EX-1.3 4 v405861_ex1-3.htm EXHIBIT 1.3

Exhibit 1.3

Neovasc Inc.

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED

DECEMBER 31, 2014 AND 2013

(Expressed in Canadian dollars)

CONTENTS

	Page

Independent Auditor’s Report	1 – 2

Consolidated Statements of Financial Position	3

Consolidated Statements of Comprehensive Loss	4

Consolidated Statements of Changes in Equity	5

Consolidated Statements of Cash Flows	6

Notes to the Consolidated Financial Statements	7 – 26

Report of Independent
Registered Public Accounting Firm

Grant Thornton LLP

Suite 1600, Grant Thornton Place

333 Seymour Street

Vancouver, BC

V6B 0A4

T +1 604 687 2711

F +1 604 685 6569

www.GrantThornton.ca

To the Board of Directors and Shareholders of
Neovasc Inc.

We have audited the accompanying consolidated financial statements of Neovasc Inc. (the “Company”), which comprise the consolidated statements of financial position as at December 31, 2014 and December 31, 2013 and the consolidated statements of comprehensive loss, changes in equity and cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information.

Management’s responsibility for the financial statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The audit of the consolidated statement of financial position as at December 31, 2014 and the consolidated statements of comprehensive loss, changes in equity and cash flows for the year then ended, was conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States) and Canadian generally accepted auditing standards. The audit of the consolidated statement of financial position as at December 31, 2013 and the consolidated statements of comprehensive loss, changes in equity and cash flow for the year then ended, was conducted in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

Audit • Tax • Advisory

Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd

An audit involves performing procedures to obtain audit evidence about, and examining on a test basis, the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We were not engaged to provide an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Neovasc Inc. as at December 31, 2014 and December 31, 2013 and its financial performance and its cash flows for the years then ended, in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

Vancouver, Canada
March 27, 2015	Chartered Accountants

Audit • Tax • Advisory

Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd

NEOVASC INC.

Consolidated Statements of Financial Position

(Expressed in Canadian dollars)

	Notes	December 31, 2014			December 31, 2013

ASSETS
Current assets
Cash and cash equivalents	6	$	6,025,013		$	3,403,472
Investments	7		11,999,999			-
Accounts receivable	8		1,790,971			1,289,933
Inventory	9		475,975			484,811
Prepaid expenses and other assets			259,261			28,266
Total current assets			20,551,219			5,206,482

Non-current assets
Property, plant and equipment	10		3,078,041			2,236,900
Total non-current assets			3,078,041			2,236,900

Total assets		$	23,629,260		$	7,443,382

LIABILITIES AND EQUITY
Liabilities
Current liabilities
Accounts payable and accrued liabilities	11	$	2,513,072		$	1,577,158
Current portion of long-term debt	12		44,591			43,548
Total current liabilities			2,557,663			1,620,706

Non-current liabilities
Long-term debt	12		157,628			200,084
Total non-current liabilities			157,628			200,084

Total liabilities			2,715,291			1,820,790

Equity
Share capital	14		99,169,635			73,411,391
Contributed surplus	14		18,899,435			10,305,204
Deficit			(97,155,101	)		(78,094,003	)
Total equity			20,913,969			5,622,592

Total liabilities and equity		$	23,629,260		$	7,443,382

SUBSEQUENT EVENTS (see Note 21)

See Accompanying Notes to the Consolidated Financial Statements

NEOVASC INC.

Consolidated Statements of Comprehensive Loss

For the years ended December 31,

(Expressed in Canadian dollars)

	Notes	2014			2013

REVENUE
Product sales		$	2,262,880		$	2,694,977
Contract manufacturing			3,355,115			1,776,893
Consulting services			10,245,456			7,275,766
	15		15,863,451			11,747,636

COST OF GOODS SOLD	17		10,112,941			7,083,877
GROSS PROFIT			5,750,510			4,663,759

EXPENSES
Selling expenses	17		176,431			78,475
General and administrative expenses	17		11,853,675			4,846,935
Product development and clinical trials expenses	17		12,886,844			6,847,318
			24,916,950			11,772,728

OPERATING LOSS			(19,166,440	)		(7,108,969	)

OTHER INCOME/(EXPENSE)
Interest income			219,547			11,450
Interest expense			(7,727	)		(9,150	)
Loss on disposal of property and equipment			(32,022	)		-
(Loss)/Gain on foreign exchange			(74,456	)		356,419
			105,342			358,719

LOSS AND COMPREHENSIVE LOSS FOR THE YEAR		$	(19,061,098	)	$	(6,750,250	)

LOSS PER SHARE
Basic and diluted loss per share	19	$	(0.36	)	$	(0.14	)

See Accompanying Notes to the Consolidated Financial Statements

NEOVASC INC.

Consolidated Statements of Changes in Equity

(Expressed in Canadian dollars)

	Notes	Share Capital			Contributed Surplus			Deficit			Total Equity

Balance at January 1, 2013		$	70,421,185		$	8,370,258		$	(71,343,753	)	$	7,447,690

Issue of share capital on exercise of warrants	14(b)(i)		2,919,062			-			-			2,919,062
Issue of share capital on exercise of options	14(b)		71,144			(28,434	)		-			42,710
Share-based payments	14(b)		-			1,963,380			-			1,963,380
Transaction with owners during the year			2,990,206			1,934,946			-			4,925,152

Loss and comprehensive loss for the year			-			-			(6,750,250	)		(6,750,250	)

Balance at December 31, 2013		$	73,411,391		$	10,305,204		$	(78,094,003	)	$	5,622,592

Issue of share capital pursuant to a bought deal prospectus offering	14(b)(ii)		25,152,000			-			-			25,152,000
Share issue costs			(506,651	)		-			-			(506,651	)
Issue of share capital on exercise of options	14(b)		1,112,895			(920,970	)		-			191,925
Share-based payments	14(b)		-			9,515,201			-			9,515,201
Transaction with owners during the year			25,758,244			8,594,231			-			34,352,475

Loss and comprehensive loss for the year			-			-			(19,061,098	)		(19,061,098	)

Balance at December 31, 2014		$	99,169,635		$	18,899,435		$	(97,155,101	)	$	20,913,969

See Accompanying Notes to the Consolidated Financial Statements

NEOVASC INC.

Consolidated Statements of Cash Flows

For the years ended December 31,

(Expressed in Canadian dollars)

	Notes	2014			2013

OPERATING ACTIVITIES
Loss for the year		$	(19,061,098	)	$	(6,750,250	)
Adjustments for:
Depreciation	17		375,811			271,660
Share-based payments	17		9,515,201			1,963,380
Loss on disposal of fixed assets			32,022			-
Write-down accounts receivable			218,501			-
Interest income			(219,547	)		(11,450	)
Interest expense			7,727			9,150
			(9,131,383	)		(4,517,510	)

Net change in non-cash working capital items:
Accounts receivable			(616,564	)		(386,524	)
Inventory			8,836			(292,869	)
Prepaid expenses and other assets			(230,995	)		1,625
Accounts payable and accrued liabilities			935,914			509,875
			97,191			(167,893	)

Interest paid and received:
Interest received			116,572			11,450
Interest paid			(7,727	)		(9,150	)
			108,845			2,300

			(8,925,347	)		(4,683,103	)

INVESTING ACTIVITES
Investments in guaranteed investment certificates			(11,999,999	)		-
Proceeds from sale of license			-			344,862
Purchase of property, plant and equipment	10		(1,248,974	)		(1,041,188	)
			(13,248,973	)		(696,326	)

FINANCING ACTIVITIES
Repayment of long-term debt	12		(41,413	)		(39,991	)
Proceeds from share issue pursuant to a bought deal prospectus offering, net of share issue costs of $506,651	14		24,645,349			-
Proceeds from exercise of warrants	14		-			2,919,062
Proceeds from exercise of options	14		191,925			42,710
			24,795,861			2,921,781

NET CHANGE IN CASH AND CASH EQUIVALENTS			2,621,541			(2,457,648	)

CASH AND CASH EQUIVALENTS
Beginning of the year			3,403,472			5,861,120
End of the year		$	6,025,013		$	3,403,472

Represented by:
Cash	6		910,048			3,403,472
Cashable high interest savings accounts	6		5,114,965			-
		$	6,025,013		$	3,403,472

See Accompanying Notes to the Consolidated Financial Statements

NEOVASC INC.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2014 and 2013

(Expressed in Canadian dollars)

INCORPORATION AND NATURE OF BUSINESS

Neovasc Inc. (“Neovasc” or the “Company”) is a limited liability company incorporated and domiciled in Canada. The Company was incorporated as Medical Ventures Corp. under the Company Act (British Columbia) on November 2, 2000 and was continued under the Canada Business Corporations Act on April 19, 2002. On July 1, 2008, the Company changed its name to Neovasc Inc.

Neovasc is the parent company. The consolidated financial statements of the Company as at December 31, 2014 and December 31, 2013 and for the years ended December 31, 2014 and 2013 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:NVC) 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 Tiara™ technology in development for the transcatheter treatment of mitral valve disease, the Neovasc Reducer™ for the treatment of refractory angina and a line of advanced biological tissue products called Peripatch™ that are used as key components in third-party medical products including transcatheter heart valves.

BASIS OF PREPARATION

(a)

Statement of compliance with IFRS

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”).

(b)

Basis of measurement

The Company’s consolidated financial statements have been prepared on the historical cost basis except as explained in the accounting policies set out in Note 3.

(c)

Basis of consolidation

The consolidated financial statements include the financial statements of the Company and its wholly-owned subsidiaries, Neovasc Medical Inc., Angiometrx Inc., Neovasc Tiara Inc., Neovasc Medical Ltd., B-Balloon Ltd. and Neovasc (US) Inc. All intercompany balances and transactions have been eliminated upon consolidation.

(d)

Presentation of financial statements

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

NEOVASC INC.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2014 and 2013

(Expressed in Canadian dollars)

BASIS OF PREPARATION (continued)

(e)

Use of estimates and management judgment

The preparation of consolidated financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.

Significant areas requiring the use of estimates relate to the determination of the net realizable value of inventory (obsolescence provisions), allowance for doubtful accounts receivable, impairment of non-financial assets, useful lives of depreciable assets and expected life, volatility and forfeiture rates for share-based payments.

Inventories

The Company estimates the net realizable values of inventories, taking into account the most reliable evidence available at each reporting date. The future realization of these inventories may be affected by future technology or other market-driven changes that may reduce future selling prices.

Allowance for doubtful accounts receivable

The Company provides for bad debts by setting aside accounts receivable past due more than 121 days. Actual collectability of customer balances can vary from the Company’s estimation.

Impairment of long-lived assets

In assessing impairment, the Company estimates the recoverable amount of each asset or cash generating unit based on expected future cash flows and uses an interest rate to discount them. Estimation uncertainty relates to assumptions about future operating results and the determination of a suitable discount rate.

Useful lives of depreciable assets

The Company reviews its estimate of the useful lives of depreciable assets at each reporting date, based on the expected utilization of the assets.

Share-based payment

The Company measures the cost of equity-settled transactions by reference to the fair value of the equity instruments at the date at which they are granted. Estimating fair value for share-based payment transactions requires determining the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires determining the most appropriate inputs to the valuation model including the expected life of the share option, volatility and forfeiture rates and making assumptions about them.

Determination of functional currency

The Company determines its functional currency based on the primary economic environment in which it operates. IAS 21 The Effects of Changes in Foreign Exchange Rates outlines a number of factors to apply in determining the functional currency, which is subject to significant judgment by management.

Deferred tax assets

Deferred tax assets are recognized in respect of tax losses and other temporary differences to the extent probable that there will be taxable income available against which the losses can be utilized. Judgment is required to determine the amount of deferred tax assets that can be recognized based on estimate of future taxable income.

NEOVASC INC.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2014 and 2013

(Expressed in Canadian dollars)

SIGNIFICANT ACCOUNTING POLICIES

The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements.

(a)

Foreign currency translation

The functional currency of Neovasc and each of its subsidiaries is the Canadian dollar. The presentation currency of the consolidated financial statements is the Canadian dollar. Primary indicators in determining functional currency include the currency that influences sales prices, labour, material purchases and other costs. Other indicators include the currency in which funds from financing activities are generated, and the currency in which receipts from operations are usually retained.

Foreign currency denominated monetary assets and liabilities are translated into Canadian dollars at the period end rate of exchange. Foreign currency denominated non-monetary assets and liabilities are translated at the historical rates of exchange in effect on the date the asset was acquired or liability incurred. Foreign currency denominated revenues and expenses are translated at the rate of exchange on the date on which such transactions occur. Foreign currency gains or losses arising on the settlement of foreign-currency denominated monetary assets and liabilities are recognized in profit or loss in the period in which they arise.

(b)

Financial instruments

Financial assets and financial liabilities are recognized on the Company’s consolidated statement of financial position when the Company becomes party to the contractual provisions of the instrument. Financial assets are de-recognized when the contractual rights to the cash flows from the financial asset expire or when the contractual rights to those assets are transferred. Financial liabilities are de-recognized when the obligation specified in the contract is discharged, cancelled or expired.

The Company classifies its cash and cash equivalents, investments and accounts receivable as loans and receivables. Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition loans and receivables are measured at amortized cost using the effective interest method. The Company classifies its long-term debt and accounts payable and accrued liabilities as other financial liabilities. These financial liabilities are recognized initially at fair value less any directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are measured at amortized cost using the effective interest method.

(c)

Cash and cash equivalents

Cash and cash equivalents include cash on hand and short-term, highly liquid investments that are readily convertible to known amounts of cash within 90 days of purchase.

(d)

Investments

Investments include investments in high interest savings accounts (“HISAs”) and guaranteed investment certificates (“GICs”) that are readily convertible to known amounts of cash after 90 days of purchase.

(e)

Inventory

Inventory is valued at the lower of cost and net realizable value for finished goods, work in progress and raw materials. Cost is determined on a first-in, first-out basis. Cost of finished goods and work in progress includes direct material and labor costs and an allocation of manufacturing overhead and applicable shipping and handling costs. In determining net realizable value, the Company considers factors such as obsolescence, future demand for inventory and contractual arrangements with customers.

NEOVASC INC.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2014 and 2013

(Expressed in Canadian dollars)

SIGNIFICANT ACCOUNTING POLICIES (continued)

(f)

Property, plant and equipment

Items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses.

As no finite useful life for land can be determined, related carrying amounts are not depreciated.

Depreciation of property, plant and equipment is recognized in profit or loss over the estimated useful lives using the following rates and methods:

Building	4% declining balance
Production equipment	30% declining balance
Computer hardware	30% declining balance
Computer software	100% declining balance
Office equipment	20% declining balance
Leasehold improvements	amortized over the life of the lease

Gains or losses arising on the disposal of property, plant and equipment are determined as the difference between the disposal proceeds and the carrying amount of the assets and are recognized in profit or loss.

(g)

Impairment of assets

Financial assets (including accounts receivable)

The Company reviews its accounts receivable at least at each reporting date to determine whether there is objective evidence that it is impaired.

The Company considers evidence of impairment for accounts receivable when the amounts are past due or when other objective information is received that a specific counterparty may default. Accounts receivable that are not considered to be individually impaired are reviewed for impairment in groups, using historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management’s judgment as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical trends.

An impairment loss is calculated as the difference between an asset’s carrying amount and the present value of the estimated future cash flows discounted at the asset’s original effective interest rate. Losses are recognized in profit or loss and reflected in an allowance account against receivables. When subsequent events cause the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss.

Non-financial assets

The carrying amounts of the Company’s non-financial assets, other than inventories are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated.

The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs of disposal. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, if it is not possible to estimate the recoverable amount of an individual asset, the asset is included in the cash-generating unit to which it belongs and the recoverable amount of the cash-generating unit is estimated. As a result, some assets are tested individually for impairment and some are tested at the cash-generating unit level. A cash-generating unit is the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets.

An impairment loss is recognized if the carrying amount of an asset or its cash-generating unit exceeds its estimated recoverable amount. Impairment losses are recognized in profit or loss. Impairment losses recognized in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amounts of the other assets in the unit on a pro-rata basis.

NEOVASC INC.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2014 and 2013

(Expressed in Canadian dollars)

SIGNIFICANT ACCOUNTING POLICIES (continued)

(h)

Employee benefits

The Company provides short-term employee benefits and post-employment benefits to current employees. The short-term employee benefits includes wages, salaries, social security contributions, paid annual leave, paid sick leave and medical care. Short-term employee benefits obligations are measured on an undiscounted basis and are expensed as the related service is provided.

The Company provides post-employment benefits through defined contribution plans, including contributions to the Canadian Pension Plan and individual Registered Retirement Savings Plans of qualified employees. Contributions to defined contribution pension plans are recognized as an employee benefit expense in the years during which services are rendered by employees.

(i)

Revenue recognition

The Company earns revenue from three sources: product sales, contract manufacturing and consulting services. Revenues from these three sources are recognized as follows:

Revenue from the sale of goods is recognized when the Company has transferred to the buyer the significant risks and rewards of ownership of the goods, the Company retains neither continuing managerial involvement nor effective control over the goods sold, the amount of revenue can be measured reliably, it is probable that the economic benefits associated with the transaction will flow to the Company and the costs incurred or to be incurred in respect of the transaction can be measured reliably.

For consulting services, revenue is recognized when the amount of revenue can be measured reliably, it is probable that the economic benefits associated with the transaction will flow to the Company and the stage of completion and the costs incurred or to be incurred in respect of the transaction can be measured reliably.

Product sales and Contract manufacturing

For product sales and contract manufacturing, these criteria are met upon time of shipment at shipping point.

Consulting services

For consulting services, these criteria are met as the services are delivered under the terms of the related consulting services contract.

(j)

Research and development

The Company is engaged in research and development. Research costs are expensed as incurred. Development costs are expensed in the period incurred, unless they meet the criteria for capitalization. The criteria include that development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and the Company intends to and has sufficient resources to complete development and to use or sell the asset. Other development expenditure is recognized in profit or loss as incurred. Management reviews the applicable criteria on a regular basis and if the criteria are no longer met, any remaining unamortized balance is written off as a charge to profit or loss. Research and development costs are reduced by any scientific research and experimental development tax credits to which the Company is entitled.

(k)

Government assistance

Government assistance, consisting of grants and scientific research and experimental development tax credits, is recorded as a reduction of either the related expense or the cost of the asset to which it relates. The assistance is recorded in the accounts when reasonable assurance exists that the Company has complied with the terms and conditions of the assistance program and when there is reasonable assurance that the assistance will be realized.

(l)

Interest income and interest expense

Interest income comprises interest income on the cash in the bank, interest income from HISAs and GICs. Interest income is recognized in profit or loss, using the effective interest method.

Interest expense comprises interest expense on the long-term debt. Interest expense is recognized in profit or loss using the effective interest method.

NEOVASC INC.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2014 and 2013

(Expressed in Canadian dollars)

SIGNIFICANT ACCOUNTING POLICIES (continued)

(m)

Operating lease

Leases where the Company does not assume substantially all the risks and rewards of ownership are classified as operating leases. Payments on operating lease are recognized as an expense on a straight-line basis over the lease term. Associated costs, such as maintenance and insurance, are expensed as incurred.

(n)

Income taxes

Tax expense represents current tax and deferred tax. Tax is recognized in profit or loss except to the extent it relates to items recognized in other comprehensive income or directly in equity. Current tax is based on the taxable profits for the year, and is calculated using tax rates that have been enacted or substantively enacted by the reporting date.

Deferred tax is recognized, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their respective carrying amounts in the consolidated financial statements. However, deferred tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction, other than a business combination, that at the time of the transaction affects neither the accounting profit nor taxable profit. Deferred tax assets are recognized to the extent that it is probable that the future taxable profit will be available against which the deductible temporary differences and the carry forward of unused tax credits and unused tax losses can be utilized. Deferred tax assets and liabilities are offset when the Company has a right and intention to offset tax assets and liabilities from the same taxation authority.

Deferred tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the reporting date and are expected to apply when the related deferred tax asset is realized or the deferred tax liability settled.

(o)

Equity

Share capital represents the value of shares that have been issued. Any transaction costs associated with the issuing of shares are deducted from share capital.

From time to time the Company issues units consisting of common shares and common share purchase warrants. The Company estimates the fair value of the common shares based on their market price on the date of the issuance of the units. The residual difference, if any, between the unit price and the fair value of each common share represents the fair value attributable to each warrant. Any transaction costs associated with the issuance of units are apportioned between the common shares and warrants based on their relative fair values.

Professional, consulting, regulatory fees and other costs that are directly attributable to financing transactions are deferred until such time as the transactions are completed. Share issue costs are charged to share capital when the related shares are issued. Costs relating to financing transactions that are abandoned are charged to profit and loss.

Contributed surplus includes the fair value of vested stock options (see Note 3(p)).

Deficit includes all current and prior period losses.

(p)

Share-based payments

The Company has an equity-settled share-based stock option plan. The Company grants stock options to buy common shares of the Company to directors, officers, employees and consultants (see Note 14(c)).

The fair value of the stock options awarded to employees, directors, officers and service providers is measured at grant date, using the Black-Scholes Option Pricing Model with assumptions for risk-free interest rates, dividend yields, volatility factors of the expected market price of the Company's common shares, based on historic market price volatility, and an expected life of the options. The fair value of the options is recognized as an employee expense, with a corresponding increase in equity, over the period that the employees unconditionally become entitled to the options. The amount recognized as expense is adjusted to reflect the number of stock options expected to vest.

For stock options with non-vesting conditions, the grant date fair value of the options is recognized to reflect such conditions and there is no true-up for differences between expected and actual outcomes.

NEOVASC INC.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2014 and 2013

(Expressed in Canadian dollars)

SIGNIFICANT ACCOUNTING POLICIES (continued)

(q)

Loss per share

Loss per share is computed using the weighted average number of common shares outstanding during the year. Diluted loss per share is computed using the weighted average number of common shares outstanding during the year for the effects of all potentially dilutive shares, only when their conversion to shares would decrease earnings per share or increase loss per share.

(r)

Operating segment

The Company operates its business in one segment. The Company reports information about revenues from customers for products sales, contract manufacturing and consulting services, from geographical areas, and from major customers (see Note 15).

(s)

Future accounting pronouncements

The Company has reviewed new and revised accounting pronouncements that have been issued but are not yet effective. The Company has not early adopted any of these standards, but will adopt by their respective mandatory application date. The Company is currently assessing their impact on its consolidated financial statements.

IFRS 9 Financial Instruments will replace IAS 39 Financial Instruments: Recognition and Measurement. The new standard replaces the current multiple classification and measurement models for financial assets and liabilities with a single model that has only two classification categories: amortized cost and fair value. IFRS 9 has also been amended not to require the restatement of comparative period financial statements for the initial application of the classification and measuring requirements of IFRS 9, but instead requires modified disclosures on transition to IFRS 9. The new standard is required to be applied for annual reporting periods beginning on or after January 1, 2018. Early application of this standard is permitted.

IFRS 15 Revenue from Contracts with Customers will replace IAS 18 Revenue and IAS 11 Construction Contracts. The new standard provides guidance on whether revenue is to be recognized over time or at a point in time, and expands and improves disclosures about revenue. The standard does not apply to certain contracts such as lease, insurance, financing arrangements, and guarantees other than product warranties. The new standard is required to be applied for annual reporting periods beginning on or after January 1, 2017. Early application of this standard is permitted.

The IASB issued amendments to IAS 16 Property, Plant and Equipment, and IAS 38 Intangible Assets to address depreciation and amortization methods which are based on revenue. The amendment to IAS 16 prohibits the use of a revenue-based depreciation method as this reflects a pattern other than the consumption of economic benefits consumed through the use of the asset. The amendment to IAS 18 introduce a rebuttable presumption that a revenue based amortization method for intangible assets is in appropriate. This presumption can be overcome only if the intangible asset is expressed as a measure of revenue or it can be demonstrated that revenue and consumption of the economic benefits of the intangible asset are highly correlated. The new standard is required to be applied for annual reporting periods beginning on or after January 1, 2016. Early application of this standard is permitted.

Amendments to IFRS 11 Joint arrangements provide guidance on the accounting for acquisitions of interests in joint operations constituting a business. The amendments require all such transactions to be accounted for using the principles on business combinations accounting in IFRS 3 Business Combinations and other IFRSs except where those principles conflict with IFRS 11. Acquisitions of interests in joint ventures are not impacted by this new guidance. The amendment is effective for annual reporting periods beginning on or after January 1, 2016.

NEOVASC INC.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2014 and 2013

(Expressed in Canadian dollars)

MANAGING CAPITAL

The Company’s objectives, when managing capital, are to safeguard cash as well as maintain financial liquidity and flexibility in order to preserve its ability to meet financial obligations and deploy capital to grow its business. In the definition of capital, the Company includes equity and long-term debt. There has been no change in the definition since the prior period.

The Company’s financial strategy is designed to maintain a flexible capital structure consistent with the objectives stated above and to respond to business growth opportunities and changes in economic conditions. In order to maintain or adjust its capital structure, the Company may issue new shares, or new debt (secured, unsecured, convertible and/or other types of available debt instruments).

The capital of the Company is comprised of:

	December 31, 2014		December 31, 2013

Equity	$	20,913,969	$	5,622,592
Long-term debt		202,219		243,632
	$	21,116,188	$	5,866,224

The Company is subject to certain financial covenants in connection with its long-term debt, including a requirement to limit the amount of total debt in relation to total equity by a ratio of less than or equal to 1:1. As at December 31, 2014 and 2013, the Company was in compliance with all financial covenants associated with its long-term debt.

For the years ended December 31, 2014 and 2013 there were no changes in the Company’s capital management policy.

FINANCIAL RISK MANAGEMENT

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

	Note	December 31, 2014		December 31, 2013

Loans and receivables
Cash and cash equivalents	6	$	6,025,013	$	3,403,472
Investments	7		11,999,999		-
Accounts receivable	8		1,790,971		1,289,933
		$	19,815,983	$	4,693,405

Other financial liabilities
Accounts payable and accrued liabilities	11	$	2,513,072	$	1,577,158
Long-term debt	12		202,219		243,632
		$	2,715,291	$	1,820,790

The estimated fair value of the long-term debt is $187,322 and has been estimated using a present value technique by discounting cash flows using interest rate of 3.5%, and is considered a level 2 fair value measurement.

The carrying amount of cash and cash equivalents, accounts receivable, investments, and accounts payable and accrued liabilities is considered a reasonable approximation of fair value due to their short term nature.

NEOVASC INC.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2014 and 2013

(Expressed in Canadian dollars)

FINANCIAL RISK MANAGEMENT (continued)

(a)

Foreign exchange risk

The majority of the Company’s revenues are derived from product sales in the United States and Europe, primarily denominated in United States and European Union currencies. Management has considered the stability of the foreign currency and the impact a change in the exchange rate may have on future earnings during the forecasting process. United States and European Union currency represents approximately 39% and 51% of the revenue for year ended December 31, 2014 (year ended December 31, 2013: 43% and 51% respectively). A 5% change in the foreign exchange rates for United States and European Union currencies will result in a change in revenues of approximately $300,000 and $400,000 respectively for the year ended December 31, 2014. A 5% change in the foreign exchange rates for the United States and European Union currencies for foreign currency denominated accounts receivable will impact net income by approximately $15,000 and $40,000 respectively (2013: $18,000 and $44,000), and a similar change for foreign currency denominated accounts payable will impact net income by approximately $48,000 and $13,000 respectively as at December 31, 2014 (2013: $17,000 and $22,000). The Company does not hedge its foreign exchange risk.

(b)

Interest rate risk

The Company makes fixed repayments on its long-term debt (see Note 12). Included in the repayments is an interest payment with an interest rate floating at prime rate plus 0.500% per annum. Management has considered the risks to cash flows from this variable interest portion and considers it unlikely that the interest rates will increase sufficiently to exceed the fixed monthly payment due on the bank loan. A 1% change in the interest rate on the bank loan will impact net income for the year ended December 31, 2014 by approximately $2,000 (2013: $2,430) and inversely change the amount of principal repaid by the same amount.

The Company receives interest on its cash in the bank at an interest rate of 0.25% (2013: 0.25%). A 1% change in the interest rate on the cash in the bank will impact net income for the year ended December 31, 2014 by approximately $12 (2013: $54).

The Company receives interest on its investment in HISAs at variable interest rate. A 1% change in the interest rate on the investment in HISAs will impact net income as at December 31, 2014 by approximately $50,000 (2013: $nil).

The Company is not exposed to cash flow interest rate risk on fixed rate cash balances, fixed rate GICs and short term accounts receivable without interest.

(c)

Liquidity risk

As at December 31, 2014, the Company had $6,025,013 cash. The cash used in operations during the year ended December 31, 2014 was $8,925,347.

As at December 31, 2014, the Company had working capital of $17,993,556 as compared to working capital of $3,585,776 at December 31, 2013.

On February 3, 2015, the Company closed an underwritten public offering of 12,075,000 common shares of the Company (of which 10,415,000 common shares were issued from treasury) at a price per share of US$7.19 for aggregate gross proceeds of approximately US$74,883,850 for the Company and US$11,935,400 for the selling security holders (including some directors, officers and employees) (see Note 21).

The Company monitors its cash flow on the monthly basis and compares actual performance to the budget for the fiscal year. The Company believes it has sufficient funds for the next 12 months but further into the future the Company is dependent on the profitable commercialization of its products or obtaining additional debt or equity financing to fund ongoing operations until profitability is achieved.

NEOVASC INC.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2014 and 2013

(Expressed in Canadian dollars)

FINANCIAL RISK MANAGEMENT (continued)

(c)

Liquidity risk (continued)

As at December 31, 2014 and 2013, the Company’s non-derivative financial liabilities have maturities (including interest payments where applicable) as summarized below:

	Current				Non-current
December 31, 2014	Within 6 months		6 to 12 months		1 to 5 years		later than 5 years
Accounts payable and accrued liabilities	$	2,513,072	$	-	$	-	$	-
Long-term debt		24,570		24,570		163,800		-
	$	2,535,135	$	22,528	$	157,628	$	-

December 31,2013
Accounts payable and accrued liabilities	$	1,577,158	$	-	$	-	$	-
Long-term debt		24,570		24,570		196,560		16,380
	$	1,598,683	$	22,023	$	186,022	$	14,063

(d)

Credit risk

Credit risk arises from the possibility that the entities to which the Company sells products may experience financial difficulty and be unable to fulfill their contractual obligations. This risk is mitigated by proactive credit management policies that include regular monitoring of the debtor’s payment history and performance. The Company does not require collateral from its customers as security for trade accounts receivable but may require certain customers to pay in advance of any work being performed or product being shipped.

The maximum exposure, if all of the Company’s customers were to default at the same time is the full carrying value of the trade accounts receivable at December 31, 2014: $1,434,455 (2013: $1,237,996).

As at December 31, 2014, the Company had $2,386 (as at December 31, 2013: $29,354) of trade accounts receivable that was overdue, according to the customers’ credit terms. During the year ended December 31, 2014 the Company wrote down $218,501 of accounts receivable owed by a customer (2013: $nil).

The Company may also have credit risk related to its cash and cash equivalents, and investments with a maximum exposure of $18,025,012 as at December 31, 2014 (2013: $3,403,472). The Company minimizes its risk to cash and cash equivalents by dealing with Canadian chartered banks.

CASH AND CASH EQUIVALENTS

	December 31, 2014		December 31, 2013
Cash held in:
Canadian dollars	$	461,425	$	2,481,367
United States dollars		327,858		288,201
European euros		120,765		633,904
Cashable high interest savings accounts		5,114,965		-
	$	6,025,013	$	3,403,472

The HISAs are held in major Canadian Chartered Banks. The HISAs are fully cashable at any time and have a variable interest rate.

NEOVASC INC.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2014 and 2013

(Expressed in Canadian dollars)

INVESTMENTS

	December 31, 2014		December 31, 2013

Guaranteed investment certificates	$	11,999,999	$	-

The GICs, issued by major Canadian Chartered Banks, are non-cashable and have 1 year term. Of these GICs, $4,999,999 will mature on March 27, 2015 and $5,000,000 will mature on June 25, 2015, both with a fixed interest rate of 1.47% per annum, and $2,000,000 will mature on September 23, 2015, and have a fixed interest rate of 1.61% per annum.

ACCOUNTS RECEIVABLE

	December 31, 2014		December 31, 2013

Trade receivables	$	1,434,455	$	1,237,996
Other receivables		356,516		51,937
	$	1,790,971	$	1,289,933

All amounts are short-term. The net carrying value of trade receivables is considered a reasonable approximation of fair value. The aging analysis of receivables is as follows:

	December 31, 2014		December 31, 2013

Not past due	$	1,432,069	$	1,208,642
Past due 0 - 30 days		2,386		29,354
	$	1,434,455	$	1,237,996

All of the Company's trade and other receivables have been reviewed for impairment. During the year ended December 31, 2014 the Company wrote down $218,501 accounts receivable owed by a customer, which the Company believes is not recoverable.

There was no allowance for doubtful accounts at December 30, 2014 or December 31, 2013 and there was no movement in the allowance for doubtful accounts in either period.

All accounts receivable are pledged as security for the long-term debt of the Company (see Note 12).

INVENTORY

	December 31, 2014		December 31, 2013

Raw materials	$	264,748	$	140,983
Work in progress		128,804		304,241
Finished goods		82,423		39,587
	$	475,975	$	484,811

During the year ended December 31, 2014 $5,447,472 (2013: $3,621,833) of inventory was expensed in cost of goods sold, and $1,997,578 (2013: $693,621) of inventory was used in internal development projects and expensed in product development and clinical trial expenses.

During the years ended December 31, 2014 and 2013 the Company did not write down any obsolete inventory.

All the inventories are pledged as security for the long-term debt of the Company (see Note 12).

NEOVASC INC.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2014 and 2013

(Expressed in Canadian dollars)

10.

PROPERTY, PLANT AND EQUIPMENT

	Land		Building		Leasehold improvements			Production equipment		Computer hardware		Computer software		Office equipment			Total

COST

Balance at January 1, 2013	$	207,347	$	1,299,642	$	-		$	678,361	$	217,111	$	271,664	$	170,133		$	2,844,258
Additions during the year		-		327,363		76,958			448,295		101,279		37,013		50,280			1,041,188
Balance at December 31, 2013	$	207,347	$	1,627,005	$	76,958		$	1,126,656	$	318,390	$	308,677	$	220,413		$	3,885,446

Additions during the year		-		393,206		41,100			403,486		212,600		36,512		162,070			1,248,974
Disposals during the year		-		-		(76,958	)		-		-		-		(29,553	)		(106,511	)
Balance at December 31, 2014	$	207,347	$	2,020,211	$	41,100		$	1,530,142	$	530,990	$	345,189	$	352,930		$	5,027,909

ACCUMULATED DEPRECIATION

Balance at January 1, 2013	$	-	$	301,053	$	-		$	509,550	$	161,221	$	265,625	$	139,437		$	1,376,886
Depreciation for the year		-		45,835		31,107			115,024		34,393		33,023		12,278			271,660
Balance at December 31, 2013	$	-	$	346,888	$	31,107		$	624,574	$	195,614	$	298,648	$	151,715		$	1,648,546

Depreciation for the year		-		51,366		35,891			180,838		62,105		25,513		20,098			375,811
Disposals during the year		-		-		(65,887	)		-		-		-		(8,602	)		(74,489	)
Balance at December 31, 2014	$	-	$	398,254	$	1,111		$	805,412	$	257,719	$	324,161	$	163,211		$	1,949,868

CARRYING AMOUNTS

At December 31, 2013	$	207,347	$	1,280,117	$	45,851		$	502,082	$	122,776	$	10,029	$	68,698		$	2,236,900
At December 31, 2014	$	207,347	$	1,621,957	$	39,989		$	724,730	$	273,271	$	21,028	$	189,719		$	3,078,041

All property, plant and equipment is pledged as security for the long-term debt of the Company (see Note 12).

NEOVASC INC.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2014 and 2013

(Expressed in Canadian dollars)

11.

ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

	December 31, 2014		December 31, 2013

Trade payables	$	2,139,005	$	1,218,890
Accrued vacation		278,540		248,334
Accrued liabilities		65,000		84,130
Other payables		30,527		25,804
	$	2,513,072	$	1,577,158

All amounts are short-term. The net carrying value of trade payables is considered a reasonable approximation of fair value.

12.

LONG-TERM DEBT

	December 31, 2014			December 31, 2013

Bank installment loan	$	202,219		$	243,632
Less current portion		(44,591	)		(43,548	)
	$	157,628		$	200,084

Repayments consist of 180 regular blended payments of $4,095 each month, including interest and principal, commencing on September 1, 2007 and ending on or before August 1, 2022. The loan agreement as amended on September 27, 2013, is collateralized by a first charge over the Company’s land and buildings and a general security agreement over all personal property of the business now owned and all personal property acquired in the future. The loan bears interest at prime plus 0.500% per annum.

Principal maturities in the next five years and thereafter are approximately as follows:

	December 31, 2014		December 31, 2013

Year 1	$	44,591	$	43,548
Year 2		45,874		44,846
Year 3		46,987		45,935
Year 4		48,127		47,049
Year 5		16,640		48,191
Thereafter		-		14,063
	$	202,219	$	243,632

More information about the Company’s exposure to interest rate and liquidity risk is given in Notes 5(b) and 5(c).

NEOVASC INC.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2014 and 2013

(Expressed in Canadian dollars)

13.

INCOME TAXES

The relationship between the expected tax expense based on the combined federal and provincial income tax rate in Canada and the reported tax expense in the consolidated statement of comprehensive income can be reconciled as follows:

	For the years ended December 31,
	2014			2013

Loss before income taxes	$	(19,061,098	)	$	(6,750,250	)

Statutory tax rate		26.00%			25.50%

Recovery of income taxes based on the combined Canadian federal
and provincial statutory rates		(4,955,886	)		(1,721,383	)

Share-based remuneration		2,473,952			505,570
Foreign exchange adjustment		83,398			(63,320	)
Other permanent differences		(184,713	)		45,000
Unrecognized deferred tax benefits		2,583,249			1,234,133
Income tax expense	$	-		$	-

The Company recorded no deferred tax assets in the consolidated statement of financial position. The unrecognized deferred tax assets include tax losses, research and development pools and differences between the carrying amount and the tax basis of the following items:

	For the years ended December 31,
	2014			2013
Deferred tax assets
Investment tax credits	$	3,783,963		$	2,816,200
Capital assets		546,530			283,632
Share issue expenses		107,612			5,789
Non-capital loss carry forwards		13,672,422			12,260,798
Foreign exchange		(37,886	)		-
Research and development expenditures		3,283,400			2,254,184
	$	21,356,041		$	17,620,603

As at December 31, 2014, the Company has approximately $12,593,000 of research and development expenditures available to reduce income taxes in the future periods, with no expiry date. The Company has loss carry forward balances for income tax purposes of approximately $29,575,000 that are available to reduce income taxes in the future periods, if any, expiring at various times through to the year 2034. The Company also has investment tax credits of approximately $4,600,000 available to reduce income taxes in the future periods, if any, expiring at various times through to the year 2034.

NEOVASC INC.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2014 and 2013

(Expressed in Canadian dollars)

14.

SHARE CAPITAL

All common shares are equally eligible to receive dividends and the repayment of capital and represent one vote at the shareholders’ meeting.

All preferred shares have no voting rights at the shareholders meeting but on liquidation, winding-up or other distribution of the Company’s assets are entitled to participate in priority to common shares. There are no preferred shares issued and outstanding.

(a)

Authorized

Unlimited number of common shares without par value.

Unlimited number of preferred shares without par value.

(b)

Issued and outstanding

	Common Shares					Contributed
	Number		Amount			Surplus

Balance, January 1, 2013		45,827,040	$	70,421,185		$	8,370,258
Issued for cash on exercise of warrants (i)		2,335,250		2,919,062			-
Issued for cash on exercise of options		52,790		71,144			(28,434	)
Share-based payments		-		-			1,963,380
Balance, December 31, 2013		48,215,080	$	73,411,391		$	10,305,204
Issued for cash pursuant to bought deal prospectus offering (ii)		4,192,000		25,152,000			-
Share issue costs (ii)		-		(506,651	)		-
Issued for cash on exercise of options		601,459		935,595			(743,670	)
Issued on net exercise of options (iii)		833,805		177,300			(177,300	)
Share-based payments		-		-			9,515,201
Balance, December 31, 2014		53,842,344	$	99,169,635		$	18,899,435

(i)

In 2013 the Company issued 2,335,250 common shares, upon the exercise of warrants issued as part of the Company’s August 2011 financing. Proceeds received from the exercise of the 2,335,250 warrants amounted to $2,919,062.

(ii)

On March 26, 2014, the Company closed a bought deal equity prospectus offering underwritten by Cormark Securities Inc., which placed 4,192,000 common shares of Neovasc at a price of $6.00 per common share, for gross cash proceeds to the Company of $25,152,000. The share issue costs were $506,651.

(iii)

On May 26, 2014, 962,500 options were exercised under a net exercise provision in the stock option plan. Under this provision the Company issued fully paid and non-assessable common shares to the option holder equal to the number of options exercised multiplied by the quotient obtained by dividing the result of the market price of one common share on the date of the exercise less the exercise price per common share by the market price of one common share on the date of the exercise. This provision is anti-dilutive to the existing shareholders. The Company does not receive cash proceeds from the exercise of the options but issues fewer common shares on the exercise of the options.

NEOVASC INC.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2014 and 2013

(Expressed in Canadian dollars)

14.

SHARE CAPITAL (continued)

(c)

Stock options

The Company adopted an equity-settled stock option plan under which the directors of the Company may grant options to purchase common shares to directors, officers, employees and service providers (the “optionees”) of the Company on terms that the directors of the Company may determine within the limitations set forth in the stock option plan. Effective June 18, 2014, 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 10,515,860, representing approximately 20% of the number of common shares of the Company outstanding on May 16, 2014.

Options under the Company’s stock option plan granted to directors, officers and employees vest immediately on the grant date, unless a vesting schedule is specified by the board. The directors of the Company have discretion within the limitations set forth in the stock option plan to determine other vesting terms on options granted to directors, officers, employees and others. The minimum exercise price of a stock option cannot be less than the applicable market price of the common shares on the date of the grant and the options have a maximum life of ten years from the date of grant. The Company also assumed options from the acquisition of Neovasc Medical Ltd. and B-Balloon Ltd which are not the part of the Company’s stock option plan. The following table summarizes stock option activity for the respective periods as follows:

				Weighted average		Average remaining
	Number of options			exercise price		contractual life (years)
Options outstanding, January 1, 2013		7,767,787		$	0.85		2.91
Granted		1,084,006			2.43
Exercised		(52,790	)		0.81
Forfeited		(3,348	)		1.63
Expired		(10,735	)		0.01
Options outstanding, December 31, 2013		8,784,920		$	1.04		2.20
Granted		2,150,000			6.52
Exercised for cash		(601,459	)		0.32
Exercised under net exercise provision 14(b)(iii)		(962,500	)		0.95
Forfeited		(24,572	)		3.47
Options outstanding, December 31, 2014		9,346,389		$	2.37		2.19
Options exercisable, December 31, 2014		8,331,895		$	2.09		1.99

The following table lists the options outstanding at December 31, 2014 by exercise price:

Exercise price		Options outstanding		Weighted average remaining term (yrs)		Options exercisable		Weighted average remaining term (yrs)
$	0.01		236,308		2.60		236,308		2.60
$	0.20-0.40		1,789,875		0.18		1,789,875		0.18
$	0.97-1.45		4,123,900		1.64		3,996,250		1.40
$	2.00-4.25		1,051,006		3.27		720,402		3.22
$	6.50-7.00		2,145,300		4.35		1,589,060		4.31
			9,346,389				8,331,895

The following table lists the options outstanding at December 31, 2013 by exercise price:

Exercise price		Options outstanding		Weighted average remaining term (yrs)		Options exercisable		Weighted average remaining term (yrs)
$	0.01		505,089		3.26		505,089		3.26
$	0.20-0.40		2,326,725		0.98		2,169,200		0.97
$	0.97-1.45		4,871,100		2.25		4,407,313		2.01
$	2.00-4.25		1,082,006		4.28		618,001		4.20
			8,784,920				7,699,603

NEOVASC INC.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2014 and 2013

(Expressed in Canadian dollars)

14.

SHARE CAPITAL (continued)

(c)

Stock options (continued)

The weighted average share price at the date of exercise for share options exercised for the year ended December 31, 2014 was $6.79 (2013: $2.03). During the year ended December 31, 2014, the Company recorded $9,515,201 as compensation expense for share-based compensation awarded to eligible optionees (2013: $1,963,380). 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:

	2014		2013
Weighted average fair value	$	5.18	$	2.26
Dividend yield		nil		nil
Volatility		110%		140%
Risk-free interest rate		1.75%		1.25%
Expected life		5 years		5 years
Forfeiture rate		5%		5%

(d)

Warrants

In 2013 the Company issued 2,335,250 common shares, upon the exercise of warrants issued as part of the Company’s August 2011 financing (see Note 14(b)(i)). Proceeds received from the exercise of the 2,335,250 warrants amounted to $2,919,062.

There were no performance conditions attached to the warrants and all the warrants vested upon issuance.

15.

SEGMENT INFORMATION

The Company’s operations are in one business segment; the development, manufacture and marketing of medical devices. Each of the Company’s product lines has similar characteristics, customers, distribution and marketing strategies, and are subject to similar regulatory requirements. Substantially all of the Company’s long-lived assets are located in Canada. The Company carries on business in Canada. The Company earns revenue from sales to customers in the following geographic locations:

	For the years ended December 31,
	2014		2013

REVENUE
United States	$	4,414,987	$	3,273,946
Europe		10,947,522		8,136,300
Israel		500,942		337,390
	$	15,863,451	$	11,747,636

Sales to the Company’s four largest customers accounted for approximately 35%, 23%, 15% and 14% of the Company’s sales for the year ended December 31, 2014. Sales to the Company’s four largest customers accounted for approximately 35%, 23%, 16% and 10% of the Company’s sales for the year ended December 31, 2013.

16.

EMPLOYEE BENEFITS EXPENSE

	For the years ended December 31,
	2014		2013

Salaries and wages	$	7,007,684	$	4,809,922
Pension plan and employment insurance		421,757		256,519
Contribution to defined contribution pension plan		132,536		97,629
Health benefits		519,496		327,872
Cash-based employee expenses		8,081,473		5,491,942
Share-based payments		9,515,201		1,963,380
	$	17,596,674	$	7,455,322

NEOVASC INC.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2014 and 2013

(Expressed in Canadian dollars)

17.

DEPRECIATION, SHARE-BASED PAYMENTS, EMPLOYEE AND OTHER EXPENSES

	For the years ended December 31,
	2014		2013

COST OF GOODS SOLD
Depreciation	$	135,949	$	73,592
Share-based payments		256,284		158,503
Cash-based employee expenses		3,863,566		2,652,843
Other expenses		5,857,142		4,198,939
TOTAL COST OF GOODS SOLD	$	10,112,941	$	7,083,877

EXPENSES
Selling expenses
Depreciation	$	385	$	550
Share-based payments		10,365		7,417
Cash-based employee expenses		72,493		69,394
Other expenses		93,188		1,114
		176,431		78,475

General and administrative expenses
Depreciation		83,186		82,316
Share-based payments		5,305,286		1,443,087
Cash-based employee expenses		1,574,590		1,337,700
Other expenses		4,890,613		1,983,832
		11,853,675		4,846,935

Product development and clinical trials expenses
Depreciation		156,292		115,202
Share-based payments		3,943,266		354,373
Cash-based employee expenses		2,570,823		1,432,005
Other expenses		6,216,463		4,945,738
		12,886,844		6,847,318

TOTAL EXPENSES	$	24,916,950	$	11,772,728

Depreciation per Statements of Cash Flows	$	375,811	$	271,660

Share-based payments per Statements of Cash Flows	$	9,515,201	$	1,963,380

Cash-based employee expenses (see Note 16)	$	8,081,473	$	5,491,942

NEOVASC INC.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2014 and 2013

(Expressed in Canadian dollars)

18.

OPERATING LEASES

The Company entered into an agreement for additional office space in August 2013. The agreement does not contain any contingent rent clauses, renewal or purchase options or escalation clauses. The term of the lease is 24 months commencing on August 1, 2013.

The Company entered into an agreement for additional office space in June 2014. The agreement does not contain any contingent rent clauses, renewal or purchase options or escalation clauses. The term of the lease is 36 months commencing on October 1, 2014.

The Company entered into an agreement for additional office space in September 2014 in Minneapolis. The agreement does not contain any contingent rent clauses, renewal or purchase options or escalation clauses. The term of the lease is 66 months commencing on September 1, 2014.

The future minimum operating lease payments due over the next six years are as follows:

	As at December 31,
	2014		2013

Year 1	$	178,992	$	26,244
Year 2		208,244		6,300
Year 3		209,680		-
Year 4		70,078		-
Year 5		52,303		-
Thereafter		8,890		-
	$	728,186	$	32,544

Lease payments recognized as an expense during the year ended December 31, 2014 amount to $119,334 (2013: $25,092).

19.

LOSS PER SHARE

Both the basic and diluted loss per share have been calculated using the loss attributable to shareholders of the Company as the numerator. The weighted average number of common shares outstanding used for basic loss per share for the year ended December 31, 2014 amounted to 52,289,492 shares (2013: 47,361,297 shares).

	For the years ended December 31,
	2014			2013

Weighted average number of common shares		52,289,492			47,361,297
Loss for the period		(19,061,098	)		(6,750,250	)
Basic loss per share	$	(0.36	)	$	(0.14	)

As the Company is currently operating at a loss no dilutive potential ordinary shares have been identified as the conversion would lead to a decrease in loss per share.

NEOVASC INC.

Notes to the Consolidated Financial Statements

For the years ended December 31, 2014 and 2013

(Expressed in Canadian dollars)

20.

RELATED PARTY TRANSACTIONS

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

	For the years ended December 31,
	2014		2013

Short-term employee benefits
Employee salaries and bonuses	$	1,148,570	$	745,673
Directors fees		133,815		62,918
Social security and medical care costs		24,428		20,741
		1,306,813		829,332

Post-employment benefits
Contributions to defined contribution pension plan		31,756		27,963

Share-based payments		6,484,928		991,986

Total key management remuneration	$	7,823,497	$	1,849,281

21.

SUBSEQUENT EVENTS

22.

AUTHORIZATION OF FINANCIAL STATEMENTS

The consolidated financial statements for the year ended December 31, 2014 (including comparatives) were approved by the board of directors on March xx, 2015.

(signed) Alexei Marko

Alexei Marko, Director

(signed) Steve Rubin

Steve Rubin, Director