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KIPS > SEC Filings for KIPS > Form 10-Q on 7-Nov-2013All Recent SEC Filings

Show all filings for KIPS BAY MEDICAL, INC.

Form 10-Q for KIPS BAY MEDICAL, INC.


7-Nov-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 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 the heading "Special Note Regarding Forward-Looking Statements".

Overview

Kips Bay Medical, Inc. is 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 surgery. The eSVS Mesh is designed to be fitted like a sleeve on the outside of saphenous vein grafts("SVG") to strengthen SVGs used in coronary artery bypass graft surgery. By strengthening the SVG and preventing the damaging expansion of the vein graft, we hope to reduce or prevent the resulting injury which can lead to SVG failure and potentially costly and complicated re-interventions for patients undergoing CABG surgery. To strengthen an SVG, the eSVS Mesh is manufactured from nitinol wire which gives the eSVS Mesh considerable strength, while remaining highly flexible and kink-resistant. CABG surgery is one of the most commonly performed cardiac surgeries in the United States. In CABG procedures, surgeons harvest blood vessels, including the left 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 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


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not aware of the establishment of any specific or supplemental reimbursements for our eSVS Mesh. Our sales to date have been limited and decreased during the three and nine month periods ended September 28, 2013 compared to the respective periods in the prior year. Our net sales were $13,000 during the third quarter of 2013 and $89,000 during the first nine months of 2013, representing decreases of 85.4% and 55.5%, respectively, compared to the respective periods in the prior year. We believe that our sales have been adversely impacted by limited reimbursements and/or budgets available to hospitals, the limited amount of clinical data on the performance of the eSVS Mesh and the continuing effects of budget difficulties in certain European countries. During the third quarter of 2013, we made changes to our sales team resulting in the departure of our former Vice President of Sales and Marketing and the addition of two new employees possessing significant sales experience building the sales of new medical device technologies. We expect sales to continue at modest levels until additional clinical study data is available.

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 clinical feasibility trial. The objective of this trial is to demonstrate the initial safety and performance of the eSVS Mesh for use as an external saphenous vein graft support device during CABG surgery. We expect to enroll 80-120 patients at up to ten international and four U.S. sites and, if this trial is successful, we intend 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 the feasibility trial commenced in Europe in late August 2012 at the Bern University Hospital in Switzerland and in the United States 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. As of November 1, 2013, twelve sites, eight in Europe and four in the United States, have received ethics committee or institutional review board approval and have enrolled, or are actively recruiting, patients in the trial. We plan to add up to two additional international sites going forward. As of November 1, 2013, 43 patients had been enrolled in the eMESH I clinical feasibility trial. Additional enrollments of patients within the United States are contingent upon approval by the FDA after reviewing six-month follow-up angiogram data for the first 10 patients. If the FDA determines that these angiograms are acceptable, we expect to receive approval from the FDA to enroll up to an additional 35 U.S. patients at up to 10 study sites. No assurance can be provided that the FDA will approve any additional enrollments. In addition, no assurance can be provided that our current feasibility trial or our anticipated larger pivotal study will be successful, or that once these studies are concluded, we will ever receive U.S. marketing approval for our eSVS Mesh.

We incurred a net loss of $4.5 million and had negative cash flow from operating activities of $4.3 million for the nine months ended September 28, 2013. We expect our losses to continue as we pursue commercialization of and further regulatory approvals for our eSVS Mesh. To date, we have used primarily equity and convertible debt financings to fund our ongoing business operations and short-term liquidity needs, and we expect to continue this practice for the foreseeable future. Our cash, cash equivalents and short-term investments, as of September 28, 2013 were $6.2 million compared to $10.4 million as of December 31, 2012. We expect this balance to decrease as we continue to use cash to fund our operations. We believe our cash, cash equivalents and short-term investments as of September 28, 2013 will be sufficient to fund our planned operations for at least the next 12 months. However, there is no assurance that we will not need or seek additional funding prior to such time.

Critical Accounting Policies and Estimates

Our critical 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 financial statements, included in Part II, Item 8, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2012. There have been no material changes to our critical accounting policies and estimates.


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Results of Operations



Comparison of the three and nine months ended September 28, 2013 to the three
and nine months ended September 29, 2012 (in thousands):



                                         Three Months Ended                              Nine Months Ended
                              September 28,     September 29,    Percent     September 28,     September 29,    Percent
                                  2013              2012         Change          2013              2012         Change
Net sales                    $            13   $            89     (85.4 )% $            89   $           200     (55.5 )%
Cost of sales                             (7 )             (37 )   (81.1 )              (42 )             (87 )   (51.7 )
Gross profit                               6                52     (88.5 )               47               113     (58.4 )
Operating expenses:
Research and development                 840               676      24.3              2,302             1,825      26.1
Selling, general and
administrative                           736               745      (1.2 )            2,283             2,320      (1.6 )
Total operating expenses               1,576             1,421      10.9              4,585             4,145      10.6
Other income (expense):
Interest income                            4                 4         -                 12                13      (7.7 )
Net loss                     $        (1,566 ) $        (1,365 )    14.7 %  $        (4,526 ) $        (4,019 )    12.6 %

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, warrants 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 September 28, 2013 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 loss for the three and nine-month periods ended September 28, 2013 and September 29, 2012 (in thousands):

                                               Three Months Ended                    Nine Months Ended
                                        September 28,      September 29,      September 28,      September 29,
                                            2013               2012               2013               2012
Cost of sales                          $             -    $            12    $             -    $            41
Research and development                            34                 42                120                108
Selling, general and administrative                 77                 91                272                308
Total stock-based compensation         $           111    $           145    $           392    $           457

Net Sales and Gross Profit

Our net sales decreased 85.4% to $13,000 in the third quarter of 2013, and decreased 55.5% to $89,000 in the first nine months of 2013 as compared with the respective periods in the prior year. Our gross profit decreased 88.5% to $6,000 in the third quarter of 2013 and 58.4% to $47,000 for the first nine months of 2013 as compared with the respective periods in the prior year. The decrease in net sales in the third quarter and year-to-date periods reflects the negative impact of limited reimbursements and/or budgets available to hospitals, the limited amount of clinical data on the performance of the eSVS Mesh and the continuing effects of economic difficulties in certain European countries. During the third quarter of 2013, we made changes to our sales team resulting in the departure of our former Vice President of Sales and Marketing and the addition of two new employees possessing significant sales experience building the sales of new medical device technologies. We expect sales to continue at modest levels until additional clinical study data is available.

Research and Development

Our research and development expenses increased 24.3% from $676,000 in the third quarter of 2012 to $840,000 in the third quarter of 2013. Research and development expenses increased 26.1% from $1.8 million in the nine months ended September 29, 2012 to $2.3 million in the nine months ended September 28, 2013. These increases were due


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primarily to costs incurred for the feasibility study we are conducting for the FDA, which began enrolling patients in August 2012, and costs associated with additional product design testing required by the FDA prior to our submission of a request for the approval to begin a pivotal study in the United States. These increases were partially offset by reductions in product development costs incurred in support of expanded product labeling for the eSVS Mesh. We expect that our research and development costs will continue to increase as clinical study related activities increase.

Selling, General and Administrative

Our selling, general and administrative ("SG&A") expenses decreased 1.2% to $736,000 in the third quarter of 2013 down from $745,000 in the third quarter of 2012. SG&A expenses decreased 1.6%, or 37,000, in the nine months ended September 28, 2013 as compared with the nine months ended September 29, 2012. These decreases were driven by a number of factors which included: a reduction in professional service fees incurred in support of our commercial sales activity and the incurrence of professional service fees related to the filing of a registration statement for our common stock purchase agreement with Aspire during the nine months ended September 29, 2012, which did not recur in 2013. These decreases were partially offset by increased travel costs for our management team and increased costs for product liability and directors and officers liability insurance. We expect SG&A expenses to increase slightly as we continue to pursue our international sales and marketing efforts.

Liquidity and Capital Resources

The following table summarizes our liquidity and capital resources as of September 28, 2013 and December 31, 2012 and our cash flow data for the nine months ended September 28, 2013 and September 29, 2012 and is intended to supplement the more detailed discussion that follows (in thousands):

Liquidity and Capital Resources   September 28, 2013     December 31, 2012
Cash and cash equivalents         $             1,955   $             9,403
Short-term investments                          4,277                   947
Working capital                                 6,835                10,611




                                                                     Nine Months Ended
Cash Flow Data                                          September 28, 2013      September 29, 2012
Cash provided by (used in):
Operating activities                                    $            (4,317 )  $             (3,557 )
Investing activities                                                 (3,407 )                   (62 )
Financing activities                                                    276                     135
Net decrease in cash and cash equivalents               $            (7,448 )  $             (3,484 )

Cash, Cash Equivalents and Short-Term Investments

Our total cash resources, including short-term investments, as of September 28, 2013 were $6.2 million compared to $10.4 million as of December 31, 2012. As of September 28, 2013, we had $393,000 in current liabilities and $6.8 million in working capital. As of December 31, 2012, we had $788,000 in current liabilities and $10.6 million in working capital. We incurred a net loss of $4.5 million and had negative cash flow from operating activities of $4.3 million for the nine months ended September 28, 2013.

We expect to continue to incur substantial losses, which will continue to generate negative net cash flows from operating activities as we continue to pursue regulatory approvals, develop additional clinical data and continue the process of commercialization in international markets for our eSVS Mesh. While we continue to market our eSVS Mesh in select European and other international markets, our sales to date have been limited and negatively affected by limited reimbursements and/or budgets available to hospitals, the limited amount of clinical data on the performance of the eSVS Mesh and the continuing effects of budget difficulties in certain European countries. We expect our sales to remain at modest levels until additional clinical study data is available.


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Net Cash Used in Operating Activities

Net cash used in operating activities was $4.3 million and $3.6 million in the nine months ended September 28, 2013 and September 29, 2012, respectively. The net cash used in each of these periods primarily reflects the net loss for these 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 the nine months ended September 28, 2013 also includes the payment of $400,000 of costs related to our December 2012 public offering of common stock.

Net Cash Used in Investing Activities

Net cash used in investment activities was $3.4 million and $62,000 in the nine months ended September 28, 2013 and September 29, 2012, respectively. Cash used in investment activities in each of these periods related primarily to the net purchase of short-term investments and purchases of property and equipment.

Net Cash Provided by Financing Activities

Net cash provided by financing activities was $276,000 and $135,000 in the nine months ended September 28, 2013 and September 29, 2012, respectively. Net cash provided by financing activities during the most recent period resulted from the sale of our common stock pursuant to the underwriter's partial exercise of its over-allotment option from our December 2012 public offering.

Capital Requirements

To date, we have used primarily equity and debt financings, and to a lesser extent, interest income, to fund our ongoing business operations and short-term liquidity needs, and we expect to continue this practice for the foreseeable future.

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 the offering were newly issued by us. Gross proceeds from the 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 the 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 the offering, and become exercisable on December 21, 2013, one year after the effective date of the offering. On January 28, 2013, we sold an additional 475,000 shares at a purchase price of $0.65 per share pursuant to the underwriter's partial exercise of its over-allotment option.

We believe our cash, cash equivalents and short-term investments as of September 28, 2013 will 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 continue our feasibility trial for the FDA, plan for our anticipated larger pivotal study and conduct additional clinical trials to obtain regulatory approvals for our eSVS Mesh. Accordingly, there is no assurance that we will not need or seek additional funding prior to such time. We may elect to raise additional funds even before we need them if market conditions for raising additional capital are favorable. As of September 28, 2013, we did not have any existing credit facilities under which we could borrow funds. 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 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 or on terms acceptable to us. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the interests of our current stockholders 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 regulatory approvals and commercialization goals and harm our business.

If adequate funds are not available, we may be required to terminate, significantly modify or delay our clinical programs, reduce our planned commercialization efforts, or obtain funds through collaborators that may require us


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to relinquish rights to our technologies or product candidates that we might otherwise seek to develop or commercialize independently.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements as defined in Regulation S-K Item 303(a)(4), that have or are reasonably likely to have a material effect on our financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources. As a result, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these arrangements.

Special Note Regarding Forward-Looking Statements

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact included in this report that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements including, in particular, the statements about our plans, objectives, strategies and prospects regarding, among other things, our financial condition, operating results and business. In some cases, you can identify forward-looking statements by the following words: "anticipate," "believe," "continue," "could," "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 use of future dates also may indicate a forward-looking statement. The forward-looking statements in this 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, research and development expenses and SG&A expenses, continued negative net cash flow from operations, recording additional non-cash compensation expenses, the adequacy of our capital resources to fund planned operations, our ability to raise additional funds 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 our forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this 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 and market acceptance of our eSVS Mesh technology and our ability to sell our eSVS Mesh in Europe and other international countries where we have received required regulatory approvals;

the status of our feasibility trial, including enrollment, completion and the results;

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;

          our ability to obtain additional capital when needed or on acceptable
terms;

          changes affecting the medical device industry;

          general and economic business conditions; and

          the other risks described under "Part I - Item 1A. Risk Factors" in

our annual report on Form 10-K for the year ended December 31, 2012.


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For more information regarding these and other uncertainties and factors that could cause our actual results to differ materially from what we have anticipated in our forward-looking statements or otherwise could materially adversely affect our business, financial condition or operating results, see the information under the heading "Part II - Item 1A. Risk Factors" of our annual report on Form 10-K for the year ended December 31, 2012. The risks and uncertainties described above and under the heading "Part I - Item 1A. Risk Factors" in our annual report on Form 10-K for the year ended December 31, 2012 are not exclusive and further information concerning us and our business, including factors that potentially could materially affect our financial results or condition, may emerge from time to time. We assume no obligation to update, amend or clarify forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements. We advise you, however, to consult any further disclosures we make on related subjects in our future annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K we file with or furnish to the Securities and Exchange Commission.

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