Document:

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
    	
 
    

 

25Exhibit 4.3

 

 

	
 
    	
Neovasc Inc.
    	
 
    
	
 
    	
Management’s
   Discussion and Analysis
    	
 
    
	
 
    	
Form 51-102F1
    	
 
    
	
 
    	
 
    	
 
    
	
 
    	
FOR THE YEARS ENDED DECEMBER 31,
    	
 
    
	
 
    	
2013 AND 2012
    	
 
    

 

2013

 

 

FORM 51-102F1: MANAGEMENT’S DISCUSSION AND ANALYSIS

 

This discussion and analysis covers the audited consolidated financial statements of Neovasc Inc. (the “Company” or “Neovasc”) for the years ended December 31, 2013 and 2012.

 

The Management’s Discussion and Analysis (“MD&A”) of financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and notes thereto for the years ended December 31, 2013 and 2012 (included as part of Neovasc Inc.’s annual filing).

 

FORWARD-LOOKING STATEMENTS

 

This Annual Information Form, contains forward-looking statements within the meaning of applicable Canadian securities legislation and U.S. securities legislation that may not be based on historical fact, including, without limitation, statements containing the words “believe”, “may”, “plan”, “will”, “estimate”, “continue”, “anticipate”, “intend”, “expect” and similar expressions.  Forward-looking statements are necessarily based on estimates and assumptions made by us in light of our experience and perception of historical trends, current conditions and expected future developments, as well as the factors we believe are appropriate.  Forward-looking statements in this Annual Information Form include, but are not limited to, statements relating to:

 

·                  our intention to expand the indications for which we may market TiaraTM (which does not have regulatory approval and is not commercialized) and ReducerTM (which has CE mark approval for sale in the European Union);

·                  our plans to develop and commercialize products and the timing of these development programs;

·                  whether we will receive, and the timing and costs of obtaining, regulatory approvals;

·                  the cost of post-market regulation if we receive necessary regulatory approvals;

·                  clinical development of our products, including the results of current and future clinical trials;

·                  our ability to enroll patients in our clinical trials;

·                  the benefits and risks of our products as compared to others;

·                  our ability to establish, maintain and defend intellectual property rights in our products;

·                  whether our third party collaborators will maintain their intellectual property rights in the technology we license;

·                  our need for additional financing and our estimates regarding our capital requirements and future revenues and profitability;

·                  our estimates of the size of the potential markets for our products;

·                  our selection and licensing of products;

·                  our potential relationships with distributors and collaborators with acceptable development, regulatory and commercialization expertise and the benefits to be derived from such collaborative efforts;

·                  sources of revenues and anticipated revenues, including contributions from distributors and collaborators, product sales, license agreements and other collaborative efforts for the development and commercialization of products;

·                  our creation of an effective direct sales and marketing infrastructure for approved products we elect to market and sell directly;

·                  the rate and degree of market acceptance of our products;

·                  our anticipated listing of our common shares on the Nasdaq Capital Market and graduation to the TSX;

·                  the timing and amount of reimbursement for our products;

·                  the success and pricing of other competing therapies that may become available;

·                  our retention and hiring of qualified employees in the future;

·                  the manufacturing capacity of third-party manufacturers for our products;

·                  the competition we face from other companies, research organizations, academic institutions and government agencies, and the risks such competition pose to our products;

·                  the confidential information we possess about patients, customers and core business functions, and the information technologies we use to protect it;

·                  our intention to continue directing a significant portion of our resources into sales expansion;

·                  our ability to get our products approved for use; and

·                  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.

 

1

 

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 factors and assumptions used by us to develop such forward-looking statements include, but are not limited to, the assumption that:

 

·                  our ability to reach agreements with regulatory agencies;

·                  recruitment to clinical trials will continue;

·                  the regulatory requirements, including patient exposure, for approval of marketing authorization applications will be maintained;

·                  genericisation of markets for Tiara and Reducer will develop;

·                  the time required to analyze and report the results of our clinical studies will be consistent with past timing;

·                  market data and reports reviewed by us are accurate;

·                  our current good relationships with our suppliers and service providers will be maintained;

·                  availability of capital on terms that are favourable to us;

·                  the success of current and future clinical trials; and

·                  feasibility of future clinical trials.

 

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 herein, under the headings “Risk Factors”. 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 Annual Information Form 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.

 

All financial information is prepared in accordance with International Financial Reporting Standards (“IFRS”) and is expressed in Canadian dollars.

 

Date: April [17], 2014

 

2

 

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, the Reducer for the treatment of refractory angina and a line of advanced biological tissue products that are used as key components in third-party medical products including transcatheter heart valves.

 

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.

 

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 a novel catheter-based treatment for refractory angina, a debilitating condition resulting from inadequate blood flow to the heart muscle.  Refractory angina affects millions of patients and at present there is no effective cure.  BBL developed certain products intended to solve problems encountered by physicians when attempting to place vascular stents at locations where an artery branches from the aorta, the ostium or where an artery splits into multiple branches, a bifurcation.  Currently Neovasc is not developing any of the BBL technologies and is focusing its product development efforts on NML’s treatment for refractory angina.

 

In late 2009, Neovasc started initial activities to develop novel technologies for catheter-based treatment of mitral valve disease.  Based on the early 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 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 2013 it is estimated that mitral regurgitation affects approximately 5.7 million people in the U.S. and EU5). 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 2.4 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.

 

Preclinical program and prototype devices of the Tiara have undergone evaluation in animal and bench models. Neovasc believes it has developed distinctive solutions to the difficulties of developing a safe and effective transcatheter mitral valve device and early results have been promising. Initial implantations of the valve have been undertaken in humans under special compassionate use exemptions (to date, two human implants of the Tiara have been completed under such exemptions).

 

While many challenges remain prior to achieving commercial production (including positive clinical trials and obtaining regulatory approval from the relevant authorities), the Tiara device is being widely recognized at leading cardiovascular medical conferences 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, however, none have reached the stage of clinical trials (although it has been reported that one transcatheter mitral valve was implanted in a European patient who subsequently died a few days later from causes that were reported by the company as being unrelated to the performance of the valve and another

 

3

 

company has reported two temporary implants of valves that were removed after a few hours — it is believed that these implants were intended to be acute only to assess the feasibility of the valve). On March 6, 2014, Edwards Lifesciences reported that in February and March 2014, it had completed the first three implants of its FORTIS transapical mitral valve at a hospital in London, U.K. and that the patients were reported to be recovering but few other details were given.

 

Neovasc believes that there are several unique attributes of the Tiara device that may provide advantages over other approaches and that it will be one of the leading transcatheter mitral valve replacement therapies to begin a formal series of human implantations.  There is no certainty that the Tiara device 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 PeripatchTM (“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. However, if this supplier were unable to provide the nitinol frame in the future, it would seriously impact the further development of the Tiara device. The Tiara delivery system is manufactured in-house by the Company using components that are readily available.

 

Regulatory Status

 

The Tiara is an early clinical-stage development product without regulatory approvals in any country. The Company will continue to fund development of the product as cash flow allows and anticipates applying for CE mark approval in Europe in the next two to four years.  To the end of December 31, 2013, the Company has spent approximately $7.8 million developing the product and anticipates that it may require an additional $10-15 million dollars to apply for 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.

 

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 U.S., who 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 simple 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 approximately 620,000 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 a 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 Reducer’s primary endpoint is 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

 

4

 

enrolled in the COSIRA (“Coronary Sinus Reducer for treatment of Refractory Angina”) trial. The COSIRA 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 (40.1%) of the control patients (p-value = 0.003)).

 

The Reducer is an hourglass-shaped, balloon-expandable, stainless steel, bare metal “stent-like” device, which is implanted in the coronary sinus, creating a restriction in venous outflow from the myocardium. It is implanted using conventional percutaneous 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 COSIRA — 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 were positive and are discussed in more detail below.

 

Following this positive data from the COSIRA trial, the Company expects to pilot launch the Reducer in selected European markets in late 2014.  The Company will also explore initiation of Reducer sales in other non-US markets.  It is anticipated that sales of the product in the United States would follow obtaining U.S. regulatory approval, if and when 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 a clinical trial named COSIRA that is expected to provide data to support broad commercialization of the Reducer product. COSIRA is a double-blinded, randomized, sham controlled, multi-center trial of 104 patients at 11 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. 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. The Company has also initiated Registries in Europe

 

5

 

and Israel to collect additional clinical data from patients treated with the Reducer. Data from the COSIRA trial and the patient registries is expected to provide critical support for adoption and use of the Reducer product in Europe and was presented at the American College of Cardiology (“ACC”) 63rd Annual Scientific Session & Expo on March 29, 2014.

 

Neovasc is also developing a U.S. regulatory approval strategy that will address the requirement for a larger randomized clinical trial, which is mandatory in the United States. The Company expects to begin this trial in 2015. 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 million.

 

Peripatch 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 or as a covering on a vascular stent). 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 aortic 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 XenoSureTM surgical patch product line.  Neovasc will continue to supply LeMaitre with surgical patches at a reduced price until March 31, 2014 or until LeMaitre is able to receive appropriate regulatory approvals and start manufacture of the surgical patches themselves (anticipated around the end of 2014), whichever is sooner. At that time, Neovasc will cease manufacture of surgical patches for this specific application.

 

The Company also provides a range of custom Peripatch products to industry customers for incorporation into their own products, such as transcatheter heart valves, covered stents 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, 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 covered stents and 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,

 

6

 

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 100% of the Company’s current revenues.

 

Regulatory Status

 

Peripatch tissue manufactured from bovine tissue is approved for sale in the United States, the European Union and Canada. While the Company does not have stand-alone approval for its porcine tissue products, third party products fabricated from Neovasc’s porcine tissue are approved for sale in European Union markets. Regulatory agencies, such as the Canadian Food Inspection Agency, regulate the import and export of such tissue. 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.

 

Clinical Trials

 

The Company is presently in the process of obtaining the clinical trial data required to support European commercial launch of the Reducer product. The COSIRA trial, which commenced in September 2010 and concluded enrollment in May 2013, is expected to generate data to support commercialization, as well as additional regulatory approval applications to be filed in other jurisdictions.  The Company is also enrolling patients receiving the Reducer product in clinical registries in Europe and Israel, with the expectation that data from these registries will support wider adoption and use of the Reducer in refractory angina patients.

 

Product Development

 

Product development at the Company is currently focused on completing commercialization of the Reducer as well as early-stage development work on the Tiara program.  The Company is also undertaking product development work under contract for third-parties.  These third-party projects are typically focused on supporting the development of products that incorporate Peripatch tissue.  These activities generate near-term revenues for Neovasc from consulting activities and also are expected to drive longer-term growth as a result of the revenues that may result from future commercial sales of new products incorporating the Peripatch tissue, as well as the related manufacturing services the Company could provide for these customers once their products reach the market.  The Company may also investigate other potential new internal projects that leverage the Company’s existing technologies, infrastructure and expertise.

 

TRENDS, RISKS AND UNCERTAINTIES

 

The Company has incurred operating losses of $6,750,250 for the year ended December 31, 2013 (2012: $351,368) and has a deficit of $78,094,003 at December 31, 2013 compared to a deficit of $71,343,753 as at December 31, 2012.  As at December 31, 2013 the Company had $3,403,472 in cash and cash equivalents.  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.  The economic crisis has significantly tightened the credit markets and may result in required funds not being available to the Company at the time needed or on terms acceptable to the Company, and may also reduce demand for the Company’s products.

 

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 fiscal 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

 

7

 

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.  To the extent possible, management implements strategies aimed at reducing or mitigating risks and uncertainties associated with its business.

 

Operating risks include but are not limited to: market acceptance of the Company’s technologies and products; 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 continued availability of capital to finance the Company’s activities; 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.

 

FOREIGN OPERATIONS

 

The majority of the Company’s revenues are derived from product sales in the United States and Europe, primarily denominated in United States 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 a 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 United States 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 ANNUAL FINANCIAL INFORMATION

 

The following discussion should be read in conjunction with the audited consolidated financial statements for the years ended December 31, 2013 and 2012.

 

DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION

 

Results for the years ended December 31, 2013 and 2012 follow:

 

Loss

 

The losses for the year ended December 31, 2013 were $6,750,250, or $0.14 basic and diluted loss per share, compared with a loss of $351,368, or $0.01 basic and diluted loss per share for the same period in 2012.  The $6,398,882 increase in the loss incurred for the year ended December 31, 2013 compared to the same period in 2012 can be substantially explained by an increase in operating losses, mostly through increases in product development and clinical trials expenses in 2013, and a decrease in other income as 2012 saw unusually high income generated through a gain on sale

 

8

 

of a license. On October 31, 2012, Neovasc 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.

 

Revenues

 

Revenues increased 50% year-over-year to $11,747,636 for the year ended December 31, 2013, compared to revenues of $7,819,154 for the same period in 2012.

 

Product sales for the year ended December 31, 2013 were $2,694,977, compared to $3,264,851 for the same period in 2012, representing a decrease of 17%.  Product sales are solely comprised of sales of surgical patches to LeMaitre.  On the sale of a license to LeMaitre to produce these surgical patches in-house, Neovasc also agreed to continue to supply LeMaitre with surgical patches at a significant price discount, until LeMaitre receives appropriate regulatory approvals and start manufacture of the surgical patches themselves. Lemaitre anticipates receiving the appropriate regulatory approvals towards the end of 2014.  At that time, Neovasc will cease manufacturing all surgical patches for LeMaitre.

 

Contract manufacturing revenues for the year ended December 31, 2013 were $1,776,893, compared to $2,005,058 for the same period in 2012, representing a decrease of 11%.  In the fourth quarter of 2013, there was a significant decrease in contract manufacturing revenues, as one customer adopted a new sterilization process and no product could be sterilized or shipped until this adoption is completed. Work in Progress also increased as Neovasc continued to manufacture up to the point of sterilization and it is anticipated that revenues will resume in the first half of 2014.

 

Revenues from consulting services for the year ended December 31, 2013 were $7,275,766, compared to $2,549,245 for the same period in 2012, representing an increase of 185%. The bulk of the growth in 2013 was the result of the Company growing consulting revenues earned with each of its top five consulting services customers and to a lesser extent attracting a number of new smaller customers. The Company’s consulting service revenues are contract-driven and they can fluctuate from quarter-to-quarter and year-to-year as current projects are completed and new projects start.  The Company hopes and anticipates that it will be able to convert more of its current consulting services customers into contract manufacturing customers as they advance their product development programs towards commercialization and market introduction.  However, this change is dependent on their product development success and is therefore difficult to project.

 

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.  Most 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 year ended December 31, 2013 was $7,083,877, compared to $4,640,302 for the same period in 2012.  The overall gross margin for the year ended December 31, 2013 was 40%, compared to 41% gross margin for the same period in 2012.  Whilst gross margins have remained relatively stable in recent years, fluctuations reflect the different margin rates achieved in the Company’s mix of consulting and contract manufacturing projects and product revenue streams.  Neovasc anticipates an improvement in margins in 2014 as the sale of low margin surgical strips to Lemaitre is discontinued and the revenue mix shifts to higher margin contract manufacturing and consulting services.

 

Expenses

 

Total expenses for the year ended December 31, 2013 were $11,772,728, compared to $8,107,079 for the same period in 2012, representing an increase of 45%.  The increase in total expenses for the year ended December 31, 2013 compared to the same period in 2012 reflects increases in general and administrative expenses of $888,985, primarily from one-time non-recurring expenses and legal and other expenses associated with strategic and product development activities, as well as product development and clinical trial expenses of $2,867,262 to advance the Tiara and Reducer development programs.

 

Selling expenses for the year ended December 31, 2013 were $78,475, compared to $169,073 for the same period in 2012.  The Company is continuing to maintain relatively constant and modest selling and marketing costs while it focuses on growing its business-to-business revenue streams.

 

9

 

General and administrative expenses for the year ended December 31, 2013 were $4,846,935, compared to $3,957,950 for the same period in 2012, representing an increase of $888,985, or 22%.  In 2013, the Company incurred additional costs establishing a dedicated regulatory affairs team and handling legal and other expenses associated with strategic and product development activities.

 

Product development and clinical trial expenses for the year ended December 31, 2013 were $6,847,318, compared to $3,980,056 for the same period in 2012, representing an increase of $2,867,262, or 72%.  The increase in product development and clinical trial expenses was due to an increase in development expenses as the Company invested in its two major new product initiatives: completing the COSIRA clinical trial for the Reducer and advancing the Tiara mitral valve development program.

 

The Company’s expenses are subject to inflation and cost increases.  Salaries and wages have increased on average by 3% in the year ended December 31, 2013 compared to the same period in 2012.  The Company has not seen a significant increase in the price of any of the components used in the manufacture of its products and services.

 

Other income

 

The other income for the year ended December 31, 2013 was $358,719, compared to other income of $4,576,859 for the same period in 2012. The Company has benefited from significant foreign exchange gains on its foreign currency-denominated cash and cash equivalents in 2013.  On October 31, 2012, Neovasc finalized its agreement with LeMaitre Vascular 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.

 

Result for the quarters ended December 31, 2013 and 2012 follow:

 

Profit or Loss

 

The net loss for the quarter ended December 31, 2013 was $2,211,875, or $0.05 basic and diluted loss per share, compared with a profit of $3,637,192 or $0.08 basic earnings per share and $0.07 diluted earnings per share for the same period in 2012.  The profit incurred in the quarter ended December 31, 2012 was due to $4,598,160 gain from the sale of a license (as discussed in the “Loss” section).

 

Revenues

 

Revenues for the quarter ended December 31, 2013 were $3,311,550 compared to $2,465,615 for the same period in 2012, representing an increase of 34%, mostly due to a year-over-year increase in consulting services of $1,160,290 offset by a decrease of $766,559 in contract manufacturing.

 

Cost of Goods Sold

 

The cost of goods sold for the quarter ended December 31, 2013 were $2,056,349, compared to $1,491,125 for the same period in 2012.  The costs rose in line with the increase in sales.  The gross margin for the quarter ended December 31, 2013 was 38%, compared to 40% for the same period in 2012.

 

Expenses

 

Total expenses for the quarter ended December 31, 2012 were $3,567,679, compared to $1,929,331 for the same period in 2012, an increase of 85%.  The increase is substantially due to an increase of $1,336,900 in clinical trial and product development expenses for the Company’s two new product development programs.

 

Selling expenses were $18,417 for the quarter ended December 31, 2013, compared to $36,560 for the same period in 2012.  General and administrative expenses were $1,183,067 for the quarter ended December 31, 2013, compared to $863,476 in the same period in 2012, representing an increase of 37%.  The increase in general and administrative expenses was principally due to an increase in corporate and strategic activities accelerate in line with revenue growth and product development advancements.  Research and development costs, including product development and clinical trial expenses were $2,366,195 for the quarter ended December 31, 2013, compared to $1,029,295 for the same period in 2012, representing an increase of 130%.  The increase in year-over-year research and development costs is principally due to increased investment in Neovasc’s two major new product initiatives: the COSIRA clinical trial for the Reducer and the development of the Tiara mitral valve program.

 

10

 

Annual Information

 

The following is a summary of selected financial information for the three fiscal years to December 31, 2013:

 

	
 
    	
 
    	
2013
    	
 
    	
2012
    	
 
    	
2011
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Sales
    	
 
    	
$
    	
11,747,636
    	
 
    	
$
    	
7,819,154
    	
 
    	
$
    	
5,255,761
    	
 
    
	
Loss
    	
 
    	
(6,750,250
    	
)
    	
(351,368
    	
)
    	
(3,860,176
    	
)
    
	
Basic and diluted loss per share
    	
 
    	
(0.14
    	
)
    	
(0.01
    	
)
    	
(0.09
    	
)
    
	
Total assets
    	
 
    	
7,443,382
    	
 
    	
8,798,596
    	
 
    	
6,300,116
    	
 
    
	
Total long-term liabilities
    	
 
    	
200,084
    	
 
    	
241,083
    	
 
    	
280,642
    	
 
    
	
Cash dividend declared per share
    	
 
    	
$
    	
nil
    	
 
    	
$
    	
nil
    	
 
    	
$
    	
nil
    	
 
    

 

Quarterly Information

 

The following is a summary of selected unaudited financial information for the eight fiscal quarters to December 31, 2013:

 

	
 
    	
 
    	
December 31,
   2013
    	
 
    	
September 30,
   2013
    	
 
    	
June 30,
   2013
    	
 
    	
March 31,
   2013
    	
 
    
	
REVENUE
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Product sales
    	
 
    	
$
    	
683,289
    	
 
    	
$
    	
654,809
    	
 
    	
$
    	
766,834
    	
 
    	
$
    	
590,045
    	
 
    
	
Contract manufacturing
    	
 
    	
96,917
    	
 
    	
583,466
    	
 
    	
521,361
    	
 
    	
575,149
    	
 
    
	
Consulting services
    	
 
    	
2,531,344
    	
 
    	
2,395,616
    	
 
    	
1,504,620
    	
 
    	
844,186
    	
 
    
	
 
    	
 
    	
3,311,550
    	
 
    	
3,633,891
    	
 
    	
2,792,815
    	
 
    	
2,009,380
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
COST OF GOODS SOLD
    	
 
    	
2,056,349
    	
 
    	
2,160,092
    	
 
    	
1,632,155
    	
 
    	
1,235,281
    	
 
    
	
GROSS PROFIT
    	
 
    	
1,255,201
    	
 
    	
1,473,799
    	
 
    	
1,160,660
    	
 
    	
774,099
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
EXPENSES
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Selling expenses
    	
 
    	
18,417
    	
 
    	
7,366
    	
 
    	
31,685
    	
 
    	
21,007
    	
 
    
	
General and administrative expenses
    	
 
    	
1,183,067
    	
 
    	
1,009,473
    	
 
    	
928,663
    	
 
    	
1,725,732
    	
 
    
	
Product development and clinical trials expenses
    	
 
    	
2,366,195
    	
 
    	
1,878,943
    	
 
    	
1,613,609
    	
 
    	
988,571
    	
 
    
	
 
    	
 
    	
3,567,679
    	
 
    	
2,895,782
    	
 
    	
2,573,957
    	
 
    	
2,735,310
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
OPERATING LOSS
    	
 
    	
(2,312,478
    	
)
    	
(1,421,983
    	
)
    	
(1,413,297
    	
)
    	
(1,961,211
    	
)
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
OTHER INCOME/(EXPENSE)
    	
 
    	
100,603
    	
 
    	
(17,843
    	
)
    	
174,904
    	
 
    	
101,055
    	
 
    
	
LOSS AND COMPREHENSIVE LOSS FOR   THE PERIOD
    	
 
    	
$
    	
(2,211,875
    	
)
    	
$
    	
(1,439,826
    	
)
    	
$
    	
(1,238,393
    	
)
    	
$
    	
(1,860,156
    	
)
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
BASIC AND DILUTED LOSS PER   SHARE
    	
 
    	
$
    	
(0.05
    	
)
    	
$
    	
(0.03
    	
)
    	
$
    	
(0.03
    	
)
    	
$
    	
(0.04
    	
)
    

 

	
 
    	
 
    	
December 31,
   2012
    	
 
    	
September 30,
   2012
    	
 
    	
June 30,
   2012
    	
 
    	
March 31,
   2012
    	
 
    
	
REVENUE
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Product sales
    	
 
    	
$
    	
866,866
    	
 
    	
$
    	
946,117
    	
 
    	
$
    	
742,226
    	
 
    	
$
    	
709,642
    	
 
    
	
Contract manufacturing
    	
 
    	
677,695
    	
 
    	
527,557
    	
 
    	
458,359
    	
 
    	
341,447
    	
 
    
	
Consulting services
    	
 
    	
921,054
    	
 
    	
532,266
    	
 
    	
434,023
    	
 
    	
661,902
    	
 
    
	
 
    	
 
    	
2,465,615
    	
 
    	
2,005,940
    	
 
    	
1,634,608
    	
 
    	
1,712,991
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
COST OF GOODS SOLD
    	
 
    	
1,491,125
    	
 
    	
1,275,096
    	
 
    	
994,809
    	
 
    	
879,272
    	
 
    
	
GROSS PROFIT
    	
 
    	
974,490
    	
 
    	
730,844
    	
 
    	
639,799
    	
 
    	
833,719
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
EXPENSES
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
Selling expenses
    	
 
    	
36,560
    	
 
    	
40,503
    	
 
    	
48,783
    	
 
    	
43,227
    	
 
    
	
General and administrative expenses
    	
 
    	
863,476
    	
 
    	
937,202
    	
 
    	
943,467
    	
 
    	
1,213,805
    	
 
    
	
Product development and clinical trials expenses
    	
 
    	
1,029,295
    	
 
    	
950,275
    	
 
    	
1,166,502
    	
 
    	
833,984
    	
 
    
	
 
    	
 
    	
1,929,331
    	
 
    	
1,927,980
    	
 
    	
2,158,752
    	
 
    	
2,091,016
    	
 
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
OPERATING LOSS
    	
 
    	
(954,841
    	
)
    	
(1,197,136
    	
)
    	
(1,518,953
    	
)
    	
(1,257,297
    	
)
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
OTHER INCOME/(EXPENSE)
    	
 
    	
4,592,033
    	
 
    	
(9,778
    	
)
    	
2,598
    	
 
    	
(7,994
    	
)
    
	
LOSS AND COMPREHENSIVE LOSS FOR   THE PERIOD
    	
 
    	
$
    	
3,637,192
    	
 
    	
$
    	
(1,206,914
    	
)
    	
$
    	
(1,516,355
    	
)
    	
$
    	
(1,265,291
    	
)
    
	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    	
 
    
	
BASIC AND DILUTED LOSS PER   SHARE
    	
 
    	
$
    	
0.08
    	
 
    	
$
    	
(0.03
    	
)
    	
$
    	
(0.03
    	
)
    	
$
    	
(0.03
    	
)
    

 

11

 

Revenues have been cyclical in nature, but show an increasing trend from quarter to quarter. The slightly unpredictable nature of revenues is expected as third party development projects are difficult to predict and may start or stop suddenly depending on the needs of the customer.

 

Selling expenses have remained relatively consistent from 2012 as efforts have been focused on servicing our existing customers.  General and administrative expense reached a peak in the first quarter of 2013 mainly due to a stock-based compensation expense of $878,816 which included options granted and vested immediately in the quarter.  Product development and clinical trial costs peaked in the fourth quarter of 2013 due to the COSIRA clinical trial and the preclinical Tiara project expenses.

 

DISCUSSION OF LIQUIDITY AND CAPITAL RESOURCES

 

Neovasc finances its operations and capital expenditures with cash generated from operations, lines of credit, long-term debt and equity financings.  At December 31, 2013, the Company had cash and cash equivalents of $3,403,472 compared to cash and cash equivalents of $5,861,120 at December 31, 2012.

 

In 2013, cash used in operating activities was $4,683,103 compared to $2,037,440 for the same period in 2012.  The increase was principally due to an increase in operating expenses and a decrease in cash generated by working capital items.  In 2013, operating expenses were $4,517,510, compared to $2,465,923 for the same period in 2012, as more expenses were incurred in research and development and clinical trials activities. Working capital items used cash of $167,893, compared to working capital items generating cash of $410,390 for the same period in 2012, as accounts receivable and inventory absorbed more cash associated with increased production activities and revenue growth and the increase in work in progress related to one customer changing their sterilization process.

 

In 2012, $4,253,298 was received from LeMaitre as the first payment of the proceeds from sale of a license and in 2013 $344,862 was received as full and final payment for the license (as discussed in the “Loss” section). In 2013, the Company invested $1,041,188 in property, plant and equipment, compared to $312,586 for the same period in 2012. During 2013, the Company invested capital to expand its clean room and manufacturing facilities and research and development capabilities. Finally, in 2012, a $1,504,290 investment in GICs maturing on October 15, 2012 was re-classified as cash equivalents.

 

In 2013, net cash provided by financing activities was $2,921,781 compared to $49,048 for the same period in 2012.  During 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.

 

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 are no significant restrictions on the transfer of funds between these entities and during the year ended December 31, 2013 the Company also had no complications in transferring funds to and from its subsidiaries in Israel.

 

The majority of the Company’s cash and cash equivalents at December 31, 2013 were denominated in Canadian dollars.  The Company is exposed to foreign currency fluctuations on $922,105 of its cash and cash equivalents held in United States dollars and European euros.

 

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.

 

OUTSTANDING SHARE DATA

 

As at April 17, 2014, the Company had [48,387,302] common voting shares issued and outstanding.  Further, the following securities are convertible into common shares of the Company: [8,610,698] stock options with a weighted average price of $1.06.  The fully diluted share capital of the Company at April 17, 2014 is 56,998,000.

 

12

 

CONTRACTUAL OBLIGATIONS

 

The following table summarizes out contractual obligations as of December 31, 2013:

 

	
 
    	
 
    	
Payments due by Period
    	
 
    
	
Contractual Obligations
    	
 
    	
Total
    	
 
    	
Less than 1 year
    	
 
    	
1-3 years
    	
 
    	
3-5 years
    	
 
    	
More than 5 years
    	
 
    
	
Long term Debt Obligations
    	
 
    	
$
    	
243,632
    	
 
    	
$
    	
43,548
    	
 
    	
$
    	
90,781
    	
 
    	
$
    	
95,240
    	
 
    	
$
    	
14,063
    	
 
    
	
Operating leases
    	
 
    	
32,544
    	
 
    	
26,244
    	
 
    	
6,300
    	
 
    	
—
    	
 
    	
—
    	
 
    
	
Total
    	
 
    	
$
    	
276,176
    	
 
    	
$
    	
69,792
    	
 
    	
$
    	
97,081
    	
 
    	
$
    	
95,240
    	
 
    	
$
    	
14,063
    	
 
    

 

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 year ended December 31, 2013 and 2012, other than those compensation based payments disclosed in Note 20 of the financial statements.

 

PROPOSED TRANSACTIONS

 

The Company is not party to any transaction requiring additional disclosure.

 

CONTROLS AND PROCEDURES

 

The Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), in cooperation with the other members of senior management and directors, are responsible for the Company’s disclosure policy.  The effectiveness of the Company’s internal disclosure controls have been evaluated by the CEO and the CFO, and they have concluded that the Company’s control procedure provides reasonable assurance that (i) information required to be disclosed by the Company in its annual and interim reports or other reports filed by it under applicable securities legislation is recorded, processed, summarized and reported within the prescribed time periods, and (ii) material information regarding the Company is accumulated and communicated to the Company’s management, including its CEO and CFO, in a timely manner.

 

The CEO and CFO are responsible for the design of internal controls over financial reporting in order to provide reasonable assurance that the Company’s financial reporting is reliable and that financial statements prepared for external purposes are prepared in accordance with IFRS and for the safeguarding of Company assets.  The CEO and CFO are aware that internal controls relating to the accounting function could be strengthened by adhering to a strict policy of segregating the duties of accounting staff to reduce the risk of unauthorized journal entries being made or a misappropriation of cash.  At the Company’s current size, adoption of such a policy is impractical.  To reduce these risks, the CFO reviews bank reconciliation statements and performs periodic reviews of non-standard entries after they have been recorded; all cheque payments require two signing authorities.  The CEO periodically reviews recorded financial information.  The CEO and CFO believe that these reviews are an adequate compensating control; accordingly, there are no plans to remediate this internal control weakness.  No material changes were made to the Company’s system of internal controls relating to financial reporting during the year ended December 31, 2013.

 

The Company files Form 52-109FV1 — Certification of annual filings — venture issuer basic certificate and chose to discuss the design and evaluation of its disclosure controls and procedures (“DC&P”) in the MD&A. As a venture issuer, the Company is not required to certify the design and evaluation of the Company’s DC&P and has not completed such an evaluation.  The Company acknowledges that there are inherent limitations on the ability of the CEO and CFO to design and implement DC&P for the Company on a cost effective basis and this may result in additional risks to the quality, reliability, transparency and timeliness of the interim and annual filings and other reports provided.

 

ADDITIONAL INFORMATION

 

Further information, including public disclosure filed with the applicable securities regulatory authorities, is available on the Company’s public profile page at www.sedar.com.

 

13

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