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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File No.: 001-35080
Kips Bay Medical, Inc.
(Exact name of Registrant as specified in its charter)
3405 Annapolis Lane North, Suite 200,
Minneapolis, Minnesota 55447
(Address of principal executive offices, including zip code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
There were 16,345,579 shares of Kips Bay Medical, Inc. common stock, par value $0.01, outstanding as of the close of business on August 3, 2012.
Kips Bay Medical, Inc.
(Dollars in thousands, except share and per share amounts)
See accompanying notes to financial statements.
Kips Bay Medical, Inc.
(Dollars in thousands, except share and per share amounts)
See accompanying notes to financial statements.
Kips Bay Medical, Inc.
(Dollars in thousands)
See accompanying notes to financial statements.
Kips Bay Medical, Inc.
1. Organization and Business
Kips Bay Medical, Inc. (we, us or our) 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 over a saphenous vein graft during CABG surgery, is designed to improve the structural characteristics and long-term performance of the saphenous vein graft. In CABG procedures, surgeons harvest blood vessels, including the internal mammary artery from the chest and the saphenous vein from the leg, and attach the harvested vessels to bypass, or provide blood flow around, blocked coronary arteries.
Recently Adopted Accounting Standards
In 2012 we adopted the amended provisions of the Comprehensive Income topic of the Financial Accounting Standards Board Codification. The amended provisions were issued to enhance comparability between entities that report under GAAP and IFRS and to provide a more consistent method of presenting non-owner transactions that affect an entitys equity. This topic eliminates the option to report other comprehensive income and its components in the statement of changes in stockholders equity and requires an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement or in two separate but consecutive statements. The adoption of this amendment did not have a material effect on our Consolidated Financial Statements as the amendment only impacts presentation.
2. Interim Financial Statements
We have prepared the accompanying unaudited interim financial statements in accordance with accounting principles generally accepted in the United States (US GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. These interim financial statements reflect all adjustments consisting of normal recurring accruals, which, in the opinion of management, are necessary to present fairly our financial position, results of operations and cash flows for the interim periods presented. These interim financial statements should be read in conjunction with the annual financial statements and the notes thereto included in our most recent annual report on Form 10-K filed with the SEC on March 15, 2012. The nature of our business is such that the results of any interim period may not be indicative of the results to be expected for the entire year.
3. Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements and accompanying notes. Actual results could differ from those estimates.
Inventories include purchased materials, labor and manufacturing overhead and are stated at the lower of cost (first-in, first-out method) or market. Appropriate consideration is given to deterioration, obsolescence and other factors in evaluating net realizable value.
Inventories, net, consist of the following (in thousands):
5. Net Loss Per Share
The following table summarizes our calculation of net loss per common share for each of the periods presented (in thousands, except share and per share data):
The following outstanding potential common shares not included in diluted net loss per share calculations as their effects were not dilutive:
6. Cash, Cash Equivalents and Short-Term Investments
Cash, cash equivalents and short-term investments consist of the following (in thousands):
As of June 30, 2012 and December 31, 2011, the remaining contractual maturities of all short-term investments were less than 12 months. Due to the short-term nature of our investments, amortized cost approximates fair value for all investments.
7. Fair Value of Financial Instruments
We apply the provisions of FASB ASC 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value under US GAAP, and enhances disclosures about fair value measurements.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between knowledgeable and willing market participants. Valuation techniques used to measure fair value, as required by FASB ASC 820, must maximize the use of observable inputs and minimize the use of unobservable inputs.
The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value. Our assessment of the significance of a particular input to the fair value measurements requires judgment, and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy. The three levels of input are:
Level 1Quoted prices in active markets for identical assets or liabilities.
Level 2Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Our cash and equivalents and short-term investments consist of bank deposits, money market funds, commercial paper and corporate debt securities. Our money market funds are traded in active markets and are recorded at fair value based upon quoted market prices.
We determine the fair value of our bank certificate of deposit, commercial paper and corporate debt securities using other observable inputs which may include quoted prices for similar assets in active markets, quoted prices for identical or similar assets in markets which are not active, other quoted prices which are directly observable and/or market inputs that are not directly observable, but are derived from or corroborated by other observable market data. Accordingly, we have classified the valuation of these securities as Level 2.
Other financial instruments, including accounts receivable, accounts payable and accrued liabilities, are carried at cost, which we believe approximates fair value because of the short-term maturity of these instruments.
A summary of financial assets measured at fair value on a recurring basis at June 30, 2012 and December 31, 2011 is as follows (in thousands):
8. Property and Equipment
Property and equipment consist of the following (in thousands):
Depreciation expense for the six months ended June 30, 2012 and July 2, 2011 was $53,000 and $48,000, respectively.
9. Commitments and Contingencies
The core intellectual property relating to our eSVS Mesh was acquired from Medtronic, Inc. pursuant to an Assignment and License Agreement dated October 9, 2007. As consideration for the assignment of such intellectual property, we have agreed to pay Medtronic an aggregate of up to $15.0 million upon the achievement of certain sales milestones and a royalty of 4% on sales of our eSVS Mesh. The milestones and related payments consist of $5.0 million due on the one-year anniversary of the first commercial sale of our eSVS Mesh, $5.0 million due when our cumulative net sales reach $15.0 million and $5.0 million due when our cumulative net sales reach $40.0 million. We had our first commercial sale of our eSVS Mesh in June 2010 and accrued an expense for the first milestone obligation at that time. This $5.0 million dollar milestone obligation was paid in June 2011. Royalty obligations are payable 60 days after the end of each fiscal quarter, are recorded as a component of our cost of sales and will terminate upon the earlier of the expiration of all of the patents and patent applications acquired from Medtronic, Inc., or when the aggregate royalties paid reaches $100.0 million. We recorded royalty expense of $4,000 and $6,000 for the six months ended June 30, 2012 and July 2, 2011, respectively.
We are not currently engaged in any litigation.
10. Common Stock Purchase Agreement
On October 24, 2011, we entered into a common stock purchase agreement (the Purchase Agreement) with Aspire Capital Fund, LLC, an Illinois limited liability company (Aspire Capital), which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $20.0 million of shares of our common stock (the Purchase Shares) over a three year period at purchase prices determined in accordance with the Purchase Agreement. Pursuant to the terms of the Purchase Agreement, we have filed and maintain a registration statement on Form S-1 with the SEC under which we have registered 3,164,357 shares of our common stock for resale by Aspire.
In consideration for entering into the Purchase Agreement, concurrently with the execution of the Purchase Agreement, we issued to Aspire Capital 378,788 shares of our common stock as a commitment fee (the Commitment Shares). The Purchase Agreement provides that we may not issue and sell more than 3,164,357 shares of our common stock, including the Commitment Shares (19.9% of the Companys outstanding shares as of October 24, 2011, the date of the Purchase Agreement), without stockholder approval as required by the applicable listing maintenance rules of The NASDAQ Capital Market.
As of June 30, 2012, we have sold 100,000 shares of common stock to Aspire Capital pursuant to the Purchase Agreement and, including the Commitment Shares, an aggregate of 478,788 shares of common stock have been issued to Aspire Capital pursuant to the Purchase Agreement.
The Purchase Agreement contains customary representations, warranties, covenants, closing conditions and indemnification and termination provisions by, among and for the benefit of the parties. The Purchase Agreement may be terminated by us at any time, at our discretion, without any cost or penalty to us. Aspire Capital has covenanted not to cause or engage in any manner whatsoever, any direct or indirect short selling or hedging of our shares. We did not pay Aspire Capital any expense reimbursement in connection with the transaction. There are no limitations on use of proceeds, financial or business covenants, restrictions on future fundings, rights of first refusal, participation rights, penalties or liquidated damages in the Purchase Agreement.
11. Stock-Based Compensation
2007 Long-Term Incentive Plan
Our 2007 Long-Term Incentive Plan (the Plan) was adopted by the Board of Directors in July 2007. The Plan permits the granting of incentive and non-statutory stock options, restricted stock, stock appreciation rights, performance units, performance shares and other stock awards to eligible employees, directors and consultants. We grant options to purchase shares of common stock under the Plan at no less than the fair market value of the underlying common stock as of the date of grant. Options granted under the Plan have a maximum term of ten years and generally vest over four years for employees, at the rate of 25% of total shares underlying the option each year, and over three years for non-employees, with 25% vesting upon grant and 25% vesting each year thereafter. Under the Plan, a total of 2,000,000 shares of common stock were initially reserved for issuance.
A summary of option activity for the six months ended June 30, 2012 is as follows:
The assumptions used in the Black-Scholes option-pricing model for the six months ended June 30, 2012 are as follows:
Stock-based compensation expense for each of the periods presented is as follows (in thousands):
12. Employee Benefit Plan
We maintain a simplified employee retirement plan, or SEP, which commenced on January 1, 2008. The SEP is a defined contribution plan; employee contributions are voluntary and are determined on an individual basis, limited by the maximum amounts allowable under federal tax regulations. We contribute up to 3% of each individuals base salary as required under the safe-harbor provisions of Internal Revenue Service rules governing SEP plans. Our contributions vest immediately and are expensed when paid. We have recorded contribution expenses of $25,000 and $26,000 for the six months ended June 30, 2012 and July 2, 2011, respectively.
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, 2011, as updated by this quarterly report.
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, or CABG, surgery. Our eSVS Mesh is a nitinol mesh sleeve that, when placed over 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 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 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 maintained 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.
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 certain budgetary pressures in Europe, our sales to date have been limited. In November 2011 we commenced enrollments in our first post-market study of the eSVS Mesh in Europe. The intent of this study is to develop clinical data to further support the marketing and reimbursement of the eSVS Mesh.
The U.S Food and Drug Administration (FDA) has reviewed and disapproved our most recent amendment to our application for an investigational device exemption (IDE) in March 2011. At that time the FDA indicated that they intended to review our IDE information with outside experts before they provide further guidance to the Company. Due to internal delays, the FDA did not begin this review until August 2011. In September 2011 the FDA advised us that we had not provided sufficient data to support our request for an IDE for our eSVS Mesh.
In April 2012, we provided additional information on our eSVS Mesh to the FDA under a Pre-IDE submission. This Pre-IDE submission allowed the FDA to determine if the additional information gathered by the Company is adequate to answer questions raised by the FDA in their disapproval of our most recent amendment to our application for an IDE. In July 2012, the FDA responded to our Pre-IDE submission and advised us that we were allowed to proceed with filing an application for an IDE to include four U.S. sites in our clinical feasibility study of our eSVS Mesh device currently being pursued in Europe. We submitted this application on July 18, 2012.
We continue to pursue a feasibility trial in Europe. 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 our eSVS Mesh for use as an external saphenous vein graft support device during coronary artery bypass procedures sufficient to allow the FDA to approve an IDE for a larger pivotal study, which is required to demonstrate clinical effectiveness and support a request for approval to sell our eSVS Mesh in the U.S. We are currently working through the ethics committee review and approval process at our selected study sites in Europe.
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.
As of June 30, 2012, we had an accumulated deficit of $27.0 million. We expect our losses to continue as we pursue commercialization of and further regulatory approvals for our eSVS Mesh. Prior to completing our IPO, we had financed our operations primarily through the private placement of convertible debt and equity securities.
Critical Accounting Policies and Estimates
Our significant accounting policies and estimates are disclosed in Part II, Item 7, Managements 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, 2011. The critical accounting policies used in the preparation of the financial statements as of June 30, 2012 have remained unchanged from December 31, 2011.
Results of Operations
Comparison of the Three and Six Months Ended June 30, 2012 to the Three and Six Months Ended July 2, 2011 (in thousands)
Cost of sales, 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 June 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 and six months ended June 30, 2012 and July 2, 2011 (in thousands):
Net Sales and Gross Profit
Our net sales increased 18.8% to $57,000 in the second quarter of 2012, and decreased 30.4% to $110,000 for the first six months of 2012 as compared with the respective periods in the prior year. Our gross profit increased 18.5% to $32,000 in the second quarter of 2012 and decreased 39.0% to $61,000 for the first six months of 2012 as compared with the respective periods in the prior year. The increase in net sales in the current quarter resulted from increased demand from our distributors. However, the overall decrease in net sales for the six months of 2012 reflects the impact of limited reimbursements available to hospitals and the continuing effects of budget difficulties in certain European countries. We expect sales to continue at modest levels until additional clinical study data is available.
Research and Development
Our research and development expenses increased 72.4% from $387,000 in the second quarter of 2011 to $667,000 in the second quarter of 2012. Research and development expenses increased 40.1% from $821,000 in the six months ended July 2, 2011 to $1.2 million in the six months ended June 30, 2012. These increases are due to
increases in clinical study and product development activities related to our eSVS Mesh. In November 2011 we began enrolling patients in a post market study and also began recruiting European sites to participate in a feasibility study for the FDA. During 2012, we also commenced product development efforts intended to support expanding our product labeling to include the use of alternate sealants and to allow physicians to use our eSVS Mesh in performing sequential grafts. We expect that our research and development costs will continue to increase as we continue human clinical trials in Europe and initiate trials in the U.S. The most significant costs will be incurred for human clinical trials in the U.S., which cannot begin until the FDA approves our IDE.
Selling, General and Administrative
Our selling, general and administrative (SG&A) expenses increased 9.1% to $752,000 from $689,000 in the three months ended June 30, 2012 and July 2, 2011, respectively. SG&A expenses increased 26.7% to $1.6 million from $1.2 million in the six months ended June 30, 2012 and July 2, 2011, respectively. These increases were driven by a combination of factors which include: compliance costs associated with becoming a public company in February 2011, costs associated with the expansion of our management team, professional service fees and costs incurred to support our commercial sales activity. The increased costs related to the expansion of our management team, both as part of becoming a public company and to support our commercial sales, included approximately $95,000 of increased stock-based compensation expenses in the first half of 2012. We expect SG&A expenses to remain relatively stable as we continue to pursue our international sales and marketing efforts.
Interest income decreased $1,000 in second quarter of 2012 and remained unchanged during the first six months of 2011, compared to the same periods in the prior year. The decrease resulted from a decrease in our cash, cash equivalents and short-term investments in the second quarter of 2012 as compared with the second quarter of 2011.
Liquidity and Capital Resources
The following table summarizes our liquidity and capital resources as of June 30, 2012 and December 31, 2011 and for each of the six months ended June 30, 2012 and July 2, 2011 and is intended to supplement the more detailed discussion that follows (in thousands):
Cash and Cash Equivalents
Our total cash resources, including short-term investments, as of June 30, 2012 were $6.9 million compared to $9.2 million as of December 31, 2011. As of June 30, 2012, we had $430,000 in current liabilities and $7.7 million in net working capital. As of December 31, 2011, we had $260,000 in current liabilities and $9.9 million in net working capital. We incurred a net loss of $2.7 million and had negative cash flow from operating activities of $2.3 million for the six months ended June 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 and increasing 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 cost pressures in the health care industry and our need to develop additional clinical data for the eSVS Mesh.
On October 24, 2011, we entered into a common stock purchase agreement (the Purchase Agreement) with Aspire Capital Fund, LLC, an Illinois limited liability company (Aspire), which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire is committed to purchase up to an aggregate of $20.0 million of shares of our common stock (the Purchase Shares) over a three year period at purchase prices determined in accordance with the Purchase Agreement. Pursuant to the terms of the Purchase Agreement, we have filed and maintain a registration statement on Form S-1 with the SEC under which we have registered 3,164,357 shares of our common stock for resale by Aspire. Without approval from our stockholders, this amount, which includes the Commitment Shares issued to Aspire at the signing of the Purchase Agreement, is the maximum number of shares which we may sell to Aspire.
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 available credit facilities at this time.
Net Cash Used in Operating Activities
Net cash used in operating activities was $2.3 million and $6.3 million in the six months ended June 30, 2012 and July 2, 2011, 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 operating activities for the six months ended July 2, 2011 included a $5.0 million milestone payment to Medtronic, Inc.
Net Cash Used in Investment Activities
Net cash used in investment activities was $1.7 million and $6.9 million in the six months ended June 30, 2012 and July 2, 2011, respectively. Cash used in investment activities is related primarily to the purchase of short-term investments and capital equipment. During 2012, such purchases were partially offset by the sales and maturities of short-term investments.
Net Cash Provided by Financing Activities
Net cash provided by financing activities was $135,000 and $13.6 million in the six months ended June 30, 2012 and July 2, 2011, respectively. Net cash provided by financing activities resulted from the sale of common stock under our common stock purchase agreement with Aspire Capital in the current year and our initial public offering in the prior year.
We expect that 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 of our eSVS Mesh. To the extent that we raise additional capital through the sale of equity or convertible debt securities, stockholders interest will 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, 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, moderate sales levels, increased research and development expenses, stable SG&A expenses, continued negative net cash flow from operations, 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 and operating and capital requirement expectations. These statements involve known and unknown risks, uncertainties and other factors that may cause our or our industrys 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, 2011, 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.
Evaluation of Disclosure Controls and Procedures. We maintain controls and procedures designed to ensure that we are able to collect the information we are required to disclose in the reports we file with the United States Securities and Exchange Commission (SEC), and to process, summarize and disclose this information within the time periods specified in the rules of the SEC. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2012, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting during the quarter ended June 30, 2012 that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.
There are no material changes from the risk factors previously disclosed in Item 1A of the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
Unregistered Sales of Equity Securities
On October 24, 2011, we entered into the Purchase Agreement with Aspire, which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire is committed to purchase up to an aggregate of $20.0 million of shares of our common stock over a three-year period at purchase prices determined in accordance with the Purchase Agreement. On April 3, 2012, we sold 100,000 shares of common stock to Aspire Capital pursuant to the Purchase Agreement, for aggregate consideration of $139,000.
We deemed the sale to Aspire to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act and Regulation D promulgated thereunder as transactions by an issuer not involving a public offering. Pursuant to the terms of the Purchase Agreement, we have filed and maintain a registration statement on Form S-1 under the Securities Act of 1933 (File No. 333-178019) with the SEC under which we have registered 3,164,357 shares of our common stock, including the 100,000 shares purchased on April 3, 2012, for resale by Aspire.
On June 18, 2012, we granted options to purchase 15,000 shares of our common stock to employees of the Company at an exercise price of $1.00 per share. The grant was deemed to be exempt from registration under the Securities Act under either (i) Rule 701 promulgated under the Securities Act as offers and sale of securities pursuant to certain compensatory benefit plans and contracts relating to compensation in compliance with Rule 701 or (ii) Section 4(2) of the Securities Act as transactions by an issuer not involving any public offering.
Use of Proceeds
We completed our initial public offering of shares of common stock (the Offering) during the first quarter of our 2011 fiscal year. The effective date of our registration statement relating to the Offering, filed on Form S-1 under the Securities Act of 1933 (File No. 333-165940), was February 10, 2011. A total of 2,062,500 shares of our common stock were registered and sold in the Offering. In addition, we also granted to Rodman and Renshaw, LLC, the managing underwriter in the Offering (Rodman), a warrant to purchase 103,125 shares of our common stock, which became exercisable at a price of $10.00 per share on February 10, 2012 and expires on February 10, 2016.
The aggregate offering price of our securities sold was $16.5 million. The aggregate underwriting discount for shares sold in the offering was $1.2 million, none of which was or will be paid to our affiliates. We incurred approximately $1.7 million of offering costs in connection with the Offering, including a non-accountable expense allowance to Rodman of $165,000. We received net proceeds from this Offering of approximately $13.6 million.
Through June 30, 2012, we have used $5.0 million of the net proceeds to fund the first milestone payment payable for the acquisition of certain intellectual property rights to our eSVS Mesh. We intend to use the remaining net proceeds from the Offering to fund the process of seeking regulatory approval to market our eSVS Mesh in the United States which includes human clinical trials; expand regulatory approval abroad; fund the development and testing of additional applications of our eSVS Mesh; and for working capital and general corporate purposes, including commercialization activities for our eSVS Mesh in select European and other international markets. Pending the uses described above, we have invested the remaining net proceeds in a variety of short-term, interest-bearing, investment grade securities.
See attached exhibit index.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
KIPS BAY MEDICAL, INC.
* Furnished herewith.