Mr. Alexei Marko reports
NEOVASC ANNOUNCES RESULTS FOR THE FOURTH QUARTER AND FISCAL YEAR 2016
Neovasc Inc. has released financial results for the quarter and year ended Dec. 31, 2016 (all figures are in U.S. dollars unless otherwise indicated).
"While the ongoing litigation continued to dominate the company's narrative in 2016, we expect to know the outcome of our U.S. appeal later this year, bringing closure to this chapter in the company's development," commented Neovasc's chief executive officer, Alexei Marko. "The evidence stemming from the 26 cases of the Tiara's use and the hundreds of commercial cases with Reducer underscore for us that we remain on a path to advancing the standard of care for mitral regurgitation and refractory angina and improving the quality of life for patients suffering from these devastating diseases."
The company's proprietary product for treating mitral valve disease, Tiara, continues to perform well and has now been used to treat 26 patients under both early feasibility and compassionate-use cases across North America and Europe. Implantation is completed through a short transapical procedure and typically results in complete resolution of the patient's mitral regurgitation without significant residual leaks or obstruction of the ventricular outflow tract. The 30-day survival rate for the first 24 patients (those treated more than 30 days ago) is 21 of 24, or 88 per cent, and there has been no 30-day mortality observed in any of the last 15 patients. One patient is now over three years postimplant. The company expects to begin enrolling patients in the coming weeks into its European CE Mark trial, with initial cases in Italy.
Sales of the Neovasc Reducer, the company's innovative device to treat refractory angina, grew 91 per cent year over year in 2016. There has been steady growth in the adoption of the product as implanting physicians see many of their patients who were refractory to other angina treatments returning with significant improvement in symptoms following implantation with Reducer.
Results for the quarters ended Dec. 31, 2016, and 2015
Revenues
Revenues for the quarter ended Dec. 31, 2016, were $2,761,122, compared with $2,224,046 for the same period in 2015. Reducer revenues increased by 47 per cent to $282,515 for the quarter ended Dec. 31, 2016, compared with $192,013, for the same period in 2015. Contract manufacturing and consulting services revenues were slightly increased in comparison with the same period in 2015. Due to a recent agreement with Boston Scientific Corp., the company expects a decline in revenue in the coming periods. This is consistent with the company's strategy to focus its business toward development and commercialization of its own products, Reducer and Tiara.
In December, 2016, the company entered into an agreement for Boston Scientific to acquire the company's advanced biologic tissue capabilities and certain manufacturing assets and make a 15-per-cent equity investment in Neovasc, for a total of $75-million in cash. Under the terms of the approximate $68-million asset purchase agreement, the company has been granted a licence to the purchased trade secrets and know-how and access to the sold facilities to allow it to continue its tissue and valve assembly activities for its remaining customers as well as continue its own tissue-related programs, including advancing the Tiara through its clinical and regulatory pathways.
Cost of goods sold
The cost of goods sold for the quarter ended Dec. 31, 2016, was $2,052,969, compared with $1,942,140 for the same period in 2015. The gross margin for the quarter ended Dec. 31, 2016, was 26 per cent, compared with 13 per cent for the same period in 2015. In 2015, the company issued a credit note to a single customer, which reduced margins from 23 per cent to 13 per cent for the fourth quarter of 2015.
Expenses
Total expenses for the quarter ended Dec. 31, 2016, were $7,437,156, compared with $8,352,093 for the same period in 2015, representing a decrease of 11 per cent. The decrease results from a $1,037,249 decrease in general and administrative expenses, offset by a $273,035 increase in clinical trial and product development expenses for the company's two new product development programs.
Selling expenses were $141,733 for the quarter ended Dec. 31, 2016, compared with $292,456 for the same period in 2015, representing a decrease of 52 per cent, due to lower sales consulting, less travel and lower stock compensation costs in 2016. General and administrative expenses were $2,461,433 for the quarter ended Dec. 31, 2016, compared with $3,498,682 for the same period in 2015, representing a decrease of 30 per cent, due to a decrease in litigation expenses of $537,872 and a $296,782 decrease in share-based payments. Product development and clinical trials expenses were $4,833,990 for the quarter ended Dec. 31, 2016, compared with $4,560,955 for the same period in 2015, representing an increase of 6 per cent due to an increased investment in the Tiara development program.
Losses
The net profit for the quarter ended Dec. 31, 2016, was $37,213,791, or basic earnings of 54 cents and fully diluted earnings of 47 cents per share, compared with a loss of $7,383,608, or a basic and diluted loss of 11 cents per share, for the same period in 2015.
Results for the years ended Dec. 31, 2016, and 2015
Revenues
Revenues decreased 4 per cent year over year to $9,512,796 for the year ended Dec. 31, 2016, compared with revenues of $9,929,940 for the same period in 2015. The reduction is primarily due to the decrease in surgical patch sales. The company ceased its production of surgical patches (product sales) in the second quarter of 2015.
Reducer sales for the year ended Dec. 31, 2016, were $1,004,948, compared with $526,412 for the same period in 2015, representing an increase of 91 per cent. The company started its sales of the Reducer in the first quarter of 2015 as it initiated its focused commercialization of the product in Europe.
Contract manufacturing revenues for the year ended Dec. 31, 2016, were $3,746,521, compared with $3,236,978 for the same period in 2015, representing an increase of 16 per cent. The increase in revenue for the year ended Dec. 31, 2016, compared with the same period in 2015 is primarily due to growing revenues from Boston Scientific. The company believes that contract manufacturing revenues will decline in 2017 with the loss of Boston Scientific as a customer and recognizes that these revenues will be derived from a smaller customer base as the transcatheter aortic valve market matures.
Revenues from consulting services for the year ended Dec. 31, 2016, were $4,761,327, compared with $5,812,814 for the same period in 2015, representing a decrease of 18 per cent. The reduction is indicative of the trend the company is seeing in consulting service revenue. The company anticipates that its consulting services revenue will decline in the long term as its consulting customers continue to transition to becoming contract manufacturing customers or cease to be customers at all.
Cost of goods sold
The cost of goods sold for the year ended Dec. 31, 2016, was $7,091,761, compared with $6,938,134 for the same period in 2015. The overall gross margin for the year ended Dec. 31, 2016, was 25 per cent, compared with gross margin of 30 per cent for the same period in 2015. The company has seen its gross margins decline due to a change in the product mix. The lower margins the company has received on its sales to Boston Scientific are only partially offset by the higher margins on the Reducer revenue.
Expenses
Total expenses for the year ended Dec. 31, 2016, were $39,243,928, compared with $31,750,140 for the same period in 2015, representing an increase of $7,493,788, or 24 per cent. The increase in total expenses for the year ended Dec. 31, 2016, compared with the same period in 2015 is primarily due to a $5,269,711 increase in general and administrative expenses (of which $6,111,912 relates to an increase in litigation expenses) and a $2,183,108 increase in product development and clinical trial expenses to advance the Tiara and Reducer development programs.
Selling expenses for the year ended Dec. 31, 2016, were $696,638, compared with $655,669 for the same period in 2015, representing an increase of $40,969, or 6 per cent. The increase in selling expenses for the year ended Dec. 31, 2016, compared with the same period in 2015 reflects costs incurred in connection with commercialization activities for Reducer in 2016. The company has minimized its increase in selling expenses in the light of higher litigation costs and the impact of litigation on the company.
General and administrative expenses for the year ended Dec. 31, 2016, were $19,182,787 compared with $13,913,076 for the same period in 2015, representing an increase of $5,269,711, or 38 per cent. The increase in general and administrative expenses for the year ended Dec. 31, 2016, compared with the same period in 2015 can be substantially explained by a $6,111,912 increase in litigation expenses, offset by a $813,075 decrease in share-based payments. In 2016, the company adjusted its compensation plan to directors, officers and senior management, decreasing the number of options granted by 75 per cent, replacing these options with a smaller cash-based bonus plan, and increasing officers' and senior management's base salaries by 10 per cent.
Product development and clinical trial expenses for the year ended Dec. 31, 2016, were $19,364,503, compared with $17,181,395 for the same period in 2015, representing an increase of $2,183,108, or 13 per cent. The increase in product development and clinical trial expenses for the year ended Dec. 31, 2016, was due to a $1,183,962 increase in cash-based employee expenses as the company hired additional staff to advance product development and a $2,076,259 increase in other expenses as the company invested in its two major new product initiatives, offset by a $1,243,976 decrease in share-based payments.
Other income and loss
The other loss for the year ended Dec. 31, 2016, was $49,471,477, compared with other income of $2,195,195 for the same period in 2015, a change of $51,666,672. This amount is made up of the $111,781,096 damages provision related to the litigation with CardiAQ Valve Technologies Inc., a $2,690,129 increase in the unrealized loss on the damages provision and a $1,894,473 increase in the loss on foreign exchange, offset by a $65,095,733 gain on sale of assets related to the agreement with Boston Scientific.
Losses
The operating losses and comprehensive losses for the year ended Dec. 31, 2016, were $86,494,893 and $82,397,922, respectively, or $1.28 basic and diluted loss per share, as compared with losses of $26,730,490 and $35,116,695, or a basic and diluted loss of 41 cents per share, for the same period in 2015. Litigation expenses for the year ended Dec. 31, 2016, represent a loss of 20 cents basic and diluted per share compared with a loss of 11 cents basic and diluted per share for the same period in 2015. The company has incurred significant costs in defending itself in lawsuits filed by CardiAQ. Total litigation costs since the initial claims were filed in June, 2015, are approximately $21.06-million, and the company may require an additional $1-million to $3-million to cover additional litigation expenses up to and including the appeal hearing, currently scheduled for August, 2017.
Discussion of liquidity and capital resources
Neovasc finances its operations and capital expenditures with cash generated from operations and equity financings. As at Dec. 31, 2016, the company had cash and cash equivalents of $22,954,571, compared with cash and cash equivalents of $55,026,171 as at Dec. 31, 2015.
The company's working capital deficit is $17,497,931 as at Dec. 31, 2016, compared with a working capital surplus of $54,274,867 as at Dec. 31, 2015. Unless the company is successful in an appeal of the verdict, or otherwise is successful in reducing the amount of the approximate $112-million damages award to an amount less that the $70-million held in escrow, the company will require significant additional financing in order to pay the damages and to continue to operate its business. There can be no assurance that such financing will be available on favourable terms, or at all. The company may be faced with significant monetary damages that could exceed its resources and/or the loss of intellectual property rights that could have a material adverse effect on the company and its financial condition. These circumstances create material uncertainty and cast substantial doubt about the company's ability to continue as a going concern.
Cash used in operating activities for the year ended Dec. 31, 2016, was $39,794,159, compared with $21,282,958 for the same period in 2015. For the year ended Dec. 31, 2016, operating expenses were $37,215,852, compared with $22,693,678 for the same period in 2015. The cash expenditures on litigation (litigation expenses less change in accounts payable related to litigation) were approximately $13.1-million and cash expenditures on research and development and clinical trials (expenses less share-based payments and depreciation and less change in accounts payable related to research and development) were approximately $17.9-million. Working capital items absorbed cash of $2,427,075, compared with working capital items generating cash of $821,165 for the same period in 2015. This was principally due to an increase in accounts receivable, which absorbed cash due at year-end due to a final payment received immediately after the year-end from Boston Scientific, and a decrease in accounts payable and accrued liabilities as operational activities declined.
Outstanding share data
As at March 23, 2017, the company had 78,699,345 common voting shares issued and outstanding. Further, the following securities are convertible into common shares of the company: 7,800,680 stock options with a weighted average price of $4.72 (Canadian). The fully diluted share capital of the company at March 23, 2017 is 86,500,025.
Neovasc's 2016 audited consolidated financial statements and notes thereto, its management discussion and analysis, and its annual information form will be posted on the company's website and will be filed on SEDAR. Neovasc's annual report on Form 40-F will be available on EDGAR. In addition to the summary contained herein, readers are encouraged to review the full disclosure in Neovasc's 2016 audited consolidated financial statements, notes thereto, and management discussion and analysis.
Conference call and webcast information
Neovasc will be hosting a conference call on March 23, 2017, at 4:30 p.m. ET to discuss these results. To participate in the conference, dial 888-390-0546 or 416-764-8688. A recording of the call will be available for 72 hours by calling 888-390-0541 or 416-764-8677 and using passcode 034470 followed by the number sign. A link to the live and archived audio webcast of the conference call will also be available on the presentations and events page of the investors section of Neovasc's website.
CONSOLIDATED STATEMENTS OF (LOSS) AND COMPREHENSIVE (LOSS)
(in U.S. dollars)
2016 2015
Revenue
Reducer $ 1,004,948 $ 526,412
Product sales - 353,736
Contract manufacturing 3,746,521 3,236,978
Consulting services 4,761,327 5,812,814
------------ ------------
9,512,796 9,929,940
Cost of goods sold 7,091,761 6,938,134
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Gross profit 2,421,035 2,991,806
------------ ------------
Expenses
Selling expenses 696,638 655,669
General and administrative expenses 19,182,787 13,913,076
Product development and clinical trials expenses 19,364,503 17,181,395
------------ ------------
39,243,928 31,750,140
------------ ------------
Operating (loss) (36,822,893) (28,758,334)
------------ ------------
Other income (expense)
Interest income 177,761 577,006
Interest (expense) - (2,538)
Damages provision (111,781,096) -
Gain on sale of assets 65,095,733 -
(Loss) gain on foreign exchange (273,746) 1,620,727
Unrealized foreign exchange (loss) on damages provision (2,690,129) -
------------ ------------
(49,471,477) 2,195,195
------------ ------------
(Loss) before tax (86,294,370) (26,563,139)
------------ ------------
Tax (expense) (200,523) (167,351)
------------ ------------
(Loss) for the year $(86,494,893) $(26,730,490)
------------ ------------
Other comprehensive gain (loss) for the year
Items that will be reclassified
subsequently to profit or (loss)
Exchange difference on translation for
other than damages provision 1,406,842 (8,386,205)
Exchange difference on translation for
damages provision 2,690,129 -
------------ ------------
4,096,971 (8,386,205)
------------ ------------
(Loss) and other comprehensive (loss) for the year $(82,397,922) $(35,116,695)
------------ ------------
(Loss) per share
Basic and diluted (loss) per share $(1.28) $(0.41)
About Neovasc Inc.
Neovasc is a specialty medical device company that develops, manufactures and markets products for the rapidly growing cardiovascular marketplace. Its products include Reducer (for the treatment of refractory angina) and Tiara (for the transcatheter treatment of mitral valve disease). The company also sells a line of advanced biological tissue products that are used as key components in third party medical products, including transcatheter heart valves.
We seek Safe Harbor.
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