Exhibit 99.2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion and Analysis [“MD&A”] for NOVADAQ® Technologies Inc. [“NOVADAQ” or the “Company”] should be read in conjunction with the unaudited interim condensed consolidated financial statements for the three month and nine month periods ended September 30, 2015, which have been prepared in accordance with International Financial Reporting Standards [“IFRS”] as issued by the International Accounting Standards Board [“IASB”]. All of the amounts are expressed in United States [“U.S.”] dollars unless otherwise indicated. References to “NOVADAQ” or “the Company” mean NOVADAQ and/or its management.
Forward-Looking Information
This MD&A contains certain information that may constitute forward-looking information within the meaning of Canadian securities laws and forward-looking statements within the meaning of United States federal securities laws, both of which we refer to as forward-looking information. In some cases, forward-looking information can be identified by the use of terms such as “may”, “will”, “should”, “expect”, “plan”, “anticipate”, “believe”, “intend”, “estimate”, “predict”, “potential”, “continue” or other similar expressions concerning matters that are not statements about the present or historical facts. Forward-looking information may relate to management’s future outlook and anticipated events or results, and may include statements or information regarding the future financial position, business strategy and strategic goals, competitive conditions, research and development activities, projected costs and capital expenditures, financial results, research and clinical testing outcomes, taxes and plans and objectives of, or involving, NOVADAQ. Without limitation, information regarding future sales and marketing activities, including SPY, SPYEliteImaging System, PINPOINT Endoscopic Fluorescence Imaging System, LUNA Fluorescence Angiography System,Firefly™ System [collectively, the “SPY Imaging Systems”] and CO2 Heart Laser System, Easy LDI Imaging System and DermACELL® tissue products [collectively, the “Other Products”, and together with the SPY Imaging Systems, the “Products”] sales, placements and utilization rates, reimbursement for the various SPY Imaging System procedures and DermACELL tissue products [“DermACELL”], future revenues arising from the sales of the Company’s Products, the sales and marketing arrangements with LifeNet Health® [“LifeNet”], the license and supply agreements with Intuitive Surgical®, Inc. [“Intuitive”], the partnership agreement with Serena Group™, the distribution agreements with MAQUET Cardiovascular [“MAQUET”], Swissray Asia, CHC Healthcare Group, Kirloskar Technologies Pvt., Ltd. [“KTPL”], Mizuho Medical Corporation [“Mizuho Medical”] and future potential partnerships, research and development activities, the Company’s plans to seek further regulatory clearances for additional indications, as well as the Company’s plans for development of a surgical lymph node and tumor margin scintigraphy imaging system is forward-looking information.
Forward-looking information is based on certain factors and assumptions regarding, among other things, market acceptance and the rate of market penetration of NOVADAQ’s Products, the success of NOVADAQ’s partnerships, the effect of reimbursement codes for procedures involving use of the Products and the clinical results of the use of the Products. While the Company considers these assumptions to be reasonable based on information currently available to it, they may prove to be incorrect and actual results may vary materially from the disclosure herein. The successful commercialization of any one of NOVADAQ’s products will depend on a number of financial, logistical, technical, legal, regulatory, competitive, economic and other factors, the outcome of which cannot be predicted, and some of which will be out of the Company’s control. In addition, despite the Company’s current focus on the commercialization of its products, the Company continues to invest in additional research and development in order to expand the applications of its imaging platform, and these activities may require significant cash commitments which may, in turn, affect the profitability of the Company.
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Forward-looking information is subject to certain factors, including risks and uncertainties, which could cause actual results to differ materially from what we currently expect. These factors include: risks relating to the transition from research and development activities to commercial activities; market acceptance and adoption of the Products; the risk that changes to current healthcare reimbursement codes or healthcare spending will negatively affect the acceptance or usage of the Products; risks related to third-party contractual performance; risks associated with the introduction of products or existing products by competitors that compete with the Products; risks related to medical or scientific advances that could render the Products obsolete; dependence on key suppliers for components of certain Products; regulatory and clinical risks; risks relating to the protection of its intellectual property [“IP”] and third party intellectual property; risks inherent in the conduct of research and development activities, including the risk of unfavorable or inconclusive clinical trial outcomes; potential product liability, competition and the risks posed by potential technological advances; and risks relating to fluctuations in the exchange rate between the U.S. and the Canadian dollar.
The Company has also included important factors in the cautionary statements included in the Company’s Annual Information Form [“AIF”] for the year ended December 31, 2014, which is filed on SEDAR at www.sedar.com and on EDGAR. Forward-looking information is provided in the AIF for the purpose of giving information about management’s current expectations and plans and allowing investors and others to get a better understanding of our operating environment. However, readers are cautioned that it may not be appropriate to use such forward-looking information for any other purpose. Prospective investors should give careful consideration to such risks and uncertainties. NOVADAQ believes that these factors could cause actual results or events to differ materially from the forward-looking statements that it makes.
Undue importance should not be placed on forward-looking information, nor should reliance be placed upon this information as of any other date. Unless required by law, NOVADAQ does not undertake to update this information at any particular time. These forward-looking statements are made as of the date of this MD&A. Unless otherwise indicated, this MD&A was prepared by management from information available through October 28, 2015.
COMPANY OVERVIEW
NOVADAQ (Toronto Stock Exchange (“TSX”): NDQ; NASDAQ Global Market (“NASDAQ”): NVDQ) primarily develops, manufactures and markets real-time fluorescence imaging products that are designed for use by surgeons in the operating room and other clinical settings where open and minimally invasive surgery or interventional procedures are performed. The focus of its operations began with research and development, and in mid-2005, the Company launched its first commercial application for the SPY Intraoperative Imaging System in the U.S. From 2009 through 2012, the Company formed certain alliances with market leading companies for the broader commercialization of NOVADAQ’s leading products. In 2013, NOVADAQ established a direct sales team in North America to focus on the sale of the Company’s PINPOINT Imaging System and the LUNA Imaging System. In 2015, NOVADAQ’s direct sales and marketing team began to sell and market the SPYElite Imaging System, which was previously distributed and marketed in North America by LifeCell Corporation [“LifeCell”]. Despite the Company’s current focus on the commercialization of the SPY Imaging Systems, the Company continues to invest in additional research and development and acquisitions in order to expand the applications of its current and future imaging platform and direct sales offerings.
The SPY fluorescence imaging technology platform [“SPY Fluorescence Imaging”] provides clinically relevant anatomic and physiologic images of blood flow in vessels and micro-vessels during a wide variety of complex surgical and outpatient procedures performed in the operating room or clinic. The technology utilized in SPY Imaging Systems has a strong record of safety and does not expose the patient or the hospital or clinic staff to ionizing radiation. The SPY Fluorescence Imaging platform is flexible and
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can be used to develop unique imaging devices specifically designed to meet the needs of different surgeons and other healthcare providers and the specialty procedures they perform. SPY images enable physicians treating life-threatening illnesses such as breast, head and neck, colon, kidney and other cancers, complex hernias, diabetes and certain cardiovascular diseases that result in chronic non-healing wounds, to effectively visualize blood flow in vessels, co-joined vessels and micro-vessels and to visually assess the quality of blood perfusion in tissue.
Over 150 peer-reviewed publications report positive clinical experiences using SPY Imaging Systems in open, robotic and endoscopic surgeries and wound care. This body of academic literature supports the Company’s claims that the use of SPY Imaging Systems enhances intra-procedural decision-making and enables surgeons and other specialists to repair or remove tissue that could, otherwise, lead to post-operative or post procedure complications, which if not addressed during the procedure can negatively impact patient quality of life and significantly increase overall treatment costs.
The Company’s SPY, SPY Elite, LUNA and PINPOINT Imaging Systems are based upon the core SPY fluorescence technology. SPY and SPY Elite are 510(k) cleared by the U.S. Food and Drug Administration [“FDA”] for the visualization of blood flow in vessels and tissue perfusion during nine different open surgery applications.
The LUNA system is FDA 510(k) cleared for use in cardiovascular applications, such as the assessment of blood flow in peripheral vessels and perfusion in extremities for patients with vascular disease and conditions that can lead to chronic and acute wounds. The SPY, SPY Elite, and LUNA Systems are also Conformité Européenne (CE Marked) for sale in Europe, are licensed by Health Canada and have regulatory authority approval for sale in Japan and certain other markets outside of the United States. The Company also markets the SPY Analysis Toolkit [“SPY-Q”], which is a companion post-processing software designed to allow physicians to enhance and apply objective analysis tools to SPY Elite and LUNA images. SPY-Q is also 510(k) cleared by the FDA and is also available in markets outside of the United States.
PINPOINT is FDA 510(k) cleared, CE Marked, licensed by Health Canada and approved by several other regulatory authorities outside of the U.S., for use in minimally invasive surgical procedures. Regulatory activities to seek approval for PINPOINT in Japan are currently ongoing. PINPOINT combines the capabilities of SPY imaging with state-of-the-art high definition visible light visualization offered by conventional endoscopes. PINPOINT provides surgeons with better visualization of important information related to anatomic structures and tissue perfusion during complex minimally invasive procedures.
DermACELL is a technologically advanced Acellular Dermal Matrix (“ADM”) that can be used in breast reconstruction surgeries, as well as in the treatment of diabetic foot ulcers and chronic non-healing wounds. Adequate blood supply is critical for successful use of regenerative human tissue matrix allografts. The use of NOVADAQ’s SPY Imaging Systems alongside DermACELL will allow clinicians to visually assess the quality of blood flow in tissue in real time allowing for the validation of adequate perfusion at the time of allograft implant.
In addition to marketing SPY Imaging Systems and DermACELL products, NOVADAQ acquired and now manufactures and markets the U.S. FDA premarket approved [“PMA”] CO2 Heart Laser™ System for TMR. TMR is a procedure aimed at improving blood flow to areas of the heart that cannot be successfully treated by alternative standard revascularization techniques and is often performed adjunctively with coronary artery bypass graft surgery. The CO2 Heart Laser line of products is exclusively distributed in the U.S. by MAQUET.
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NOVADAQ’s intellectual property consists of 59 patent families representing 101 granted or allowed patents and 111 pending applications in various stages of review and prosecution. While the industry is highly competitive and subject to rapid and significant technological changes, the Company believes that there currently is no widely adopted alternative practical method of routinely visually assessing blood flow in vessels and micro vessels and tissue perfusion during the course of complex open, robotic or minimally invasive operative procedures. NOVADAQ will vigorously defend its patent estate if infringement is deemed to occur.
Over the years, the Company has incurred recurring operating losses, having invested significantly in its research and development activities, as well as supporting its selling and marketing, and general and administrative expenses. The Company has financed its operations through different sources including the issuance of common shares and shareholder warrants, the formation of strategic alliances with licensee partners and research and development grants awarded by governmental agencies. The Company expects to continue to incur losses and may require significant capital to fulfill its future obligations. Please refer to the section on “Liquidity and Capital Resources” below. The Company believes that its market leadership position, the ongoing advancement of its technology and the quality of its direct sales and marketing infrastructure will allow it to operate profitably in the future.
DEVELOPMENTS IN Q3 2015
On September 28, 2015, NOVADAQ announced the unveiling of SPY-Q Case Manager [SPY-QCM], at the Symposium on Advanced Wound Care Fall 2015 meeting held in Las Vegas, Nevada from September 26-28, 2015.
SPY-QCM is an image acquisition and analysis software toolkit that will also enable physicians treating patients with compromised blood flow and tissue perfusion to assess the effectiveness of chosen treatments over time using new case management functionality. SPY-QCM will compile image data acquired using NOVADAQ’s Fluorescence Angiography System over the course of a treatment period, and will provide a clear history of a patient’s recovery progress and, if appropriate, allow them to alter treatment strategies to maximize the likelihood of a successful outcome.
Effective September 30, 2015, NOVADAQ entered into a Co-Marketing Agreement [the “Agreement”] with Arthrex, Inc. [“Arthrex”], a global medical device company and leader in orthopaedic medical device innovation.
The Agreement allows the two companies to combine their expertise and devices to offer a world-class endoscopic system for a wide variety of surgical specialties, including orthopedic, general, colorectal and gynecological surgeries. NOVADAQ’s “plug and play” PINPOINT upgrade kit facilitates the seamless integration of its SPY imaging technology into Arthrex’s Synergy System, combining the most clinically relevant fluorescence imaging experience with the leading 4K white light endoscopic system.
Both companies will continue to sell their own standalone systems in addition to the combined systems, giving end-users unparalleled choice in providing the best care for their patients. Arthrex will have the ability to include the PINPOINT upgrade kit in all new Synergy System purchases, as well as upgrade their existing installed base. NOVADAQ’s sales team will continue to sell PINPOINT as a part of its fluorescence imaging ecosystem and NOVADAQ will also supply the disposable kits required to perform SPY imaging procedures directly to those Arthrex customers that have purchased PINPOINT upgrade kits.
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SELECTED YEAR TO DATE INFORMATION
The table below summarizes information regarding NOVADAQ’s revenues, loss from operations and other financial information for the periods presented in accordance with IFRS as issued by the IASB and should be read in conjunction with the corresponding unaudited interim condensed consolidated financial statements and related notes.
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| | | Nine months ended September 30, | |
in $000’s | | 2015 | | | 2014 | | | 2013 | |
Revenues | | | | | | | | | | | | |
Product sales | | | 41,695 | | | | 30,894 | | | | 21,376 | |
Royalty revenue | | | 1,435 | | | | 1,163 | | | | 1,273 | |
Partnership fee revenue | | | — | | | | 975 | | | | 975 | |
Service revenue | | | 664 | | | | 547 | | | | 648 | |
| | | | | | | | | | | | |
Total revenues | | | 43,794 | | | | 33,579 | | | | 24,272 | |
Cost of sales | | | 13,078 | | | | 12,161 | | | | 8,929 | |
| | | | | | | | | | | | |
Gross profit | | | 30,716 | | | | 21,418 | | | | 15,343 | |
Gross profit percentage | | | 70 | % | | | 64 | % | | | 63 | % |
Operating expenses | | | | | | | | | | | | |
Selling and distribution expenses | | | 41,361 | | | | 20,179 | | | | 9,197 | |
Research and development expenses | | | 12,732 | | | | 7,388 | | | | 5,692 | |
Administrative expenses | | | 6,464 | | | | 6,359 | | | | 4,368 | |
Write-down of inventory | | | — | | | | — | | | | 31 | |
Write-down of equipment | | | — | | | | — | | | | 26 | |
| | | | | | | | | | | | |
Total operating expenses | | | 60,557 | | | | 33,926 | | | | 19,314 | |
| | | | | | | | | | | | |
Loss from operations | | | (29,841 | ) | | | (12,508 | ) | | | (3,971 | ) |
Finance costs | | | (78 | ) | | | — | | | | (180 | ) |
Finance income | | | 166 | | | | 176 | | | | 67 | |
Warrants revaluation adjustment | | | 8,682 | | | | 5,520 | | | | (15,460 | ) |
Gain on investment | | | — | | | | 25 | | | | 25 | |
| | | | | | | | | | | | |
Loss before income taxes | | | (21,071 | ) | | | (6,787 | ) | | | (19,519 | ) |
Income tax recovery (expense) | | | 48 | | | | (15 | ) | | | (68 | ) |
| | | | | | | | | | | | |
Net loss and comprehensive loss for the period | | | (21,023 | ) | | | (6,802 | ) | | | (19,587 | ) |
| | | | | | | | | | | | |
Basic loss and comprehensive loss per share for the period | | | (0.38 | ) | | | (0.12 | ) | | | (0.43 | ) |
| | | | | | | | | | | | |
Diluted loss and comprehensive loss per share for the period | | | (0.52 | ) | | | (0.22 | ) | | | (0.43 | ) |
| | | | | | | | | | | | |
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RESULTS OF OPERATIONS – Year to Date Q3, 2015 as compared to Year to Date Q3, 2014
Revenues
Revenues for the nine-month period increased by 30% to $43,794,000 in 2015 from $33,579,000 in 2014. Product sales increased by $10,801,000 or 35% mainly due to an increase in recurring revenue of $5,836,000 or 48% and an increase in capital sales of $4,965,000 or 27%. Part of the increase in revenue recognized on SPY Elite kit sales results from the Company recognizing 100% of SPY Elite sales in 2015 due to the termination of the LifeCell agreements in Q4-2014.
Royalty revenue for the nine-month period in 2015 increased by $272,000 as compared to the same period in 2014 due to more Firefly Illuminators being sold by our partner.
Partnership fee revenue of $975,000 in 2014 related to the fee revenue recognized in 2014 on the marketing and distribution agreements with LifeCell which did not recur due to the termination of the agreements in Q4-2014.
Gross Profit
Gross profit was $30,716,000 for the nine-month period in 2015 compared to $21,418,000 in the same period in 2014. As a percentage of revenue, gross profit increased by 6% from 64% in 2014 to 70% in 2015. The increase in gross profit was a result of higher recurring and capital sales and an increase in manufacturing costs recovered in 2015, as compared to 2014, due to more units manufactured in 2015.
Operating Expenses
Selling and distribution expenses of $41,361,000 for the nine-month period in 2015 were $21,182,000 higher than expenses of $20,179,000 for the same corresponding period in the prior year as a result of additional direct sales force personnel; higher promotional spending; and an increase in costs related to the sponsorship of clinical studies.
Research and development expenses of $12,732,000 for the nine-months ended September 30, 2015 were $5,344,000 higher than expenses of $7,388,000 for the same period in 2014 due to higher patent and trademark expenses of $4,418,000; an increase in salaries and benefits in the amount of $537,000 to support expanded operations; higher product design expenses of $243,000; and an increase in non-cash stock option expense in the amount of $141,000.
Administrative expenses of $6,464,000 for the nine-month period in 2015 were $103,000 higher than expenses of $6,361,000 for the corresponding period in 2014. The increase mainly related to higher salaries and benefits in the amount of $707,000 and higher public company listing fees in the amount of $122,000. These amounts were partially offset by a reduction in professional fees of $747,000.
Finance Costs
Finance costs of $78,000 for the nine-month period in 2015 were comprised of non-cash imputed interest for the distribution rights payable with LifeNet.
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Finance Income
Finance income of $166,000 for the nine-month period ended September 30, 2015 was lower than income of $176,000 for the same period in 2014 due to lower cash balances resulting from cash usage to support operations.
Warrants Revaluation Adjustment
The revaluation of the warrants to fair value resulted in non-cash revaluation income of $8,682,000 for the nine-month period in 2015 compared to warrant revaluation income of $5,520,000 in the same period in 2014. During the nine-month period in 2015, the Company’s share price decreased by $6.19, whereas the share price for the corresponding period in 2014 decreased by $3.80.
Income Tax Expense
Income taxes recovery for the nine-month period in 2015 was $48,000, compared to income tax expense of $15,000 for the nine-month period ended September 30, 2014 as a result of a reduction in taxable income.
Net Loss
Net loss for the nine-month period in 2015 was $21,023,000, compared to a net loss of $6,802,000 for the same period in 2014. The increase in net loss of $14,221,000 was due to higher operating costs in the amount of $26,631,000, partially offset by the non-cash warrant revaluation income of $8,682,000 in 2015 compared to warrant revaluation income of $5,520,000 in 2014 and an increase in gross profit in the amount of $9,298,000.
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SUMMARY OF QUARTERLY RESULTS
The following table sets forth information regarding NOVADAQ’s revenues, loss from operations and other information for the periods presented, which were prepared in accordance with IFRS as issued by the IASB, and should be read in conjunction with the corresponding unaudited interim condensed consolidated financial statements and related notes.
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| | | Q3 | | | Q2 | | | Q1 | | | Q4 | | | Q3 | | | Q2 | | | Q1 | | | Q4 | |
in $000’s, except per share amounts | | 2015 | | | 2015 | | | 2015 | | | 2014 | | | 2014 | | | 2014 | | | 2014 | | | 2013 | |
Revenues | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Product sales | | | 16,290 | | | | 14,337 | | | | 11,067 | | | | 9,803 | | | | 11,111 | | | | 10,391 | | | | 9,391 | | | | 9,643 | |
Royalty revenue | | | 443 | | | | 541 | | | | 452 | | | | 745 | | | | 489 | | | | 270 | | | | 405 | | | | 616 | |
Partnership fee revenue | | | — | | | | — | | | | — | | | | 2,316 | | | | 325 | | | | 325 | | | | 325 | | | | 325 | |
Service revenue | | | 303 | | | | 189 | | | | 172 | | | | 158 | | | | 203 | | | | 166 | | | | 177 | | | | 164 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total revenues | | | 17,036 | | | | 15,067 | | | | 11,691 | | | | 13,022 | | | | 12,128 | | | | 11,152 | | | | 10,298 | | | | 10,748 | |
Cost of sales | | | 4,477 | | | | 4,381 | | | | 4,220 | | | | 3,897 | | | | 4,327 | | | | 4,232 | | | | 3,602 | | | | 4,004 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross profit | | | 12,559 | | | | 10,686 | | | | 7,471 | | | | 9,125 | | | | 7,801 | | | | 6,920 | | | | 6,696 | | | | 6,744 | |
Gross profit percentage | | | 74 | % | | | 71 | % | | | 64 | % | | | 70 | % | | | 64 | % | | | 62 | % | | | 65 | % | | | 63 | % |
Operating expenses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Selling and distribution expenses | | | 13,370 | | | | 15,493 | | | | 12,498 | | | | 7,505 | | | | 6,279 | | | | 7,192 | | | | 6,708 | | | | 4,863 | |
Research and development expenses | | | 3,981 | | | | 5,129 | | | | 3,622 | | | | 3,394 | | | | 2,802 | | | | 2,331 | | | | 2,255 | | | | 2,282 | |
Administrative expenses | | | 1,319 | | | | 2,458 | | | | 2,687 | | | | 3,935 | | | | 2,413 | | | | 1,968 | | | | 1,980 | | | | 2,867 | |
Termination fee | | | — | | | | — | | | | — | | | | 4,500 | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total operating expenses | | | 18,670 | | | | 23,080 | | | | 18,807 | | | | 19,334 | | | | 11,494 | | | | 11,491 | | | | 10,943 | | | | 10,012 | |
Loss from operations | | | (6,111 | ) | | | (12,394 | ) | | | (11,336 | ) | | | (10,209 | ) | | | (3,693 | ) | | | (4,571 | ) | | | (4,247 | ) | | | (3,268 | ) |
Finance costs | | | (26 | ) | | | (26 | ) | | | (26 | ) | | | — | | | | — | | | | — | | | | — | | | | (3 | ) |
Finance income | | | 56 | | | | 56 | | | | 54 | | | | 48 | | | | 50 | | | | 59 | | | | 70 | | | | 42 | |
Warrant revaluation adjustment | | | 2,321 | | | | 6,338 | | | | 23 | | | | (7,356 | ) | | | 6,670 | | | | 10,794 | | | | (11,944 | ) | | | 445 | |
Gain on investment | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 25 | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) before income taxes | | | (3,760 | ) | | | (6,026 | ) | | | (11,285 | ) | | | (17,517 | ) | | | 3,027 | | | | 6,282 | | | | (16,096 | ) | | | (2,784 | ) |
Income tax recovery (expense) | | | 48 | | | | — | | | | — | | | | (34 | ) | | | 1 | | | | (2 | ) | | | (15 | ) | | | 68 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) and comprehensive income (loss) for the period | | | (3,712 | ) | | | (6,026 | ) | | | (11,285 | ) | | | (17,551 | ) | | | 3,028 | | | | 6,280 | | | | (16,111 | ) | | | (2,716 | ) |
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Basic income (loss) and comprehensive income (loss) per share for the period | | | (0.07 | ) | | | (0.11 | ) | | | (0.20 | ) | | | (0.32 | ) | | | 0.05 | | | | 0.11 | | | | (0.29 | ) | | | (0.05 | ) |
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Diluted income (loss) and comprehensive income (loss) per share for the period | | | (0.11 | ) | | | (0.22 | ) | | | (0.20 | ) | | | (0.32 | ) | | | (0.06 | ) | | | (0.08 | ) | | | (0.29 | ) | | | (0.05 | ) |
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Balance Sheet Data
| | | | | | | | | | | | |
| in $000’s | | As at September 30, | | | As at December 31, | | | As at September 30, | |
| | | 2015 | | | 2014 | | | 2014 | |
Cash and cash equivalents | | | 116,422 | | | | 141,448 | | | | 157,750 | |
Working capital | | | 133,241 | | | | 156,649 | | | | 171,666 | |
Total assets | | | 181,151 | | | | 196,881 | | | | 206,603 | |
Total non-current liabilities | | | 15,121 | | | | 28,056 | | | | 20,052 | |
Total liabilities | | | 29,854 | | | | 34,390 | | | | 28,002 | |
Shareholders’ equity | | | 151,297 | | | | 162,491 | | | | 178,601 | |
Note – Certain prior period comparatives have been reclassified to conform to the current year’s presentation.
RESULTS OF OPERATIONS – Q3, 2015 as compared to Q3, 2014 and Q2, 2015
Revenue
Revenues increased by 40% to $17,036,000 in Q3-2015 from $12,128,000 in Q3-2014. Product sales increased by $5,180,000 or 47% mainly due to an increase in an increase in capital sales of $3,398,000 or 53% and recurring revenue of $1,781,000 or 38%. Part of the increase in revenue recognized on SPY Elite kit sales results from the Company recognizing 100% of SPY Elite sales in 2015 due to the termination of the LifeCell agreements in Q4-2014.
Royalty revenue for Q3-2015 decreased from Q3-2014 by $46,000 due to less Firefly Illuminators being sold by our partner.
Partnership fee revenue of $325,000 in Q3-2014 related to the fee revenue recognized in 2014 on the marketing and distribution agreements with LifeCell which did not recur due to the termination of the agreements in Q4-2014.
In comparison to Q2-2015, revenues increased by $1,969,000 or 13% mainly due to an increase in product sales. Revenue from direct capital sales and direct recurring revenue increased by 19% and 7%, respectively, as compared to Q2-2015. Direct revenues exclude our partnered revenues and sales outside of North America. Direct recurring revenues include all kits, service, rental and DermACELL sales.
In Q3-2015, an estimated 10,500 procedures using SPY technology systems were performed, representing an increase over Q3-2014 and Q2-2015 of 15% and 10%, respectively.
Gross Profit
Gross profit was $12,559,000 in Q3-2015 compared to $7,801,000 in Q3-2014. As a percentage of revenue, gross profit increased by 10% from 64% in Q3-2014 to 74% in Q3-2015. The increase in gross profit percentage was primarily the result of higher recurring and capital sales. In comparison to Q2-2015, gross profit was higher by 3% due to higher manufacturing costs recovered in Q3-2015, as compared to Q2-2015, due to more units manufactured.
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Operating Expenses
Selling and distribution expenses of $13,370,000 for Q3-2015 were $7,091,000 higher than Q3-2014 expenses of $6,279,000 as a result of additional direct sales force personnel and higher promotional spending. In comparison to Q2-2015, selling and distribution expenses decreased by $2,123,000 which was mainly due a decrease in costs related to the sponsorship of clinical studies.
Research and development expenses of $3,981,000 in Q3-2015 were $1,179,000 higher than Q3-2014 expenses of $2,802,000 mainly due to higher patent and trademark expenses of $1,240,000. In comparison to Q2-2015, research and development expenses were $1,148,000 lower due to lower patent and trademark expenses of $1,167,000 and lower stock option expense of $239,000, partially offset by an increase in product design expense in the amount of $200,000.
Administrative expenses of $1,319,000 in Q3-2015 were $1,094,000 lower than Q3-2014 expenses of $2,413,000. The decrease mainly related to lower professional fees in the amount of $957,000 and a decrease in non-cash stock option expense in the amount of $295,000. In comparison to Q2-2015, administrative expenses were lower than the previous quarter by $1,139,000 mainly due to a decrease in non-cash stock option expense of $713,000 and lower professional fees in the amount of $107,000.
Finance Costs
Finance costs of $26,000 in Q3-2015 were comprised of non-cash imputed interest for the distribution rights payable with LifeNet.
Finance Income
Finance income of $56,000 in Q3-2015 was relatively consistent with finance income of $50,000 in Q3-2014.
Warrants Revaluation Adjustment
The Q3-2015 non-cash warrant revaluation income was $2,321,000 compared to $6,670,000 in Q3-2014. During Q3-2015 the Company’s share price decreased $1.68, compared to a $3.79 share price decrease in Q3-2014. During Q2-2015 the Company’s share price decreased by $4.13 which resulted in a non-cash warrant revaluation income of $6,338,000.
Net Income (Loss)
Net loss was $3,712,000 in Q3-2015 compared to a net income of $3,028,000 in Q3-2014. The change was primarily a result of an increase in operating expenses of $7,176,000 and a decrease in warrant revaluation income of $4,349,000. Offsetting these amounts was an increase in gross profit of $4,758,000.
In comparison to Q2-2015, net loss decreased by $2,314,000 primarily due to an increase in gross profit of $1,873,000 and a decrease in operating expenses of $4,410,000. Offsetting these amounts was a reduction in non-cash warrant revaluation income of $4,017,000.
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FINANCIAL POSITION
The following is a discussion of the changes to the Company’s financial position as at September 30, 2015 as compared to December 31, 2014:
| | | | | | | | | | | | | | | | | | |
| in $000’s | | September 30,
2015 | | | December 31,
2014 | | | Change
($) | | | Change
(%) | | | Changes during the nine months
ended September 30, 2015, include |
ASSETS | | | | | | | | | | | | | | | | | | |
Current assets | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | | 116,422 | | | | 141,448 | | | | (25,026 | ) | | | (18 | ) | | See Liquidity and Capital Resources section below. |
Accounts receivable | | | 18,736 | | | | 13,503 | | | | 5,233 | | | | 39 | | | An increase in sales in Q3-15 as compared to Q4-14. |
Prepaid expenses and other assets | | | 3,420 | | | | 1,205 | | | | 2,215 | | | | 184 | | | An increase in prepaid insurance and deposits for sales and marketing events. |
Income taxes recoverable | | | — | | | | 29 | | | | (29 | ) | | | (100 | ) | | A decrease due to taxes recovered. |
Inventories | | | 9,396 | | | | 6,798 | | | | 2,598 | | | | 38 | | | An increase to meet forecasted sales. |
| | | | | | | | | | | | | | | | | | |
| | | 147,974 | | | | 162,983 | | | | (15,009 | ) | | | (9 | ) | | |
Non-current assets | | | | | | | | | | | | | | | | | | |
Property and equipment, net | | | 14,214 | | | | 13,648 | | | | 566 | | | | 4 | | | Net additions to revenue generating fixed assets in 2015 of $4,396 less depreciation of $3,830. |
Intangible assets, net | | | 18,963 | | | | 20,250 | | | | (1,287 | ) | | | (6 | ) | | A decrease due to amortization recorded in 2015. |
| | | | | | | | | | | | | | | | | | |
Total Assets | | | 181,151 | | | | 196,881 | | | | (15,730 | ) | | | (8 | ) | | |
| | | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | | |
| in $000’s | | September 30,
2015 | | | December 31,
2014 | | | Change
($) | | | Change
(%) | | | Changes during the nine months
ended September 30, 2015, include |
Current liabilities | | | | | | | | | | | | | | | | | | |
Accounts payable and accrued liabilities | | | 13,119 | | | | 5,345 | | | | 7,774 | | | | 145 | | | An increase due to working capital requirements. |
Provisions | | | 371 | | | | 335 | | | | 36 | | | | 11 | | | An increase in warranty provision due to higher capital sales in Q3-15 as compared to Q4-2014. |
Deferred revenue | | | 993 | | | | 404 | | | | 589 | | | | 146 | | | An increase in extended warranty purchased by customers. |
Distribution rights payable | | | 250 | | | | 250 | | | | –– | | | | –– | | | |
| | | | | | | | | | | | | | | | | | |
| | | 14,733 | | | | 6,334 | | | | 8,399 | | | | 133 | | | |
Non-current liabilities | | | | | | | | | | | | | | | | | | |
Deferred revenue | | | 635 | | | | 552 | | | | 83 | | | | 15 | | | An increase in extended warranty purchased by customers. |
Distribution rights payable | | | 1,709 | | | | 1,631 | | | | 78 | | | | 5 | | | An increase resulting from interest accretion recorded in 2015. |
Shareholder warrants | | | 12,777 | | | | 25,873 | | | | (13,096 | ) | | | (51 | ) | | Exercises of $4,414 and non-cash revaluation adjustment of $8,682. |
| | | | | | | | | | | | | | | | | | |
Total Liabilities | | | 29,854 | | | | 34,390 | | | | (4,4,536 | ) | | | (13 | ) | | |
| | | | | | | | | | | | | | | | | | |
Total Shareholders’ Equity | | | 151,297 | | | | 162,491 | | | | (11,194 | ) | | | (7 | ) | | Net loss of $21,023 offset by, stock based compensation of $3,973 and exercise of shareholder warrants and stock options of $5,114 and $742 respectively. |
| | | | | | | | | | | | | | | | | | |
Total Liabilities and Shareholders’ Equity | | | 181,151 | | | | 196,881 | | | | (15,730 | ) | | | (8 | ) | | |
| | | | | | | | | | | | | | | | | | |
Note – Certain prior period comparatives have been reclassified to conform to the current year’s presentation.
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LIQUIDITY AND CAPITAL RESOURCES
Since its inception, NOVADAQ has financed its cash requirements primarily through the issuance of securities and convertible debt, strategic alliances, licensing and development fees, investment tax credits and government funding and interest income. Given the Company’s history of continuing losses and its accumulated deficit, revenues will need to continue to increase over a sustained period. The Company does not yet generate sufficient operational cash flows to meet the Company’s planned growth and to fund development activities. The Company relies on funding from outside sources to execute its current and future business development plans which include but are not limited to potential acquisitions, design and development and clinical trials, the investment required for the revenue generating assets utilized in the placement and rental models and the required funding for the recruitment and development of the direct sales team. The Company is dependent on the willingness of investors or strategic partners to continue to invest in the Company or to enter into strategic relationships to continue further development of the Company’s products. There can be no assurance, however, that NOVADAQ will be successful in securing partnerships or financing on terms that would be favorable to the Company, or at all.
Based on the cash on hand in the amount of $116,422,000 as at September 30, 2015, the capacity to borrow funds from its revolver loan (as further described below), and the sales and margins which the Company anticipates to generate from operations in the upcoming 12 months, the Company expects to have sufficient funds to support its cash requirements for at least the next 12 months. The Company invests its cash and cash equivalents in daily interest accounts at a chartered bank in Canada.
Operating Activities
In Q3-2015, cash used in operating activities was $5,667,000 which included cash expenditures (cash burn) before change in working capital of $3,544,000, and an increase in working capital of $1,984,000. The cash burn during the quarter was mainly driven by increased selling and distribution expenses associated with the continued build-out of NOVADAQ’s direct sales and marketing infrastructure, which was partially offset by an increase in gross profit. The increase in working capital was driven by increased inventories and accounts receivable, partially offset by increased accounts payable and accrued liabilities and a decrease in prepaid expenses and other assets.
Investing Activities
In Q3-2015, cash used from investing activities was $2,312,000 comprised of net additions to revenue generating fixed assets which were primarily utilized in the placement of assets at hospitals and clinics and leasehold improvements and furniture and fixtures in the amount of $685,000 related to the new facility in Burnaby B.C.
Financing Activities
In Q3-2015, cash provided from financing activities was $12,000 comprised of proceeds from the exercise of stock options.
Revolver Loan
On August 26, 2011, the Company executed a revolving credit agreement with a Canadian chartered bank, entitling the Company to borrow up to a maximum limit of $2,500,000, subject to a borrowing base formula, certain financial covenants and certain reporting requirements. The credit facility is secured by a general security agreement constituting a first-ranking security interest in all personal property of the Company with a conventional rate of interest. Currently, the Company has no committed sources of
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capital other than this revolving credit loan. Since its inception and as at September 30, 2015, the Company has not utilized this credit facility. As at September 30, 2015, the maximum amount that can be borrowed under the revolver loan was $2,298,000.
Contractual Obligations
The Company’s short-term and long-term contractual obligations are as follows:
| | | | | | | | | | | | |
in $000’s | | 0-1 year | | | 1-5 years | | | After 5 years | |
Operating leases | | | 670 | | | | 1,933 | | | | 2,375 | |
Funding for clinical study | | | 233 | | | | — | | | | — | |
The long-term operating lease commitments are for premises located in: Mississauga, ON, Taunton, MA, Richmond, B.C. and Burnaby B.C.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Except as disclosed in Note 2 to our interim condensed consolidated financial statements, there were no significant changes in our accounting policies and critical accounting estimates for the three and nine month periods ended September 30, 2015. We describe our significant accounting policies and critical accounting estimates in Note 2 to the audited consolidated financial statements and MD&A for the year ended December 31, 2014.
RELATED PARTY TRANSACTIONS
As at September 30, 2015 and December 31, 2014, the Company has no receivable or payable balances with key management personnel or directors. The key management personnel include the President and Chief Executive Officer; Chief Financial Officer; Senior Vice President and General Manager; and Senior Vice President, Marketing.
NEW STANDARDS, INTERPRETATIONS & AMENDMENTS ADOPTED BY THE COMPANY
Annual Improvements to IFRS (2010-2012) and (2011-2013) cycles
In December 2013, the IASB issued Annual Improvements to IFRS: 2010-2012 Cycle and Annual Improvements to IFRS: 2011-2013 Cycle, both of which are required to be applied for annual periods beginning on or after July 1, 2014. The Company has adopted these amendments in its financial statements for the annual period beginning January 1, 2015. The adoption of the amendments did not have a material effect on the Company’s consolidated financial statements.
NEW STANDARDS, INTERPRETATIONS & AMENDMENTS NOT YET ADOPTED BY THE COMPANY
Standards issued but not yet effective up to the date of issuance of the Company’s consolidated financial statements are listed below. This listing is of standards and interpretations issued, which the Company reasonably expects to be applicable at a future date. The Company intends to adopt those standards when they become effective.
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Disclosure Initiative: Amendments to IAS 1
On December 18, 2014 the IASB issued amendments to IAS 1,Presentation of Financial Statements, as part of its major initiative to improve presentation and disclosure in financial reports (the “Disclosure Initiative”). The amendments are effective for annual periods beginning on or after January 1, 2016. Early adoption is permitted. The Company intends to adopt these amendments in its financial statements for the annual period beginning on January 1, 2016. The extent of the impact of adoption of the amendments has not yet been determined.
IFRS 15 – Revenue from Contracts with Customers [“IFRS 15”]
IFRS 15 contains a single model that applies to contracts with customers and two approaches to recognizing revenue: at a point in time or over time. The model features a contract-based five-step analysis of transactions to determine whether, how much and when revenue is recognized. New estimates and judgmental thresholds have been introduced, which may affect the amount and/or timing of revenue recognized.
The Company currently intends to adopt IFRS 15 in its financial statements for the annual period beginning on January 1, 2018. The extent of the impact of adoption of the standard has not yet been determined.
IFRS 9 – Financial Instruments [“IFRS 9’]
IFRS 9 (2009) introduced new requirements for the classification and measurement of financial assets. Under IFRS 9 (2009), financial assets are classified and measured based on the business model in which they are held and the characteristics of their contractual cash flows.
IFRS 9 (2010) introduced additional changes relating to financial liabilities and IFRS 9 (2013) introduced hedging guidance.
On July 24, 2014, the IASB issued the final version of the standard, which supersedes all previous versions (IFRS 9 (2014)).
The Company does not intend to early adopt IFRS 9 (2014) in its financial statements and will adopt it for the annual period beginning on January 1, 2018, which is the mandatory adoption date specified in IFRS 9 (2014). The extent of the impact of adoption of the standard has not yet been determined.
FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTS
The Company’s financial instruments were comprised of the following as at September 30, 2015: cash and cash equivalents of $116,422,000; accounts receivable of $18,736,000; accounts payable and accrued liabilities and provisions of $13,491,000; distribution rights payable of $1,959,000; and shareholder warrants of $12,777,000. The Company invested its cash and cash equivalents in daily interest savings accounts. Accounts receivable not provided for is subject to minimal credit risk based on the nature of the Company’s customers and letters of credit securing certain international sales. The receivables are being carried at amortized cost. Accounts payable and accrued liabilities and provisions are carried at amortized cost, and are comprised of short-term obligations owing to suppliers relative to the Company’s operations. Distribution rights liability is payable over a 10-year term and is carried at amortized cost. The shareholder warrants are re-valued quarterly utilizing the Black-Scholes model to determine fair value.
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Fair Value
Fair value is the estimated amount that the Company would pay or receive to dispose of financial instruments in an arm’s length transaction between knowledgeable, willing parties who are under no compulsion to act. The fair value of financial instruments that are traded in active markets at each reporting date is determined by reference to quoted market prices, without any deduction for transaction costs. For financial instruments not traded in an active market, the fair value is determined using appropriate valuation techniques that are recognized by market participants. Such techniques may include using recent arm’s length market transactions, reference to the current fair value of another instrument that is substantially the same, discounted cash flow analysis or other valuation models.
Concentration of Accounts Receivable
As at September 30, 2015, two customers had an accounts receivable balance exceeding 10% of total accounts receivable [December 31, 2014 – two customers]. Concentration of these customers comprised 31% of total accounts receivable as at September 30, 2015 as compared to 52% as at December 31, 2014.
For the nine month period ended September 30, 2015, there were sales to one customer that exceeded 10% of total revenue [nine month period September 30, 2014 – three customers]. For the nine month period ended September 30, 2015, concentration of the one customer comprised 13% of total revenue. For the nine month period ended September 30, 2014, concentration of the three customers comprised 35%, 16% and 12% of total revenue.
RISKS AND UNCERTAINTIES
The results of operations and financial condition of the Company are subject to a number of risks and uncertainties, and are affected by a number of factors outside of the control of management. For a detailed discussion regarding the relevant risks and uncertainties, see the Company’s annual MD&A and AIF for the year ended December 31, 2014, both of which are filed on SEDAR and EDGAR.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the U.S. Exchange Act, and under National Instrument 52-109 in Canada) to provide reasonable assurance that all material information relating to the Company and its subsidiaries is gathered and reported to senior management on a timely basis so that appropriate decisions can be made regarding public disclosure.
The Chief Executive Officer [“CEO”] and Chief Financial Officer [“CFO”] have designed such disclosure controls and procedures, or caused them to be designed under their supervision, to provide reasonable assurance that material information relating to the Company, including its consolidated subsidiaries, is made known to them by others within those entities, particularly during the period in which the disclosures are being prepared to provide reasonable assurance that information required to be disclosed under securities legislation is recorded, processed, summarized and reported within the time periods specified in the securities legislation.
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Due to inherent limitations in control systems and procedures no matter how well conceived or operated, their evaluation can provide only reasonable, not absolute, assurance that such disclosure controls and procedures are operating effectively.
Internal Control over Financial Reporting
Management is also responsible for establishing and maintaining adequate internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial reports for external purposes in accordance with IFRS as issued by the IASB.
The CEO and CFO have designed internal controls over financial reporting [“ICFR”], or caused it to be designed under their supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with IFRS as issued by the IASB.
Changes in Internal Control over Financial Reporting
There have been no material changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2015, which have materially affected, or are reasonably likely to affect, the Company’s internal control over financial reporting.
OUTSTANDING SHARE DATA AND OTHER INFORMATION
The Company is authorized to issue an unlimited number of common shares and an unlimited number of preferred shares, issuable in series. As at the date of this MD&A, there are a total of 56,199,159 common shares, 1,917,785 stock options, 19,802 RSU’s and 1,561,515 shareholder warrants outstanding. The shareholder warrants are exercisable into one common share.
ADDITIONAL INFORMATION
Additional information concerning the Company, including the most recently filed AIF, is available on both EDGAR and SEDAR at www.sedar.com.
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