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KIPS > SEC Filings for KIPS > Form 10-Q on 9-May-2013All Recent SEC Filings

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Form 10-Q for KIPS BAY MEDICAL, INC.


9-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of financial condition and results of operations together with our unaudited financial statements and the related notes included elsewhere in this quarterly report. This discussion and analysis contains forward-looking statements about our business and operations, based on current expectations and related to future events and our future financial performance, that involve risks and uncertainties. Our actual results may differ materially from those we currently anticipate as a result of many important factors, including the factors we describe under "Risk Factors" and elsewhere in our annual report on Form 10-K for the year ended December 31, 2012, as updated by this quarterly report.

Overview

Kips Bay Medical, Inc. ("we", "us", "our" or the "Company") was incorporated in the state of Delaware on May 1, 2007. We are a medical device company focused on manufacturing and commercializing our external saphenous vein support technology, or eSVS Mesh, for use in coronary artery bypass grafting ("CABG") surgery. Our eSVS Mesh is a nitinol mesh sleeve that, when placed on the outside of a saphenous vein graft during CABG surgery, is designed to improve the structural characteristics and long-term performance of the saphenous vein graft. CABG surgery is one of the most commonly performed cardiac surgeries in the United States. In CABG procedures, surgeons harvest blood vessels, including the internal mammary artery from the chest wall and the saphenous vein from the leg, and attach the harvested vessels to the heart in order to bypass, or provide blood flow around, blocked coronary arteries. We believe the use of our eSVS Mesh with saphenous vein grafts in CABG surgery will improve the long-term outcome of CABG procedures, including improved openness, or patency, and improved blood flow characteristics through the saphenous vein graft, resulting in a reduced need for costly and potentially complicated reoperations or revascularization procedures.

We received authorization to apply the CE Mark to our eSVS Mesh in May 2010 and we began marketing and commenced shipments in select international markets in June 2010. Our eSVS Mesh is a novel product and we are not aware of the establishment of any specific or supplemental reimbursements for our eSVS Mesh. Given the budgetary pressures in Europe, our sales to date have been limited.

We are currently conducting a feasibility trial for the U.S Food and Drug Administration ("FDA"). This trial is a multi-center, randomized study of external saphenous vein support using our eSVS Mesh in CABG surgery and is titled the "eMESH I" study. The objective of this study is to demonstrate the initial safety and performance of the eSVS Mesh for use as an external saphenous vein graft ("SVG") support device during CABG surgery. We expect to enroll up to 120 patients at eight European and four U.S. sites and further expect to use the data from this study as the basis for the filing of a request for an investigational device exemption ("IDE") to perform a larger pivotal study which is required to demonstrate clinical effectiveness and support a request for approval to sell our eSVS Mesh in the United States. Enrollments in this trial commenced in late August 2012 at the Bern University Hospital in Switzerland and in February 2013 at the Northeast Georgia Medical Center in Gainesville, Georgia. The primary safety endpoint is the 30 day rate of MACE, defined as the rate of the composite of total mortality, myocardial infarction (heart attack), and/or coronary target vessel revascularization (percutaneous coronary intervention or CABG) within 30 days of the procedure. The eSVS Mesh performance will be evaluated based upon the angiographic patency rate of the enrolled grafts, where patency is defined as less than 50% stenosis, or blockage, of the SVG at six months after surgery. We are currently working through the internal review and approval process with a number of leading cardiac centers in Europe and the United States to expand the total number of research sites to 12. As of May 1, 2013, seven sites have received ethics committee approval and are actively recruiting patients for this study.


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Upon completion of this study, we expect to request an IDE for a pivotal study in the U.S. However, we could be delayed by adverse clinical results or regulatory complications, and we may never receive U.S. marketing approval.

In December 2012, we completed a public offering of 10,000,000 shares of our common stock at a purchase price of $0.65 per share. All shares sold in this offering were newly issued by us. Gross proceeds from this offering were $6.5 million. After deducting the underwriting commissions and other expenses, we realized net proceeds of approximately $5.4 million. As additional consideration for this transaction, we issued options to purchase 500,000 shares of our common stock to the underwriter and its designees. These options have a five year term, an exercise price of $0.8125 per share or 125% of the purchase price of shares sold in this public offering, and become exercisable on December 21, 2013, one year after the effective date of this public offering. On January 28, 2013, we issued an additional 475,000 shares to the underwriter at a purchase price of $0.65 per share pursuant to the underwriter's partial exercise of its over-allotment option from this public offering.

As of March 30, 2013, we had an accumulated deficit of $31.3 million. We expect our losses to continue as we pursue commercialization of and further regulatory approvals for our eSVS Mesh.

Critical Accounting Policies and Estimates

Our significant accounting policies and estimates are disclosed in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Note 2 to our Audited Consolidated Financial Statements, included in Part II, Item 8, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2012. The critical accounting policies used in the preparation of the financial statements as of March 30, 2013 have remained unchanged from December 31, 2012.


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Results of Operations



Comparison of the Three Months Ended March 30, 2013 to the Three Months Ended
March 31, 2012 (in thousands)



                                              Three Months Ended           Percent
                                       March 30, 2013    March 31, 2012    Change
Net sales                             $             36   $            53     (32.1 )%
Cost of sales                                      (16 )             (24 )   (33.3 )
Gross profit                                        20                29     (31.0 )
Operating expenses:
Research and development                           705               483      46.0
Selling, general and administrative                774               822      (5.8 )
Total operating expenses                         1,479             1,305      13.3
Other income (expense):
Interest income                                      3                 5     (40.0 )
Net loss                              $         (1,456 ) $        (1,271 )    14.6 %

Manufacturing costs and research and development and selling, general and administrative expenses include non-cash stock-based compensation expense as a result of our issuance of stock options and restricted stock grants. We expense the fair value of equity awards over their vesting periods. The terms and vesting schedules for share-based awards vary by type of grant and the employment status of the grantee. The awards granted through March 30, 2012 vest upon time-based conditions. We expect to record additional non-cash compensation expense in the future, which may be significant. The following table summarizes the stock-based compensation expense in our statements of comprehensive income for the three months ended March 30, 2013 and March 31, 2012 (in thousands):

                                               Three Months Ended
                                       March 30, 2013      March 31, 2012
Manufacturing                         $              -    $             15
Research and development                            49                  55
Selling, general and administrative                 93                 110
Total stock-based compensation        $            142    $            180

Net Sales and Gross Profit

Our net sales were $36,000 in the first quarter of 2013, which represents a decrease of 32.1% from the first quarter of 2012. Our gross profit decreased 31.0% to $20,000 in the first quarter of 2013 as compared with $29,000 in the first quarter of 2012. These decreases in the current quarter reflected lower demand from our distributors. We expect sales to continue at modest levels until additional clinical study data is available.

Research and Development

Our research and development expenses increased 46.0% from $483,000 in the first quarter of 2012 to $705,000 in the first quarter of 2013. This increase is due primarily to costs incurred for the feasibility study we are conducting for the FDA, which began enrolling patients in August 2012. Also contributing to this increase was our product development efforts intended to support expanding the product labeling for our eSVS Mesh to include the use of alternate sealants and to allow its use by physicians when they perform sequential grafts. We expect that our research and development costs will continue to increase as we continue our feasibility study for the FDA.

Selling, General and Administrative

Our selling, general and administrative ("SG&A") expenses decreased 5.8% to $774,000 in the three months ended March 30, 2013 from $822,000 in the prior year period. This decrease was driven by a number of factors which


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included: a reduction in consulting fees incurred to support our commercial sales activity; and the first quarter of 2012 included professional fees related to the filing of a registration statement, required per our common stock purchase agreement with Aspire, which did not recur in 2013. These decreases were partially offset by increased travel costs of our executive management. We expect SG&A expenses to remain at or near current levels.

Interest Income

Interest income decreased $2,000 in first quarter of 2013 compared with the same period in the prior year. The decrease resulted primarily from our having lower cash, cash equivalents and short-term investments in the first quarter of 2013 as compared with the first quarter of 2012.

Liquidity and Capital Resources

The following table summarizes our liquidity and capital resources as of March 30, 2013 and December 31, 2012 and for the three months ended March 30, 2013 and March 31, 2012 and is intended to supplement the more detailed discussion that follows (in thousands):

Liquidity and Capital Resources    March 30, 2013     December 31, 2012
Cash and cash equivalents         $          4,416   $             9,403
Short-term investments                       4,459                   947
Working capital                              9,621                10,611




                                                    Three Months Ended
Cash Flow Data                               March 30, 2013    March 31, 2012
Cash provided by (used in):
Operating activities                        $         (1,733 ) $        (1,233 )
Investment activities                                 (3,530 )          (2,198 )
Financing activities                                     276                 -
Net decrease in cash and cash equivalents   $         (4,987 ) $        (3,431 )

Cash and Cash Equivalents

Our total cash resources, including short-term investments, as of March 30, 2013 were $8.9 million compared to $10.4 million as of December 31, 2012. As of March 30, 2013, we had $469,000 in current liabilities and $9.6 million in net working capital. As of December 31, 2012, we had $788,000 in current liabilities and $10.6 million in net working capital. We incurred a net loss of $1.5 million and had negative cash flow from operating activities of $1.7 million for the three months ended March 30, 2012.

As we continue to pursue regulatory approvals, develop additional clinical data, continue the process of commercialization in international markets and develop additional applications for our eSVS Mesh, we expect to continue to incur substantial losses, which will continue to generate negative net cash flows from operating activities.

We market our eSVS Mesh in select European and other international markets. We continue to generate moderate levels of sales which we believe reflect the effects of cost pressures in the health care industry and our need to develop additional clinical data for the eSVS Mesh.

In December 2012, we completed a public offering of 10,000,000 shares of our common stock at a purchase price of $0.65 per share. All shares sold in this offering were newly issued by the Company. Gross proceeds from this offering were $6.5 million. After deducting the underwriting commissions and other expenses, we realized net proceeds of approximately $5.4 million. As additional consideration for this transaction, we issued options to purchase 500,000 shares of our common stock to the underwriter and its designees. These options have a five year term, an exercise price of $0.8125 per share or 125% of the purchase price of shares sold in this public offering, and become exercisable on December 21, 2013, one year after the effective date of this public offering. On January 28,


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2013, we issued an additional 475,000 shares to the underwriter at a purchase price of $0.65 per share pursuant to the underwriter's partial exercise of its over-allotment option from this public offering.

In the future, we may seek to raise additional funds through various sources, such as equity and debt financings, or through strategic collaborations and license agreements. We can give no assurances that we will be able to secure such additional sources of funds to support our operations, or if such funds are available to us, that such additional financing will be sufficient to meet our needs. We expect that our current cash, cash equivalents and short-term investments will be sufficient to fund our planned operations for at least the next 12 months, and we have no current intention to enter into a credit facility or loan agreement. We do not anticipate any adverse effects stemming from the lack of an available credit facility at this time.

Net Cash Used in Operating Activities

Net cash used in operating activities was $1.7 million and $1.2 million in the three months ended March 30, 2013 and March 31, 2012, respectively. The net cash used in each of these periods primarily reflects the net loss for those periods, offset in part by depreciation, non-cash stock-based compensation and the effects of changes in operating assets and liabilities.

Net Cash Used in Investment Activities

Net cash used in investment activities was $3.5 million and $2.2 million in the three months ended March 30, 2013 and March 31, 2012, respectively. Cash used in investment activities is related primarily to the purchase of short-term investments.

Net Cash Provided by Financing Activities

Net cash provided by financing activities was $276,000 in the three months ended March 30, 2013. Net cash provided by financing activities resulted from the sale of common stock to the underwriter of our December 2012 public offering, pursuant to the underwriter's partial exercise of its over-allotment option.

Capital Requirements

We expect our existing resources as of the date of this quarterly report to be sufficient to fund our planned operations for at least the next 12 months. However, we may require significant additional funds earlier than we currently expect in order to conduct additional clinical trials to obtain regulatory approvals for our eSVS Mesh. To the extent that we raise additional capital through the sale of equity or convertible debt securities, stockholders' interest may be diluted, and the terms may include liquidation or other preferences that adversely affect the rights of our current stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions such as incurring additional debt, making capital expenditures or declaring dividends. Any of these events could adversely affect our ability to achieve our product development and commercialization goals and harm our business.

If adequate funds are not available, we may be required to terminate, significantly modify or delay our development programs, reduce our planned commercialization efforts, or obtain funds through collaborators that may require us to relinquish rights to our technologies or product candidates that we might otherwise seek to develop or commercialize independently. We may elect to raise additional funds even before we need them if the conditions for raising capital are favorable.

Off-Balance Sheet Arrangements

We have not engaged in any off-balance sheet activities as defined in Regulation S-K Item 303(a)(4).

Special Note Regarding Forward-Looking Statements

This quarterly report contains forward-looking statements that involve risks and uncertainties. In some cases, you can identify forward-looking statements by the following words: "anticipate," "believe," "continue," "could,"


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"estimate," "expect," "intend," "may," "ongoing," "plan," "potential," "predict," "project," "should," "will," "would," or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. The forward-looking statements in this quarterly report include, but are not limited to, statements regarding uses for and benefits of our technology, the timing of and strategy for governmental approvals and product introductions, the commencement and cost of preclinical trials and post-market studies, our expectations regarding continued and increasing operating losses, modest sales levels, increased research and development expenses, stable SG&A expenses, continued negative net cash flow from operations, recording additional non-cash compensation expenses, our expected use of proceeds from our initial public offering, the adequacy of our capital resources to fund planned operations, our ability to raise additional funds, the effects of our lack of credit facilities and operating and capital requirement expectations. These statements involve known and unknown risks, uncertainties and other factors that may cause our or our industry's results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this quarterly report, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain. Many important factors affect our ability to achieve our objectives, including:

          our ability to commercialize our eSVS Mesh technology;

          our ability to obtain and maintain foreign and domestic regulatory
approvals of our eSVS Mesh technology;

          our ability to obtain coverage and reimbursement from third-party
payors for our eSVS Mesh technology and the extent of such coverage;

          the successful development of our distribution and marketing
capabilities;

          our ability to attract and retain scientific, regulatory, and sales
and marketing support personnel;

          our ability to obtain and maintain intellectual property protection
for our eSVS Mesh technology;

          any future litigation regarding our business, including product
liability claims;

          changes in governmental laws and regulations relating to healthcare;

          the availability and cost of third-party products and the ability of
our suppliers to timely meet our demands;

          changes affecting the medical device industry;

          general and economic business conditions; and

          the other risks described under Item 1A.  "Risk Factors" in our

annual report on Form 10-K for the year ended December 31, 2012, as updated in this quarterly report.

You should read these risk factors and the other cautionary statements made in this quarterly report as being applicable to all related forward-looking statements wherever they appear in this quarterly report. We cannot assure you that the forward-looking statements in this quarterly report will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. You should read this quarterly report completely. Other than as required by law, we undertake no obligation to update these forward-looking statements, even though our situation may change in the future.

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