
    	
11,747,636
    	
 
    	
$
    	
7,819,154
    	
 
    


 

Sales to the Company’s four largest customers accounted for approximately 35%, 23%, 16% and 10% of the Company’s sales for the year ended December 31, 2013.  Comparatively, sales to the Company’s four largest customers accounted for approximately 39%, 21%, 18% and 10% of the Company’s sales for the year ended December 31, 2012.

 

22









 

NEOVASC INC.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2013 and 2012

(Expressed in Canadian dollars)

 

15.       EMPLOYEE BENEFITS EXPENSE

 

	
 
    	
 
    	
For the years ended
   December 31,
    	
 
    
	
 
    	
 
    	
2013
    	
 
    	
2012
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Salaries and wages
    	
 
    	
$
    	
4,809,922
    	
 
    	
$
    	
3,246,687
    	
 
    
	
Canadian pension plan and employment insurance
    	
 
    	
256,519
    	
 
    	
162,287
    	
 
    
	
Contribution to defined contribution pension plan
    	
 
    	
97,629
    	
 
    	
78,584
    	
 
    
	
Cash-based employee expenses
    	
 
    	
5,164,070
    	
 
    	
3,487,558
    	
 
    
	
Share-based payments
    	
 
    	
1,963,380
    	
 
    	
2,365,833
    	
 
    
	
 
    	
 
    	
$
    	
7,127,450
    	
 
    	
$
    	
5,853,391
    	
 
    


 

16.       DEPRECIATION AND SHARE-BASED PAYMENTS

 

	
 
    	
 
    	
For the years ended
   December 31,
    	
 
    
	
 
    	
 
    	
2013
    	
 
    	
2012
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
COST OF GOODS SOLD
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Depreciation
    	
 
    	
$
    	
73,592
    	
 
    	
$
    	
18,278
    	
 
    
	
Share-based payments
    	
 
    	
158,503
    	
 
    	
70,120
    	
 
    
	
Cash-based employee expenses
    	
 
    	
2,421,207
    	
 
    	
1,372,196
    	
 
    
	
Other costs
    	
 
    	
4,430,575
    	
 
    	
3,179,708
    	
 
    
	
TOTAL COST OF GOODS SOLD
    	
 
    	
$
    	
7,083,877
    	
 
    	
$
    	
4,640,302
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
EXPENSES
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Selling expenses
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Depreciation
    	
 
    	
$
    	
550
    	
 
    	
$
    	
532
    	
 
    
	
Share-based payments
    	
 
    	
7,417
    	
 
    	
14,395
    	
 
    
	
Cash-based employee expenses
    	
 
    	
65,174
    	
 
    	
128,945
    	
 
    
	
Other expenses
    	
 
    	
5,334
    	
 
    	
25,201
    	
 
    
	
 
    	
 
    	
78,475
    	
 
    	
169,073
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
General and administrative   expenses
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Depreciation
    	
 
    	
82,316
    	
 
    	
88,600
    	
 
    
	
Share-based payments
    	
 
    	
1,443,087
    	
 
    	
1,759,037
    	
 
    
	
Cash-based employee expenses
    	
 
    	
1,297,045
    	
 
    	
1,007,922
    	
 
    
	
Other expenses
    	
 
    	
2,024,487
    	
 
    	
1,102,391
    	
 
    
	
 
    	
 
    	
4,846,935
    	
 
    	
3,957,950
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Product development and   clinical trials expenses
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Depreciation
    	
 
    	
115,202
    	
 
    	
28,455
    	
 
    
	
Share-based payments
    	
 
    	
354,373
    	
 
    	
522,281
    	
 
    
	
Cash-based employee expenses
    	
 
    	
1,380,644
    	
 
    	
978,495
    	
 
    
	
Other expenses
    	
 
    	
4,997,099
    	
 
    	
2,450,825
    	
 
    
	
 
    	
 
    	
6,847,318
    	
 
    	
3,980,056
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
TOTAL EXPENSES
    	
 
    	
$
    	
11,772,728
    	
 
    	
$
    	
8,107,079
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Depreciation per Statements of Cash Flows
    	
 
    	
$
    	
271,660
    	
 
    	
$
    	
135,865
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Share-based payments per Statements of Cash Flows
    	
 
    	
$
    	
1,963,380
    	
 
    	
$
    	
2,365,833
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Cash-based employee expenses (see Note 15)
    	
 
    	
$
    	
5,164,070
    	
 
    	
$
    	
3,487,558
    	
 
    


 

23











 

NEOVASC INC.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2013 and 2012

(Expressed in Canadian dollars)

 

17.       OPERATING LEASES

 

The Company entered into an agreement for additional office space in October 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 commenced from October 1, 2012.

 

The Company entered into another 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.

 

The future minimum operating lease payments due over the next two years are as follows:

 

	
 
    	
 
    	
As at December 31,
    	
 
    
	
 
    	
 
    	
2013
    	
 
    	
2012
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Year 1
    	
 
    	
$
    	
26,244
    	
 
    	
$
    	
20,592
    	
 
    
	
Year 2
    	
 
    	
6,300
    	
 
    	
15,444
    	
 
    
	
 
    	
 
    	
$
    	
32,544
    	
 
    	
$
    	
36,036
    	
 
    


 

Lease payments recognized as an expense during the year amount to $25,092.

 

18.       GAIN ON SALE OF LICENSE

 

On October 31, 2012, the Company finalized its agreement with LeMaitre allowing LeMaitre to exercise its option to purchase certain specific rights to Neovasc’s biological vascular surgical patch product technology on an accelerated basis, at an agreed price of US$4,600,000.  Under the terms of the amended agreement, Neovasc received US $4.255 million from LeMaitre on closing and US$345,000 one year after closing.

 

The total gain from the sale of license is $4,598,160 (US$4,600,000).

 

19.       LOSS PER SHARE

 

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 year ended December 31, 2013 amounted to 47,361,297 shares (2012: 45,780,690 shares).

 

	
 
    	
 
    	
For the years ended
   December 31,
    	
 
    
	
 
    	
 
    	
2013
    	
 
    	
2012
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Weighted average number of common shares
    	
 
    	
47,361,297
    	
 
    	
45,780,690
    	
 
    
	
Loss for the period
    	
 
    	
(6,750,250
    	
)
    	
(351,368
    	
)
    
	
Basic loss per share
    	
 
    	
$
    	
(0.14
    	
)
    	
$
    	
(0.01
    	
)
    
								


 

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.

 

24











 

NEOVASC INC.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2013 and 2012

(Expressed in Canadian dollars)

 

20.       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 years ended
   December 31,
    	
 
    
	
 
    	
 
    	
2013
    	
 
    	
2012
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Short-term employee benefits
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Employee salaries and bonuses
    	
 
    	
$
    	
745,673
    	
 
    	
$
    	
670,000
    	
 
    
	
Directors fees
    	
 
    	
62,918
    	
 
    	
59,421
    	
 
    
	
Social security and medical care costs
    	
 
    	
20,741
    	
 
    	
20,791
    	
 
    
	
 
    	
 
    	
829,332
    	
 
    	
750,212
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Post-employment benefits
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Contributions to defined contribution pension plan
    	
 
    	
27,963
    	
 
    	
25,125
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Share-based payments
    	
 
    	
991,986
    	
 
    	
1,277,708
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Total key management   remuneration
    	
 
    	
$
    	
1,849,281
    	
 
    	
$
    	
2,053,045
    	
 
    


 

21.       SUBSEQUENT EVENTS

 

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 $6.00 per common share, for gross cash proceeds to the Company of $25,152,000.

 

22.       AUTHORIZATION OF FINANCIAL STATEMENTS

 

The consolidated financial statements for the year ended December 31, 2013 (including comparatives) were approved by the board of directors on April 16, 2014.

 

	
 
    	
 
    
	
Alexei Marko, Director
    	
 
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
 
    
	
Steven Rubin, Director
    	
 
    


 

25