UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16
OF THE SECURITIES EXCHANGE ACT OF 1934

For the month of November 2020

Commission File Number: 001-36458

Neovasc Inc.
(Translation of registrant's name into English)

Suite 5138 - 13562 Maycrest Way Richmond, British Columbia, Canada, V6V 2J7
(Address of principal executive offices)

Indicate by check mark whether the Registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

[ x ] Form 20-F   [  ] Form 40-F

Indicate by check mark if the Registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): [   ]

Indicate by check mark if the Registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): [   ]


SUBMITTED HEREWITH

Exhibits

Exhibit   Description
   
99.1   Condensed Interim Consolidated Financial Statements for the period ended September 30, 2020
99.2   Management’s Discussion and Analysis for the period ended September 30, 2020
99.3   Form 52-109F2 Certification of Interim Filings Full Certificate - CEO
99.4   Form 52-109F2 Certification of Interim Filings Full Certificate - CFO

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

  NEOVASC INC.
(Registrant)
     
Date: November 5, 2020 By /s/ Chris Clark
    Chris Clark
    Chief Financial Officer


Neovasc Inc.: Exhibit 99.1 - Filed by newsfilecorp.com

                               

Neovasc Inc.

CONDENSED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED

SEPTEMBER 30, 2020 AND 2019

(Expressed in U.S. dollars)


CONTENTS

  Page
   
Condensed Interim Consolidated Statements of Financial Position 1
   
Condensed Interim Consolidated Statements of Loss and Comprehensive Loss 2
   
Condensed Interim Consolidated Statements of Changes in Equity 3
   
Condensed Interim Consolidated Statements of Cash Flows 4
   
Notes to the Condensed Interim Consolidated Financial Statements 5 - 33


NEOVASC INC.

Condensed Interim Consolidated Statements of Financial Position

(Expressed in U.S. dollars) (Unaudited)

      September 30,     December 31,  
  Notes   2020     2019  
               
ASSETS              
  Current assets              
    Cash and cash equivalents 6 $ 14,034,457   $ 5,292,833  
    Accounts receivable 7   870,114     715,696  
    Finance lease receivable 8   93,492     86,764  
    Inventory 9   713,431     618,650  
    Research and development supplies 9   337,092     671,845  
    Prepaid expenses and other assets 10   611,791     630,042  
  Total current assets     16,660,377     8,015,830  
               
Non-current assets              
    Restricted cash 11   450,331     462,874  
    Right-of-use asset 12   753,357     720,473  
    Finance lease receivable  8   67,706     138,690  
    Property and equipment 13   854,291     767,973  
  Total non-current assets     2,125,685     2,090,010  
               
Total assets   $ 18,786,062   $ 10,105,840  
               
LIABILITIES AND EQUITY              
  Liabilities              
  Current liabilities              
  Accounts payable and accrued liabilities 14 $ 6,997,723   $ 7,794,456  
  Lease liabilities 15   323,570     436,352  
  2017 Convertible notes 16   -     5,400,189  
  2019 Convertible notes 16   167,409     1,090,561  
  2020 Convertible notes 16   134,697     -  
  Total current liabilities     7,623,399     14,721,558  
               
  Non-Current Liabilities              
  Accounts payable and accrued liabilities 14   -     1,186,601  
    Lease liabilities 15   550,162     468,527  
    2019 Convertible notes 16   5,790,155     8,174,919  
    2020 Convertible notes 16   2,662,029     -  
    Derivative liability - warrants 16   1,507,467     -  
Total non-current liabilities     10,509,813     9,830,047  
               
Total liabilities   $ 18,133,212   $ 24,551,605  
               
  Equity              
    Share capital 17 $ 365,267,373   $ 328,460,681  
    Contributed surplus 17   33,358,931     29,766,225  
    Accumulated other comprehensive loss     (7,169,707 )   (6,140,507 )
    Deficit     (390,803,747 )   (366,532,164 )
  Total equity     652,850     (14,445,765 )
               
Total liabilities and equity   $ 18,786,062   $ 10,105,840  

Going Concern and Uncertainty (see Note 1(b) and 5(d))

Subsequent Events (see Note 25)

Contingent liabilities and provisions (see Note 23)

See Accompanying Notes to the Condensed Interim Consolidated Financial Statements


NEOVASC INC.

Condensed Interim Consolidated Statements of Loss and Comprehensive Loss

For the three and nine months ended September 30,

(Expressed in U.S. dollars) (Unaudited)


  Notes   For the three months ended     For the nine months ended  
      September 30     September 30  
      2020     2019     2020     2019  
REVENUE 18 $ 626,418   $ 500,498   $ 1,443,360   $ 1,526,211  
COST OF GOODS SOLD     150,503     137,999     349,735     348,987  
GROSS PROFIT     475,915     362,499     1,093,625     1,177,224  
                           
EXPENSES                          
Selling expenses 20   498,671     380,412     1,504,714     1,143,157  
General and administrative expenses 20   4,642,979     2,197,922     10,955,991     7,342,314  
Product development and clinical trials expenses 20   5,502,717     4,777,197     14,615,847     13,165,344  
      10,644,367     7,355,531     27,076,552     21,650,815  
                           
OPERATING LOSS     (10,168,452 )   (6,993,032 )   (25,982,927 )   (20,473,591 )
                           
OTHER (EXPENSE)/INCOME                          
Interest and other income     495,628     58,651     554,278     78,040  
Interest and prepayment penalty expense     (191,989 )   -     (729,539 )   -  
Impairment on right-of-use asset     -     -     -     (260,616 )
Gain/(loss) on foreign exchange     (65,983 )   (16,111 )   (191,636 )   (28,262 )
Unrealized gain/(loss) on derivative liability warrants and convertible notes 16   730,242     934,129     4,233,073     (1,166,922 )
Realized gain/(loss) on exercise of warrants, derivative liability warrants and convertible notes 16   1,567,127     (201,119 )   587,497     (938,374 )
Amortization of deferred loss 16   (2,601,250 )   -     (2,736,332 )   -  
      (66,225 )   775,550     1,717,341     (2,316,134 )
LOSS BEFORE TAX     (10,234,677 )   (6,217,482 )   (24,265,586 )   (22,789,725 )
                           
Tax (expense)/recovery     -     15,505     (5,997 )   12,895  
LOSS FOR THE PERIOD   $ (10,234,677 ) $ (6,201,977 ) $ (24,271,583 ) $ (22,776,830 )
                           
OTHER COMPREHENSIVE (LOSS)/INCOME FOR THE PERIOD                          
Fair market value changes in convertible notes due to changes in own credit risk     (158,244 )   (353,209 )   (1,029,200 )   312,973  
LOSS AND OTHER COMPREHENSIVE LOSS FOR THE PERIOD   $ (10,392,921 ) $ (6,555,186 ) $ (25,300,783 ) $ (22,463,857 )
                           
LOSS PER SHARE                          
Basic and diluted loss per share 21 $ (0.51 ) $ (0.83 ) $ (1.69 ) $ (3.72 )

See Accompanying Notes to the Condensed Interim Consolidated Financial Statements


NEOVASC INC.

Condensed Interim Consolidated Statements of Changes in Equity

(Expressed in U.S. dollars) (Unaudited)

  Notes   Share
Capital
    Contributed
Surplus
    Accumulated Other Comprehensive Loss     Deficit     Total Equity  
Balance at January 1, 2019   $ 304,460,533   $ 26,260,806   $ (7,653,028 ) $ (332,735,195 ) $ (9,666,884 )
                                 
Issue of share capital on public offering   (net of share issuance costs) 17(a)   7,802,417     -     -     -     7,802,417  
Issue of share capital on private placement
  (net of share issuance costs)
    1,706,380     -     -     -     1,706,380  
Issue of share capital on exercise of warrants 17(a)   1,437,131     -     -     -     1,437,131  
Issue of share capital on conversion of notes 17(a)   9,009,570     -     -     -     9,009,570  
Issue of Broker warrants 17(a)   -     315,611     -     -     315,611  
Share-based payments 20   -     2,613,453     -     -     2,613,453  
Transactions with owners during the period     19,955,498     2,929,064     -     -     22,884,562  
                                 
Loss for the period     -     -     -     (22,776,830 )   (22,776,830 )
Other comprehensive loss for the period     -     -     312,973     -     312,973  
                                 
Balance at September 30, 2019   $ 324,416,031   $ 29,189,870   $ (7,340,055 ) $ (355,512,025 ) $ (9,246,179 )
                                 
Balance at January 1, 2020   $ 328,460,681   $ 29,766,225   $ (6,140,507 ) $ (366,532,164 ) $ (14,445,765 )
Issue of share capital on public offering                                
(net of share issuance costs) 17(a)   27,313,795     -     -     -     27,313,795  
Issue of share capital on conversion of notes 17(a)   1,293,093     -     -     -     1,293,093  
Issue of Broker warrants 17(a)   (488,053 )   488,053     -     -     -  
Issue of shares capital on exchange of warrants 17(a)   8,687,479     -     -     -     8,687,479  
Issue of share capital on exercise of stock options 17(a)   378     (174 )   -     -     204  
Share-based payments 20   -     3,104,827     -     -     3,104,827  
Transactions with owners during the year     36,806,692     3,592,706     -     -     40,399,398  
                                 
Loss for the period     -     -     -     (24,271,583 )   (24,271,583 )
Other comprehensive loss for the period     -     -     (1,029,200 )   -     (1,029,200 )
                                 
Balance at September 30, 2020   $ 365,267,373   $ 33,358,931   $ (7,169,707 ) $ (390,803,747 ) $ 652,850  

See Accompanying Notes to the Condensed Interim Consolidated Financial Statements


NEOVASC INC.

Condensed Interim Consolidated Statements of Cash Flows

For the three and nine months ended September 30,

(Expressed in U.S. dollars) (Unaudited)


  Notes   For the three months ended     For the nine months ended  
      September 30     September 30  
      2020     2019     2020     2019  
OPERATING ACTIVITIES                          
Loss for the period   $ (10,234,677 ) $ (6,201,977 ) $ (24,271,583 ) $ (22,776,830 )
Adjustments for:                          
  Depreciation 20   192,999     156,238     564,605     450,922  
  Share-based payments 20   1,354,147     735,199     3,441,584     2,613,453  
  Impairment of right-of-use asset     -     -     -     260,616  
  Accretion on collaboration, license and
   settlement agreement provision
    36,830     68,113     133,570     279,295  
  Unrealized (gain)/loss on derivative
   liability and convertible notes
16   730,242     (934,129 )   4,233,073     1,166,922  
  Realized loss on exercise of warrants
   and convertible notes
16   1,567,127     201,119     587,497     938,374  
  Amortization of deferred loss     2,601,250     -     2,736,332     -  
  Non-cash legal costs from financing
   activity
    1,527,761     -     1,527,761     -  
  Loss on disposal of assets     -     -     (27,864 )   -  
  Write-down accounts receivable     -     -     -     64,600  
  Income tax expense/(recovery)     -     (15,505 )   5,997     (12,895 )
  Interest income and expenses     (377,691 )   (58,651 )   175,261     (78,040 )
      (7,196,750 )   (6,049,593 )   (20,534,907 )   (17,093,583 )
Net change in non-cash working capital
   items:
                         
  Accounts receivable     (276,901 )   21,532     (154,418 )   41,306  
  Inventory     115,639     (2,099 )   (94,781 )   (217,259 )
  Research and development supplies     -     -     334,753     -  
  Prepaid expenses and other assets     118,097     (116,101 )   18,251     (152,785 )
  Accounts payable and accrued
   liabilities
    (424,355 )   673,516     (1,203,661 )   1,292,866  
 Payment of amounts due on
   collaboration, license and
   settlement agreements
    (1,250,000 )   (1,400,000 )   (1,250,000 )   (2,150,000 )
      (1,717,520 )   823,332     (2,349,856 )   (1,185,872 )
Income tax and Interest paid and received:                          
  Income tax (paid)/recovered     -     15,505     (5,997 )   12,895  
  Interest received     38,813     95,151     97,463     177,383  
      38,813     110,656     91,466     190,278  
Net cash applied to operating activities     (8,875,457 )   (6,762,269 )   (22,793,297 )   (18,089,267 )
                           
INVESTING ACTIVITIES                          
  Decrease/(increase) in restricted cash     (9,626 )   5,260     12,543     (13,316 )
  Purchase of property and equipment 13   (223,040 )   (56,403 )   (269,457 )   (163,625 )
Net cash applied to investing activities     (232,666 )   (51,143 )   (256,914 )   (176,941 )
                           
FINANCING ACTIVITIES                          
  Proceeds from public offering net of
   share issuance  costs
17(a)   11,336,577     -     30,180,405     8,118,030  
  Proceeds from private placement 16(d)   -     -     -     11,483,496  
  Proceeds from convertible note 17(e)   -     -     5,000,000     -  
  Proceeds from exercise of warrants 16(e)   4,973,035     -     4,973,035     1,200,400  
  Proceeds from government assistance 24   495,628     -     495,628     -  
  Proceeds from exercise of options     -     -     204     -  
  Repayment of 2017 convertible note 16(b)   -     -     (2,897,000 )   -  
  Repayment of 2019 convertible note 17(e)   (4,877,225 )   -     (4,877,225 )   -  
  Interest payment of 2019 convertible
   note
    (95,808 )   -     (670,808 )   -  
  Payment of lease obligation     (137,808 )   (130,389 )   (412,404 )   (382,554 )
Net cash from financing activities     11,694,399     (130,389 )   31,791,835     20,419,372  
                           
NET CHANGE IN CASH AND
CASH EQUIVALENTS
    2,586,276     (6,943,801 )   8,741,624     2,153,254  
CASH AND CASH EQUIVALENTS                          
Beginning of the period     11,448,181     18,339,864     5,292,833     9,242,809  
End of the period   $ 14,034,457   $ 11,396,063   $ 14,034,457   $ 11,396,063  
Represented by:                          
Cash and cash equivalents 6 $ 14,034,457   $ 11,396,063   $ 14,034,457   $ 11,396,063  

See Accompanying Notes to the Condensed Interim Consolidated Financial Statements


NEOVASC INC.

Notes to the Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2020 and 2019

(Expressed in U.S. dollars)

1. INCORPORATION AND GOING CONCERN

(a) Business description

Neovasc Inc. ("Neovasc" or the "Company") is a 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 condensed interim consolidated financial statements of the Company as at September 30, 2020 and for the three and nine months ended September 30, 2020 comprise the Company and its subsidiaries, all of which are wholly owned.  The Company's principal place of business is located at Suite 5138 - 13562 Maycrest Way, Richmond, British Columbia, V6V 2J7 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 Toronto Stock Exchange (TSX: NVCN) and the Nasdaq Capital Market (NASDAQ: NVCN).

Neovasc is a specialty medical device company that develops, manufactures, and markets products for the rapidly growing cardiovascular marketplace. Its products include the Neovasc Reducer™ ("Reducer"), for the treatment of refractory angina, which is not currently commercially available in the United States and has been commercially available in Europe since 2015, and the Tiara™ ("Tiara"), for the transcatheter treatment of mitral valve disease, which is currently under clinical investigation in the United States, Canada and Europe.

(b) Going concern and uncertainty

As at September 30, 2020, the Company had approximately $14 million in cash and cash equivalents. The Company expects that it will have sufficient cash on hand to sustain operations until March 2021 at the current burn rate. Given the current nature of the impact of COVID-19 on the capital markets, the Company can give no assurance that it will be able to obtain the additional funds needed, on terms agreeable to the Company, or at all. These circumstances indicate the existence of material uncertainty and cast substantial doubt about the Company's ability to continue as a going concern.

These condensed interim consolidated financial statements do not reflect adjustments that would be necessary if the going concern assumption were not appropriate. Should the Company be unable to obtain additional capital in the future and the Company's ability to continue as a going concern be impaired, material adjustments may be necessary to these condensed interim consolidated financial statements.

(c) Share consolidation (reverse stock split)

On September 18, 2018, the Company effected a share consolidation (reverse stock split) of its issued and outstanding common shares in the capital of the Company ("Common Shares") on the basis of one post-consolidation Common Share for every one hundred pre-consolidation Common Shares. On June 25, 2019, the Company effected a share consolidation (reverse stock split) of its issued and outstanding Common Shares the basis of one post-consolidation Common Share for every ten pre-consolidation Common Shares. All references in these consolidated financial statements to Common Shares and options have been retroactively adjusted to reflect the share consolidations.  The number of 2017 Warrants (as defined below) and aggregate principal amount of 2017 Notes and 2019 Notes (as defined below) were not affected by the consolidations, but the Common Shares issuable upon exercise of the 2017 Warrants or conversion of the 2017 Notes and the 2019 Notes will be adjusted proportionally to each share consolidation ratio.

(d) Nasdaq listing

On January 14, 2019, the Company received written notification (the "Bid Price Notification Letter") from the Nasdaq Listing Qualifications Department notifying the Company that it was not in compliance with the $1.00 minimum bid price requirement set forth in the Nasdaq Marketplace Rules. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company was provided 180 calendar days, or until July 15, 2019, to regain compliance. The Company received confirmation of compliance in respect of this deficiency on July 17, 2019.


NEOVASC INC.

Notes to the Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2020 and 2019

(Expressed in U.S. dollars)

1.    INCORPORATION AND GOING CONCERN (continued)

(d)  Nasdaq listing (continued)

On August 22, 2019, the Company received written notification (the "Market Value Notification Letter") from the Nasdaq Listing Qualifications Department notifying the Company that it was not in compliance with the $35 million minimum market value requirement set forth in the Nasdaq Marketplace Rules. In accordance with Nasdaq Listing Rule 5810(c)(3)(C), the Company was provided 180 calendar days, or until February 17, 2020, to regain compliance.

The Company did not regain compliance by February 17, 2020.  On February 19, 2020, the Company received notice from the Listing Qualifications Staff (the "Staff") of The Nasdaq Stock Market LLC ("Nasdaq") indicating that the Staff had determined to delist the Company's common shares from Nasdaq unless the Company requests a hearing before the Nasdaq Hearings Panel. On February 26, 2020, the Company requested such a hearing and the date of the hearing was set by the Nasdaq for April 2, 2020.  On April 30, 2020, the Panel granted the Company's request for an extension through August 17, 2020 to evidence compliance with the $35 million minimum market value of listed securities requirement for continued listing on the Nasdaq.

On June 25, 2020,  the Nasdaq Notice confirmed that the Company has regained compliance with Listing Rule 5550(b)(2) pursuant to Listing Rule 5810 as the Company's market value exceeded $35 million for 10 consecutive business days between May 29, 2020 through June 11, 2020.

(e) Impacts of COVID-19 pandemic

The Company is subject to risks and uncertainties as a result of the COVID-19 pandemic. The extent of the impact of the COVID-19 pandemic on the Company's business is highly uncertain and difficult to predict, as the response to the pandemic is in its early stages and information is rapidly evolving. Furthermore, capital markets and economies worldwide have also been negatively impacted by the COVID-19 pandemic, and it is possible that it could cause a local and/or global economic recession. Such economic disruption could have a material adverse effect on our business.

The severity of the impact of the COVID-19 pandemic on the Company's business will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on the Company's customers, all of which are uncertain and cannot be predicted. The Company's future results of operations and liquidity could be adversely impacted by a decrease in Reducer sales, delays in payments of outstanding receivable amounts beyond normal payment terms, supply chain disruptions and uncertain demand, and the impact of any initiatives or programs that the Company may undertake to address financial and operational challenges faced by its customers. As of the date of issuance of these condensed interim consolidated financial statements, the extent to which the COVID-19 pandemic may materially impact the Company's financial condition, liquidity, or results of operations is uncertain.


NEOVASC INC.

Notes to the Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2020 and 2019

(Expressed in U.S. dollars)

2. BASIS OF PREPARATION

(a)  Statement of compliance with IFRS

These condensed interim consolidated financial statements are prepared in accordance with International Accounting Standard ("IAS") 34 Interim Financial Reporting, as issued by the International Accounting Standards Board ("IASB"), using the accounting policies consistent with the Company's annual consolidated financial statements for the year ended December 31, 2019 and 2018.  These condensed interim consolidated financial statements should be read in conjunction with the Company's audited annual consolidated financial statements for the year ended December 31, 2019 and 2018 and the accompanying notes included in those financial statements.  For a full description of accounting policies, refer to the audited annual consolidated financial statements of the Company for the year ended December 31, 2019 and 2018.

The results for the three and nine months ended September 30, 2020 may not be indicative of the results that may be expected for the full year or any other period.

The condensed interim consolidated financial statements include the financial statements of the Company and its wholly-owned subsidiaries, Neovasc Medical Inc., Neovasc Tiara Inc., Neovasc GmbH, Neovasc (US) Inc., Neovasc Management Inc., Neovasc Medical Ltd., and B-Balloon Ltd. (which is in the process of being voluntarily liquidated).  All intercompany balances and transactions have been eliminated upon consolidation.

(b)  Presentation of financial statements

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

3. SIGNIFICANT ACCOUNTING POLICIES

The condensed interim consolidated financial statements have been prepared in accordance with the accounting policies adopted in the Company's most recent annual consolidated financial statements for the year ended December 31, 2019, except the following:

New Accounting Policy - Government assistance and government grants

Government grants are recognized when there is a reasonable assurance that the grant will be received and that the Company will comply with all conditions related to the grant. A grant without specified future performance conditions is recognized in income when the grant proceeds are receivable. A grant that imposes specified future performance conditions is recognized in income when those conditions are met. Government grants related to current expenses are recognized as income over the period necessary to match them with the related expenses, for which they are intended to compensate, on a systematic basis. Government grants related to specific projects are recognized as income over the period necessary to match them with the related project costs, for which they are intended to compensate, on a systematic basis. Government grants in the form of forgivable loans are treated as a government grant when there is reasonable assurance that the entity will meet the terms for forgiveness of the loan.

Government grants received before the income recognition criteria are satisfied are presented as a liability in the statement of financial position. Government refundable advances provided to the Company to finance research and development activities on a risk-sharing basis are considered part of the Company's operating activities and are therefore presented as cash flows from operating activities in the statement of cash flows.


NEOVASC INC.

Notes to the Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2020 and 2019

(Expressed in U.S. dollars)

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 the convertible debt. There has been no change in the definition since the prior year.

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, new units or new debt (secured, unsecured, convertible and/or other types of available debt instruments).  For the three and nine months ended September 30, 2020, there were no changes in the Company's capital management policy.

The capital of the Company is comprised of:

    September 30,
2020
    December 31,
2019
 
2017 Convertible Notes $ -   $ 5,400,189  
2019 Convertible Notes   5,957,564     9,265,480  
2020 Convertible Notes   2,796,726     -  
Derivative liability - warrants   1,507,467     -  
Equity   652,850     (14,445,765 )
Capital $ 10,914,607   $ (219,904 )

5. FINANCIAL RISK MANAGEMENT

(a) Fair value estimation

The fair value hierarchy establishes three levels to classify fair value measurements based upon the observability of significant inputs used in the valuation techniques.  The three levels of the fair value hierarchy are described below:

Level 1 |  Quoted prices (unadjusted) in active markets for identical assets or liabilities

 Level 2 |  Inputs other than quoted prices included in level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices)

Level 3 |  Inputs for the assets or liability that are not based on observable market data (that is, unobservable inputs)

The following table sets forth the Company's financial assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy as at June 30, 2020 and December 31, 2019.  As required by IFRS 13, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

As at December 31, 2019:

    Level 1     Level 2     Level 3     Total  
Financial liabilities at fair value through profit and loss                        
2017 Convertible Notes $ -   $ -   $ 5,400,189   $ 5,400,189  
2019 Convertible Notes $ -   $ -   $ 9,265,480   $ 9,265,480  

As at September 30, 2020:

    Level 1     Level 2     Level 3     Total  
Financial liabilities at fair value through profit and loss                        
2019 Convertible Notes $ -   $ -   $ 5,957,564   $ 5,957,564  
2020 Convertible Notes $ -   $ -   $ 2,796,726   $ 2,796,726  
Derivative liability - warrants $ -   $ -   $ 1,507,467   $ 1,507,467  


NEOVASC INC.

Notes to the Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2020 and 2019

(Expressed in U.S. dollars)

5. FINANCIAL RISK MANAGEMENT

(a) Fair value estimation (continued)

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

  Note   September 30,
2020
    December 31,
2019
 
Amortized cost              
Cash and cash equivalents 6 $ 14,034,457   $ 5,292,833  
Accounts receivable 7   870,114     715,696  
Restricted cash 11   450,331     462,874  
    $ 15,354,902   $ 6,471,403  
Other financial liabilities at amortized cost              
Accounts payable and accrued liabilities (current) 14 $ 6,997,723   $ 7,794,456  
Accounts payable and accrued liabilities (non-current) 14   -     1,186,601  
               
Financial liabilities at fair value through profit and loss              
2017 Convertible Notes (current) 17 $ -   $ 5,400,189  
2019 Convertible Notes (current) 17   167,409     1,090,561  
2019 Convertible Notes (non-current) 17   5,790,155     8,174,919  
2020 Convertible Notes (current) 17   134,697     -  
2020 Convertible Notes (non-current) 17   2,662,029     -  
Derivative liability warrant (non-current) 17   1,507,467     -  
    $ 17,259,480   $ 23,646,726  

The carrying amounts of cash and cash equivalents, accounts receivable, restricted cash and accounts payable and accrued liabilities are considered a reasonable approximation of fair value due to their short-term nature.

(b)  Foreign exchange risk

A portion of the Company's revenues are derived from product sales in Europe, denominated in Euros. 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. The Euro represents approximately 40% of revenues for the nine months ended September 30, 2020, respectively (nine months ended September 30, 2019: 31%). A 10% change in the foreign exchange rates for the Euro for foreign currency denominated accounts receivable will impact net income as at September 30, 2020 by approximately $10,142 (as at September 30, 2019: $6,180), and a similar change in foreign currency denominated accounts payable, which are denominated in Canadian dollars and Euros will impact net income by approximately $110,531 and $70,469 respectively, as at September 30, 2020 (as at September 30, 2019: $57,151 and $111,781). A similar change in foreign currency denominated cash and cash equivalents, and restricted cash, which are denominated in Canadian dollars and Euros will impact net income by approximately $116,451 and $34,263, respectively, as at September 30, 2020 (as at September 30, 2019: $85,470 and $56,715). The Company does not hedge its foreign exchange risk.

(c)  Interest rate risk

The Company is not exposed to material cash flow interest rate risk on fixed rate cash balances, and short-term accounts

receivable, accounts payable, 2019 and 2020 Notes that have fixed interest terms.


NEOVASC INC.

Notes to the Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2020 and 2019

(Expressed in U.S. dollars)

5. FINANCIAL RISK MANAGEMENT (continued)

(d)  Liquidity risk

As at September 30, 2020, the Company had $14,034,457 in cash and cash equivalents as compared to cash and cash equivalents of $5,292,833 at December 31, 2019.  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 Company monitors its cash flow on a monthly basis and compares actual performance to the budget for the period. The Company expects that its cash on hand as at September 30, 2020 is sufficient to sustain operations until approximately March 2021 at the current burn rate. The Company may obtain additional debt or equity financing in future periods. 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.

Trade payables were aged as follows as at September 30, 2020 and do not include accrued liabilities. All trades payables are current liabilities:

    Total  
Current $ 1,694,800  
31-60 days   962,765  
Over 60 days   239,666  
  $ 2,897,231  

The following is an analysis of the contractual maturities of the Company's non-derivative accrued liabilities as at September 30, 2020:

    Within One Year     Between One and Two Years  
             
Collaboration, license and settlement agreements (undiscounted) $ 1,250,000   $ -  
  $ 1,250,000   $ -  

(e)  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 the Company's customers were to default at the same time is the full carrying value of the trade accounts receivable as at September 30, 2020 is $683,582 (as at September 30, 2019: $541,180). As at September 30, 2020, the Company had $177,832 (as at September 30, 2019: $284,744) of trade accounts receivable that were overdue according to the customers' credit terms. During the three and nine months ended September 30, 2020 the Company wrote down $nil and $nil, respectively, of accounts receivable owed by customers (three and nine months ended September 30, 2019: $nil and $64,600, respectively).

The Company may also have credit risk related to its cash and cash equivalents and restricted cash, with a maximum exposure of $14,484,788 as at September 30, 2020 (as at December 31, 2019: $5,755,707). The Company minimizes its risk to cash and cash equivalents and restricted cash by maintaining the majority of its balances with Canadian Chartered Banks.


NEOVASC INC.

Notes to the Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2020 and 2019

(Expressed in U.S. dollars)

6. CASH AND CASH EQUIVALENTS

    September 30,
2020
    December 31,
2019
 
Cash held in:            
United States dollars $ 12,977,648   $ 4,489,501  
Canadian dollars   714,179     525,371  
Euros   342,630     277,961  
  $ 14,034,457   $ 5,292,833  

7. ACCOUNTS RECEIVABLE

    September 30,
2020
    December 31,
2019
 
             
Trade accounts receivable $ 683,582   $ 597,505  
Other accounts receivable   186,532     118,191  
  $ 870,114   $ 715,696  

All amounts are short-term. The aging analysis of trade receivables is as follows:

    September 30,
2020
    December 31,
2019
 
             
Not past due $ 505,750   $ 472,257  
Past due 0 - 30 days   21,732     14,139  
30 - 60 days   19,800     20,000  
60 - 90 days   -     -  
90 - 120 days   -     -  
Over 120 days   136,300     114,676  
Loss Allowance   (26,360 )   (23,567 )
  $ 683,582   $ 597,505  

All the Company's trade and other receivables have been reviewed for impairment. During the three and nine months ended September 30, 2020, the Company wrote off $nil and $nil, respectively of accounts receivable (the three and nine months ended September 30, 2019: $nil, and $64,600).

8. FINANCE LEASE RECEIVABLE

The Company entered into a sublease agreement which has been recognized as a finance lease. Finance lease receivables are presented in the statement of financial position as follows:

    September 30,
2020
    December 31,
2019
 
             
Current $ 93,492   $ 86,764  
Non-current   67,706     138,690  
  $ 161,198   $ 225,454  

 The following is a detailed maturity analysis of the undiscounted finance lease receivables as at September 30, 2020:

    Total  
Less than 1 year $ 105,404  
1-2 years   70,269  
2-3 years   -  
3-4 years   -  
4-5 years   -  
Total undiscounted finance lease receivables $ 175,673  


NEOVASC INC.

Notes to the Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2020 and 2019

(Expressed in U.S. dollars)

9. INVENTORY AND RESEARCH AND DEVELOPMENT SUPPLIES

    September 30,
2020
    December 31,
2019
 
             
Raw materials $ 522,382   $ 500,263  
Finished goods   191,049     118,387  
  $ 713,431   $ 618,650  
             
Research and development supplies $ 337,092   $ 671,845  

During the three and nine months ended September 30, 2020 the Company did not write down any inventory. During the three and nine months ended September 30, 2020, $150,503 and $349,735 of inventory was expensed in cost of goods sold (three and nine months ended September 30, 2019: $137,999 and $348,987).

10.  PREPAID EXPENSES AND OTHER ASSETS

    September 30,
2020
    December 31,
2019
 
             
Prepaid expenses $ 20,950   $ 7,140  
Prepaid insurance   337,969     269,262  
Deposits on rental agreements   127,677     119,660  
Retainers for professional services   23,000     23,000  
Other prepaid expenses and other assets   102,195     210,980  
  $ 611,791   $ 630,042  

11. RESTRICTED CASH

    September 30,
2020
    December 31,
2019
 
             
Restricted cash $ 450,331   $ 462,874  

Restricted cash represents $600,000 CAD security held by a Canadian Chartered Bank as a guarantee for the Company's same day electronic processing facility and corporate credit card facility.


NEOVASC INC.

Notes to the Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2020 and 2019

(Expressed in U.S. dollars)

12. RIGHT OF USE ASSET

COST   Total  
Balance at January 1, 2019, $ 1,407,704  
Balance at December 31, 2019   1,057,333  
Impairment of right-of-use asset   (231,773 )
Impairment reversal   156,366  
Sublease   (274,965 )
Lease modification   307,433  
Balance as at September 30, 2020 $ 1,364,765  
       
ACCUMULATED DEPRECIATION      
Balance at January 1, 2019,   -  
Balance at December 31, 2019   336,860  
Depreciation for the period   274,549  
Balance as at September 30, 2020 $ 611,409  
       
NET BOOK VALUE      
As at January 1, 2019, $ 1,407,704  
As at December 31, 2019 $ 720,473  
As at September 30, 2020 $ 753,357  

The Company's right-of-use asset relates to the lease of buildings.

The Company entered into an agreement for additional office space in September 2014 in Richmond, Canada.  The agreement did not contain any contingent rent clauses, or purchase options or escalation clauses.  The term of the lease was 36 months commencing on October 1, 2014. The lease contained an option to renew for an additional 36 months. In February 2017, the Company renewed the lease and added additional office premises. The term of the combined lease is 60 months commencing June 1, 2017. The amended agreement does not contain any contingent rent clauses, purchase options or escalation clauses. The Company entered into a sublease agreement for a portion of office space in September 2019. The term for the sublease agreement was 32 months commencing on October 7, 2019 (See Note 8).

The Company entered into an agreement for additional office space in September 2014 in Minneapolis.  The agreement did not contain any contingent rent clauses, purchase options or escalation clauses.  The original term of the lease was 66 months commencing on September 1, 2014.  Additional office space was added in July 2015 in Minneapolis.  The term of the combined lease is 69 months commencing on July 1, 2015. In August 2019, the Company renewed the lease for an additional 36 months commencing June 1, 2020.

The Company entered into an agreement for additional office space in December 2016 in Richmond, Canada.  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 December 19, 2016. In December 2018, the Company renewed the lease for another 24 months commencing on December 19, 2018.

The Company entered into an agreement for additional office space in June 2018 in Richmond, Canada. The agreement does not contain any contingent rent clauses, purchase options or escalation clauses.  The term of the lease is 36 months commencing on August 1, 2018. The lease contains an option to renew for an additional 24 months. The Company renewed the lease for an additional 36 months commencing August 1, 2021.


NEOVASC INC.

Notes to the Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2020 and 2019

(Expressed in U.S. dollars)

13. PROPERTY AND EQUIPMENT

   

Leasehold improvements
    Production & development
equipment
    Computer hardware     Computer software     Office equipment     Total  
COST                                    
Balance at January 1, 2019 $ 169,938   $ 1,488,958   $ 543,922   $ 653,072   $ 316,085   $ 3,171,975  
Additions during the year   -     203,169     -     40,332     -     243,501  
Disposals during the year   -     -     -     -     -     -  
Balance at December 31, 2019 $ 169,938   $ 1,692,127   $ 543,922   $ 693,404   $ 316,085   $ 3,415,476  
                                     
Additions during the period   -     162,274     106,149     33,289     -     301,712  
Disposals during the period   -     (32,255 )   -     -     -     (32,255 )
Balance as at September 30, 2020 $ 169,938   $ 1,822,146   $ 650,071   $ 726,693   $ 316,085   $ 3,684,933  
                                     
ACCUMULATED DEPRECIATION                                    
Balance at January 1, 2019 $ 89,855   $ 951,605   $ 433,443   $ 646,072   $ 237,372   $ 2,358,347  
Depreciation for the year   18,132     184,429     33,144     40,371     15,744     291,820  
Disposals during the year   -     (2,664 )   -     -     -     (2,664 )
Balance at December 31, 2019 $ 107,987   $ 1,133,370   $ 466,587   $ 686,443   $ 253,116   $ 2,647,503  
                                     
Depreciation for the period   19,227     134,864     20,054     27,414     9,444     211,003  
Disposals during the period   -     (27,864 )   -     -     -     (27,864 )
Balance at September 30, 2020 $ 127,214   $ 1,240,370   $ 486,641   $ 713,857   $ 262,560   $ 2,830,642  
                                     
CARRYING AMOUNTS                                    
As at December 31, 2019 $ 61,951   $ 558,757   $ 77,335   $ 6,961   $ 62,969   $ 767,973  
As at September 30, 2020 $ 42,724   $ 581,776   $ 163,430   $ 12,836   $ 53,525   $ 854,291  


NEOVASC INC.

Notes to the Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2020 and 2019

(Expressed in U.S. dollars)

14. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

    September 30,
2020
    December 31,
2019
 
Current accounts payable and accrued liabilities            
Trade payables $ 2,897,232   $ 3,993,203  
Accrued liabilities   1,107,714     2,163,886  
Accrued vacation   414,317     211,168  
Accrued employee termination expenses   -     13,887  
Loan payable (Paycheck Protection Program)   536,624     -  
Other accounts payable   542,903     320,306  
Share appreciation rights liability   336,757     -  
Collaboration, license, and settlement agreements provision   1,162,176     1,092,006  
Total current accounts payable and accrued liabilities $ 6,997,723   $ 7,794,456  
             
Non-current accrued liabilities            
Non-current collaboration, license and settlement agreements provision   -     1,186,601  
  $ -   $ 1,186,601  
             
Total accounts payable and accrued liabilities $ 6,997,723   $ 8,981,057  

Included in accounts payable and accrued liabilities are $458,186 related to settlement charges as part of a collaboration agreement and $703,990 related to a settlement provision (see Note 23). This represents the calculated net present value of the amounts set out per the agreement with payments due over the next year. Included in accounts payable and accrued liabilities is a gross amount of $536,624 related to the Paycheck Protection Program ("PPP")(See Note 24).

15. LEASE LIABILITY

    Total  
Balance at January 1, 2019, $ 1,289,106  
       
Interest expense   128,911  
Lease payments   (513,138 )
Balance at December 31, 2019 $ 904,879  
       
Lease Liability, current $ 436,352  
Lease Liability, non-current $ 468,527  
       
Lease modification   307,433  
Interest expense   73,824  
Lease payments   (412,404 )
Balance at September 30, 2020 $ 873,732  
       
Lease Liability, current $ 323,570  
Lease Liability, non-current $ 550,162  
       
The maturity analysis of the undiscounted contractual balances      
of the lease liabilities is as follows:      
In one year or less $ 452,601  
In more than one year, but not more than five years   236,967  
  $ 689,567  

 


NEOVASC INC.

Notes to the Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2020 and 2019

(Expressed in U.S. dollars)

16. DERIVATIVE WARRANT LIABILITY FROM FINANCING AND CONVERTIBLE NOTE

(a) Derivative Warrant Liability from Financing

On November 17, 2017, Neovasc completed an underwritten public offering (the "2017 Public Transaction") of 6,609,588 Series A units (the "Series A Units") and 19,066,780 Series B units (the "Series B Units") of the Company, at a price of $1.46 per Unit for gross proceeds of $37,487,497 before deducting the underwriting discounts and commissions and other estimated offering costs.

Each Series A Unit was comprised of:

(i) 0.001 Common Share

(ii) one Series A Common Share purchase warrant of the Company exercisable for 0.001 Common Shares at an exercise price of $1,610 per Series A Warrant Share for a period of five years following issuance (each, a "Series A Warrant"),

(iii) one Series B Common Share purchase warrant of the Company exercisable for 0.001 Common Shares at an exercise price of $1,610 per Series B Warrant Share for a period of two years following issuance (each, a "Series B Warrant"); and

(iv) 0.40 Series C Warrant of the Company to purchase a unit at an exercise price of $1.46 per unit for a period of two years following issuance (each, a "Series C Unit") comprised of 0.001 Common Shares, one Series A Warrant and one Series B Warrant.

Each Series B Unit was comprised of:

(i) either 0.001 Common Shares or one Series D Common Share purchase warrant of the Company exercisable for 0.001 Common Shares (each, a "Series D Warrant") at an exercise price of $1,460 per Series D Warrant Share, all of which were be pre-funded except for a nominal exercise price of $0.001 per Series D Warrant Share for a period of five years following issuance,

(ii) one Series A Warrant,

(iii) one Series B Warrant,

(iv) 0.40 Series C Warrant, and

(v) 1.1765 Series F Common Share purchase warrant of the Company with each warrant exercisable for 0.001 Common Shares at an exercise price of $1,610 per Series F Warrant Share for a period of two years following issuance (each, a "Series F Warrant").

15,493 Common Shares and 3,573,830 Series D Warrants were issued as part of the Series B Unit.  Since initial issuance and during the period up to December 31, 2018, all of the 3,573,830 Series D Warrants were exercised for gross proceeds of $35,738 and 3,573 Common Shares were issued from treasury.  All the warrants (collectively, the "2017 Warrants") issued pursuant to the 2017 Public Transaction and the 2017 Private Placement (as defined below) included various price adjustment clauses, some of which caused the number of shares to be issued upon exercise to be variable, and therefore do not meet the fixed for fixed test under IAS 32 - Financial instruments; presentation.  Accordingly, the warrants have been accounted for as derivative financial liabilities and measured at fair value through profit and loss ("FVTPL").  The fair values of the warrants were calculated using a binomial option pricing model and have been classified as level 3 in the fair value hierarchy.

The total fair value of the warrants issued in connection with the Public Transaction, together with the Series E Warrants (as defined below) issued in connection with the Private Transaction (as defined below), was $89,470,273 which exceeded the transaction price giving rise to a loss of $45,132,259.  Since the fair values of the derivatives were not determined using a valuation that only used data from observable markets, the loss on initial recognition has been recognized in income over the expected term of the instruments on a straight-line basis depending on the term of the warrants.

(b) 2017 Convertible Notes

On November 17, 2017, the Company also completed a brokered private placement (the "2017 Private Placement" and together with the Public Transaction the "2017 Financings") for the sale of $32,750,000 aggregate principal amount of senior secured convertible notes of the Company (the "2017 Notes") and Series E warrants (the "Series E Warrants") to purchase one Common Share per Series E Warrant for gross proceeds of $27,837,500.

The 2017 Notes were issued with an original issue price of $850 per $1,000 principal amount of note.  The 2017 Notes have an 18-month term and carry an interest rate of 0.0% per annum (increasing to 15% upon an event of default) from the closing date of the Private Transaction ("Private Transaction"). On September 12, 2018, the Company and the holders of 2017 Notes amended certain terms of the 2017 Notes, including a one-year extension of the maturity date of the 2017 Notes from May 17, 2019 until May 17, 2020 and certain other amendments. Upon any event of a default, the interest rate applicable to the 2017 Notes would automatically be increased to 15% per annum.  Interest on the 2017 Notes, as applicable, will commence accruing on the date of issue, will be computed on the basis of a 360-day year and twelve 30-day months and became payable in cash on January 1, 2018 and on the first day of each calendar quarter thereafter up to, and including, the maturity date.


NEOVASC INC.

Notes to the Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2020 and 2019

(Expressed in U.S. dollars)

16. DERIVATIVE WARRANT LIABILITY FROM FINANCING AND CONVERTIBLE NOTES (continued)

(b) 2017 Convertible Notes (continued)

The conversion option contained within the 2017 Notes contains similar price adjustment characteristics to certain of the warrants, which precludes the 2017 Notes from being recognized within equity.  The 2017 Notes contain a future-priced conversion mechanism that allows the holder of a 2017 Notes to replace the conversion price then in effect with a price (the "Alternate Conversion Price") that is 85% of the lowest volume weighted average price ("VWAP") of the Common Shares during the ten consecutive trading day period ending and including the date of delivery of the applicable conversion notice.  The 2017 Notes are also subject to full ratchet anti-dilution provisions in certain circumstances.

Accordingly, the Company has elected to measure the 2017 Notes at FVTPL.  The Series E Warrants are also classified as derivative financial liabilities and measured at FVTPL. The fair values of the warrants were calculated using a binomial option pricing model and have been classified as level 3 in the fair value hierarchy. The fair value of the convertible debt was $26,100,900 which exceeded the transaction price giving rise to a loss of $5,113,917.  Since the fair value of the convertible debt is not determined using a valuation that only uses data from observable markets, the loss on initial recognition has been deferred and will be recognized in income over the expected term of the instrument. As at June 30, 2020 the loss on initial recognition has been fully amortized.

On May 26, 2020, the Company made a final payment of $2,897,000 to holders of the 2017 Notes and $1,016,000 in 2017 Notes was converted for the issuance of 500,014 Common Shares. The Company and certain holders of the 2017 Notes have also agreed to a mutual release (the "Settlement") in return for the issuance by the Company, in the aggregate, of 500,000 Settlement Warrants to such holders.

(c) 2019 Convertible Notes

On May 16, 2019, the Company completed a private placement of (i) 15% original issue discount convertible notes ("2019 Notes") with a face value of $11.5 million, for gross proceeds to the Company of $9,775,000, and (ii) 334,951 common shares of the Company at a price of $5.15 per Common Share, for gross proceeds to the Company of $1,725,000.

The 2019 Notes have the following key terms:

Accordingly, the 2019 Notes contain two embedded derivatives: the conversion option and the prepayment option. Accordingly, the Company has elected to measure the 2019 Notes at FVTPL. The fair values of the 2019 Notes were calculated using the Cox Ross Rubinstein binomial tree model and have been classified as level 3 in the fair value hierarchy.


NEOVASC INC.

Notes to the Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2020 and 2019

(Expressed in U.S. dollars)

16. DERIVATIVE WARRANT LIABILITY FROM FINANCING AND CONVERTIBLE NOTES (continued)

(d)  2020 Convertible Notes

On May 28, 2020, the Company issued senior secured convertible notes ("2020 Notes") with a principal amount of $5 million, convertible at $2.815 per Common Share for 1,776,041 Common Shares and 2,573,959 Warrants ("2020 Warrants") exercisable at $2.634 per 2020 Warrant share with a 4-year term.

The 2020 Notes have the following key terms:

Accordingly, the 2020 Notes contain three embedded derivatives: change in control redemption option, the early redemption option and the conversion option but will not be separated from the host debt instrument and the entire hybrid contract will be designated as at fair value through profit or loss. The fair values of the 2020 Notes were calculated using the Cox Ross Rubinstein binomial tree model and have been classified as level 3 in the fair value hierarchy. The fair value of the convertible debt was $6,449,634 which exceeded the transaction price giving rise to a loss of $3,511,670.  Since the fair value of the convertible debt is not determined using a valuation that only uses data from observable markets, the loss on initial recognition has been deferred and will be recognized in income over the expected term of the instrument.

(e)    Warrants and Convertible Notes Model

The 2017 Warrants were accounted for based on the level 3 fair value estimate of Series A Warrants, Series B Warrants, Series C Warrants, Series D Warrants, Series E Warrants and Series F Warrants by using a binomial option pricing model.

The 2017 Notes were accounted for based on the level 3 fair value estimate of the notes based on a binomial tree model.

Key assumptions used in the model at March 31, 2020 and December 31, 2019 and 2018 are summarized below:

Valuation Date   March 31,
2020
    December 31,
2019
    December 31,
2018
 
Price of Common Shares $ 1.46   $ 5.41   $ 6.03  
Dividend Yield   0%     0%     0%  
Historical volatility of Common Shares   100.84%     129.54%     141.96%  
Historical volatility of index   36.07%     11.65%     15.37%  
Volatility input   75.16%     70.59%     78.67%  
Risk-free rate   1.11%     1.79%     2.52%  
Credit spread   29.58%     23.00%     24.51%  

The 2019 Notes were accounted for based on the level 3 fair value estimate of the notes based on a binomial tree model.

Key assumptions used in the model at initial recognition and at September 30, 2020 are summarized below:

Valuation Date   September 30,
2020
    December 31,
2019
    May 16,
2019
 
Price of Common Shares $ 2.14   $ 5.41   $ 49.46  
Dividend Yield   0%     0%     0%  
Historical volatility of Common Shares   113.98%     124.77%     142.38%  
Historical volatility of index   22.31%     13.76%     15.66%  
Volatility input   68.14%     69.26%     79.02%  
Risk-free rate   0.22%     1.65%     2.13%  
Credit spread   22.03%     27.15%     19.64%  


NEOVASC INC.

Notes to the Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2020 and 2019

(Expressed in U.S. dollars)

16. DERIVATIVE WARRANT LIABILITY FROM FINANCING AND CONVERTIBLE NOTES (continued)

(e)    Warrants and Convertible Notes Model (continued)

The 2020 Warrants were accounted for based on the level 3 fair value estimate of the Warrants by using a binomial option pricing model.

The 2020 Notes were accounted for based on the level 3 fair value estimate of the notes based on a binomial tree model.

Key assumptions used in the model at initial recognition and at September 30, 2020 are summarized below:

Valuation Date   September 30,
2020
    May 28,
2020
 
Price of Common Shares $ 2.14   $ 2.86  
Dividend Yield   0%     0%  
Historical volatility of Common Shares   109.51%     127.50%  
Historical volatility of index   19.81%     18.91%  
Volatility input   64.66%     73.21%  
Risk-free rate   0.26%     0.32%  
Credit spread   18.26%     19.35%  

The carrying amounts for the 2017 derivative warrant liability from financing are as follows:

    Series A Units     Series B Units     Series E Warrants     Total  
Fair value adjustment, December 31, 2018   1,190,630     (8,411,543 )   (4,512,848 )   (11,733,761 )
Balance, Derivative financial liability
December 31, 2018
$ 35,693   $ 82,523   $ 72,087   $ 190,303  
Less:                        
Exercise of 822,192 Series C Warrants   (5,638 )   -     -     (5,638 )
Fair value adjustment, March 31, 2019   (5,575 )   (5,253 )   (6,677 )   (17,505 )
Cancellation of 35,950,340 Series A Warrants   (24,480 )   (77,270 )   -     (101,750 )
Cancellation of 22,431,506 Series E Warrants   -     -     (65,410 )   (65,410 )
Balance, derivative warrant liability from financing as at September 30, 2020 $ -   $ -   $ -   $ -  


NEOVASC INC.

Notes to the Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2020 and 2019

(Expressed in U.S. dollars)

16. DERIVATIVE WARRANT LIABILITY FROM FINANCING AND CONVERTIBLE NOTES (continued)

(e) Warrants and Convertible Notes Model (continued)

The carrying amounts for the 2020 derivative warrant liability from financing are as follows:

    2020 January Warrants  
Inception of the January 2020 Warrants (see Note 17(e))   6,145,620  
Add: Deferred loss   (223,791 )
Less: Jan 31 exercise 1,241,490 pre-funded warrants   (3,885,746 )
Fair value adjustment, January 30, 2020 realized gain   (422,102 )
Add: Amortization of deferred loss   124,053  
Less: Fair value adjustment, March 30, 2020 unrealized gain   (1,715,390 )
Balance, March 30, 2020 $ 22,644  
Less: June exercise 1,185,000 Series A; 991,940 Series B   (969,133 )
FV revaluation at May 28 realized loss   957,847  
Amortization of deferred loss   98,961  
Less: Fair value adjustment, June 30, 2020 unrealized gain   (45,897 )
Balance, June 30, 2020 $ 64,422  
Amortization of deferred loss   5,168  
Less: Fair value adjustment, September 30, 2020 unrealized gain   (21,734 )
Balance, September 30, 2020 $ 47,856  
    2020 May Warrants  
Inception of the May 2020 Warrants (see Note 17(e))   4,526,732  
Add: Deferred loss   (2,464,696 )
Amortization of deferred loss   55,709  
Less: Fair value adjustment, June 30, 2020 unrealized gain   (1,069,013 )
Balance, June 30, 2020 $ 1,048,732  
Less: July 23 exercise 1,424,049 warrants   (2,082,598 )
August 17 exercise of 501,000 warrants   (565,221 )
Derecognition of deferred loss   1,843,332  
Amortization of deferred loss   35,644  
Less: Fair value adjustment, September 30, 2020 unrealized gain   (106,350 )
Balance, September 30, 2020 $ 173,539  
    2020 June Warrants  
Inception of the June 2020 Warrants (see Note 17(e))   2,404,957  
Add: Deferred loss   (448,877 )
Amortization of deferred loss   8,609  
Less: Fair value adjustment, June 30, 2020 unrealized gain   (164,711 )
Balance, June 30, 2020 $ 1,799,978  
Amortization of deferred loss   56,571  
Less: Fair value adjustment, September 30, 2020 unrealized gain   (489,496 )
Balance, September 30, 2020 $ 1,367,053  
    2020 August Warrants  
Inception of the August 2020 Warrants (see Note 17(e))   3,511,115  
Add: Deferred loss   (3,167,758 )
Amortization of deferred loss   212,630  
Less: Fair value adjustment, September 30, 2020 unrealized gain   (1,315,978 )
Balance, September 30, 2020 $ (759,991 )
    2020 Settlement Warrants  
Inception of the 2020 Settlement Warrants (see Note 17(e))   807,977  
Less: Fair value adjustment, June 30, 2020 unrealized gain   (232,042 )
Balance, June 30, 2020 $ 575,935  
Less: Fair value adjustment, September 30, 2020 unrealized gain   (58,645 )
Balance, September 30, 2020 $ 517,290  
    2020 Repayment Warrants  
Inception of the 2020 Repayment Warrants (see Note 17(e))   161,720  
Balance, September 30, 2020 $ 161,720  

 


NEOVASC INC.

Notes to the Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2020 and 2019

(Expressed in U.S. dollars)

16. DERIVATIVE FINANCIAL LIABILITY FROM FINANCING AND CONVERTIBLE NOTES (continued)

(e)    Warrants and Convertible Notes Model (continued)

 The carrying amounts for the 2017 Notes, 2019 Notes, and 2020 Notes are as follows:

    2017 Convertible Notes  
Balance, convertible notes December 31, 2018   14,617,336  
Less: Exercise of 11,197,000 convertible notes   (13,095,938 )
Fair value adjustment   3,878,791  
Balance, convertible notes December 31, 2019 $ 5,400,189  
Fair value adjustment, (unrealized) loss due to changes in credit spread   (17,122 )
Fair value adjustment, March 31, 2020 unrealized gain   (1,599,573 )
Balance, convertible notes March 31, 2020 $ 3,783,494  
Less: Exercise of 1,016,000 convertible notes   (1,293,093 )
Fair value adjustment Settlement Warrants   (807,977 )
Fair value adjustment at maturity realized loss   1,214,576  
Re-payment of convertible note   (2,897,000 )
Balance, convertible notes June 30, 2020 and September 30, 2020 $ -  
2017 Convertible Notes, current $ -  
  2017 Convertible Notes, non-current $ -  

    2019 Convertible Notes  
Fair value, May 16, 2019   9,775,000  
Fair value adjustment,   (509,520 )
Balance, convertible notes December 31, 2019 $ 9,265,480  
Fair value adjustment, (unrealized) loss due to changes in credit spread   (1,421,063 )
Fair value adjustment, March 31, 2020 unrealized gain   (1,533,410 )
Fair value adjustment, March 31, 2020 realized loss   143,750  
Balance, convertible notes March 31, 2020 $ 6,454,757  
Fair value adjustment, June 30, 2020 unrealized loss   1,370,016  
Fair value adjustment, June 30, 2020 realized gain   (413,681 )
Fair value adjustment, (unrealized) loss due to changes in credit spread   2,303,406  
Balance, convertible notes June 30, 2020 $ 9,714,498  
Re-payment of convertible note July 23 conversion   (3,613,341 )
Re-payment of convertible note Aug 17 conversion   (1,263,884 )
Fair value adjustment, Repayment warrants   (161,720 )
Fair value adjustment, June 30, 2020 realized gain   1,171,782  
Fair value adjustment, (unrealized) loss due to changes in credit spread   110,229  
Balance, convertible notes September 30, 2020 $ 5,957,564  
2019 Convertible Notes, current $ 167,409  
2019 Convertible Notes, non-current $ 5,790,155  

    2020 Convertible Notes  
Fair value, May 26, 2020   6,449,634  
Add: Deferred loss   (3,511,670 )
Amortization of deferred loss   79,373  
Fair value adjustment, June 30, 2020 unrealized gain   (438,810 )
Fair value adjustment, June 30, 2020 realized loss   34,985  
Fair value adjustment, (unrealized) loss due to changes in credit spread   5,736  
Balance, convertible notes June 30, 2020 $ 2,619,248  
Add: Amortization of deferred loss   216,282  
Fair value adjustment, Sept 30, 2020 realized loss   (86,819 )
Fair value adjustment, (unrealized) loss due to changes in credit spread   48,015  
Balance, convertible note September 30, 2020 $ 2,796,726  
2020 Convertible Notes, current $ 134,697  
2020 Convertible Notes, non-current $ 2,662,029  


NEOVASC INC.

Notes to the Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2020 and 2019

(Expressed in U.S. dollars)

17. SHARE CAPITAL

All Common Shares are equally eligible to receive dividends and the repayment of capital and represent one vote at shareholders' meetings.  All Preferred Shares have no voting rights at shareholders' meetings 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.

We may issue our Preferred Shares from time to time in one or more series. The terms of each series of Preferred Shares, including the number of shares, the designation, rights, preferences, privileges, priorities, restrictions, conditions and limitations, will be determined at the time of creation of each such series by our board of directors, without shareholder approval, provided that all Preferred Shares will rank equally within their class as to dividends and distributions in the event of our dissolution, liquidation or winding-up.

All share and per share amounts are net of share issuance costs and have been adjusted to retroactively reflect the impact of the September 18, 2018 reverse stock split on a 1 for 100 basis and the June 25, 2019 reverse stock split on a 1 for 10 basis.

    Common Shares     Contributed  
    Number     Amount     Surplus  
Balance, January 1, 2019   2,801,720   $ 304,460,533   $ 26,260,806  
Common Shares issued from public offerings (i)   2,222,222     7,802,417     315,611  
Common Shares issued from private placement (ii)   334,951     1,664,662     -  
Common Shares issued from exercise Series B Warrants (iii)   223,304     16,931     -  
Common Shares issued from exercise of Series C Warrants (iv)   822     1,186,027     -  
Common Shares issued from exercise of 2017 Notes (v)   3,074,136     13,095,938     -  
Common Shares issued from exchange of
Series A and Series E Warrants (vi)
  49,624     234,173     -  
Share-based payments   -     -     3,189,808  
Balance, December 31, 2019   8,706,779   $ 328,460,681   $ 29,766,225  
Common Shares issued from public offerings Series A (vii)   1,185,000     4,111,950     -  
Common Shares issued from exercise of Series B
Pre-funded warrants (viii)
  1,241,490     3,885,746     -  
      Transaction costs for both Series A and Series B   -     (545,477 )   -  
        Broker warrants (See Note 17 (f))   -     (82,597 )   82,597  
Common Shares issued from exercise of stock options   50     379     (174 )
Common Shares issued from Warrant conversion (ix)   672,937     969,133     -  
Common Shares issued from conversion of 2017 Notes (x)   500,014     1,293,093     -  
Common Shares issued from public offerings Series A (xi)   3,883,036     9,591,099     -  
        Transaction costs for public offerings Series A   -     (983,968 )   -  
        Broker warrants (See Note 17 (f))   -     (162,467 )   162,467  
Common Shares issued from public offerings Series A (xii)   4,532,772     12,238,484     -  
        Transaction costs for public offerings Series A   -     (984,040 )   -  
        Broker warrants (See Note 17 (f))   -     (242,989 )   242,989  
Common Shares issued from Warrant conversion (xiii)   1,925,049     7,718,346     -  
Share-based payments   -     -     3,104,827  
Balance, September 30, 2020   22,647,127   $ 365,267,373   $ 33,358,931  


NEOVASC INC.

Notes to the Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2020 and 2019

(Expressed in U.S. dollars)

17.   SHARE CAPITAL (continued)

(a)    Authorized (continued)

(i) During the year ended December 31, 2019, 2,222,222 Common Shares were issued for gross proceeds of $10,000,000 less $1,270,000 in underwriting commission, a $315,611 fair value charge for 144,444 Broker Warrants issued (see Note 17(e)) and $611,972 in other share issuance costs.

(ii) On May 16, 2019, the Company completed a private placement of (i) 15% original issue discount convertible notes with a face value of $11.5 million, for gross proceeds to the Company of $9,775,000, and (ii) 334,951 common shares of the Company at a price of $5.15 per Common Share, for net proceeds of $1,664,662.

(iii) During the year ended December 31, 2019, 223,304 Common Shares were issued on the exercise of 822,192 Series B Warrants. The related derivative liability of $16,931(see Note 16) was derecognized at the dates of exercise.

(iv) During the year ended December 31, 2019, the remaining 822,192 Series C Warrants were exercised for 822 Common Shares, 822,192 Series A Warrants and 822,192 Series B Warrants and net cash proceeds of $1,186,027.  The related derivative financial liability of $5,638 (see Note 16) was derecognized at the dates of exercise.

(v) During the year ended December 31, 2019, 3,074,136 Common Shares were issued on the conversion of $11,197,000 of aggregate principal amount of 2017 Notes.  The $13,095,938 aggregate principal amount of 2017 Notes (see Note 16) was derecognized at the date of exercise.

(vi) During the year ended December 31, 2019, the Company entered into exchange agreements with the holders of the remaining Series A Warrants and Series E Warrants to issue 49,624 Common shares for the surrender and cancellation of all 35,950,340 Series A Warrants and all 22,431,506 Series E Warrants outstanding on the basis of 0.00085 of a Common Share for each Warrant.

(vii) On January 6, 2020, the Company completed a registered direct offering of an aggregate of 1,185,000 Series A Units and 1,241,490 series B units: Series B Units at a price of $4.1351 per Series A Unit and $4.135 per Series B Unit for aggregate gross proceeds to the Company of approximately $10,000,000, less $1,087,996 in underwriting commission, a $82,597 fair value charge for 157,721 Broker Warrants issued (see Note 17(f)) and $185,883 in other share issuance costs.

(viii) During the three months ended March 31, 2020, 1,241,490 Common Shares were issued on the conversion of Series B Pre-funded warrants from the January 6, 2020 registered direct offering

(ix) On May 28, 2020, the Company issued an aggregate of 672,937 Exchange Shares for the surrender and cancellation of 2,176,490 January 2020 warrants outstanding on the basis of approximately 0.3092 of an Exchange Share for each warrant.

(x) During the three months ended June 30, 2020, 500,014 Common Shares were issued on the conversion of $1,016,000 of aggregate principal amount of 2017 Notes.  The fair value of 2017 Notes related to this conversion (see Note 16) was derecognized at the date of exercise.

(xi) On June 16, 2020, the Company completed a registered direct offering of an aggregate 3,883,036 units (the "Units") at a price of $2.973 per unit for aggregate gross proceeds to the Company of approximately $11,500,000 less $1,184,646 in underwriting commission, a $162,467 fair value charge for Compensation Warrants "2020 Compensation Warrants" (see Note 17 (f)), and $278,482 in other share issuance costs.

(xii) On August 12, 2020 the Company completed a registered direct offering of an aggregate 4,532,772 common shares at a price of $2.775 per common share for aggregate gross proceeds to the Company for approximately $12,600,000 less $1,006,547 in underwriting commission, a $242,989 fair value charge for Compensation Warrants "2020 Compensation Warrants" (see Note 17 (f)), and $256,876 in other share issuance costs. Transaction costs of $984,040 are allocated to equity and $297,884 are allocated to the Statement of Loss and Comprehensive Loss.

(xiii) During the nine months ended September 30, 2020, 1,925,049 Commons shares were issued on the conversion of May 2020 warrants. Using the exercise proceeds of $4,877,225, the Company has prepaid a portion of the 2019 Convertible Note.

(b) 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 4, 2018, 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 15% of the number of Common Shares of the Company outstanding at any time.


NEOVASC INC.

Notes to the Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2020 and 2019

(Expressed in U.S. dollars)

17. SHARE CAPITAL (continued)

(b)    Stock Options (continued)

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 following table summarizes stock option activity for the respective years as follows:

          Weighted average     Average remaining  
    Number of options     exercise
price
    contractual life (years)  
Options exercisable, January 1, 2019   146,263   $ 127.04     7.62  
Granted   697,150     4.27        
Exercised   -     -        
Forfeited   (13,344 )   58.64        
Expired   (1,867 )   4,997.06        
Options outstanding, December 31, 2019   1,051,665   $ 20.63     7.09  
Options exercisable, December 31, 2019   398,596   $ 35.69     6.97  
Granted   1,800,100     2.60        
Exercised   (50 )   4.10        
Forfeited   (253,176 )   39.15        
Expired   (455 )   7,957.80        
Options outstanding, September 30, 2020   2,598,084   $ 4.88     7.29  
Options exercisable, September 30, 2020   884,641   $ 7.59     7.05  

The following table lists the options outstanding as at September 30, 2020 by exercise price:

 

Exercise price

Options

outstanding

Weighted average remaining term (yrs)

Options

exercisable

Weighted average remaining term (yrs)

$2.11

553,500

7.97

138,375

7.97

$2.27

6,000

7.87

1,500

7.87

$2.42

705,125

7.73

176,282

7.73

$3.35

534,363

7.30

133,858

7.30

$4.10

504,450

6.48

252,750

6.48

$4.80

5,000

6.58

2,500

6.58

$5.00 - $5,353.20

289,646

6.32

179,376

6.26

 

2,598,084

7.29

884,641

7.05

The following table lists the options outstanding as at December 31, 2019 by exercise price:

 

Exercise price

Options

outstanding

Weighted average remaining term (yrs)

Options

exercisable

Weighted average remaining term (yrs)

$4.10

561,050

7.23

140,450

7.23

$5.00

130,950

7.41

32,738

7.41

$8.80

88,800

6.92

59,242

6.92

$27.20

263,250

6.75

162,268

6.75

$27.30 - $9,276.86

7,615

4.71

3,898

3.69

 

1,051,665

 

398,596

 



NEOVASC INC.

Notes to the Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2020 and 2019

(Expressed in U.S. dollars)

17. SHARE CAPITAL (continued)

(b)    Stock Options (continued)

During the three and nine months ended September 30, 2020, the Company recorded $702,489 and $2,424,656, as compensation expense for share-based compensation awarded to eligible optionees (three and nine months ended September 30, 2019: $735,199 and  $2,613,453, respectively). 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:

    2020     2019  
Weighted average fair value $ 2.11   $ 3.60  
Weighted average exercise price $ 2.57   $ 4.30  
Weighted average share price at grant $ 2.57   $ 4.30  
Dividend yield   nil     nil  
Volatility   124%     141%  
Risk-free interest rate   1.09%     1.51%  
Expected life   4 years     4 years  
Forfeiture rate   7.00%     7.00%  

(c)  Restricted share units

On December 2, 2019, the Company adopted a Restricted Share Unit ("RSU") Plan which provides for RSUs to be awarded to directors, officers, employees and service providers. The maximum number of Common Shares authorized and reserved for issuance under the RSU Plan is equal to 5% of the issued and outstanding Common Shares of the Company. The shareholders of the Company approved the amended RSU Plan at the annual meeting of the shareholders on September 3, 2020, which falls within 12 months of the effective date of the RSU Plan.

The granting of RSUs is considered an equity-settled share-based payment transaction. The fair value of the grant was determined by multiplying the Company's share price at the grant date by the number of RSUs granted and is recognized over the vesting period of the grant. The expense recognized for the three and nine months ended September 30, 2020 was $314,901 and $680,171. As of September 30, 2020, the total remaining unrecognized compensation cost related to RSUs amounted to approximately $1,354,732, which will be amortized over the remaining vesting periods.

RSU transactions are summarized as follows:

    Number of RSUs     Weighted Average Grant Date Fair Value Per Share  
Outstanding, December 31, 2019   152,956   $ 2.98  
Granted   631,044   $ 2.78  
Vested   -     -  
Outstanding, September 30, 2020   784,000   $ 2.82  

(d)  Share appreciation rights

On September 22, 2020, the Company adopted a Share Appreciation Rights ("SAR") Plan which provides for SARs to be awarded to directors, officers, employees and service providers. The granting of SARs is considered a cash-settled payment transaction. The fair value of the SAR is measured applying an option pricing model, taking into account the terms and conditions on which the SARs are granted. The liability of the SAR is measured initially at grant date and at the end of each reporting period until settled. As of September 30, 2020, the Company recognizes the full $336,757 expense.

SAR transactions are summarized as follows:

    Number of SARs     Weighted Average Grant Date Fair Value Per Share  
Outstanding, December 31, 2019   -     -  
Granted   1,811,768   $ 0.185  
Vested   -     -  
Outstanding, September 30, 2020   1,811,768   $ 0.185  


NEOVASC INC.

Notes to the Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2020 and 2019

(Expressed in U.S. dollars)

17. SHARE CAPITAL (continued)

(e)  Warrants

The following table lists the number of warrants issued on November 17, 2017 as well as the number issued, exercised, and exchanged since then and the remaining warrants outstanding at September 30, 2020.

Warrants

As at November 17, 2017

 

Issued

Exercised

Exchanged

As at September 30, 2020

 

 

 

 

 

 

Series A

25,676,368

10,273,972

-

(35,950,340)

-

Series B

25,676,368

10,273,972

(35,950,340)

-

-

Series C

10,273,972

-

(10,273,972)

-

-

Series D

3,573,830

-

(3,573,830)

-

-

Series E

22,431,506

-

-

(22,431,506)

-

Series F

22,431,506

-

(22,431,506)

-

-

On September 18, 2018, the Company effected a share consolidation (reverse stock split in the ratio of 1 for 100 Common Shares outstanding) of the Common Shares on the basis of one post-consolidation Common Shares for every 100 pre-consolidation Common Shares. On June 25, 2019, the Company effected a share consolidation (reverse stock split) of its issued and outstanding Common Shares the basis of one post-consolidation Common Share for every ten pre-consolidation Common Shares.  The number of 2017 Warrants and aggregate principal amount of 2017 Notes were not affected by the consolidations, but the Common Shares issuable upon exercise of the 2017 Warrants or conversion of the 2017 Notes was adjusted proportionally to the share consolidation ratios.

The September 2018 share consolidation adjusted the notional exercise price of the Series A Warrants, Series B Warrants and Series E Warrants. There were no Series D Warrants and Series F Warrants outstanding at the date of the September 2018 share consolidation. There were no 2017 Warrants outstanding at the time of the June 2019 share consolidation.

On March 12, 2019, the Company entered into exchange agreements with the holders of all of its outstanding Series A Warrants and Series E Warrants, pursuant to which the Company issued an aggregate of 49,624 Common Shares for the surrender and cancellation of all of the Series A Warrants and Series E Warrants outstanding, on the basis of 0.085 of a Common Share for each Series A Warrant or Series E Warrant (the "Exchange"). Following completion of the Exchange, there are no longer any warrants outstanding from the 2017 Financings. Under IFRIC 19, the surrender and cancellation of Series A warrants and Series E warrants created a loss on extinguishment of $39,367 and $24,565, respectively.

On January 6, 2020, the Company completed a registered direct offering of an aggregate of 1,185,000 Series A Units and 1,241,490 series B units: Series B Units at a price of $4.1351 per Series A Unit and $4.135 per Series B Unit for aggregate gross proceeds to the Company of approximately $10,000,000. Each Series A Unit consists of one Common Share of Neovasc and one warrant to purchase one Common Share. Each Warrant entitles the holder to acquire one Common Share of Neovasc at a price of US$4.1351 at any time prior to four years following the date of issuance. Each Series B Unit consists of one pre-funded warrant of Neovasc and one Warrant. Each Pre-Funded Warrant entitles the holder to acquire one Common Share of Neovasc at a price of US$0.0001 at any time until the exercise in full of each Pre-Funded Warrant. All Pre-Funded Warrants were exercised as at September 30, 2020. The 2020 Warrants include a cashless exercise option. In accordance with IAS 32 - Financial instruments; presentation, the 2020 warrants have been accounted for as derivative financial liabilities and measured at FVTPL. The fair value of $6,145,620 for the 2020 Series A warrants and Series B Pre-Funded warrants and warrant was computed using the Black-Scholes pricing model with the following assumptions: a) average risk-free interest rate of 1.60%; b) expected life of 1 years; c) the price of the stock on the grant date of $3.47; d) expected volatility of 70%; and e) no expected dividend payments. On May 28, 2020, the Company issued an aggregate of 672,937 Exchange Shares for the surrender and cancellation of 2,176,490 January 2020 warrants outstanding on the basis of approximately 0.3092 of an Exchange Share for each warrant. Subsequent to the exchange, 250,000 Warrants remain outstanding.


NEOVASC INC.

Notes to the Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2020 and 2019

(Expressed in U.S. dollars)

17. SHARE CAPITAL (continued)

(e)  Warrants (continued)

On May 26, 2020, the Company granted 2,573,959 2020 warrants with an exercise price of $2.634 and term of 4 years. The 2020 Warrants are convertible into common shares of the Company at the option of the holder (however, the holder may not own greater than 9.99% of the total outstanding common shares of the Company as a result of the conversion). The 2020 Warrants include a cashless exercise option. In accordance with IAS 32 - Financial instruments; presentation, the 2020 warrants have been accounted for as derivative financial liabilities and measured at FVTPL.  The fair values of $4,526,732 of the warrants were calculated using a binomial option pricing model and have been classified as level 3 in the fair value hierarchy. On July 23, 2020 1,424,049 warrants were exercised and on August 17, 2020 501,000 warrants were exercised leaving 648,910 warrants remaining. The total exercise proceeds of $4,877,225 net of interest and prepayment penalty has been applied to the principal of the 2019 Note.

On May 28, 2020 the Company entered into a settlement agreement to issue 500,000 settlement warrants ("Settlement Warrants"). Each Settlement Warrant entitles the holder to purchase one Common Share in the capital of the Company at an exercise price of $2.634 per Settlement Warrant for a period of 4 years following issuance and are subject to transfer/leak-out restrictions, including volume and public float restrictions. The Settlement Warrants include a cashless exercise option. In accordance with IAS 32 - Financial instruments; presentation, the Settlement Warrants have been accounted for as derivative financial liabilities and measured at FVTPL. The fair value of $807,977 of the Settlement Warrants were calculated using the Cox Ross Rubinstein binomial tree model and have been classified as level 3 in the fair value hierarchy.

On June 16, 2020, the Company completed a registered direct offering of an aggregate 3,883,036 units (the "Units") at a price of $2.973 per unit for aggregate gross proceeds to the Company of approximately $11,500,000 less $1,184,646 in underwriting commission, a $162,467 fair value charge for Compensation Warrants "2020 Compensation Warrants" (see Note 17 (a)), and $278,482 in other share issuance costs. Each Unit consists of one Common Share of the Company and three-quarters of one warrant (each whole warrant, a "Warrant") to purchase one Common Share issuing 2,912,277 warrants in total. Each Warrant entitles the holder to acquire one Common Share of the Company at a price of $2.88 at any time prior to June 16, 2025. The 2020 Warrants include a cashless exercise option. In accordance with IAS 32 - Financial instruments; presentation, the 2020 warrants have been accounted for as derivative financial liabilities and measured at FVTPL.  The fair value of $2,404,957 for the 2020 Series A warrants was computed using the Black-Scholes pricing model with the following assumptions: a) average risk-free interest rate of 0.32%; b) expected life of 2 years; c) the price of the stock on the grant date of $2.47; d) expected volatility of 70%; and e) no expected dividend payments.

On July 23, 2020, the Company issued the 2020 Repayment Warrants ("Repayment Warrants") to purchase up to 481,778 Common Shares at an exercise price of $7.50 per Common Share for a period of five years following issuance. The fair value of $134,718 for the 2020 Repayment Warrants was computed using the Black-Scholes pricing model with the following assumptions: a) average risk-free interest rate of 0.29%; b) expected life of 2 years; c) the price of the stock on the grant date of $2.54; d) expected volatility of 70.0%; and e) no expected dividend payments.

On August 12, 2020 the Company completed a registered direct offering of an aggregate 4,532,772 Common Shares at a price of $2.775 per Common Share for aggregate gross proceeds to the Company for approximately $12,600,000 less $1,006,547 in underwriting commission, a $242,989 fair value charge for Compensation Warrants "2020 Compensation Warrants" (see Note 17 (a)), and $238,718 in other share issuance costs. Each Common Share was sold with 0.75 of a Common Share purchase warrant (each whole warrant, a "Warrant") issuing 3,399,579 warrants in total. Each Warrant entitles the holder to acquire one Common Share of the Company at an exercise price of $2.69 per share at any time prior to the date which is five years following the date of issuance. The 2020 Warrants include a cashless exercise option. In accordance with IAS 32 - Financial instruments; presentation, the 2020 warrants have been accounted for as derivative financial liabilities and measured at FVTPL.  The fair value of $3,511,115 for the Warrants was computed using the Black-Scholes pricing model with the following assumptions: a) average risk-free interest rate of 0.32%; b) expected life of 2 years; c) the price of the stock on the grant date of $2.70; d) expected volatility of 70%; and e) no expected dividend payments.

On August 17, 2020, the Company issued the 2020 Repayment Warrants to purchase up to 165,518 Common Shares at an exercise price of $7.50 per Common Share for a period of five years following issuance. The fair value of $27,002 for the 2020 Repayment Warrants was computed using the Black-Scholes pricing model with the following assumptions: a) average risk-free interest rate of 0.31%; b) expected life of 2 years; c) the price of the stock on the grant date of $2.13; d) expected volatility of 68.0%; and e) no expected dividend payments.


NEOVASC INC.

Notes to the Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2020 and 2019

(Expressed in U.S. dollars)

17. SHARE CAPITAL (continued)

(f) Broker Warrants

In February and March of 2019, the Company completed two $5 million underwritten public offerings and issued 144,444 broker warrants ("Broker Warrants") as part of the underwriter's commission.  The Company uses the Black-Scholes pricing model to calculate the fair value of the Broker Warrants. The model requires six key inputs: risk free interest rate, exercise price, market price at date of issue, expected dividend yield, expected life and expected volatility, all of which, other than the exercise price and market price, are estimates by management of the Company. The fair value for the February 28, 2019 $5 million public offering and 72,222 broker warrants was computed using the Black-Scholes pricing model with the following assumptions: a) average risk-free interest rate of 2.51%; b) expected life of 3 years; c) the price of the stock on the grant date of $4.50; d) expected volatility of 81%; and e) no expected dividend payments. The fair value for the March 15, 2019 $5 million public offering and 72,222 broker warrants was computed using the Black-Scholes pricing model with the following assumptions: a) average risk-free interest rate of 2.43%; b) expected life of 3 years; c) the price of the stock on the grant date of $4.50; d) expected volatility of 82%; and e) no expected dividend payments. The Black-Scholes model was used to compute broker warrant fair values because it is the most commonly used pricing model and is considered to produce a reasonable estimate of fair value.

As part of the underwriter's compensation in the January 2020 Financing, the Company issued the 2020 Broker Warrants to purchase up to 157,721 Common Shares at an exercise price of $5.1689 per Common Share for a period of three years following issuance. The fair value of $82,597 for the 2020 broker warrants was computed using the Black-Scholes pricing model with the following assumptions: a) average risk-free interest rate of 1.60%; b) expected life of 1 years; c) the price of the stock on the grant date of $3.47; d) expected volatility of 70%; and e) no expected dividend payments.

On June 16, 2020, the Company issued the 2020 Compensation Warrants to purchase up to 252,397 Common Shares at an exercise price of $3.71 per Common Share for a period of five years following issuance. The fair value of $162,467 for the 2020 compensation warrants was computed using the Black-Scholes pricing model with the following assumptions: a) average risk-free interest rate of 0.32%; b) expected life of 2 years; c) the price of the stock on the grant date of $2.47; d) expected volatility of 70.0%; and e) no expected dividend payments.

On August 12, 2020, the Company issued the 2020 Compensation Warrants to purchase up to 294,630 Common Shares at an exercise price of $3.47 per Common Share for a period of five years following issuance. The fair value of $242,989 for the 2020 compensation warrants was computed using the Black-Scholes pricing model with the following assumptions: a) average risk-free interest rate of 0.32%; b) expected life of 2 years; c) the price of the stock on the grant date of $2.70; d) expected volatility of 70.0%; and e) no expected dividend payments

18. SEGMENT INFORMATION

The Company's operations are in one business segment: the development, manufacturing 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 United States and Europe.  The Company earns revenue from sales to customers in the following geographic locations:

    For the three months ended
September 30,
    For the nine months ended
September 30,
 
    2020     2019     2020     2019  
REVENUE                        
Europe $ 626,418   $ 465,498   $ 1,443,360   $ 1,349,711  
Rest of the World   -     35,000     -     176,500  
  $ 626,418   $ 500,498   $ 1,443,360   $ 1,526,211  

Sales to the Company's three largest customers accounted for approximately 15%, 13%, and 12% of the Company's sales for the nine months ended September 30, 2020.  Sales to the Company's three largest customers accounted for approximately 11%, 10%, and 8% of the Company's sales for the nine months ended September 30, 2019. 


NEOVASC INC.

Notes to the Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2020 and 2019

(Expressed in U.S. dollars)

19. EMPLOYEE BENEFITS EXPENSE

    For the three months ended
September 30,
    For the nine months ended
September 30,
 
    2020     2019     2020     2019  
Salaries and wages $ 2,386,946   $ 2,194,192   $ 7,659,259   $ 6,179,743  
Pension plan and employment insurance   106,997     89,271     434,420     376,716  
Contribution to defined contribution pension plan   62,854     44,220     173,091     137,972  
Health benefits   169,356     183,247     490,884     463,707  
Cash-based employee expenses $ 2,726,153   $ 2,510,930   $ 8,757,654     7,158,138  
                         
Share-based payments   1,354,147     735,199     3,441,584     2,613,453  
Total employee expenses $ 4,080,300   $ 3,246,129   $ 12,199,238   $ 9,771,591  

20. DEPRECIATION, SHARE-BASED PAYMENTS, EMPLOYEE AND OTHER EXPENSES

    For the three months ended
September 30,
    For the nine months ended
September 30,
 
    2020     2019     2020     2019  
EXPENSES                        
Selling expenses                        
Share-based payment $ 116,554   $ 43,596   $ 227,855   $ 153,221  
Cash-based employee expenses   175,154     130,037     598,017     351,250  
Other expenses   206,963     206,779     678,842     638,686  
  $ 498,671   $ 380,412   $ 1,504,714   $ 1,143,157  
General and administrative expenses                        
Depreciation   70,930     35,109     204,711     102,865  
Share-based payments   745,954     406,315     1,932,024     1,421,505  
Cash-based employee expenses   595,640     644,792     2,222,251     1,659,055  
Accretion on collaboration, license and settlement agreements provision   36,830     68,113     133,570     279,295  
Legal costs from financing activities   2,130,220     163,525     3,499,830     878,026  
Other expenses   1,063,405     880,068     2,963,605     3,001,568  
  $ 4,642,979   $ 2,197,922   $ 10,955,991   $ 7,342,314  
Product development and clinical trials expenses                        
Depreciation   122,069     121,129     359,894     348,057  
Share-based payments   491,639     285,288     1,281,705     1,038,727  
Cash-based employee expenses   1,955,359     1,736,101     5,937,386     5,147,833  
Other expenses   2,933,650     2,634,679     7,036,862     6,630,727  
  $ 5,502,717   $ 4,777,197   $ 14,615,847   $ 13,165,344  
                         
TOTAL EXPENSES $ 10,644,367   $ 7,355,531   $ 27,076,552   $ 21,650,815  
                         
Depreciation per Statements of Cash Flows $ 192,999   $ 156,238   $ 564,605   $ 450,922  
                         
Share-based payments per Statements of Cash Flows $ 1,354,147   $ 735,199   $ 3,441,584   $ 2,613,453  
                         
Cash-based employee expenses (see Note 19) $ 2,726,153   $ 2,510,930   $ 8,757,654   $ 7,158,138  


NEOVASC INC.

Notes to the Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2020 and 2019

(Expressed in U.S. dollars)

21. 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 three and nine months ended September 30, 2020 amounts to 19,942,961 and 14,395,585, respectively (three and nine months ended September 30, 2019: 7,499,962 and 6,124,915, respectively)

    For the three months ended
September 30,
    For the nine months ended
September 30,
 
    2020     2019     2020     2019  
                         
Weighted average number of Common Shares   19,942,961     7,499,962     14,395,585     6,124,915  
Loss for the period $ (10,234,677 ) $ (6,201,977 ) $ (24,265,586 ) $ (22,776,830 )
Basic and diluted loss per share $ (0.51 ) $ (0.83 ) $ (1.69 ) $ (3.72 )

Instruments that could potentially have a dilutive effect on the Company's weighted average shares outstanding include all of the outstanding convertible notes, restricted share units, stock options, and warrants. These instruments are currently excluded from the calculation of diluted earnings per share as they are antidilutive for the periods presented.

22. RELATED PARTY TRANSACTIONS

The Company's key management personnel include members of the board of directors, executive officers, and former executive officers.  The Company provides salaries or cash compensation, and other non-cash benefits to directors and executive officers.

    For the three months ended
September 30,
    For the nine months ended
September 30,
 
    2020     2019     2020     2019  
Short-term employee benefits                        
Employee salaries and bonuses $ 918,811   $ 518,188   $ 2,196,406   $ 1,190,868  
Directors fees   67,500     67,500     198,333     202,500  
Social security and medical care costs   15,805     9,368     73,082     64,007  
    1,002,116     595,056     2,467,821     1,457,375  
Post-employment benefits                        
Contributions to defined contribution pension plan   9,665     7,255     28,694     23,022  
                         
Share-based payments   181,873     385,856     1,114,226     1,275,299  
                         
Total key management remuneration $ 1,193,653   $ 988,167   $ 3,610,741   $ 2,755,696  

23.   CONTINGENT LIABILITIES AND PROVISIONS

Litigation

Litigation resulting from third party claims has been, and may be, costly and time-consuming and could divert the attention of management and key personnel from our business operations. Although we intend to vigorously defend ourselves against any future claims that may occur, we cannot assure that we will succeed in appealing and defending any of these claims and that judgments will not be upheld against us. If we are unsuccessful in our appeal and defense of these claims or unable to settle the claims in a manner satisfactory to us, we may be faced with significant loss of intellectual property rights that could have a material adverse effect on the Company and its financial condition.


NEOVASC INC.

Notes to the Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2020 and 2019

(Expressed in U.S. dollars)

23. CONTINGENT LIABILITIES AND PROVISIONS (continued)

Claims by CardiAQ in Germany

On June 23, 2014, Edwards Lifesciences CardiAQ LLC ("CardiAQ") filed a complaint against Neovasc in Munich, Germany (the "German Court") requesting that Neovasc assign its right to one of its European patent applications to CardiAQ. After a hearing held on December 14, 2016, the German Court rendered its decision on June 16, 2017, granting co-ownership of the European patent application to CardiAQ but denying their claim for full entitlement. On July 14, 2017, Neovasc filed a notice of appeal against the German Court's decision with the Appeals Court of Munich (the 'Appeals Court'). On July 20, 2017, CardiAQ filed a notice of appeal with the same court. The decision of the Appeals Court of Munich was rendered on March 21, 2019, wherein it amended the decision of the German Court and dismissed the complaint of CardiAQ in full. There are no monetary awards associated with these matters and no damages award was recognized. On March 30, 2020, the German Supreme Court granted CardiAQ leave to appeal the Appeals Court decision and at a hearing held on August 4, 2020 the German Supreme Court set aside the prior decision of the Appeals Court and remanded the matter back to the Appeals Court for a new hearing and decision.

The next hearing at the Appeals Court will be on February 25, 2021.

Claims by CardiAQ in the United States

On March 24, 2017, CardiAQ filed a related lawsuit in the in the U.S. District Court for the District of Massachusetts (the "Court"), asserting two claims for correction of patent inventorship as to Neovasc's U.S. Patents Nos. 9,241,790 and 9,248,014. On October 4, 2017, CardiAQ amended its pleading to add a third claim for correction of patent inventorship as to Neovasc's U.S. Patent No. 9,770,329. The lawsuit did not seek money damages and would not have prevented the Company from practicing these patents. The Company moved to dismiss the complaint on November 16, 2017, and the Court denied this motion on September 28, 2018.  On April 17, 2019, the Company resolved the three claims for correction of patent inventorship and, without reaching conclusion on the merits of the claims, the parties agreed to the correction of patent inventorship and added co-inventors to the three patents in question. Each party will bear its own costs. There were no monetary awards associated with these matters and no damages award was recognized.

Other Matters

By way of Amended Statement of Claim in Federal Court of Canada Action T-1831-16 (the "Action"), Neovasc Inc. and Neovasc Tiara Inc. (the "Neovasc Defendants") were added as defendants to an existing action commenced by Edwards Lifesciences PVT, Inc. and Edwards Lifesciences (Canada) Inc. (collectively the "Edwards Plaintiffs") against Livanova Canada Corp., Livanova PLC, Boston Scientific and Boston Scientific Ltd. (collectively, the "BSC/Livanova Defendants"). The Action was first filed in October 2016 and first concerned an allegation by the Edwards Plaintiffs that the manufacturing, assembly, use, sale and export of the Lotus Aortic Valve devices by the BSC/Livanova Defendants infringes on the Edwards Plaintiffs' patents. In February 2017, the Neovasc Defendants were added to the Edwards Plaintiffs' claim making related allegations.  On January 22, 2019, the Company announced that pursuant to a settlement reached with the Edwards Plaintiffs, the patent infringement action that the Edwards Plaintiffs had previously commenced in the Federal Court of Canada against the Neovasc Defendants, Boston Scientific and Livanova, has been dismissed on a no-costs basis.  No damages award was recognized.

On August 3, 2018, the Company announced that it had entered into a collaboration and licensing agreement with Penn Medicine and the Gorman Cardiovascular Research Group at the University of Pennsylvania (collectively, "UPenn"), which resolved certain potential claims against the Company that had been previously disclosed. The collaboration and licensing agreement with UPenn contemplates certain fees being paid by Neovasc to UPenn, including fees in installments totaling $2.65 million over the four years following the agreement's execution. In addition, Neovasc agreed to pay UPenn a royalty of 1.0-1.5% on the annual net sales of the Tiara following the first commercial sale of the Tiara. Also contained in the collaboration and licensing agreement are buy-out clauses that allow Neovasc, or an acquirer of Neovasc or the Tiara assets, to buy out these royalty obligations. As part of the collaboration and licensing agreement, certain potential claims against the Neovasc Defendants were resolved.


NEOVASC INC.

Notes to the Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2020 and 2019

(Expressed in U.S. dollars)

23. CONTINGENT LIABILITIES AND PROVISIONS (continued)

Other Matters (continued)

When the Company assesses that it is more likely that a present obligation exists at the end of the reporting period and that the possibility of an outflow of economic resources embodying economic benefits is probable, a provision is recognized and contingent liability disclosure is required. The Company has accrued $458,186 as at September 30, 2020 representing the discounted value of future payments anticipated under the settlement agreement with UPenn. The Company has not accrued for any future royalty payments in the settlement agreement with UPenn as the amounts are undeterminable at this time.

On September 7, 2018, Endovalve Inc. and Micro Interventional Devices, Inc. (collectively, "Endovalve") filed a complaint in the United States District Court for the District of New Jersey against the Neovasc Defendants, alleging claims for trade secret misappropriation, breach of contract, and unfair competition. Endovalve alleged that it was a former customer of Neovasc Inc., and that the Neovasc Defendants improperly used trade secrets in the development of Tiara. The complaint sought injunctive relief, money damages, and attorneys' fees. On February 20, 2019, the Company announced that it had entered into a settlement agreement with Endovalve. The settlement agreement with Endovalve contemplates certain fees being paid by Neovasc to Endovalve, including settlement fees in installments totaling $3 million over the two and a half years following the agreement's execution. In addition, Neovasc agreed to pay Endovalve a royalty of 1.3% on the annual net sales of the Tiara following the first commercial sale of the Tiara. Also contained in the settlement agreement are buy-out clauses that allow Neovasc, or an acquirer of Neovasc or the Tiara assets, to buy out these royalty obligations. As part of the settlement agreement, the claims against the Neovasc Defendants were dismissed with prejudice.

When the Company assesses that it is more likely that a present obligation exists at the end of the reporting period and that the possibility of an outflow of economic resources embodying economic benefits is probable, a provision is recognized and contingent liability disclosure is required. The Company has accrued $703,990 as at September 30, 2020 representing the discounted value of future payments anticipated under the settlement agreement with Endovalve. The Company has not accrued for any future royalty payments in the settlement agreement with Endovalve as the amounts are undeterminable at this time.

24. GOVERNMENT ASSISTANCE

On July 21, 2020, the Company submitted the application for forgiveness of the PPP loan. The Company's application for the Paycheck Protection Program loan for approximately $530,000 was approved by the U.S. Small Business Administration. This program helps businesses keep their workforce employed during the COVID-19 crisis by providing relief in the form of a forgivable loan used for payroll costs. The amount is advanced in the form of a loan that is forgivable if the borrowers, being certain wholly-owned subsidiaries of the Company, allocate the funds principally for the purposes of retaining employees in the US through the payment of payroll and group health care benefits costs and other expenses in accordance with the loan agreement.

On July 30, 2020, the Company applied for the Canadian Emergency Wage Subsidy (CEWS) program through the Government of Canada's COVID-19 Economic Response Plan. The CEWS program protects and prevents further job losses, encourage employers to rehire workers previously laid off as a result to COVID-19 and help better position Canadian companies and other employers to resume normal operations following the crisis. The submission was approved and the Company received approximately $495,628 in wage subsidy.

25.  SUBSEQUENT EVENTS

On October 27, 2020, the Company announced that the United States Food and Drug Administration's (FDA's) Circulatory System Devices Advisory Panel voted 14 to 4 "in favor" that the Neovasc Reducer™ is safe when used as intended, and voted 1 to 17 "against" on the issue of a reasonable assurance of effectiveness. The third vote was 13 to 3 "against" (2 abstained) on whether the relative benefits outweighed the relative risks.


NEOVASC INC.

Notes to the Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2020 and 2019

(Expressed in U.S. dollars)

26. AUTHORIZATION OF FINANCIAL STATEMENTS

The condensed interim consolidated financial statements for the three and nine months ended September 30, 2020 (including comparatives) were approved by the audit committee on behalf of the board of directors on November 2, 2020.

(signed) Chris Clark


Chris Clark, Chief Financial Officer

(signed) Paul Geyer


Paul Geyer, Director

1


Neovasc Inc.: Exhibit 99.2 - Filed by newsfilecorp.com

                                           

                                       


MANAGEMENT'S DISCUSSION AND ANALYSIS

This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") covers the unaudited condensed interim consolidated financial statements of Neovasc Inc. (the "Company", "Neovasc", "we", "us", or "our") for the three and nine months ended September 30, 2020 and 2019.

This MD&A should be read in conjunction with the unaudited condensed interim consolidated financial statements and notes thereto for the three and nine months ended September 30, 2020 and 2019 (included as part of Neovasc's quarterly filing) as well as the audited consolidated financial statements and notes thereto and the MD&A for the years ended December 31, 2019, 2018 and 2017 and the Annual Report on Form 20-F.

The Company has prepared this MD&A with reference to National Instrument 51-102 - Continuous Disclosure Obligations of the Canadian Securities Administrators.

The names TiaraTM ("Tiara"), and Neovasc ReducerTM ("Reducer") are our trademarks; other trademarks, product names and Company names appearing herein are the property of their respective owners.

All financial information is prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board.  The Company presents its consolidated financial statements in U.S. dollars.

On September 18, 2018, the Company effected a share consolidation (reverse stock split) of its issued and outstanding common shares in the capital of the Company (the "Common Shares") on the basis of one post-consolidation Common Share for every one hundred pre-consolidation Common Shares. On June 25, 2019, the Company effected a share consolidation (reverse stock split) of its issued and outstanding Common Shares on the basis of one post-consolidation Common Share for every ten pre-consolidation Common Shares. All references in this MD&A to Common Shares and options have been retroactively adjusted to reflect the share consolidations. The number of warrants and aggregate principle amount of the notes outstanding were not affected by the consolidations, but the Common Shares issuable upon exercise of the warrants or conversion of the notes have been and will be adjusted in accordance with the adjustment provisions in such warrants or notes, as applicable.

On December 31, 2019, the Company identified certain accounting differences requiring restatement of previously issued consolidated financial statements for the years ended December 31, 2018 and 2017. The accounting differences are related to Reducer units purchased for research and development during the year ended December 31, 2017 and recognized as product development and clinical trials expenses during that period. Not all of the units were used for product development and clinical trials and during the year ended December 31, 2019, as Reducer revenue increased, the Company used certain of those units in commercial activities. In order to correctly state the cost of goods sold for the year ended December 31, 2019 and the correct period expense for the years ended December 31, 2019, 2018 and 2017 the Company has restated the years ended December 31, 2018 and 2017 to include those Reducer units as research and development supplies assets with potential future economic value at the end of each of those periods. All references relating to financial information for the years ended December 2018 and 2017 have been adjusted to be reflected in this Annual Report.

Additional information about the Company, including the Company's audited consolidated financial statements and Annual Report on Form 20-F, is available on SEDAR at www.sedar.com and as filed with the U.S. Securities and Exchange Commission (the "SEC") on the website of the SEC at www.sec.gov.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTORS

This MD&A contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 and applicable Canadian securities laws.  The words "expect", "anticipate", "plan", "may", "will", "estimate", "continue", "intend", "believe", "target", "potential", "seek", "explore" and other similar words or expressions are intended to identify such forward-looking statements.  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 MD&A include, but are not limited to, statements relating to:


 our ability to continue as a going concern;

 our need for significant additional financing and our estimates regarding our capital requirements and future revenues, expenses and profitability;

 our intended use of the net proceeds from the August 2020 offering (the "August 2020 Offering") of units (the "August 2020 Units") comprised of one Common Share and three-quarters of one common share purchase warrants (the "August 2020 Warrants") ;

 our intended use of the net proceeds from the June 2020 offering (the "June Offering") of units (the "June Units") comprised of one Common Share and three-quarters of one common share purchase warrants (the "June 2020 Warrants") ;

 our intended use of the net proceeds from the May 2020 private placement offering (the "May Offering") of secured convertible notes (the "2020 Notes") and common share purchase warrants (the "May 2020 Warrants");

 our estimates regarding our fully diluted share capital and future dilution to shareholders;

 our intention to remediate our material weakness in internal control over financial reporting ("ICFR") as of December 31, 2019, 2018 and 2017;

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

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

 our anticipation that the Tiara will receive CE Mark approval in Europe from the Medical Device Directive in 2021;

 the anticipated timing of additional implantations in the TIARA-II trial and our intention to initiate additional investigational sites in 2021 as required approvals are obtained;

 our plans to develop and commercialize products, including the Tiara, and the timing and cost of these development programs;

 our plans to develop and commercialize the Tiara transfemoral trans-septal system, including our ability to improve current prototypes;

 our ability to grow revenues from the Reducer in a timely manner;

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

 our efforts to obtain approval for entrance into the U.S. market for the Reducer, including our discussions with the U.S. Food and Drug administration (the "FDA") and potential pathways to the U.S. market;

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

 our ability to enroll patients in our clinical trials, studies and compassionate use cases in Canada, the United States, Europe, Israel and other markets;

 our ability to advance and complete the COSIRA-II IDE pivotal clinical trial;

 our belief that the full PMA application pathway brings the best chance of success within reasonable cost and time constraints for Tiara;

 our belief that the TIARA-I Early Feasibility study demonstrates the safety of the Neovasc transcatheter mitral valve replacement ("TMVR") system;

 our belief that the clinical evidence already available will be sufficient to support the availability of Tiara for the treatment of patients in Europe;

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

 our ability to get our products approved for use;

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

 our ability to find strategic alternatives for adoption of the Reducer, including potential alliances in order to broaden and deepen therapy penetration and potentially advance the COSIRA-II study;

 our plans to increase Reducer implants in Europe in 2020;

 our expectation that in 2020 more German clinics will negotiate and finalize reimbursement negotiations with German insurance companies relating to the Reducer;

 our estimates of the size of the potential markets for our products including the anticipated market opportunities for the Reducer and the Tiara;


 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 other third-parties, product sales, license agreements and other collaborative efforts for the development and commercialization of products;

 our ability to meet our financial and organizational restructuring goals to establish a lean and accountable organization with stable capitalization;

 our ability to meet our cash expenditure covenants;

 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;

 the timing and amount of reimbursement for our products;

 the composition and compensation of our management team and board of directors;

 the impact of foreign currency exchange rates; and

 the composition and compensation of our board of directors and senior management team in the future.

Forward-looking statements are based on estimates and assumptions made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors that the Company believes are appropriate in the circumstances.  Many factors could cause the Company's actual results, performance or achievements to differ materially from those expressed or implied by the forward-looking statements, including, without limitation:

 the substantial doubt about our ability to continue as a going concern;

 risks related to the recent coronavirus outbreak or other health epidemics, which could significantly impact our operations, sales or ability to raise capital;

 risks relating to our need for significant additional future capital and our ability to raise additional funding;

 risks relating to the sale of a significant number of Common Shares;

 risks relating to the Company's conclusion that it did not have an effective ICFR as of December 31, 2019, 2018 and 2017;

 risks relating to our Common Share price being volatile;

 risks relating to the influence of significant shareholders of the Company over our business operations and share price;

 risks related to the recent COVID-19 outbreak or other health epidemics, which could continue to have a significant impact on our operations, sales or ability to raise capital;

 risks relating to our significant indebtedness, and its effect on our financial condition;

 risks relating to lawsuits that we are subject to, which could divert our resources and result in the payment of significant damages and other remedies;

 risks relating to claims by third-parties alleging infringement of their intellectual property rights;

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

 risks relating to results from clinical trials of our products, which may be unfavorable or perceived as unfavorable;

 our history of losses and significant accumulated deficit;

 risks associated with product liability claims, insurance and recalls;

 risks relating to use of our products in unapproved circumstances, which could expose us to liabilities;

 risks relating to competition in the medical device industry, including the risk that one or more competitors may develop more effective or more affordable products;

 risks relating to our ability to achieve or maintain expected levels of market acceptance for our products, as well as our ability to successfully build our in-house sales capabilities or secure third-party marketing or distribution partners;

 our ability to convince public payors and hospitals to include our products on their approved products lists;

 risks relating to new legislation, new regulatory requirements and the efforts of governmental and third-party payors to contain or reduce the costs of healthcare;


 risks relating to increased regulation, enforcement and inspections of participants in the medical device industry, including frequent government investigations into marketing and other business practices;

 risks associated with the extensive regulation of our products and trials by governmental authorities, as well as the cost and time delays associated therewith;

 risks associated with post-market regulation of our products;

 health and safety risks associated with our products and our industry;

 risks associated with our manufacturing operations, including the regulation of our manufacturing processes by governmental authorities and the availability of two critical components of the Reducer;

 risk of animal disease associated with the use of our products;

 risks relating to the manufacturing capacity of third-party manufacturers for our products, including risks of supply interruptions impacting the Company's ability to manufacture its own products;

 risks relating to our dependence on limited products for substantially all of our current revenues;

 risks relating to our exposure to adverse movements in foreign currency exchange rates;

 risks relating to the possibility that we could lose our foreign private issuer status under U.S. federal securities laws;

 risks relating to the possibility that we could be treated as a "passive foreign investment company" ("PFIC");

 risks relating to breaches of anti-bribery laws by our employees or agents;

 risks associated with future changes in financial accounting standards and new accounting pronouncements;

 risks relating to our dependence upon key personnel to achieve our business objectives;

 our ability to maintain strong relationships with physicians;

 risks relating to the sufficiency of our management systems and resources in periods of significant growth;

 risks associated with consolidation in the health care industry, including the downward pressure on product pricing and the growing need to be selected by larger customers in order to make sales to their members or participants;

 risks relating to our ability to successfully identify and complete corporate transactions on favorable terms or achieve anticipated synergies relating to any acquisitions or alliances;

 risks relating to conflicts of interests among the Company's officers and directors as a result of their involvement with other issuers;

 risks relating to future issuances of equity securities by us, or sales of common shares or conversions of convertible notes by our existing security holders, causing the price of our securities to fall;

 risks relating to the broad discretion in our use of proceeds from an offering of our securities;

 risks relating to our intention to not pay dividends in the foreseeable future; and

 anti-takeover provisions in our constating documents which could discourage a third-party from making a takeover bid beneficial to our shareholders.

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

 our ability to continue as a going concern;

 our regulatory and clinical strategies will continue to be successful;

 our current positive interactions with regulatory agencies will continue;

 recruitment to clinical trials and studies will continue;

 the time required to enroll, analyze and report the results of our clinical studies will be consistent with projected timelines;

 current and future clinical trials and studies will generate the supporting clinical data necessary to achieve approval of marketing authorization applications;

 the regulatory requirements for approval of marketing authorization applications will be maintained;

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

 our estimates of market size and reports reviewed by us are accurate;

 our efforts to develop markets and generate revenue from the Reducer will be successful;


 genericisation of markets for the Tiara and the Reducer will develop;

 capital will be available on terms that are favorable to us;

 our ability to retain and attract key personnel, including members of our board of directors and senior management team; and

 our estimates and assumptions about the impact that the COVID-19 crisis will have on the Company

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 "Risk Factors" in our Annual Report on Form 20-F, which is available on SEDAR at www.sedar.com and as filed with the SEC at www.sec.gov.  These factors should be considered carefully, and readers should not place undue reliance on the Company's forward-looking statements.  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 MD&A 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.

The Company advises that these cautionary remarks expressly qualify in their entirety all forward looking statements attributable to the Company or persons acting on its behalf.

Date: November 5, 2020


 

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 Reducer, for the treatment of refractory angina, which is not currently commercially available in the United States (2 U.S. patients have been treated under Compassionate Use) and has been commercially available in Europe since 2015, and Tiara, for the transcatheter treatment of mitral valve disease, which is currently under clinical investigation in the United States, Canada, Israel and Europe. 

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 and on January 1, 2015 ANG was amalgamated into NMI.

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 the Reducer.  In 2009, Neovasc ceased all activities related to BBL's technologies and is in the process of voluntarily liquidating BBL.

In late 2009, Neovasc started initial activities to develop novel technologies for the catheter-based treatment of mitral valve disease.  Based on the positive results of these activities, the Company launched a program to develop the Tiara transcatheter mitral valve.

In late 2016, Neovasc sold its tissue processing technology and facility for $67,909,800 to Boston Scientific Corporation ("Boston Scientific"), and concurrently, Boston Scientific invested an additional $7,090,200 in Neovasc for a 15% equity interest in the Company. Under the terms of the equity investment, Boston Scientific purchased 11,817 Common Shares of Neovasc at a price of $600 per Common Share, for gross proceeds of $7,090,200. Under the terms of the asset purchase agreement, Neovasc has been granted a license to the purchased assets and access to the sold facilities to allow it to continue its tissue and valve assembly activities for its remaining customers, and continue its own tissue-related programs, including advancing the Tiara through its clinical and regulatory pathways.

Additionally, throughout the years 2014 to 2019, the Company announced a number of developments pertaining to litigation, all as more fully discussed under the heading "Trends, Risks and Uncertainties" and "Contractual Obligations and Contingencies" herein.

In November 2017, Neovasc completed the 2017 underwritten public offering (the "2017 Public Offering") and a private placement (the "2017 Private Placement" and collectively with the 2017 Public Offering, the "2017 Financings") for aggregate gross proceeds of approximately $65 million. The Company used the net proceeds of the 2017 Financings to fully fund the approximately $42 million balance of the damages and interest awards in its litigation with Edwards Lifesciences CardiAQ LLC ("CardiAQ") formerly known as CardiAQ Valve Technologies Inc., (after subtracting the approximately $70 million that the Company had paid into escrow), with remaining funds being used (i) to partially fund the ongoing Tiara clinical program; (ii) to support the completion of the TIARA-II study; and (iii) for general corporate purposes. For a description of the terms of the 2017 Financings and the securities issued pursuant to the 2017 Financings, see "Operating Results" and "Share Capital" of the Company's Annual Report on Form 20-F and the prospectus supplement, dated November 10, 2017 and the form of 2017 Notes, each as filed or furnished under the Company's profiles on SEDAR at www.sedar.com and on the SEC's website at www.sec.gov. 


On February 28, 2019, the Company completed an underwritten public offering of 1,111,111 Common Shares, at a price of $4.50 per Common Share, for gross proceeds of approximately $5 million before deducting the underwriting commission and offering expenses payable by the Company ("February 2019 Financing"). As part of the underwriter's compensation in the February 2019 Financing, the Company issued the underwriter warrants (the "February Broker Warrants") to purchase in aggregate up to a 72,222 Common Shares, exercisable at a price per Common Share equal to $5.625 for a period of three years following issuance.

On March 15, 2019, the Company completed an underwritten public offering of 1,111,111 Common Shares, at a price of $4.50 per Common Share, for gross proceeds of approximately $5 million before deducting the underwriting commission and offering expenses payable by the Company ("March 2019 Financing)" and together with the February 2019 Financing and May 2019 Financing, the "2019 Financings". As part of the underwriter's compensation in the March 2019 Financing, the Company issued the underwriter warrants (the "March Broker Warrants", and together with the February Broker Warrants, the "2019 Broker Warrants") to purchase in aggregate up to a 72,222 Common Shares, exercisable at a price per Common Share equal to $5.625 for a period of three years following issuance.

On May 16, 2019, the Company completed an offering of (i) 15% original issue discount convertible notes ("2019 Notes") with a face value of $11.5 million, for gross proceeds to the Company of $9,775,000, and (ii) 334,951 Common Shares at a price of $5.15 per Common Share, for gross proceeds to the Company of $1,725,000 (the "May 2019 Financing").

On June 4, 2019, Dr. William O'Neill resigned from the board of Directors and Fred Colen was elected in his place, and on September 16, 2019, Jane Hsiao resigned from the board of Directors and Norman Radow was appointed in her place.

On January 6, 2020, the Company completed the registered direct January 2020 Offering of an aggregate of 1,185,000 series A units ("Series A Units") and 1,241,490 series B units ("Series B Units") at a price of US$4.1351 per Series A Unit and US$4.135 per Series B Unit for aggregate gross proceeds to the Company of approximately US$10 million, before deducting placement agent's fees and estimated expenses of the offering payable by the Company. Each Series A Unit consisted of one Common Share and one warrant (a "January 2020 Warrant") to purchase one common share. Each January 2020 Warrant entitles the holder to acquire one common share of the Company at a price of US$4.1351 at any time prior to the date which is four years following the date of issuance. Each Series B Unit consists of one pre-funded warrant of the Company (each, a "January 2020 Pre-Funded Warrant") and one January 2020 Warrant. Each January 2020 Pre-Funded Warrant entitles the holder to acquire one common share of the Company at a price of US$0.0001 at any time until the exercise in full of each Pre-Funded Warrant.

On May 26, 2020, the Company made a final payment of $2,897,000 to holders of the 2017 Notes and $1,016,000 in 2017 Notes was converted for the issuance of 500,014 Common Shares. The Company and certain holders of the 2017 Notes have also agreed to a mutual release (the "Settlement") in return for the issuance by the Company, in the aggregate, of 500,000 settlement warrants (the "Settlement Warrants") to such holders.

On May 28, 2020, the Company completed the May Offering of the 2020 Notes with a principal amount of $5 million, convertible at $2.815 per Common Share for 1,776,041 Common Shares and 2,573,959 warrants ("May 2020 Warrants") exercisable at $2.634 per May 2020 Warrant share with a 4-year term. The May Offering was completed in two tranches comprised of an initial closing of US$4 million aggregate principal amount of 2020 Notes and 2,573,959 May 2020 Warrants and an additional closing of US$1,000,000 aggregate principal amount of 2020 Notes.

On June 16, 2020, the Company completed the registered direct June Offering of an aggregate 3,883,036 June 2020 Units at a price of $2.973 per unit for aggregate gross proceeds to the Company of approximately $11,500,000 before deducting placement agent's fee and estimated expenses of the June Offering payable by the Company.

On July 23, 2020 Strul Medical Group LLC ("SMG") exercised 1,424,049 of the 2,573,959 May 2020 Warrants at an exercise price of US$2.634 per May 2020 Warrant for aggregate exercise proceeds to the Company of US$3,750,945.07 (the "Exercise Proceeds"). Using the Exercise Proceeds, the Company has prepaid a portion of the 2019 Notes. The total aggregate amount of the Exercise Proceeds has been applied to the prepayment of the 2019 Note whereby US$3,613,341.12 has been applied to the US$11,500,000 principal of the 2019 Note, US$72,266.82 has been paid as a prepayment penalty pursuant to the terms of the 2019 Note and US$65,337.13 has been paid in accrued interest. In connection with the prepayment of the 2019 Note, the Company also issued to SMG 481,778 common share purchase warrants (the "Repayment Warrants") at an exercise price of US$7.50 per Repayment Warrant in accordance with the terms of the 2019 Note.


On August 22, 2019, the Company received written notification (the "Notification Letter") from the Nasdaq Stock Market LLC (the "Nasdaq") notifying the Company that it is not in compliance with the minimum market value requirement set forth in Nasdaq Rules for continued listing on the Nasdaq Capital Market. Nasdaq Listing Rule 5550(b)(2) requires companies to maintain a minimum market value of US$35 million and Listing Rule 5810(c)(3)(C) provides that a failure to meet the market value requirement exists if the deficiency continues for a period of 30 consecutive business days. Based on the market value of the Company for the 30 consecutive business days from July 10, 2019 to August 20, 2019, the Company no longer met the minimum market value requirement. The Notification Letter did not impact the Company's listing on the Nasdaq Capital Market at this time. In accordance with Nasdaq Listing Rule 5810(c)(3)(C), the Company has been provided 180 calendar days, or until February 17, 2020, to regain compliance with Nasdaq Listing Rule 5550(b)(2). To regain compliance, the Company's market value must exceed US$35 million for a minimum of 10 consecutive business days. The Company did not regain compliance by February 17, 2020.  On February 19, 2020, the Company received notice from the Listing Qualifications Staff (the "Staff") of the Nasdaq indicating that the Staff had determined to delist the Company's common shares from Nasdaq unless the Company requests a hearing before the Nasdaq Hearings Pane (the "Panel")l.  On February 26, 2020, the Company requested such a hearing and the date of the hearing was set by the Nasdaq for April 2, 2020.  This request for a hearing will stay any further action by the Staff and the Company's securities will continue to be eligible to trade on Nasdaq at least pending the ultimate conclusion of the hearing process  On April 30, 2020, the Panel granted the Company's request for an extension through August 17, 2020 to evidence compliance with the $35 million minimum market value of listed securities requirement for continued listing on the Nasdaq. On June 25, 2020,  the Nasdaq Notice confirmed that the Company has regained compliance with Listing Rule 5550(b)(2) pursuant to Listing Rule 5810 as the Company's market value exceeded $35 million for 10 consecutive business days between May 29, 2020 through June , 2020.

Nasdaq has broad discretionary public interest authority that it can exercise to apply additional or more stringent criteria for the continued listing of the Common Shares, or suspend or delist Common Shares even if the Common Shares meet all enumerated criteria for continued listing on the Nasdaq. The Nasdaq could use this discretionary authority at any time to delist the Common Shares. There can be no assurance that Nasdaq will not exercise such discretionary authority. In addition, there is no assurance that the Company will be able to maintain and/or regain compliance with the Nasdaq Marketplace Rules for continued listing.

On August 12, 2020 the Company completed the registered direct August 2020 Offering of 4,532,772 August 2020 Units  at a price of $2.775 per August 2020 Unit, with each August 2020 Unit comprised of one Common Share and three-quarters of one August 2020 Warrant for  aggregate gross proceeds to the Company for approximately $12,600,000 before deducting placement agent's fee and estimated expenses of the August 2020 Offering payable by the Company.

On August 17, 2020 SMG exercised 501,000 of the remaining 1,149,910 May 2020 Warrants at an exercise price of US$2.634 per May 2020 Warrant for aggregate exercise proceeds to the Company of US$1,319,634. Using the Exercise Proceeds, the Company has prepaid a portion of the 2019 Notes. The total aggregate amount of the Exercise Proceeds has been applied to the prepayment of the 2019 Note whereby US$1,263,884.57 has been applied to the remaining US$7,886,658.88 principal of the 2019 Note, US$25,277.69 has been paid as a prepayment penalty pursuant to the terms of the 2019 Note and US$30,471.74 has been paid in accrued interest. In connection with the prepayment of the 2019 Note, the Company also issued to SMG 168,518 common share purchase warrants at an exercise price of US$7.50 per Repayment Warrant in accordance with the terms of the 2019 Note.

The Company and its subsidiaries now operate as follows: Neovasc Inc. is the Canadian public Company and 100% owner of each of the subsidiary entities. NMI and Neovasc (US) Inc. ("NUS") are the operating companies for the group. They hold the majority of the tangible assets and NMI holds the Peripatch tissue license. NMI and NUS employ the majority of the employees of the Company. Neovasc Tiara Inc. ("NTI") holds all the intangible assets related to the Tiara and NML holds all the intangible assets related to the Reducer program. NMI charges both NTI and NML for the development services performed by its employees to develop the Tiara and the Reducer respectively. NML receives a royalty based on the Reducer revenues generated by NMI. NUS, the full-fledged distributer of Reducer IP in the US and of Tiara IP globally, charges NMI for development services performed by its employees to develop the Tiara and the Reducer respectively and these are then passed on through NMI to NTI and NML respectively. Neovasc GmbH conducts sales and marketing activities on behalf of NMI as part of the license agreement between NML and NMI for NMI to manufacture, distribute and sell the Reducer on behalf of NML. Neovasc Management Inc provides executive management services to Neovasc Inc.


Neovasc's Strategy

The Company's core strategy is to advance Tiara development programs for both the Tiara TA transapical system and the Tiara TF Transfemoral system. Additionally, the Company focuses on expanding revenue and global reimbursement for Reducer providing minimally invasive medical devices for a cardiovascular market that the Company believes is both growing and under-served by current treatment solutions.

Key elements of this strategy include:

Neovasc's Products

Tiara

In 2009, Neovasc started initial activities to develop novel technologies for catheter-based treatment of mitral valve disease. 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 transapically delivered Tiara is currently in the clinical trial phase providing a minimally invasive transcatheter device for patients who experience severe Mitral Regurgitation as a result of functional (most patients) or degenerative mitral heart valve disease, combined with an enlarged left ventricle. There are millions of patients worldwide who suffer from severe Mitral Regurgitation, the majority of them with functional Mitral Regurgitation. The unmet medical need in these patients is high. Mitral Regurgitation is often severe and can lead to heart failure and death. 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. Many of these patients are treated today via minimally invasive mitral valve repair procedures; however, these procedures are also complex, can take a long period of time to complete, and the clinical outcomes may not be optimal. Currently there is no transcatheter mitral valve replacement device approved for use in the U.S.


Our clinical experience to date has been with the 35 mm and 40 mm Tiara valves. First clinical use of the 40mm Tiara occurred in the fourth quarter of 2015. These two sizes allow for the treatment of approximately 75% of the annulus sizes in this high-risk patient population, in our TIARA-I and TIARA-II Clinical Studies. Currently, approximately 20% of this high-risk patient population meet all inclusion criteria for the Tiara studies and can be treated.

As of August 6, 2020, 2020, 83 patients have been treated with Tiara in either the TIARA-I Early Feasibility Clinical Study, compassionate use cases or in our TIARA-II CE Mark Clinical Study. Neovasc believes that early results have been encouraging. The 30-day survival rate for the 83 patients treated with the Tiara (i.e., those treated more than 30 days ago) is 89% with one patient now more than six years and eight months post implant. The Tiara has successfully treated both functional and degenerative Mitral Regurgitation patients, as well as patients with pre-existing prosthetic aortic valves and mitral surgical annuloplasty rings. On November 15, 2019, TIARA-I study enrollment was closed with 27 patients treated. This decision was not due to any safety concerns. The objective of the TIARA-I Early Feasibility study was to demonstrate the safety of the Neovasc TMVR system, while gathering preliminary information on device performance and clinical outcomes. With the experience to date, the Company believes it  has accomplished this objective. The patients that are in follow-up will continue their follow up assessments, adverse event reporting requirements, etc., as per protocol through their 5-year visits. This decision had no impact on the TIARA-II CE Mark Study. There are currently 18 active sites across Germany, Israel, Spain, the Netherlands and the UK with two additional sites close to being activated, however due to the COVID-19 pandemic restrictions, our sites were notified on April 24, 2020 that we were placing enrollment on temporary hold. The results from our clinical experience to-date continues to demonstrate the potential benefit for patients who otherwise have no treatment options. 

Neovasc believes that there are several unique attributes of the Tiara that may provide advantages over other approaches to mitral valve replacement, in particular the low atrial profile, its D shape, enabling a better anatomical fit and less risk of left ventricular outflow tract obstruction, and its unique combined skirt and anchoring mechanism. The Tiara has successfully treated 17 patients with previous aortic valves (AVR), including mechanical, bioprosthetic and TAVI, without any LVOT obstruction, no peri-procedural deaths or paravalvular leak. Data on the first 12 patients with previous AVR treated with Tiara was published in 2018 in Circulation: Cardiovascular Interventions.

There are several other transcatheter mitral valve replacement devices in development by third-parties, some of which have been implanted in early feasibility type studies, pivotal U.S. studies, and CE Mark studies with varying results. There is no certainty that the Tiara will successfully proceed through clinical evaluation and ultimately receive regulatory approval to treat these patients.

The Tiara valve is manufactured, packaged and labelled in-house by the Company and is made up of two major components: the leaflets which are made from the Peripatch bovine tissue licensed from Boston Scientific, a fabric skirt, 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. If this supplier were unable to provide the nitinol frame in the future, it would seriously impact further development of the Tiara. The Tiara delivery system is manufactured, packaged and labelled in-house by the Company using customized standard catheter construction components that are readily available through vendors.

The TIARA-II study is estimated to cost approximately $15 million. While many challenges remain prior to achieving commercialization (including, but not limited to, positive clinical trial results and obtaining regulatory approval from the relevant authorities), the Company believes the Tiara is being recognized as one of the leading mitral valve replacement devices. Neovasc is managing and conducting the TIARA-II study itself in conjunction with certain service providers who undertake portions of data collection, data management, data analysis, safety and event monitoring and similar functions. The Tiara is currently manufactured for use in these studies by Neovasc at its own facilities following required medical device quality requirements. In the event of a positive outcome from the TIARA-II study and the Company successfully obtaining CE Mark approval, the Tiara would be commercially manufactured in the same manner at Neovasc's facility.


Regulatory Status

The Company has filed for CE Mark for Tiara TA in Europe under the Medical Device Directive and anticipates a CE Mark decision in the first half 2021.  There is no assurance that European regulatory filing and an 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.

The Tiara TA and Tiara TF are early-stage development products without any regulatory approvals in any country. The Company intends to continue to fund development of this product as cash flow allows.

Reducer

The Reducer is a treatment for patients with refractory angina, a painful and debilitating condition that occurs when the coronary vasculature delivers an inadequate supply of blood to the heart muscle, despite treatment with standard revascularization or cardiac drug therapies.

Worldwide, coronary artery disease ("CAD") is the leading cause of death. It is the largest contributor to the global burden of disease as reflected in disability-adjusted life years, a measure which combines premature mortality and the prevalence and severity of ill-health. On this measure, the impact of CAD increased by 29% in the period from 1990 to 2010. This reflects the worldwide shift to those chronic diseases associated with an aging global population. The most frequent (and often the first) manifestation of stable CAD is chronic stable angina. As a result, angina is a significant burden on healthcare systems worldwide. There is a clear association between more frequent angina and greater utilization of healthcare resources.

Refractory angina, resulting in continued symptoms despite maximal medical therapy without revascularization options, is estimated to affect 600,000 to 1.8 million Americans, with 50,000 to 100,000 new cases per year. A recent publication in the Cardiovascular Revascularization Medicine journal by Benck and Henry suggests that the prevalence of No-Option Refractory Disabling Angina (NORDA) in the U.S. population is between 26,000 and 52,000. Another publication in the European Heart Journal by Crea et al., stated persistence of angina caused by incomplete coronary revascularization may occur in up to 30% in the current era, although definitions of incomplete revascularization are heterogeneous.  It further stated that persistent angina is associated with a significant economic burden with healthcare costs almost being two-fold higher among patients with persistent angina post-percutaneous coronary intervention vs. those who become symptom free. Additionally, there is emerging interest in treating patients that have refractory angina despite patent coronary arteries.  Angina with non-obstructive coronary artery disease may affect as many as 39% of patients with chest pain according to a study from Patel et. al, published in the New England Journal of Medicine.  Furthermore, a publication in Circulation by Lee et. al, suggests upwards of 20% of patients with angina and non-obstructive coronary artery disease have evidence of microvascular dysfunction.  Increasing interest in diagnosis and treatment of angina and microvascular dysfunction as evidenced by the 2019 ESC Guidelines for the diagnosis and management of chronic coronary syndromes provides growing support for Reducer treatment.

The pain and shortness of breath associated with refractory angina can make it difficult for patients to engage in routine activities, such as walking or climbing stairs. Clinical studies demonstrate that the Reducer can provide significant relief of chest pain, shortness of breath and other debilitating symptoms in refractory angina patients. A significant proportion of the refractory angina patients in the United States and in Europe are potential candidates for the current Reducer therapy, either because they cannot be revascularized or because they are otherwise poorly managed using conventional medical therapies. These patients represent a substantial potential market opportunity for the Reducer. There continues to be interest from the medical community to explore the use of Reducer for other indications. Further clinical trials will need to be conducted to explore this possibility.

The Reducer is targeting a patient population that has failed to gain relief of their symptoms, despite other medical treatment options. A refractory patient, by definition, is resistant to other existing interventional cardiology therapies and is not receiving adequate relief from available drug regimens to manage their chest pain, shortness of breath and other debilitating symptoms. Neovasc believes that further studies may demonstrate that additional patient populations may benefit from treatment with Reducer and thus could further increase its market potential.


The Reducer is an hourglass-shaped, balloon-expandable, stainless steel, bare metal device, which is implanted in the coronary sinus, creating a restriction in venous outflow from the myocardium (the muscular layer of the heart wall). It is implanted using conventional percutaneous, or needle puncture, 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 0.035 inch guidewire. The implant procedure requires minimal training for experienced interventionalists. Once guidewire access to the coronary sinus is achieved, implantation typically takes less than 20 minutes.

Using a catheter-based procedure, the Reducer is implanted in the coronary sinus (the main vein draining blood from the heart muscle). Following implantation, the Reducer (all but the mid-section) becomes covered with endothelial tissue after about 4-6 weeks. This tissue coverage creates a permanent (but reversible, if necessary) 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 focal narrowing provides a backwards pressure elevation in the coronary sinus which is intended to improve blood perfusion to ischemic territories of the heart muscle by forcing redistribution of blood from the less ischemic areas to the more ischemic areas of the heart muscle. This can result in improved perfusion of the endocardium, which helps relieve ischemia and chest pain, shortness of breath and other debilitating symptoms. The physiological mechanism behind this effect is well documented in the 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, a first-in-human clinical trial of 15 patients suffering from chronic refractory angina who were followed out to six months, and then again at three years post 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 were 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 at six months and these same results were noted at the three year follow up. During this period, the Reducer remained patent with no evidence of migration, and symptom relief was maintained in these patients.

The Company completed the COSIRA trial, a prospective, multicenter, randomized, double-blind, sham-controlled study to assess the safety and effectiveness of the Reducer device in 2013. The COSIRA trial's primary endpoint was a two-class improvement in angina symptoms six months after implantation based on the 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 III or IV, were enrolled in the COSIRA trial. The COSIRA trial 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 [42.3%] of the control patients [p-value = 0.003]). The COSIRA trial results were published in the New England Journal of Medicine in February 2015.

In 2016, Neovasc initiated the REDUCER-I post market observational study as a multi-center, multi-country, three-arm study collecting long-term data from European patients implanted with the Reducer. The study is expected to enroll up to 400 patients. Currently, 274 patients have been enrolled across 25 centers that are active in Italy, Germany, Austria, Belgium, the Netherlands, the United Kingdom, Spain and Switzerland. Enrollment has been delayed due to the impact of COVID-19 in 2020. 15 patients were enrolled in the third quarter of 2020, compared to 14 patients in the same period last year.


In 2018 an article by Parikh, et al., was published in the Journal of the American College of Cardiology (JACC) titled, "First-in-Human Use of Coronary Sinus Reducer in Patients with Refractory Angina".  This article describes the long-term structural, anatomic, and clinical durability of the Reducer. Reducers were patent 12 years following implantation, with no signs of strut fractures, dislocation, thrombosis, or migration, and the sustained improvement in angina class seen at six months and three years, was also maintained at the 12 year follow-up.

Hundreds of patients have been enrolled in clinical studies conducted by third parties across Europe and Israel relating to the Reducer. These studies continue to show a strong safety profile and positive clinical results that trend closely to the COSIRA randomized study. Many of these studies have been published and presented in medical forums. It is anticipated that as the commercial use of the Reducer continues to expand, additional third-party studies, investigations and presentations will be undertaken. If the results from such third-party activities continue to show positive results from the product, they may provide additional data to support expanded adoption of the Reducer for the intended patient population. As a result of the clinical evidence from these studies and publications, the Reducer Therapy has now been recognized in the European Society of Cardiology Guidelines as a treatment option for refractory angina.

Included in the numerous publications of clinical results since the COSIRA study was published in the New England Journal of Medicine in 2015, a recent publication in the European Heart Journal by Gallone, et al., on the "Cost-effectiveness of the coronary sinus Reducer and its impact on the healthcare burden of refractory angina" indicated that the Reducer was consistently cost-effective according to a range of cost-effectiveness thresholds after just one year of implant. 

Following the positive data from the COSIRA trial, the Company initiated a pilot launch of the Reducer in select European markets in early 2015. The Company has signed distribution agreements in multiple jurisdictions across Europe. Direct sales are underway in select centers in Germany. Based on the initial results from the targeted launch, Neovasc has developed an expanded sales plan and strategy for 2020 and beyond.

Based on achieving NUB 1 status in Germany and a general positive reception in the European market, with positive experiences by many physicians from the treatment of their own patients with the Reducer, we are seeing an increase in adoption of the Reducer therapy in Europe. The commercial progress for the Reducer in the third quarter of 2020 was encouraging with a 25% increase in revenue compared to 2019. However, the impact of COVID-19 in the second quarter of 2020 has seen revenue for the nine months ended September 30, 2020 to decrease 5% compared to the same period in the prior year.

We are seeing a growing level of enthusiasm in Europe for the Reducer therapy and we believe that the therapy has significant potential. In order to further accelerate the penetration of the therapy, we are open to considering strategic alternatives for the Reducer, including potential alliances in Europe, the United States (though now less likely given the outcome of the FDA panel meeting) and the rest of the world.

On June 20, 2018, the Company announced the first U.S. patient had been implanted with the Reducer under compassionate use. On October 3, 2018, the Company reported the positive follow-up for this patient noting that the patient was able to walk several miles without any symptoms. The patient has reduced his use of nitroglycerin from 2-3 times a week to 1 or 2 times per month. A second patient received a Reducer implant under compassionate use on January 31, 2019 in the U.S. The most recent update from the attending physician indicated that both patients are doing very well.

On May 6, 2019, the Company announced that 1,000 patients diagnosed with refractory angina have been treated with the Reducer. The Reducer therapy now benefits from medical evidence spanning 1,000 patients and 14 years of follow up.

On September 3, 2019, the Company announced that the European Society of Cardiology included Neovasc Reducer in the European Practice Guidelines for the Diagnosis and Management of Chronic Coronary Syndromes. The Reducer entered at Class 2 B.

On November 1, 2019, the Company announced it had advised the FDA of its decision to submit a PMA application, and on December 31, 2019, the Company announced the submission of a PMA to the FDA for the Reducer.


On July 9, 2020, the Company announced it had received notification of an FDA Circulatory Systems Devices Panel Meeting scheduled for October 27, 2020.

On October 28, 2020, the Company announced results from the FDA Circulatory Systems Devices Panel Meeting at which the Panel voted 14 to 4 "in favor" that the Neovasc Reducer™ is safe when used as intended and voted 1 to 17 "against" on the issue of a reasonable assurance of effectiveness. The third vote was 13 to 3 "against" (2 abstained) on whether the relative benefits outweighed the relative risks. The FDA will provide the Company with their decision on the PMA at a later date.

Regulatory Status

The Reducer is approved for sale in Europe, having received CE Mark designation in November 2011. In preparation for product launch, Neovasc completed development of the commercial-generation Reducer and the product is currently in commercial scale manufacture.

On November 3, 2017, Neovasc received FDA approval for a U.S. IDE clinical trial, COSIRA-II (a trial design similar to the COSIRA study). While the principal investigator and co-principal investigator for this study were already appointed, the Company evaluated the timing for starting such a U.S. clinical trial, funding being the largest impediment. The cost of this U.S. clinical trial is expected to be approximately $20 million.

On October 10, 2018, the Company announced that the FDA had granted "Breakthrough Device Designation" for the Reducer. The FDA grants this designation in order to expedite the development and review of a device that demonstrates compelling potential to provide a more effective treatment or diagnosis for life-threatening or irreversibly debilitating diseases.

On December 20, 2018, Neovasc filed a comprehensive Q-Sub submission to the FDA with all available Reducer Clinical evidence, requesting a Sprint FDA discussion meeting. The Neovasc team, together with two top U.S. Cardiologists, met with the FDA proposing moving forward with a PMA submission using the available Neovasc clinical evidence including the prospective, multicenter, randomized, double-blind, sham controlled study assessing the safety and efficacy of the Reducer in 104 patients in the European Union and Canada (COSIRA), a multi-center, multi-country, three-arm observational post market study (REDUCER-I), and supportive safety and efficacy data from peer-reviewed journals.

On February 20, 2019, the Company announced that the FDA had informed Neovasc that, despite "Breakthrough Device Designation", the FDA review team recommended collection of further pre-market blinded data prior to PMA submission.

On June 26, 2019, the Company and two top U.S. Cardiologists, met with FDA to further discuss available clinical evidence for the Reducer, to try to reach agreement on potential options to enter the U.S. Market.  FDA provided the Company with guidance towards potential alternate options, including the HDE pathway for class IV refractory angina patients and/or alternate clinical trial designs for a broader refractory angina patient population.

Following the Sprint discussion held with the FDA on October 9, 2019 and weighing all available options a decision was made by the Company to pursue a PMA application for this Breakthrough medical device. 

On October 27, 2020, the FDA Circulatory Systems Devices Panel Meeting was held.  The Panel voted 14 to 4 "in favor" that the Neovasc Reducer™ is safe when used as intended and voted 1 to 17 "against" on the issue of a reasonable assurance of effectiveness. The third vote was 13 to 3 "against" (2 abstained) on whether the relative benefits outweighed the relative risks. The FDA will provide the Company with their decision on the PMA. 

New Products/Components/Cycles

Tiara

A key strategic and focused activity for the Company in the Mitral Valve space is the development of the transfemoral, trans-septal version of the Tiara Mitral Valve, which the Company believes has the potential to be an important advance for the optimal treatment of severe Mitral Regurgitation, by providing a safe and broadly usable implantation technique. These development activities are taking place both in the Company's Vancouver, BC and New Brighton, MN facilities. Outside of the development of a unique and innovative delivery system, the Company will make several minor, but meaningful changes to the current Tiara valve, in order to enhance trans-septal delivery and deployment, as well as to further increase the suitable patient population, while maintaining the core features and functionality of the current valve in order to leverage clinical and technical performance data. We initiated the formal development of this system, based on the completed conceptual work, at the end of the first quarter of 2019.


Reducer

The Reducer is a commercial-stage product with European CE Mark approval. The Company initiated a pilot launch of the Reducer in select European markets in 2015. The Company has also initiated Reducer sales in other non-US markets with distribution agreements in several countries.

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