Aug 10, 2020
Operator
Greetings, and welcome to the Neovasc, Incorporated Second Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode.
A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Mr. Mike Cavanaugh, Investor Relations.
Please go ahead, sir.
Mike Cavanaugh
Good afternoon, and thank you for joining us today. Earlier today, Neovasc, Inc.
released financial results for the quarter ended June 30, 2020. The release is currently available on the Investors section of the company's website at www.neovasc.com/investors.
Fred Colen, President and Chief Executive Officer; and Chris Clark, Chief Financial Officer, will host this afternoon's call. Before we get started, I would like to remind everyone that management will be making statements during this call that include forward-looking statements within the meaning of applicable securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and Canadian securities laws.
Any statements contained in this call that are not statements of historical facts should be deemed to be forward-looking statements. All forward-looking statements, including, without limitation, our examination of historical operating trends, expectations regarding coverage decisions, pricing and enrollment matters and our future financial expectations and results are based upon current estimates and various assumptions.
Words such as expect, outlook, will, should, continue, strategy, potential, intend, try, believe, plan and similar words or expressions are meant to identify forward-looking statements. These statements involve material risks and uncertainties that could cause actual results to differ materially from those anticipated or implied by these forward-looking statements.
Accordingly, you should not place undue reliance on these statements. For more information on the risks and uncertainties related to these forward-looking statements, please refer to the cautionary statements regarding forward-looking statements and Risk Factors section of Neovasc's annual report on Form 20-F and the discussion of Neovasc's MD&A, which are available on EDGAR and SEDAR.
The information provided in this conference call speaks only to the live broadcast today, August 6, 2020. Neovasc disclaims any intention or obligation, except as required by law, to update or revise any information, financial projections or other forward-looking statements, whether because of new information, future events or otherwise.
I will now turn the call over to Fred.
Fred Colen
Thank you, Mike, and good afternoon, everyone. Neovasc delivered another solid quarter, despite the challenges of the global COVID-19 pandemic, making good progress in all 4 of our value creation strategies, continuing the balance sheet cleanup and regaining market capitalization compliance with the NASDAQ Stock Exchange.
On June 4, we completed a $5 million convertible debt note issuance. On June 16, we closed an $11.5 million equity offering priced at the market.
And on June 25, we announced that we have regained compliance with all the NASDAQ continuing listing requirements. We used the proceeds of the debt and equity raises to retire the remaining 2017 notes and we now have cash to fund operations through to mid-October under better terms for the company.
These were very important steps that allow Neovasc to focus on the execution of our 4 value creation strategies. As we announced last month, we achieved revenues of $284,000 in the second quarter of 2020, obviously heavily impacted by the virus situation in the second quarter, in the second half of March, in April and in May.
While we saw a near cessation of elective procedures beginning in March 2020 due to the COVID-19 situation, we noted that Reducer implants in Europe recovered sharply in June. We expected a gradual recovery in Reducer volumes beginning in the second half of the quarter, but the recovery started a little later in the quarter.
It was, however, also more rapid than anticipated. It is important to note that while Reducer implant procedures are considered elective, many patients are suffering severe pain and other associated serious life-impacting symptoms from refractory angina, and we believe the underlying strength of the business, coupled with the backlog of delayed implantations, will continue to drive volume growth in the second half of 2020, provided the COVID-19 virus situation, in particular, in Europe, does not worsen again.
We saw a strong monthly worldwide implants in June. And while Germany continues to be the largest market for Reducer, Italy, Austria, Switzerland and The Netherlands all continued to show rising implant volumes.
In our DACH region, consisting of Germany, Austria and Switzerland, we actually reached our original pre-COVID-19 implant and revenue targets. The DACH geography is particularly important to Neovasc, given the strong margins our direct sales force provides in Germany.
Late in the quarter, the Reducer was featured in a session at the PCR e-Course entitled, "Current Evidence For The Interventional Treatment of INOCA" According to the course organizers, this session about microvascular dysfunction was the single most viewed presentation in its group, and nearly tripled the average number of viewers compared to other sessions in the category. The tremendous response is evidence of the strong interest in a therapy for refractory angina.
For the third quarter, we are seeing the strengths of the overall business continue in July, and we actually believe to have a shot at reaching our original pre-COVID plan for Q3. So far, we seem to indeed be on track, and this is very encouraging indeed.
This obviously assumes that the COVID-19 virus situation in Europe does not worsen again significantly. We are also working towards commercializing the device in the U.S.
market. To that end, we recently announced that the FDA has scheduled a review of the PMA for Reducer at the October 27, 2020 Circulatory System Devices Panel Meeting.
Needless to say, we are pleased with the active invitation and are looking forward to working with the panel in October. Also during the quarter, we announced positive interim results from the REDUCER-1 study of refractory angina patients.
The primary efficacy endpoint of the study is improvement in chest pain or angina, as measured by the Canadian Cardiovascular Society grading system. 70% of patients saw improvement in their symptoms by at least 1 CCS class that was maintained through 3 years.
All but about this, 34% of patients saw an improvement in their symptoms by at least 2 CCs classes that was also maintained through 3 years. We believe data like this support Reducer as the only available device to effectively treat refractory angina.
Moving on to the Tiara value creation strategies. During the second quarter, we advanced our CE Mark submission for the transapical Tiara TA under the current medical device directive regulations in Europe.
We have active ongoing discussions with our notified body, and we are encouraged with the interactions to date. As a result of the COVID-19-related travel restrictions and limited support, we have placed Tiara II enrollment on a temporary hold.
We do not expect the trial status to impact the timing of our approval decision in Europe, which we currently expect in the first half of 2021. We are also continuing to develop the next-generation for a transfemoral Tiara TF device.
We made significant progress in the second quarter on this front as well, with the completion of several animal implants. We have received positive feedback from top cardiologists in Europe, Canada and the United States related to device which retrievability, the low profile of the system and the novel V shape of the implant.
We continue to believe in the potential of the transfemoral Tiara TF to expound the size of the market and to be more broadly usable than competitive systems under development as well as broader usable compared to our own Tiara transapical system. Importantly, we remain focused on a first-in-human implant in the first half of 2021, a slight delay against our original plan due to COVID-19-related inefficiencies and delayed key supplier deliveries, including delayed animal implant opportunities.
We are enthused by the progress we are seeing on the Tiara TF device and recent feedback we have received from leading physicians in the field. Overall, we are very pleased with the quarter.
Under trying circumstances, our Reducer implant recovered sharply in June, and we believe this is a testament to the efficacy of the device as well as the unmet need it fulfills. We also made tangible and significant progress on the other value creation strategies and believe we have put the building blocks in place to advance Neovasc's value strategies for the balance of the year and into 2021.
I will now turn the call over to Chris to discuss our financial results.
Chris Clark
Thank you, Fred. Earnings for the second quarter of 2020 was $284,000 compared to revenues of $440,000 for the same period in 2019, a decrease of 35%, which can be attributed to the impact of COVID-19.
As Fred pointed out on his remarks, despite the year-over-year decrease related to the impact of COVID-19, physician interest in Reducers are coming sharply and we are poised to capitalize on the favorable underlying market dynamics when the market returns to normalcy. Cost of goods sold in the second quarter of 2020 was $75,000 compared to $67,000 for the same period of 2019, and the gross margin was 74% compared to 85% in the prior year period, a decrease of 11%, principally driven by lower volumes in the second quarter of 2020.
Total expenses for the second quarter of 2020 were $8.9 million compared to $7 million for the same period in 2019, representing a year-over-year increase of 27%. General and administrative expenses for the quarter were $3.8 million compared with $2.5 million for the second quarter of 2019, principally driven by an increase in legal expenses, which we retired for 2017 months and raised additional debt and equity financings and by an increase in employee-related expenses.
Product development and clinical trial expenses were $4.6 million compared with $4.1 million for the second quarter 2019, principally driven by an increase in development costs for the Reducer and Tiara and also by an increase in employee-related expenses. The operating loss and comprehensive loss for the second quarter of 2020 were $8.7 million and $12.2 million, respectively, or $0.81 basic and diluted loss per share as compared with $6.6 million and $8.0 million, respectively, or $1.17 basic and diluted loss per share for the same period in 2019.
In the second quarter of 2020, the company recorded book entries of approximately $3.5 million related to the accounting treatment and valuation of our convertible notes compared to $1.3 million in the second quarter of 2019. Neovasc financed its operation and capital expenditures with cash generated from operations and through equity and debt financings.
The company had approximately $11.5 million in cash and cash equivalents at June 30, 2020. The company expects that it will have sufficient cash on hand to sustain operations until mid-October at the current run rate.
Given the current nature of the capital markets due to the impact of COVID-19, the company can give no assurance that it will able to obtain additional funds as needed until available to the company or at all. As of today's date, the company has 17.6 million common shares issued and outstanding, and has a fully diluted share count of 29.1 million shares.
We've completed an enormous amount work to clean up our capital structure and form the company's development needs. And we believe that the intrinsic value of our actions to our - will be better reflected in our overall market capitalization in the future as we reach key milestones for each product.
Back to you, Fred.
Fred Colen
Thank you, Chris, and thank you all for listening to our opening remarks. We are continuing to make great progress with our core value creation strategies.
Reducer orders in Europe recovered sharply in June, and we believe we are well positioned to continue the momentum for this unique product in Europe. In the United States, the FDA has given us a definitive date for a panel review of our PMA.
Regarding our Tiara device, we advanced our application for CE Mark designation in the European Union for the Tiara TA during the quarter. We are making great progress with the new Tiara TF, having completed further animal implants during the quarter and are targeting first-in-human implants in the first half of 2021 as well, while we received very positive feedback from and created real excitement with leading cardiology experts in the structural heart space after showing that our transfemoral Tiara system during the quarter.
We have accomplished all of this during very challenging times, and I would like to thank our dedicated employees for an outstanding performance this quarter. I would also like to thank our loyal investors for their continued confidence in us.
We continually strive to create value for our shareholders, and we believe the results we have just reported demonstrate that. With that, I'll now turn it over to the operator for any questions.
Operator
[Operator Instructions] The first question is from Ahu Demir, NOBLE Capital.
Ahu Demir
I'll start with the Reducer. Since you're seeing some reduction in the revenues, would you provide some maybe guidance for the full year of 2020 on the revenues for the Reducer product?
Fred Colen
Ahu, this is Fred. So on the Reducer revenue, we obviously saw a quite dramatic impact of virus - COVID-19 virus-related in the second quarter.
It started in the second half of March, and it was pretty dramatic in April and May. And then we saw a very sharp recovery in June as well as a very strong July performance.
So with that, we actually believe we have a shot at reaching our original pre-COVID Q3 plan for revenue of the Reducer. So that is actually a pretty strong statement.
I mean, I believe that new companies are saying that in the third quarter, there still will be an impact related to the virus. And we're basically saying that we believe we have a shot at reaching our pre-COVID plan for Q3 as it relates to Reducer revenue.
Obviously, if that is the case, we believe that to be the case as well for the fourth quarter. Now that all means, obviously, that not all of assumes, obviously, Ahu, that there should not be any serious worsening of the COVID virus situation, particularly in Europe, otherwise, these numbers will be impacted again.
But in the current situation, we believe we have a shot at the Q3 revenues, as originally planned, as well as a shot at the Q4 revenues. So that means for the year, there would be an impact only as we just reported for the second quarter, I think that actually is a pretty strong performance, given that there has been dramatic impact because of the COVID, to many, many medtech businesses around the globe.
Ahu Demir
I'll just have a follow-up question on the FDA meeting. Could you please highlight for us maybe the expectations from this meeting?
What we should be expecting? What are the strategies that you plan to conduct following that?
Fred Colen
Yes. So panel meetings are well-established practice in the FDA.
In particular, new therapies have to go through a panel discussion. There's going to be presentations by physicians.
There's going to be representation by the industry and by patients. At the panel meeting, the FDA will present information from their side, their views as well as their ideas about where the Reducer stands.
There will be strong presentations by, like I said, physicians, industry and patients. And then, the panel will debate the pros and the cons, the efficacy and the safety profile of the Reducer.
And that will end with basically a recommendation from the panel as to an approval or not by the FDA. So basically, the outcome will be a panel vote and a panel discussion and panel decision on October 27 as to what the panel believes is the right outcome for the Reducer.
And that recommendation, that vote we'll then go to the FDA and then the FDA will make its own final determination after receiving the outcome of the panel discussion and the ultimate vote from the panel. So that is what will happen that day.
We are heavily preparing for this day with the FDA, we have engaged a professional organization that is extremely well versed and experienced in conducting panel meetings with the FDA. So we are being guided and supported and helped by a professional organization to prepare for this.
And we are going through an enormous amount of work to prepare for this day in a very comprehensive and detailed manner. As you can see, we, in principle, have a parallel path going on a company.
We have a very active schedule and a lot of active work going on as it relates to the Reducer and the potential Reducer PMA approval in the U.S. While in parallel, we also have discussion and ongoing interactions with the notified body in Europe for CE Mark of our transapical Tiara device.
So we're actually - I don't know if the audience realizes this, but we actually have a dual-track of procedural activities going on, on the regulatory side for approvals both in the U.S. and in Europe, and that's running completely in parallel.
So for a small company like us, that is a huge effort. And therefore, when you hear Chris talk about, we see an uptick in some of the expenses, it obviously is also related to that, that we are on a very active and busy stage to prepare for these regulatory approval processes on both continents for these two products.
On the other hand, you can also say this is actually a very exciting scenario. Because we are working on a potential approval for the Tiara in Europe and for the Reducer in the U.S.
at the same time. So that is a pretty exciting proposition.
Ahu Demir
Yes, definitely. Thank you so much for taking my questions.
I want to allow other people to ask questions, as well. Thank you, Fred.
Fred Colen
Thank you, Ahu.
Operator
[Operator Instructions] Gentlemen, there are no further questions at this time. This does conclude today's conference.
You may disconnect your lines. And thank you for your participation.
Fred Colen
Thank you. Bye-bye.