NASDAQ: NVCN
TSX: NVC
VANCOUVER, Aug. 9, 2016 /PRNewswire/ - Neovasc Inc. ("Neovasc" or the "Company") (NASDAQ: NVCN) (TSX: NVC) today announced financial results for the quarter ended June 30, 2016 (all figures in US dollars unless otherwise indicated).
"Activities to increase the rate of enrolment of patients in the Tiara clinical program, including adding new centres, introducing the 40 mm Tiara and refining inclusion criteria are resulting in an increased number of implantations. There have now been 19 patients treated with Tiara and we continue to be encouraged by the early results from these cases," commented Neovasc CEO, Alexei Marko. "In addition, the commercial launch of Reducer in select European countries and elsewhere continues to build momentum, with the second quarter being our sixth consecutive quarter of strong sales growth."
Litigation Update
On June 6, 2014, Neovasc was named in a lawsuit filed by CardiAQ Valve Technologies, Inc. ("CardiAQ") in the U.S. District Court for the District of Massachusetts concerning intellectual property rights ownership, alleged unfair trade practices and an alleged breach of contract relating to Neovasc's transcatheter mitral valve technology, including Tiara.
- On May 19, 2016, following a trial in Boston, a jury found in favor of CardiAQ, on CardiAQ's claims for relief for breach of contract, breach of the duty of honesty in contractual performance, and three of CardiAQ's six asserted trade secrets.
- The jury awarded US$70 million on the trade secret claim for relief, and no damages on the contractual claims for relief.
- Both parties are pursuing a number of post-trial motions, including a motion from CardiAQ seeking an injunction to require the Company to cease Tiara operations for 18 months, and all related briefs for those motions are to be filed by August 12. The Court is then expected to hold a hearing on these motions and issue an order sometime in the near future. Following the court order, one or both parties may potentially pursue appeals before the U.S. Court of Appeals for the Federal Circuit.
- The Company has provided for a $70 million contingent liability in its financial statements as at June 30, 2016.
- Additional information regarding the CardiAQ litigation can be found in Managements Discussion and Analysis of Financial Condition and Results of Operations for the three and six months ended June 30, 2016 and 2015.
- The Company intends to vigorously defend itself in the litigation with CardiAQ and so the outcome of these matters, including whether the Company will be required to pay some or all of the jury award of $70 million, is not currently determinable.
- Litigation is inherently uncertain. Therefore, until these matters have been resolved to their ultimate conclusion by the appropriate courts, the Company cannot give any assurances as to the outcome. If the Company is unsuccessful in its defense of these claims, including any appeal of the verdict in the Massachusetts litigation, or is unable to settle the claims in a manner satisfactory to the Company, it may be faced with significant monetary damages that could exceed its resources, the loss of intellectual property rights and damage to its competitive position.
Separate to the litigation with CardiAQ, on June 6, 2016, an alleged purchaser of Neovasc common stock filed a lawsuit, on behalf of a putative class of purchasers of Neovasc securities, against Neovasc in the United States District Court for the District of Massachusetts concerning alleged violations of the United States securities laws. The complaint filed in the lawsuit, which principally bases the plaintiff's claims on the Company's prior disclosures regarding the lawsuit filed by CardiAQ in the United States District Court for the District of Massachusetts, does not specify the amount of damages sought. Further, as of the present time, no class has been certified by the court. The Company and its officers have filed a motion to dismiss the complaint and intend to vigorously defend themselves in the litigation, and so the outcome of this matter is not currently determinable. Litigation is inherently uncertain. Therefore, until this matter has been resolved to its ultimate conclusion by the appropriate court, the Company cannot give any assurances as to the outcome.
Going Concern
The circumstances relating to the CardiAQ litigation described above indicate the existence of material uncertainty and cast substantial doubt about the Company's ability to continue as a going concern.
Results for the three months ended June 30, 2016 and 2015
Revenues
Revenues for the three months ended June 30, 2016 were $1,710,932 compared to revenues of $2,972,382 for the same period in 2015, representing a decrease of 42%. The Company is focusing its business away from its traditional revenue streams towards development and commercialization of its own products, the Reducer and the Tiara. The Company started its sales of the Reducer in the first quarter of 2015 as it initiated its focused commercialization of the product in Europe.
Sales of the Reducer for the three months ended June 30, 2016 were $246,122, compared to $134,607 for the same period in 2015, representing an increase of 83%. The Reducer has seen steady quarter over quarter revenue growth since in launch in the first quarter of 2015. The success of the commercialization of the Reducer will be dependent on the amount of internal resources allocated to the product, obtaining appropriate reimbursement codes in various territories and correctly managing the referrals process.
Revenues from consulting services for the three months ended June 30, 2016 were $1,223,973, compared to $1,700,464 for the same period in 2015, representing a decrease of 28%. The Company anticipates that its consulting services revenue will decline in the long term as its consulting customers continue to transition to becoming contract manufacturing customers or cease being customers as they move manufacturing in house. Contract manufacturing revenues for the three months ended June 30, 2016 were $240,837, compared to $972,216 for the same period in 2015, representing a decrease of 75%. The decrease in revenue for the three months ended June 30, 2016 compared to the same period in 2015 is primarily due to temporary delay in shipping to a single customer that resulted in an increase in inventory during the period. The delay in shipping has been resolved and the Company believes it will clear the backlog and return sales to more appropriate levels in the third quarter and beyond.
Cost of Goods Sold
The cost of goods sold for the three months ended June 30, 2016 was $1,391,708, compared to $1,815,354 for the same period in 2015. The overall gross margin for the three months ended June 30, 2016 was 19%, compared to 38% gross margin for the same period in 2015. The decrease in the margins can be attributed to a significant decrease in throughput during the quarter as sales to a single large customer were stalled. The Company has seen its consulting services revenue margins decline as its ability to charge higher fees for these services has decreased as the transcatheter aortic valve market has matured. In addition, the Company is experiencing higher cost of goods sold as it has implemented a rigorous commercial stage quality system required to meet the expectations of its more advanced customers. These increases are not productive improvements and result in an overall downward trend in margins.
Expenses
Total expenses for the three months ended June 30, 2016 were $13,313,333, compared to $7,940,815 for the same period in 2015, representing an increase of $5,372,518 or 68%. The increase in total expenses for the three months ended June 30, 2016 compared to the same period in 2015 reflects a $55,696 increase in sales and marketing expenses as the Company expands its commercialization activities of the Reducer in Europe, a $3,892,082 increase in general and administrative expenses (of which $4,017,810 relates to an increase in litigation expenses) and a $1,424,740 increase in product development and clinical trial expenses to advance the Tiara and the Reducer development programs.
Selling expenses for the three months ended June 30, 2016 were $181,174, compared to $125,478 for the same period in 2015, representing an increase of $55,696, or 44%. The increase in selling expenses for the three months ended June 30, 2016 compared to the same period in 2015 reflects an increase in costs incurred for commercialization activities related to the Reducer. The Company expects to continue to increase its selling expenses in 2016 as it continues its commercialization of the Reducer in select countries in Europe.
General and administrative expenses for the three months ended June 30, 2016 were $7,427,124, compared to $3,535,042 for the same period in 2015, representing an increase of $3,892,082 or 110%. The increase in general and administrative expenses for the three months ended June 30, 2016 compared to the same period in 2015 can be substantially explained by a $4,017,810 increase in litigation expenses and a decrease of $125,728 in all other expenses.
Product development and clinical trial expenses for the three months ended June 30, 2016 were $5,705,035, compared to $4,280,295 for the same period in 2015, representing an increase of $1,424,740, or 33%. The increase in product development and clinical trial expenses for the three months ended June 30, 2016 was due to a $295,159 increase in cash-based employee expenses as the Company hired additional staff to advance product development and a $1,501,447 increase in other expenses as the Company invested in its two major new product initiatives, offset by a $421,204 decrease in share-based payments.
Other Loss
The other loss for the three months ended June 30, 2016 was $70,648,431, compared to other income of $76,447 for the same period in 2015. As at June 30, 2016 the Company has recognized a contingent liability of $70 million after a jury award on certain trade secret claims made by CardiAQ as described above. In addition, during the three months ended June 30, 2016 the Company had an increase in foreign exchange losses of $553,645 and a decrease in interest income of $172,471 compared to the same period in 2015.
Losses
The operating losses and comprehensive losses for the three months ended June 30, 2016 were $83,692,460 and $83,064,254, respectively, or $1.25 basic and diluted loss per share, as compared with losses of $6,752,338 and $5,295,022, or $0.10 basic and diluted loss per share for the same period in 2015. The $76,940,122 increase in the operating loss incurred for the three months ended June 30, 2016 compared to the same period in 2015 consists of a $70 million contingent liability related to the jury award against the Company in its litigation with CardiAQ, a $792,806 reduction in gross margin, a $3,892,082 increase in general and administrative expenses (of which $4,017,810 relates to an increase in litigation expenses), a $1,424,740 increase in product development and clinical trial expenses, and a $553,645 increase in foreign exchange losses.
The contingent liability for the three months ended June 30, 2016 represent a loss of $1.05 basic and diluted loss per share compared to a loss of $nil basic and diluted loss per share for the same period in 2015. Litigation expenses for the three months ended June 30, 2016 represent a loss of $0.09 basic and diluted loss per share compared to a loss of $0.03 basic and diluted loss per share for the same period in 2015. To date, the Company has incurred significant costs in defending itself in lawsuits filed by CardiAQ. Total litigation expenses since the initial claims were filed in June 2014 are approximately $17.7 million and the Company expects that it may require an additional $5.0 million to cover additional litigation expenses up to and including appellate court, if applicable.
Discussion of Liquidity And Capital Resources
Neovasc finances its operations and capital expenditures with cash generated from operations, lines of credit and equity financings.
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