TSX Venture Exchange: NVC
-- Robust Rise in Contract Manufacturing Helps Fuel 41% Year-Over-Year Revenue Increase --
-- Successful Financing Generated Cash to Fund Key Milestones for High Potential
ReducerTM and TiaraTM New Product Programs --
VANCOUVER, Nov. 2, 2011 /PRNewswire/ - Neovasc Inc.(TSXV: NVC), today announced financial results for the three and nine months ended September 30, 2011.
“This has been a good quarter for Neovasc, with strong revenue growth driven by robust contract manufacturing sales, continued progress in our two high potential product development programs and completion of a successful $4.72 million financing that leaves us well resourced to achieve our new product milestones through 2012,” commented Alexei Marko, CEO of Neovasc.
Mr. Marko added, “Our past optimism that product development progress by our tissue business customers would result in rising revenues for Neovasc was illustrated by the surge in our contract manufacturing revenues in the third quarter, which reflected customer new product advances. The results also show how the multiple revenue streams in our tissue business can ensure good growth even when one segment experiences a temporary slow-down. These revenues in conjunction with our recently completed financing put Neovasc in a strong financial position to complete key milestone activities for our new product development programs. We continue to focus on completing our COSIRA study and preparing for European commercialization of our innovative Reducer product for the treatment of refractory angina, and we are making excellent progress in our Tiara project to develop a novel transcatheter treatment for mitral valve disease, a common, life threatening and poorly treated condition. We look forward to continued progress in these programs over the coming quarter and into the new year.”
DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION
Results for the three and nine months ended September 30, 2011 and 2010 follow:
Revenues
For the quarter ended September 30, 2011 revenues were $1,426,047, compared to revenues of $1,014,500 for the same period in 2010, an increase of 41%. For the nine months ended September 30, 2011, revenues were $3,475,372, compared to revenues of $3,040,261 for the same period in 2010, an increase of 14%.
Product sales for the three months ended September 30, 2011 were $391,197, compared to product sales of $539,478 in the same period of 2010, representing a decrease of 27%. Product sales for the nine months ended September 30, 2011 were $1,120,290, compared to product sales of $1,492,273 in the same period of 2010, representing a decrease of 25%. The decrease in product sales in the second and third quarters of 2011 partly reflects a temporary suspension in sales of Neovasc’s tissue products to one customer as a result of a change in product specifications that required review and approval internally and from the appropriate regulatory authorities. The requisite approvals have now been received and sales have resumed to that customer.
Contract manufacturing revenues were $528,467 in the third quarter of 2011, compared to $99,878 in the comparable period in 2010, an increase of 429%. Contract manufacturing revenues were $1,053,678 in the nine months ended September 30, 2011, compared to $531,780 for the comparable period of 2010, an increase of 98%. The increase in contract manufacturing revenues reflects the Company’s success in attracting more contract manufacturing customers as well as larger orders from existing customers as they advance their new product development programs.
Revenues from consulting services for the three months ended September 30, 2011 were $506,383, compared to consulting service revenues of $375,144 in the same period in 2010, representing an increase of 35%. Revenues from consulting services for the nine months ended September 30, 2011 were $1,301,404, compared to consulting service revenues of $1,016,208 in the same period in 2010, representing an increase of 28%. Neovasc’s consulting service revenues are contract-driven and they can fluctuate from quarter to quarter as current projects are completed and new projects start.
Cost of Goods Sold
The cost of goods sold for the three and nine months ended September 30, 2011 were $792,684 and $1,869,417 respectively, as compared to $568,536 and $1,772,935 in the comparable periods in 2010. The overall gross margin was 44% for the third quarter and 46% for the nine months ended September 30, 2011, compared to 44% and 42% gross margins, respectively, in the comparable periods in 2010.
The improvement in gross margins in the nine months to September 30, 2011 compared to the same period in 2010 can be substantially explained by a shift in product mix to higher margin product lines. Neovasc continues exploring a number of initiatives aimed at strengthening margins going forward, including implementing further manufacturing efficiencies, reviewing pricing strategies for certain products and focusing on further expanding sales of higher margin product lines such as custom tissue for transcatheter heart valves and related manufacturing services.
Expenses
Total expenses for the three and nine months ended September 30, 2011 were $1,594,968 and $4,518,971, respectively, as compared to $853,931 and $3,066,347 in the same periods in 2010, representing an increase of 87% and 47%, respectively. Of these expenses, 49% of the increase in the third quarter and 59% of the increase in the first nine months of 2011 can be explained by an increase in non-cash share-based payments, as discussed in the “Loss” section. Net of these non-cash share-based payments, total expenses increased $381,081 and $601,499 between the comparable periods in 2010 and 2011, substantially due to an increase in clinical trial and product development expenses for Neovasc’s two product development programs.
Selling expenses were $48,154 and $145,242 for the three and nine months ended September 30, 2011, compared to $40,763 and $135,012 in the comparable periods in 2011. 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.
General and administrative expenses were $774,829 and $2,337,821 for the three and nine months ended September 30, 2011, as compared to $482,775 and $1,704,081 in the comparable periods of 2010, representing an increase of 60% and 37%, respectively. The increase in general and administrative expenses in the three and nine months ended September 30, 2011 was principally due to an increase in non-cash share-based payments, as discussed in the “Loss” section. Other expenses have remained equivalent year-over-year.
Research and development costs, including product development and clinical trial expenses were $771,985 and $2,035,908 for the three and nine months ended September 30, 2011, as compared to $330,393 and $1,227,254 in the comparable periods of 2010, representing an increase of 134% and 66%, respectively. 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 Neovasc Reducer and the development program for the Neovasc Tiara mitral valve program.
Loss
The loss for the three and nine months ended September 30, 2011 was $891,507 and $2,880,746, or $0.02 and $0.07 basic and diluted loss per share, respectively, as compared with a loss of $406,944 and $1,812,914 or $0.01 and $0.05 basic and diluted loss per share, respectively, for the comparable periods in 2010. The increase in the loss incurred in the first nine months of 2011 as compared to the same period in 2010 can be substantially explained by an increase in product development and clinical trial activities of $808,654 and an increase in non-cash share-based payments of $851,125. In 2010 and 2011 the officers and directors of Neovasc were awarded a fixed number of options under the Company’s established remuneration and incentive plans. While the actual number of options granted in each year was equivalent, under the Black Scholes model used to value the options, the significantly higher price of the Company’s shares in 2011 produced a higher overall valuation of the options issued and therefore resulted in a higher charge to the income statement in 2011. In addition, the Company granted options to a consultant to provide strategic advisory services over the next four years in August 2011, which contributed to the increase in non-cash share-based payment in the third quarter of 2011.
DISCUSSION OF LIQIDITY AND CAPITAL RESOURCES
The Company finances its operations and capital expenditures with cash generated from operations, lines of credit, long-term debt and equity financings. At September 30, 2011, the Company had cash and cash equivalents of $3,976,672, as compared to cash and cash equivalents of $1,489,027 at December 31, 2010. In addition, at September 30, 2011 the Company had restricted cash and cash equivalents related to a security on long-term debt of US$40,000 (December 31, 2010: CAD$50,000 held as a guaranteed investment certificate) included in long-term assets and a bank overdraft facility of $nil (December 31, 2010: $213,280) included in current liabilities.
At September 30, 2011 the Company had working capital of $4,868,877 as compared to working capital of $1,752,712 at December 31, 2010. The increase in working capital during the first nine months of 2011 was predominantly due to the net impact of an increase in cash from completion of a non-brokered private placement in August 2011; an increase in accounts receivable due to higher sales in the third quarter of 2011 as compared to the fourth quarter of 2010; and a decrease in accounts payable and accrued liabilities.
Cash used in operating activities was $1,980,818 for the nine months ended September 30, 2011, as compared to $2,049,973 for the same period in 2010. The decrease in cash used during the nine months of 2011, compared to the same period of 2010, is principally due to an increase in operating expenses offset by a decrease in working capital requirements. During the nine months ended September 30, 2011, operating expenses were $1,566,101 compared to $1,310,812 for the comparative period in 2010 and working capital items absorbed cash of $415,972, while in the same period of 2010 working capital items absorbed $731,957.
Net cash invested in capital assets was $35,068 and $142,474 for the three and nine months ended September 30, 2011, compared to net cash invested in capital assets of $74,122 and $101,690 for the three and nine months ended September 30, 2010. During the three and nine month periods in 2011 the Company invested capital to expand its clean room and manufacturing facilities.
Net cash provided by financing activities was $4,625,535 and $4,610,937 for the three and nine months ended September 30, 2011, compared to cash used by financing activities of $73,905 for the three months ended September 30, 2010, and cash provided by financing activities of $2,829,437 for the nine months ended September 30, 2010. On February 19, 2010, the Company completed a non-brokered private placement of 5,691,658 units at the price of $0.27 per unit for aggregate gross proceeds of $1,536,748. Each unit consists of one common share of Neovasc stock and one-half of one common share purchase warrant of Neovasc stock. Each whole warrant entitled the holder thereof to purchase one common share of Neovasc stock at the exercise price of $0.40 per share for a period of one-year after the closing date of the offering. Share issue costs were $22,015. On April 23, 2010, there were 4,635,114 warrants exercised, as part of the Company’s April 2009 financing. Proceeds from the exercise of the 4,635,114 warrants amounted to $1,390,534. The remaining warrants issued as part of the Company’s April 2009 financing expired on April 23, 2010. On January 17, 2011 and February 15, 2011, the Company issued 197,922 and 128,371 common shares, respectively, upon the exercise of warrants issued as part of the Company’s February 2010 financing. Proceeds from the exercise of the 326,293 warrants amounted to $130,517. On August 16, 2011, the Company completed a non-brokered private placement of 4,720,500 equity units at the price of $1.00 per unit for aggregate gross proceeds of approximately $4,720,500. Each unit consists of one common share of Neovasc stock and one-half of one common share purchase warrant of Neovasc stock. Each whole warrant entitles the holder thereof to purchase one common share of Neovasc stock at the exercise price of $1.25 per share for a period of two years after the closing date of the offering.
