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KIPS > SEC Filings for KIPS > Form 10-Q on 8-May-2014All Recent SEC Filings

Show all filings for KIPS BAY MEDICAL, INC.

Form 10-Q for KIPS BAY MEDICAL, INC.


8-May-2014

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 below under the heading "Special Note Regarding Forward-Looking Statements."

Business Overview

We are a medical device company focused on developing, manufacturing and commercializing our external saphenous vein support technology, the eSVS Mesh, for use in coronary artery bypass surgery, or CABG, surgery. Our eSVS Mesh is designed to be fitted like a sleeve on the outside of saphenous vein grafts (referred to as SVGs or vein grafts) to strengthen SVGs used in CABG 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.

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. In November 2013, we received an updated CE Mark expanding our ability to promote the eSVS Mesh for use with sequential grafts. We are in the process of requesting a further update of our CE Mark to allow changes in the application of our eSVS Mesh to the saphenous vein graft and to the surgical implant technique for the eSVS Mesh treated graft that were recently approved by the FDA for use in our eMESH I clinical feasibility trial. While we believe that these changes will be approved, we cannot provide any assurance that this approval will be received or received in a timely manner.

We sell our eSVS Mesh to distributors who, in turn, sell to hospitals and clinics primarily in the European Union. Our eSVS Mesh is a novel product and we are not aware of the establishment of any specific or supplemental reimbursements for it. To date, sales of our eSVS Mesh have been limited. We believe that sales of our eSVS Mesh have been adversely impacted by limited reimbursements available to hospitals, the limited amount of clinical data on the performance of the eSVS Mesh and the effects of budget difficulties in certain European countries. We expect sales to continue at modest levels until additional positive clinical study data becomes available.

We are currently conducting a feasibility trial for the U.S Food and Drug Administration, or 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 study 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 and to support a future pivotal trial. We expect to enroll up to 120 patients at up to 10 international and 10 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, or IDE, to perform a larger pivotal study. The pivotal study is required to demonstrate clinical effectiveness and support a request for approval to sell our eSVS Mesh in the United States. Patients in the eMESH I clinical feasibility trial will be followed through hospital discharge, with additional follow-up visits at 30 days, three months, six months, one year and yearly thereafter through five years. However, only the results through the six-month follow-up visit will be submitted to the FDA as part of an application for an IDE to conduct a pivotal trial 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. As of May 1, 2014, seven sites in Europe and five sites in the United States have enrolled or are recruiting patients for the trial, although one European site is waiting for CE Mark approval of the new implant technique recently approved by the FDA. As of May 1, 2014, 54 patients have been enrolled in the eMESH I clinical feasibility trial. In March 2014, we announced that the FDA has permitted us to include more U.S. patients and U.S. study sites in our eMESH I clinical feasibility trial. With this expanded approval, the FDA has increased the allowed number of U.S. patients from 15 to 27 (15 additional patients from the 12 enrolled as of the date of the expanded approval) and increased the allowed number of U.S. sites from four to 10. In addition, the FDA also approved a combination of changes in the application of the eSVS Mesh to the saphenous vein graft and to the surgical implant technique for the eSVS Mesh treated graft. These changes are intended to reduce the risk of early graft occlusion, make it easier to implant the eSVS Mesh and reduce procedural costs. We plan to incorporate these changes at our clinical study sites in Europe, upon each site receiving any necessary ethics committee and/or government approvals.


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No assurance can be provided that our eMESH I clinical feasibility trial will be successful or that the FDA will approve an IDE for a future pivotal trial. Even if our eMESH I clinical feasibility trial is successful, if we are unable to demonstrate, with human clinical data, that our eSVS Mesh is safe and improves the long term patency of saphenous vein grafts as compared to traditional CABG surgery in our planned larger pivotal trial, we may be unable to obtain regulatory approval for, or successfully commercialize, our eSVS Mesh in the United States or in other countries which require us to first obtain FDA approval. Sales of our eSVS Mesh in countries where we have obtained regulatory approvals have been limited and we have no other products ready for clinical testing or commercialization. Therefore, our ability to remain in business would be doubtful if our eSVS Mesh is not proven to be safe and effective.

On January 29, 2014, we completed a public offering of 6,035,000 shares of our common stock at a purchase price of $0.70 per share. All shares sold in the offering were newly issued by us. Gross proceeds from the offering were $4.2 million. After deducting the underwriting discounts and commissions and other expenses, we realized net proceeds of approximately $3.6 million.

On March 5, 2014, we received notice from The NASDAQ Stock Market granting us an additional 180 days (until September 2, 2014) to regain compliance with the $1.00 minimum bid price rule. To regain compliance with the minimum bid price rule, the closing bid price of our common stock must remain at $1.00 per share or more for a minimum of 10 consecutive trading days.

We incurred net losses of $1.4 million and $1.5 million for the three months ended March 29, 2014 and March 30, 2013, respectively. We had negative cash flows from operating activities of $1.4 million and $1.7 million for the three months ended March 29, 2014 and March 30, 2013, respectively. 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 March 29, 2014 were $7.3 million compared to $5.0 million as of December 31, 2013. 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 March 29, 2014 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.

Results of Operations



Comparison of the Three Months ended March 29, 2014 to the Three Months ended
March 30, 2013 (in thousands):



                                                                Three Months Ended
                                             March 29, 2014      March 30, 2013       Percent Change
Net sales                                    $            26     $            36            (27.7 )%
Cost of sales                                            (12 )               (16 )          (25.0 )
Gross profit                                              14                  20            (30.0 )
Operating expenses:
Research and development                                 639                 705             (9.4 )
Selling, general and administrative                      814                 774              5.2
Total operating expenses                               1,453               1,479             (1.8 )
Other income:
Interest income                                            2                   3            (33.3 )
Net loss                                     $        (1,437 )   $        (1,456 )           (1.3 )


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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 March 29, 2014 vest upon time-based conditions. We expect to record additional non-cash stock-based 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 months ended March 29, 2014 and March 30, 2013 (in thousands):

                                                 Three Months Ended
                                       March 29, 2014         March 30, 2013
Research and development              $          37          $          49
Selling, general and administrative              84                     93
Total stock-based compensation        $         121          $         142

Net Sales and Gross Profit

Our net sales declined to $26,000 in the first quarter of 2014, a decrease of 27.7%, from $36,000 in the first quarter of 2013. Our gross profit declined to $14,000 in the first quarter of 2014, a decrease of 30%, from $20,000 in the first quarter of 2013. This decrease in net sales reflects the negative impact of limited reimbursements available to hospitals, the limited amount of clinical data on the performance of our eSVS Mesh and the effects of economic difficulties in certain European countries. We expect sales to continue at modest levels until additional clinical study data becomes available.

Research and Development

Our research and development expenses decreased 9.4% to $639,000 in the first quarter of 2014, down from $705,000 in the first quarter of 2013. This decrease was due primarily to non-recurring costs incurred in the first quarter of 2013 related to additional design testing required by the FDA as part of our November 2012 IDE approval with conditions. In addition, the costs we incurred for our post-market studies of the eSVS Mesh declined during the current year period. Costs incurred in conjunction with our eMESH I clinical feasibility trial during the first quarter of 2014 were comparable with costs incurred during the first quarter of 2013. We expect that our research and development expenses will increase as clinical study related activities increase and as we resume the enrollment of patients in the United States.

Selling, General and Administrative

Our selling, general and administrative ("SG&A") expenses increased 5.2% to $814,000 in the first quarter of 2014, up from $774,000 in the first quarter of 2013. This increase was primarily a result of the higher costs associated with expanding our sales team from one to two individuals and costs incurred in connection with holding a special meeting of our stockholders in February 2014. We expect SG&A expenses to increase slightly as we continue to pursue our international sales and marketing efforts.

Interest Income

Interest income decreased to $2,000 in the first quarter of 2014 from $3,000 in the first quarter of 2013. This decrease resulted from reduced earnings on our investments as the average time to maturity for our investments decreased in the current year period.


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Liquidity and Capital Resources

The following table summarizes our liquidity and capital resources as of March 29, 2014 and December 31, 2013 and our cash flow data for the three months ended March 29, 2014 and March 30, 2013 and is intended to supplement the more detailed discussion that follows (in thousands):

Liquidity and Capital Resources    March 29, 2014       December 31, 2013
Cash and cash equivalents         $          5,352     $             2,316
Short-term investments                       1,922                   2,684
Working capital                              7,795                   5,454




                                                                  Three Months Ended
Cash Flow Data                                            March 29, 2014      March 30, 2013
Cash provided by (used in):
Operating activities                                     $         (1,362 )   $        (1,733 )
Investing activities                                                  754              (3,530 )
Financing activities                                                3,644                 276
Net increase (decrease) in cash and cash equivalents     $          3,036     $        (4,987 )

Working Capital

Our total cash resources, including short-term investments totaled $7.3 million as of March 29, 2014, compared to $5.0 million as of December 31, 2013. We had $556,000 in current liabilities, which included $105,000 of accrued costs related to our January 2014 underwritten public offering of common stock, and $7.8 million in working capital as of March 29, 2014, compared to $455,000 in current liabilities and $5.5 million in working capital as of December 31, 2013.

Cash Flows

Net Cash Used in Operating Activities

Net cash used in operating activities was $1.4 million in the three months ended March 29, 2014 compared to $1.7 million in the three months ended March 30, 2013. The net cash used in each of these periods primarily reflects the net loss for these periods, offset in part by non-cash stock-based compensation, depreciation and the effects of changes in operating assets and liabilities. Net cash used in the three months ended March 30, 2013 also includes the payment of $400,000 of costs related to our December 2012 public offering of common stock.

Net Cash Provided by (Used in) Investing Activities

Net cash provided by investing activities was $754,000 in the three months ended March 29, 2014 compared to net cash used in investing activities of $3.5 million in the three months ended March 30, 2013. Cash provided by or used in investing activities is primarily related to purchases and sales of short-term investments.

Net Cash Provided by Financing Activities

Net cash provided by financing activities was $3.6 million in the three months ended March 29, 2014 compared to $276,000 in the three months ended March 30, 2013. Net cash provided by financing activities during the most recent period was solely attributable to proceeds from our January 2014 underwritten public offering of common stock. Net cash provided by financing activities in the prior year period 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 to incur substantial expenses and generate significant operating losses as we continue to execute our business strategy including:

? conducting clinical trials to obtain regulatory approval for our eSVS Mesh in the United States;

? commercializing our eSVS Mesh in select European and other international markets;

? hiring additional personnel for managerial, research and development, operations and other functions;

? conducting pre-clinical and clinical trials to expand indications for our eSVS Mesh and to pursue other product development initiatives;

? expanding our facilities to increase our manufacturing and development capabilities; and

? implementing new operational, financial and management systems to comply with Securities and Exchange Commission requirements.


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Our future capital uses and requirements depend on numerous current and future factors. These factors include, but are not limited to, the following:

? the progress of preclinical and clinical trials required to support our applications for regulatory approvals, including our human clinical trials in the United States;

? our ability to demonstrate the safety and effectiveness of our eSVS Mesh;

? our ability to obtain FDA approval of our eSVS Mesh and other required regulatory approvals;

? the market acceptance and level of future sales of our eSVS Mesh;

? the rate at which physicians adopt our eSVS Mesh for use in CABG surgery;

? the selling price of our eSVS Mesh to distributors and the price that distributors charge hospitals;

? the rate of progress in establishing reimbursement arrangements with third-party payors;

? the effect of competing technological and market developments;

? the cost and delays in product development that may result from changes in regulatory oversight applicable to our eSVS Mesh;

? the costs involved in filing and prosecuting patent applications and enforcing or defending patent claims;

? the cost of expanding our commercial operations, including our selling and marketing efforts; and

? our ability to establish and maintain effective relationships with independent distributors.

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 available to hospitals, the limited amount of clinical data on the performance of the eSVS Mesh and the effects of budget difficulties in certain European countries. We expect our sales to remain at modest levels until additional clinical study data becomes available.

To date, we have used primarily equity and debt financings to fund our ongoing business operations and short-term liquidity needs, and we expect to continue this practice for the foreseeable future. On December 13, 2013, we filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission registering the offer and sale by us from time to time of up to $50.0 million in common stock, preferred stock, debt securities, warrants and units, which registration statement was declared effective as of December 20, 2013. Because we are a "smaller reporting company" under federal securities laws, we are limited, however, to offering and selling securities totaling no more than one-third of our public float during any period of 12 months.

On January 29, 2014, we completed a public offering of 6,035,000 shares of our common stock at a purchase price of $0.70 per share under our shelf registration statement, resulting in net proceeds of $3.6 million, after deduction of underwriter discounts, commissions and related expenses. After the completion of this offering, we may not be able to offer and sell additional securities under our existing shelf registration until one year elapses from the date of this offering or until the value of our public float increases. We intend to use the net proceeds from this offering for working capital and general corporate purposes, including funding clinical activities and the process of seeking regulatory approval to market our eSVS Mesh in the United States and abroad.

On February 4, 2014, following approval by our stockholders at a special meeting of stockholders, we amended our Certificate of Incorporation by filing a Certificate of Amendment to Certificate of Incorporation to increase the number of authorized shares of common stock from 40 million to 90 million.

We believe our cash, cash equivalents and short-term investments as of March 29, 2014 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.


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As of March 29, 2014, 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. This risk may increase if we lose the NASDAQ Capital Market listing of our common stock and/or economic and market conditions deteriorate.

To the extent that we raise additional capital through the sale of common stock, the interests of our current stockholders may be diluted. If we issue preferred stock or convertible debt securities, it could affect the rights of our common stockholders or reduce the value of our common stock. In particular, specific rights granted to future holders of preferred stock or convertible debt securities may include voting rights, preferences as to dividends and liquidation, conversion and redemption rights, sinking fund provisions, and restrictions on our ability to merge with or sell our assets to a third party. 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.

Prior to issuing any capital stock with rights, preferences or limitations equal or superior to our common stock owned by Kips Bay Investments, LLC or debt securities convertible into capital stock with rights, preferences or limitations equal or superior to our common stock owned by Kips Bay Investments, LLC, we must obtain the consent of Kips Bay Investments, LLC, one of our significant stockholders, and no assurance can be provided that Kips Bay Investments, LLC would provide such consent, which could limit our ability to raise additional financing.

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

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, 2013. There have been no material changes to our critical accounting policies and estimates.

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.


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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 clinical 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 . . .

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