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Table Of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2014

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from             to             

 

Commission file number: 001-35080

 

KIPS BAY MEDICAL, INC.
(Exact name of registrant as specified in its charter)

 

Delaware
(State or other jurisdiction
of incorporation)

20-8947689
(IRS Employer
Identification No.)

3405 Annapolis Lane North, Suite 200

 

Minneapolis, Minnesota

55447

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (763) 235-3540

 

Securities Registered Pursuant to Section 12(b) of the Act: None.

 

Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value

 

          Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes     No 

 

          Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes     No 

 

          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     No 

 

          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     No 

 

          Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 

 

          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. (Check one):

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 
(Do not check if smaller reporting company)

Smaller reporting company 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes     No 

 

The aggregate market value of the registrant’s common stock, excluding shares beneficially owned by affiliates, computed by reference to the closing sales price at which the common stock was last sold as of June 27, 2014 (the last trading day of the registrant’s second fiscal quarter) as reported by the NASDAQ Capital Market on that date was $9,287,192.

 

As of March 10, 2015, there were 33,014,079 shares of the registrant’s common stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None.



 

TABLE OF CONTENTS

 

 

Page

PART I  

Item 1. Business

2

Item 1A. Risk Factors

28

Item 1B. Unresolved Staff Comments

52

Item 2. Properties

53

Item 3. Legal Proceedings

53

Item 4. Mine Safety Disclosures

53
   

PART II

 

   

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

54

Item 6. Selected Financial Data

55

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

56

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

66

Item 8. Financial Statements and Supplementary Data

67

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

67

Item 9A. Controls and Procedures

67

Item 9B. Other Information

67
   

PART III

 

   

Item 10. Directors, Executive Officers and Corporate Governance

68

Item 11. Executive Compensation

74

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

82

Item 13. Certain Relationships and Related Transactions, and Director Independence

84

Item 14. Principal Accounting Fees and Services

85
   

PART IV

 

   

Item 15. Exhibits, Financial Statement Schedules

86

 


 

 

This annual report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created by those sections. For more information, see “Part I. Item 1. Business – Forward-Looking Statements.”

 

As used in this report, the terms “Kips Bay,” the “Company,” “we,” “us,” “our” and similar references refer to Kips Bay Medical, Inc. and the term “common stock” refers to our common stock, par value $0.01 per share.

 

Kips Bay Medical® and eSVS® are a couple of our trademarks used in this report. This report also includes trademarks, trade names and service marks that are the property of other organizations. Solely for convenience, trademarks and trade names referred to in this report appear without the ® and ™ symbols, but those references are not intended to indicate that we will not assert, to the fullest extent under applicable law, our rights, or that the applicable owner will not assert its rights, to these trademarks and trade names.

 

 

PART I

 

Item 1.     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, or CABG, surgery. Our eSVS Mesh is designed to be fitted like a sleeve on the outside of saphenous vein grafts (referred to as an SVG or vein graft) 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. In the near term, we are focused on and committed to spending substantially all of our resources on completing our current eMESH I clinical feasibility trial, and if that trial is successful, using the data from that 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 premarket approval application filing with the U.S. Food and Drug Administration, or FDA, seeking approval to sell the eSVS Mesh in the United States. No assurance can be provided that the results from the feasibility trial will be sufficient to support a larger pivotal study.

 

CABG is one of the most commonly performed cardiac surgeries in the world. According to the Cleveland Clinic, each year, over 800,000 CABG surgeries are performed worldwide. According to results published in the European Journal of Cardio-Thoracic Surgery in 2009, each CABG procedure involves an average of 3.3 bypass grafts. In CABG procedures, the left internal mammary artery, or LIMA, is most commonly used to bypass the left anterior descending artery, or LAD, and saphenous veins generally are used for any remaining grafts.

 

In CABG procedures, surgeons harvest blood vessels, including the LIMA from the chest and the saphenous vein from the leg, and attach the harvested vessels to provide blood flow around, and thereby bypassing, blockages in coronary arteries of the heart. The effectiveness of the procedure, however, is often limited by the failure rate of SVGs, which has been shown in various studies and reports to range from 7% to 26% one year after surgery and 40% to 50% ten years after surgery. Failure of vein grafts is typically evidenced by partial or complete blockage and this compromised blood flow can lead to chest pain (angina), congestive heart failure, irregular heartbeat, myocardial infarction (heart attack) or death. Vein graft failures can lead to the need for further, costly coronary interventions up to and including re-doing the CABG surgery. A repeat of a CABG procedure to repair a failing or failed graft is a technically more difficult procedure with mortality rates three to five times higher than the original CABG procedure.

 

We believe the use of our eSVS Mesh with SVGs in CABG surgery can strengthen the SVG and prevent the damaging consequences of expansion of the vein graft. We hope to reduce or prevent the resulting injury which can lead to SVG failure and thereby reduce the need for costly and complicated re-interventions for patients undergoing CABG surgery and also to improve patients’ quality of life. To strengthen an SVG, the eSVS Mesh is manufactured from nitinol wire which gives it considerable strength, while remaining highly flexible and kink-resistant.

 

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. A single graft that is connected from the aorta to multiple coronary arteries is referred to as a sequential graft. In August 2014, we received an updated CE Mark incorporating changes in the application of our eSVS Mesh to the SVG and to the surgical implant technique for the eSVS Mesh treated graft that were approved by the FDA in March 2014 for use in our eMESH I clinical feasibility trial.

 

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 and we do not expect sales to improve in the near future until additional clinical data is available. We believe that sales of our eSVS Mesh have been, and will continue to be, adversely impacted by the limited amount of clinical data on the performance of the eSVS Mesh, limited reimbursements available to hospitals and the effects of economic difficulties in certain European countries. We estimate that more than 550 commercial implants have been performed in Europe and the Middle East since commercialization of the eSVS Mesh device began in June 2010. Over this period, there have been no reportable adverse events related to the eSVS Mesh device. In January 2015, we reorganized our operations by eliminating staff positions, instituting salary reductions and reducing our non-clinical related operating expenses, in order to conserve our capital while we pursue the completion of the eMESH I clinical feasibility trial. As a result, we are not focusing our efforts on sales of the eSVS Mesh, at least in the short term.

 

 

We are currently conducting a feasibility trial for the 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. Enrollments in eMESH I feasibility trial commenced internationally 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 (either 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.

 

The objective of this study is to demonstrate to the FDA the initial safety and performance of the eSVS Mesh for use as an external saphenous vein graft support device during CABG surgery. If the feasibility trial is successful, we intend to use the data from this study as the basis for the filing of a request for an IDE to perform a larger pivotal study. The pivotal study is required to demonstrate clinical effectiveness and support a premarket approval application filing with the FDA seeking approval to sell the 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.

 

In March 2014, the FDA approved a combination of changes in the application of the eSVS Mesh to the SVG and to the surgical implant technique for the eSVS Mesh treated graft. These changes were based upon our consultations with medical advisors and several of the cardiac surgeons participating in the eMESH I clinical feasibility trial and our initial review of early results from the eMESH I trial. The changes are intended to reduce the variables in the study and the risk of early graft occlusion. We also believe these changes will simplify the process of applying and implanting the eSVS Mesh thereby reducing procedural costs. No assurance can be provided, however, that these changes will reduce the variables in the study and the risk of early graft occlusion or that the feasibility trial for the FDA will be successful.   Due to our concern that the results of our feasibility trial prior to the change in the implant technique would not be adequate to allow us to obtain an IDE to perform a pivotal study and based upon our discussions with the FDA, we believe that the success of the feasibility trial is completely dependent upon the results from patients implanted with the eSVS Mesh using the new implant technique. Since enrollment using the new implant technique did not commence in earnest until October 2014, we do not expect to receive a meaningful number of follow-up angiographic results from the new implant technique patients until May or June 2015.

 

Enrollment in the eMESH I clinical feasibility trial has reached our targeted goal of 45 to 50 patients treated with the new surgical technique. As of March 5, 2015, 105 patients have been enrolled in the feasibility trial, including 49 patients enrolled with the new technique. Based upon the progress in our enrollments, in December 2014, we terminated our clinical trial agreements with two U.S. sites that had not enrolled any patients. This reduced the U.S. study sites from seven to five. No assurance can be provided that our eMESH I clinical feasibility trial will be successful, that the FDA will approve an IDE for a pivotal study or that once these studies are concluded, we will receive U.S. marketing approval for the eSVS Mesh. If these events do not occur, we may be forced to cease operations since we do not have any other products in development. In addition, we need additional financing to continue our operations, and in particular, to complete our eMESH I clinical feasibility trial. If we do not receive such additional financing, we may be forced to cease operations.

 

 

On January 5, 2015, we announced that we streamlined and scaled back our operations to focus our efforts and resources on regulatory and clinical activities which further the clinical development of the eSVS Mesh. As part of this reorganization, we reduced our personnel from thirteen to eight employees. These reductions included our two sales directors, two administrative positions and one operations position. In addition, our officers agreed to accept temporary salary reductions. We believe that these actions will reduce our monthly cash operating expenses, excluding costs related to our eMESH I clinical feasibility trial, to approximately $200,000. With our operating expense reductions, we expect that our available cash equivalents and short-term investments of $3.6 million as of December 31, 2014, will be sufficient to fund our operations through December 2015.

 

We also recently announced that we have begun to receive follow-up angiograms on certain patients that participated in our original international human clinical trial, the “CE Mark” trial. The eligible patients are those whose eSVS Mesh treated saphenous vein grafts were open, or patent, at the conclusion of the CE Mark trial. Enrollments in this original trial occurred between August 2008 and July 2009. Follow-up angiograms from these patients will provide an opportunity to evaluate the performance of the eSVS Mesh treated grafts five to six years after bypass surgery. We anticipate that these follow-up angiograms will provide a meaningful indication of the potential long-term performance of the eSVS Mesh.

 

In addition to the feasibility trial, we also are conducting a post-market study intended to support our international reimbursement and marketing activities with a clinical evaluation of the short-term (three to six months) and long-term (two years) post-implant patency of our eSVS Mesh in the treatment of SVGs used in CABG, as compared with prospective SVG CABG without our eSVS Mesh. This study is being performed at the University Hospital Basel, Clinic for Cardiac Surgery, in Basel, Switzerland and has reached its initial target enrollment of 20 patients.

 

Our Strategy

 

Our objective is to obtain regulatory approval and commercialize our eSVS Mesh in the United States and achieve significant market adoption of our eSVS Mesh technology in CABG and other vascular applications. Key elements of our strategy to achieve this objective include the following:

 

 

Obtain Regulatory Approval and Commercialize Our eSVS Mesh in the United States. We are currently conducting our eMESH I clinical feasibility trial in the United States and Europe. Enrollments in this trial commenced in Europe in August 2012 at the Bern University Hospital, Bern, Switzerland and in the United States in February 2013 at the Northeast Georgia Medical Center in Gainesville, Georgia. Upon completion of the eMESH I feasibility trial, we expect to request an IDE for a pivotal study. In the United States, a pivotal study is required to develop the clinical data necessary to support an application for premarket approval from the FDA. If we receive the necessary regulatory approval, we plan to commercially introduce our eSVS Mesh in the United States through a combination of direct sales employees and independent distributors with access to key CABG centers and key physicians. However, we could be delayed by adverse clinical results or regulatory complications, and we may never receive U.S. marketing approval.

 

 

Commercialize Our eSVS Mesh in Select European and other International Markets. In the near term, we are focused on and committed to spending substantially all of our resources on completing our current eMESH I clinical feasibility trial, and if that trial is successful, using the data from that study as the basis for the filing of a request for an IDE to perform a larger pivotal study. Longer term, however, assuming we have adequate cash resources, we intend to re-initiate our strategy to commercialize our eSVS Mesh in select European and other international markets. We received the initial CE Mark approval for our eSVS Mesh in May 2010. The CE Mark allows us to sell our eSVS Mesh for use in CABG procedures in the countries within the European Union, the European Economic Area, and the European Free Trade Association. In August 2014, we received an updated CE Mark incorporating changes in the application of our eSVS Mesh to the SVG and to the surgical implant technique for the eSVS Mesh treated graft that were approved by the FDA in March 2014 for use in our eMESH I clinical feasibility trial.

 

 

 

Partner with Leading Medical Centers and Thought Leaders in the Industry. We are working with respected medical centers and key thought leaders to demonstrate and communicate the potential benefits of our eSVS Mesh. We believe that it will be important to increase the awareness of our eSVS Mesh by collaborating with key opinion leaders at leading academic and medical institutions and supporting post-approval marketing studies outside of the United States and publication of peer-reviewed articles. We believe that we have formed strong relationships with surgeons at a number of University-based and private cardiovascular surgery centers.

 

CABG Surgery

 

Coronary artery bypass grafting involves the construction of an alternative path for blood to flow around, or “bypass”, a narrowed or occluded coronary artery and thereby restore blood flow from the aorta to an area past the blockage. This procedure is generally accomplished by harvesting and using saphenous veins from the patient’s leg and the left internal mammary artery, or LIMA, from the chest wall as bypass grafts. Most commonly, the LIMA is utilized for bypassing blockages in the left anterior descending artery, or LAD, of the heart, while saphenous veins are utilized for bypassing blockages in other coronary arteries.

 

For SVGs, one end of the harvested vessel is generally attached to the aorta for blood inflow, and the opposite end is attached to the target coronary vessel. If a LIMA is used as the bypass graft, it must be cut away from the chest wall, leaving one end in place near the aorta, while the opposite end is attached to the target vessel, providing blood flow from the arterial circulation. Once in place, these grafts allow blood flow to bypass the narrowed or occluded portion of the coronary artery.

 

The following diagram illustrates the use of the left internal mammary artery graft and SVGs in CABG surgery:

 

 

 

Current Disadvantages of Saphenous Vein Grafts

 

Since its first successful use in the 1960’s, the SVG has been and continues to be one of the most commonly used conduits in CABG surgery. Some of the main advantages of using the saphenous vein include its ease of accessibility, its ease of handling, and the number of grafts, typically three, that can be constructed from a single vein. Despite these advantages and the widespread use of saphenous veins in CABG surgery, several issues have been identified, such as:

 

 

Pressure normally exerted on veins is much lower than the pressure on arteries. Arterial pressure is normally 80-120 mm Hg while central venous pressure is normally about 3-10 mm Hg.

 

 

Veins do not have the strong muscular wall found in arteries. Therefore, when placed under higher arterial pressures, the veins typically dilate, or expand, with a significant increase in the vein graft wall tension, or stress, which can damage the internal lining of the vein graft.

 

 

Veins have large lumens as compared to arteries, resulting in a mismatch of lumen diameters when an SVG is connected to a coronary artery. This size mismatch can result in slower, more turbulent blood flow in the vein graft which can be harmful to the normal and necessary function of the internal lining of the vein graft.

 

The higher pressure of arterial blood flow and the size mismatch that results when a saphenous vein is used as a graft in CABG surgery often cause the vein to expand, damaging the lining of the vein. The vein responds to this damage by causing its walls to thicken in a manner that often leads to failure of the bypass graft. Smooth muscle cells proliferate in the middle layer of the vein wall and migrate to the inner surface of the vein in a process known as neointimal hyperplasia. The resulting accumulation of activated smooth muscle cells secrete inflammatory and growth factors leading to a stenotic build-up, or constriction and narrowing of the graft, and graft failure over time. The failure rate of SVGs in CABG procedures is well documented in the scientific literature.

 

A sampling of data from some of the larger benchmark studies is provided below: 

 

Saphenous Vein Graft Failure Rates

 

 

 

 

 

1 Year

 

5 Year*

 

10 Year*

 

Year

 

Author

 

Number of
Patients

 

Failure
Rate

 

Number of
Patients

 

Failure
Rate

 

Number of
Patients

 

Failure
Rate

 

1984

 

Barner, et al. 

 

 

248

 

 

7

%

 

112

 

 

26

%

 

 

 

 

1996

 

Fitzgibbon, et al. 

 

 

3,993

 

 

19

%

 

1978

 

 

25

%

 

 

 

 

2004

 

Goldman, et al. 

 

 

660

 

 

8

%

 

336

 

 

25

%

 

368

 

 

39

%

2005

 

Alexander

 

 

2,000

 

 

26

%

 

 

 

 

 

 

 

 

2009

 

Puskas, et al. 

 

 

183

 

 

18

%

 

 

 

 

 

 

 

 

 


* Five and ten year data is not available for those studies for which data is not presented in these columns.

 

Failure of these grafts, typically evidenced by partial or complete blockage and reduced or stopped blood flow, can lead to chest pain or angina, congestive heart failure, irregular heartbeat, myocardial infarction, revascularization or death. A repeat of a CABG procedure to repair a failing or failed graft is a technically more difficult procedure with mortality rates three to five times higher than the original CABG procedure.

 

eSVS Mesh—Our Solution

 

Our eSVS Mesh is designed to address the limitations of unsupported SVGs by providing vein grafts with physical attributes similar to those of an artery. The eSVS Mesh is designed to be fitted like a sleeve on the outside of saphenous vein grafts 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.

 

 

An artery has a thick muscular wall which developed to handle the higher pressures, and a relatively small lumen that produces higher blood velocities, offering less chance for blood to pool and clot. In contrast, a vein has a thinner, less muscular wall due to the lower pressures normally found in veins and a larger lumen designed to maintain these lower pressures. We believe that larger, thinner-walled veins will have greater potential benefit from our eSVS Mesh.

 

Our eSVS Mesh is designed to provide the vein graft with physiological attributes similar to those of an artery by strengthening the vessel wall, reducing the lumen diameter and improving blood flow characteristics. We believe the key benefits of our eSVS Mesh technology include:

 

 

Structural Support to Strengthen SVG. Structural support provided by our eSVS Mesh is designed to prevent expansion of the SVG and the resulting damage to the vessel when it is exposed to the significantly higher arterial pressures, which can prevent a thickening of the vessel wall over time (neointimal hyperplasia) and the resulting graft failure.

 

 

Improved Arterial-Like Blood Flow. Our eSVS Mesh is designed to reduce the diameter of the SVG. We refer to this as radial constriction. Radial constriction helps to insure that the inside diameter of the graft, or lumen, will be more uniform in size and more closely match the inside diameter of the target coronary artery to which it is attached, thereby increasing blood flow velocities and reducing the potential for clot formation.

 

 

Innovative Design. Our eSVS Mesh is designed to pulse, or “comply,” as blood flows through the SVG in a manner similar to the typical compliance of an artery.

 

 

Compatibility with Current CABG Procedures. We believe that our eSVS Mesh is compatible with current CABG procedures, including on-pump or off-pump procedures, robotically assisted CABG and open or endoscopic saphenous vein harvest methods. Except for the placement of our eSVS Mesh on the SVG, the surgical steps to use an SVG with our eSVS Mesh are essentially the same as would be performed for any coronary artery bypass procedure utilizing unsupported SVGs. We do not expect, nor have we seen, a significant increase in CABG procedure time due to eSVS Mesh use.

 

Our eSVS Mesh technology consists of the following:

 

 

eSVS Mesh (25 cm length, and either 3.5, 4.0 or 4.5 mm in diameter);

 

 

 

 

 

Delivery tube for use in placing our eSVS Mesh on the saphenous vein (color-coded, one for each diameter of our eSVS Mesh);

 

 

 

 

Suture snare for use in loading our eSVS Mesh onto the saphenous vein; and

 

 

 

 

Sizing tool for use in choosing the correct device size based on saphenous vein diameter.

 

 

 

Clinical Development of Our eSVS Mesh

 

Feasibility Trial for the FDA

 

We are currently conducting a feasibility trial for the 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 and to support a future pivotal trial. The protocol for this trial was reviewed by the FDA and incorporates specific guidance provided by the FDA. As part of this trial, each patient in the United States is required to have two qualifying SVGs to be enrolled in the trial. Additional SVGs are allowed but will not be included in the trial evaluation. Each patient will serve as his or her own control, meaning that each trial subject will be implanted with one SVG treated with our eSVS Mesh and one untreated SVG. The two SVGs must be pre-specified during the procedure and the graft treated with our eSVS Mesh will be randomized to either the right coronary artery or the left circumflex artery system. Due to difficulties experienced by our European sites in finding patients with two qualifying grafts and based upon further discussions with the FDA, we implemented a modification to the study protocol for Europe in August 2013 which allowed our European study sites to enroll patients with only one qualifying graft. The intent of this modification was to increase European enrollments in the trial.

 

In November 2012, the FDA approved our investigational device exemption to begin enrolling patients in the eMESH I clinical feasibility trial in the United States. In this initial approval, the FDA allowed us to enroll 15 patients at up to four sites in the United States. Additional enrollments within the United States were contingent upon the FDA’s favorable review of early angiographic results data from the trial. In March 2014, the FDA granted us an expanded approval allowing us to enroll up to 27 U.S. patients (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.

 

With this expanded approval, 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. We refer to these changes as the new surgical technique. These changes were based upon our initial review of early results from the eMESH I trial and our consultations with medical advisors and several of the cardiac surgeons participating in the eMESH I clinical feasibility trial. The changes were intended to reduce the variables in the study and the risk of early graft occlusion. In addition, we believe these changes will simplify the process of applying and implanting the eSVS Mesh thereby reducing procedural costs.

 

Enrollments in the feasibility trial commenced internationally 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. Enrollment in the eMESH I clinical feasibility trial has reached our targeted goal of 45 to 50 patients treated with the new surgical technique. As of March 5, 2015, 105 patients have been enrolled in the feasibility trial, including 49 patients treated with its new surgical technique. Based upon the progress in our enrollments, in December 2014, we terminated our clinical trial agreements with two U.S. sites that had not enrolled any patients. This reduced the U.S. study sites from seven to five. We intend to continue enrollments at the U.S. study sites in order to allow these sites to gain more experience working with the eSVS Mesh. We expect to use the data from this trial as the basis for the filing of a request for IDE to perform a pivotal trial which is required to demonstrate clinical effectiveness and to support a request for approval to sell our eSVS Mesh in the United States.

 

 

European Post-Market Studies

 

In addition to the feasibility trial, we also are conducting a post-market study intended to support our international reimbursement and marketing activities with a clinical evaluation of the short-term (three to six months) and long-term (two years) post-implant patency of our eSVS Mesh in the treatment of SVGs used in CABG, as compared with prospective SVG CABG without our eSVS Mesh. This study is being performed at the University Hospital Basel, Clinic for Cardiac Surgery, in Basel, Switzerland and reached its initial target enrollment of 20 patients in the fourth quarter of 2013.

 

CE Mark and International Human Clinical Trial

 

We received CE Mark approval in May 2010 based upon our international human clinical trial. We began marketing and commenced shipments of our eSVS Mesh in select European markets in June 2010. In November 2013, we received an updated CE Mark expanding our ability to market the eSVS Mesh for use with sequential grafts. In August 2014, we received an updated CE Mark incorporating changes in the application of our eSVS Mesh to the SVG and to the surgical implant technique for the eSVS Mesh treated graft that were approved by the FDA in March 2014 for use in our eMESH I clinical feasibility trial.

 

The first human clinical trial of our eSVS Mesh was a non-inferiority trial where each patient was randomized to receive an SVG with our eSVS Mesh to bypass either the right coronary artery or the left circumflex artery, two arteries commonly bypassed during CABG. The bypassed artery not chosen to receive our eSVS Mesh served as the control and received a standard SVG. To ensure Good Clinical Practices compliance, outside resources were utilized for data collection and analysis, including a contract research organization, or CRO, for data entry and verification, a physician clinical events committee for the review and evaluation of adverse events, and an angiographic core lab for assessment of SVG patency. Seven international centers enrolled 90 patients in this trial. Enrollment in this trial closed on July 21, 2009. The international sites involved in this trial, and the number of patients enrolled at each site, is provided below:

 

Center Name

 

Number of Patients Enrolled

 

Schleswig-Holstein University Hospital, Kiel, Germany

  25  

National University Hospital, Singapore

  21  

University Of Cape Town, Cape Town, South Africa

  20  

Hospital Regional De Sion, Sion, Switzerland

  9  

Auckland City Hospital, Auckland, New Zealand

  8  

Hospital Universitario 12 de Octubre, Madrid, Spain

  5  

Prince Charles Hospital, Brisbane, Australia

  2  

Total

  90  

 

 

In this trial, our goal was to demonstrate that the use of our eSVS Mesh results in no more major adverse cardiac and cerebral events, or MACCE, than standard CABG surgery. The primary safety endpoint of this trial was statistical non-inferiority based on the total rate of MACCE at 30-days post-implant as compared to published literature. MACCE is a composite of the following: myocardial infarction, or heart attack; stroke; revascularization due to blocked vein grafts, including surgery or stenting; and death. In summary, there were four adverse events that met the protocol definition of MACCE, which compared favorably to the compilation of published literature that presented 30-day post-implant MACCE rates for CABG surgery patients, separating the MACCE category into the composite factors listed above. A table summarizing these results is shown below:

 

   

Trial Data

   

Published Literature

 

Myocardial infarction

    2(2.2

)%

    2.8 %

Stroke

    2(2.2

)%

    1.8 %

Revascularization

    0

 %

    0 %

Death*

    0

 %

    4.8 %

Total

    4(4.4

)%

    9.4 %

 

 

*

One patient death eight months after surgery due to non-cardiac causes

 

The primary effectiveness endpoint of this trial was statistical non-inferiority of angiographic stenosis, or patency, of eSVS Mesh vessels as compared to control vessels at nine to 12 months post-implant. A vessel was considered to be patent, or open, if there was less than 50% stenosis. The data from the first 42 patients demonstrated statistical non-inferiority and was the basis for the granting of a CE Mark approval for the eSVS Mesh. However, when the data from the remaining 31 patients was obtained, the combined results were inconclusive regarding the effectiveness of the eSVS Mesh primarily due to the following two factors:

 

 

One center had implant methods incompatible with our eSVS Mesh. Specifically, this center had issues with failure of the proximal anastomotic site, resulting in graft closure. We have modified our instructions for use to provide clear direction to surgeons on how to make the proximal anastomotic site when using our eSVS Mesh.

 

 

The amount of downsizing in the diameter of the SVGs prescribed in our instructions for use and sizing tool was too aggressive, resulting in a higher than anticipated closure rate in SVGs utilizing the eSVS Mesh, particularly when our smallest device, 3.0 millimeters, was used. This resulted in lumen diameters that were very small and did not remain patent. We have modified our instructions for use and sizing tool to decrease the amount of downsizing applied to SVGs by our eSVS Mesh and discontinued the 3.0 millimeter size of our eSVS Mesh.

 

Of the 90 patients participating in the study, 73 patients returned for angiographic studies nine to 12 months following their implant. In the full group, 49% (36 of 73) of the eSVS Mesh vessels were patent and 81% (59 of 73) of the untreated vessels were patent. If, however, we exclude eSVS Mesh grafts implanted at the center with the incompatible treatment methods and grafts treated with our 3.0 millimeter eSVS Mesh, which was discontinued after this study, at nine to 12 months following the implant, 73% (24 of 33) of the eSVS Mesh vessels were patent and 81% (59 of 73) of the untreated vessels were patent. The data from the first 42 patients in this trial formed the basis for our CE Mark application, which we submitted in February 2010 and for which we received approval in May 2010. The Notified Body, which oversees our CE Mark approval, has received and reviewed the combined results of this trial and we continue to provide them the required annual updates on the clinical use of our eSVS Mesh.

 

Five-Year eSVS Mesh Performance Information

 

We have begun to receive follow-up angiograms on certain patients that participated in our original international human clinical trial, the “CE Mark” trial. The eligible patients are those whose eSVS Mesh treated saphenous vein grafts were open, or patent, at the conclusion of the CE Mark trial. Enrollments in this original trial occurred between August 2008 and July 2009. Follow-up angiograms from these patients will provide an opportunity to evaluate the performance of the eSVS Mesh treated grafts five to six years after bypass surgery. We anticipate that these follow-up angiograms will provide a meaningful indication of the potential long-term performance of the eSVS Mesh.

 

 

In order to accomplish this follow-up study, we are working with the investigators/surgeons at the original hospitals, who are required to obtain approval from the ethics committee of each hospital in order to approach the patients and request their participation in this follow-up study. Three of the original hospitals have received this approval and are actively contacting their original study patients. To date, we have received follow-up angiograms from three patients and are currently having these angiograms evaluated by an independent laboratory. We expect three of the seven original study sites to participate in this follow-up study and hope to receive 10 to 15 follow-up angiograms by the end of the second quarter of 2015.

 

Pivotal Trial

 

In the United States, a pivotal study is required to develop the clinical data necessary to support an application for premarket approval from the FDA. We anticipate that the primary safety endpoint of a pivotal trial in the United States will be statistical non-inferiority of major adverse cardiac events, or MACE, at 30-days post-implant in patients with SVGs treated with our eSVS Mesh as compared with the reported total rate of MACE as published in prior CABG study reports. The primary effectiveness endpoint of this trial is expected to be statistical non-inferiority of the patency of SVGs treated with our eSVS Mesh vessels as compared to untreated SVGs at 12 months post-implant.

 

Until the requirements of the study are agreed to by the FDA, which includes the number of patients required, we cannot estimate the time required to complete enrollment on a pivotal study. However, prior to commercializing our eSVS Mesh in the United States, we will be required to submit a pre-market approval application to the FDA which includes the final results from a pivotal study. Approval of a pre-market approval by the FDA generally takes from one to five years, or even longer, from the time the application is filed with the FDA until an approval is obtained. We could be delayed by adverse clinical results or regulatory complications, and we may never receive marketing approval of our eSVS Mesh in the United States.

 

Preclinical Testing

 

Preclinical trials of our eSVS Mesh technology have been presented in peer-reviewed journals, including The Journal of Thoracic and Cardiovascular Surgery in February 2008 and the Journal of Vascular Surgery in June 2009. Between 2002 and 2007, Medtronic, Inc. sponsored multiphase trials with the Cardiovascular Research Unit of the Christiaan Barnard Department of Cardiothoracic Surgery at the University of Cape Town in South Africa, to evaluate the effects of various designs of external nitinol mesh sleeves on the vascular architecture of vein grafts used in CABG and peripheral bypass procedures. This multiphase research concluded that the use of our eSVS Mesh technology showed a statistically significant decrease in intimal hyperplasia after six months of implantation. In addition to these trials, Medtronic and the University of Cape Town collaborated on stress, fatigue, durability, and finite element analysis of knitted eSVS Mesh designs.

 

In October 2007, we acquired ownership of the core intellectual property relating to our eSVS Mesh from Medtronic and initiated additional work on the technology. This work included developing additional sizes of our eSVS Mesh, completing required preclinical and biological testing of the product and accessories, developing packaging and labeling for our eSVS Mesh, and creating product documentation intended to comply with relevant FDA and international standards.

 

In addition, we initiated and completed a series of animal trials utilizing sheep to confirm that our eSVS Mesh, as manufactured by us, performed as expected, and produced the expected results. These animal trials showed a statistically significant inhibition of the formation of intimal hyperplasia when our eSVS Mesh was used with an SVG in CABG procedures. However, sheep arterial pressures and vasculature differ from humans, and human clinical studies may not be consistent with animal trial results.

 

In August 2012, we submitted additional pre-clinical test information to the FDA. The FDA considered this additional information prior to issuing their November 8, 2012 letter granting us an approval with conditions to begin human clinical testing of our eSVS Mesh in the United States.

 

In 2013, we completed an animal study to demonstrate the compatibility of our eSVS Mesh with a synthetic sealant and to demonstrate the ability to perform sequential grafts with our eSVS Mesh. A single graft that is connected from the aorta to multiple coronary arteries is referred to as a sequential graft. We submitted this data to our Notified Body, as part of a request for an expansion of the product labeling for our eSVS Mesh to indicate that our eSVS Mesh is compatible with a synthetic sealant and with the performance of sequential bypass grafts. Both of these requests were approved, and in November 2013, we received an updated CE Mark certificate.

 

 

In 2014, we completed an animal study to evaluate whether our proposed surgical implant technique changes for use with our eSVS Mesh posed any risk to the performance of an SVG treated with our eSVS Mesh or to patient safety. We submitted this data to our Notified Body, as part of a request for an approval to promote the use of this new surgical implant technique for our eSVS Mesh. In August 2014, this request was approved and we received an updated CE Mark certificate for the new implant technique approved for use in our eMESH I clinical feasibility trial by the FDA in March 2014.

 

Additional eSVS Mesh Applications

 

We are currently focused on and committed to spending substantially all of our resources on completing our current eMESH I clinical feasibility trial. We expect that our eMESH I clinical feasibility trial will remain our primary focus for 2015. We have not devoted substantial amounts of time to the development of additional eSVS Mesh applications and we will only devote time to the further development of additional applications for the eSVS Mesh as schedules and priorities permit. Nonetheless, additional development projects based on our eSVS Mesh technology that we may in the future explore and advance include peripheral grants, synthetic grafts and arteriovenous fistula for dialysis.

 

Each of these potential applications is described below:

 

 

Arteriovenous Fistula for Dialysis. In this clinical application, a fistula, or connection, is made between an artery and a vein, normally in the non-dominant arm, for circulatory system access in patients requiring chronic dialysis.

 

 

Peripheral Grafts. In this clinical application, SVGs are used to bypass obstructed arterial vessels in the legs. We have conducted initial preclinical trials for this application, utilizing SVGs with our eSVS Mesh in place and have completed preliminary assessments of this procedure.

 

 

Synthetic Grafts. In this clinical application, our eSVS Mesh may provide a compliant, structural support to a graft made from synthetic or biological materials which allow for the optimization of the physical properties of the graft.

 

Sales and Marketing

 

Europe and Other International Markets

 

In May 2010, we obtained the CE Mark for our eSVS Mesh, which allows us to sell our eSVS Mesh for use in CABG procedures in countries within the European Union, the European Economic Area, and the European Free Trade Association. In November 2013, we received an updated CE Mark expanding our ability to promote the eSVS Mesh for use with sequential grafts. In August 2014, we received an updated CE Mark approval for the new implant technique approved for use in our eMESH I clinical feasibility trial by the FDA in March 2014. We began marketing and commenced shipments of our eSVS Mesh in select European Union markets in June 2010. However, our sales have been limited and we believe that sales of our eSVS Mesh have been, and will continue to be, adversely impacted by the limited amount of clinical data on the performance of the eSVS Mesh, limited reimbursements available to hospitals and the effects of economic difficulties in certain European countries.

 

 

We utilize independent distributors to commercialize our eSVS Mesh in Europe. We have entered into agreements with independent distributors for Switzerland, Italy, Spain, Belgium, the Netherlands, Luxembourg, Ireland, Greece, Denmark, Sweden, Norway, Austria, France and other countries to conduct sales in these markets. We have also entered into an agreement with an independent distributor for the United Arab Emirates. These distribution agreements generally have terms of three years, restrict distributors from selling products competitive with our eSVS Mesh and grant exclusivity within a territory, which is generally limited to a single country. In addition, we may terminate the distributor’s exclusivity or the entire agreement if the distributor fails to achieve agreed upon sales targets. These distributors are supported by our U.S.-based staff with regard to product and physician training and promotional materials. We work with our distributors to drive clinical utilization of our eSVS Mesh in key centers within their respective territories. As the European cardiac surgery market is characterized by centralized, high-volume cardiac surgery centers, we believe this market can be effectively addressed through a small, highly-focused independent distributor network. As announced in January 2015, we reorganized our operations by eliminating staff positions, instituting salary reductions and reducing our non-clinical related operating expenses, in order to conserve our capital while we pursue the completion of the eMESH I clinical feasibility trial. As a result, we are not focusing our efforts on sales of the eSVS Mesh, at least in the short term.

 

We are not aware of the establishment of any specific or supplemental reimbursements for our eSVS Mesh and we were recently denied a government-sponsored supplemental reimbursement in Germany for our eSVS Mesh for 2014. We have, however, obtained reporting codes for the eSVS Mesh in Germany (an “OPS” code) and Switzerland (a “CHOP” code). Effective January 1, 2014, these codes allow for the clinical use and cost of the eSVS Mesh to be captured and identified by the respective governmental reimbursement authorities. Our ultimate goal in obtaining these reporting codes is to lead to a more informed decision by the respective health systems to either institute a new reimbursement for the eSVS Mesh or adjust the existing reimbursement codes for CABG surgery to cover the cost of the eSVS Mesh.

 

In the future, we intend to resume our pursuit of additional post-market clinical studies designed to validate both the short and long-term outcomes of patients who receive our eSVS Mesh. We intend to use follow-up imaging studies to evaluate patency rates of eSVS Mesh-treated SVGs as compared with SVGs not treated with the eSVS Mesh. We envision that the results of these studies will be presented at scientific meetings and presented in peer-reviewed journals, which we believe will increase the visibility and adoption of our eSVS Mesh. We also intend to use these studies to support applications for public hospital reimbursement in those countries that require outcomes data for such reimbursement.

 

United States

 

We are required to obtain a pre-market application approval from the FDA in order to market our eSVS Mesh in the United States. The timeline for obtaining this approval is subject to the results of our current FDA feasibility trial, a future pivotal trial and requirements of the FDA. If and when our eSVS Mesh receives the required regulatory approval in the United States, we intend to utilize a combination of direct sales employees and independent distributors to commercialize our eSVS Mesh in the United States. We expect that these contracts will be on terms similar to those described above for our agreements with international distributors. We expect that these distributors will be supported by our staff with regard to training and promotional materials. We have engaged an outside reimbursement expert to assist us in evaluating the current requirements for obtaining reimbursement for our eSVS Mesh from the Centers for Medicare & Medicaid Services, or CMS, and private U.S. insurance carriers. We intend to incorporate in our pivotal trial protocol, requirements to collect the data required to optimize our chances for obtaining favorable reimbursement decisions in the United States.

 

Intellectual Property

 

Patents, trade secrets, know-how and other proprietary rights are important to the success of our business. We believe our patents are valuable and our trade secrets, especially with respect to manufacturing processes, are also important in maintaining the proprietary nature of our eSVS Mesh.

 

We protect our proprietary rights through a variety of methods, including filing patent applications and trademark applications and vigorously preserving the trade secrets covering our technology and other intellectual property rights. As a condition of employment, we require employees to execute an agreement relating to the confidential nature of and company ownership of proprietary information and assigning intellectual property rights to us. We require confidentiality agreements from vendors, consultants and others who may have access to proprietary information. We generally limit access to our facilities and review the release of company information in advance of public disclosure.

 

 

As of March 5, 2015, we have 14 issued patents covering the eSVS Mesh: seven issued in the United States, two each issued in Japan, South Africa and Canada and one European patent. The European patent has been validated and is enforceable in eight European countries. In addition, we have two patent applications pending in the United States and five patent applications pending in countries outside the United States. Our issued patents and pending patent applications include claims directed towards, among other things, the knitted, resilient and compliant structure of our eSVS Mesh, which is designed to provide structural support to prevent vessel expansion and provide the vein graft with physiological attributes similar to those of an artery, and the surgical procedures relating to the delivery system design and implant deployment method for our eSVS Mesh.

 

Competitors may attempt to replicate some or all of the competitive advantages we derive from our eSVS Mesh or design around our technology, and they may be able to market products and use manufacturing processes that are substantially similar to ours, each of which we believe would be highly likely if we are able to achieve significant market acceptance of our eSVS Mesh. In addition, third parties may assert that our eSVS Mesh infringes the claims in their patents or seek to expand their patent claims to cover aspects of our eSVS Mesh. An adverse determination in litigation or interference proceedings to which we may become a party could subject us to significant liabilities or require us to seek licenses. Although patent and intellectual property disputes in the medical device area have often been settled through licensing or similar arrangements, costs associated with these arrangements may be substantial and could include ongoing royalties. We may be unable to obtain necessary licenses on satisfactory terms, if at all, and we may be required to redesign our eSVS Mesh to avoid infringement.

 

The core intellectual property relating to our eSVS Mesh was sold to us by Medtronic pursuant to an Assignment and License Agreement dated October 9, 2007. Pursuant to the Assignment and License Agreement, Medtronic also sold to us intellectual property relating to a brushed ePTFE vascular graft, or the Brushed Graft Product. As consideration for the sale of intellectual property relating to the eSVS Mesh and the Brushed Graft Product and other rights granted by the Assignment and License Agreement, we have agreed to pay Medtronic an aggregate of $20.0 million upon the achievement of certain sales milestones relating to the eSVS Mesh and the Brushed Graft Product and a royalty of 4% on sales of our eSVS Mesh and the Brushed Graft Product. The royalty will terminate upon the earlier of the expiration of all of the patents and patent applications, or when the aggregate royalties paid reach $100.0 million. If we become insolvent, make an assignment for the benefit of creditors, go into liquidation or receivership or otherwise lose legal control of our business, any or all technology sold to us pursuant to our agreement with Medtronic, including potentially all of the core intellectual property and patent rights related to our eSVS Mesh, could revert to Medtronic, at Medtronic’s discretion and upon notice by Medtronic. In addition, if we determine to cease commercializing our eSVS Mesh, Medtronic may cause the core intellectual property and patent rights related to our eSVS Mesh to revert to Medtronic.

 

Competition

 

The development and commercialization of medical devices to treat cardiovascular disease is a highly competitive industry. Physicians and patients may select among a variety of treatments to address coronary artery disease, including pharmaceutical therapy, balloon angioplasty, stenting with bare metal or drug-eluting stents, atherectomy and CABG procedures, with the selection often depending upon the health of the patient and the severity of the coronary artery disease. If physicians or their patients choose alternative treatments to CABG surgery due to the disadvantages of CABG surgery, such as the failure rate of CABG surgery, or if additional alternative treatments for cardiovascular disease are developed, there may be a decrease in the number of CABG surgery procedures. The American College of Cardiology/American Heart Association treatment guidelines indicate that CABG is the recommended procedure to improve long-term survival in patients with coronary artery disease in their left main coronary artery or coronary artery disease in three or more coronary arteries.

 

Our eSVS Mesh is designed to improve the structural characteristics and long-term performance of vein grafts in CABG surgery. If our eSVS Mesh is proven to do so successfully, we believe physicians may more frequently choose to perform CABG surgery over alternative treatments. We expect that competition for our eSVS Mesh will come from other products or techniques to improve the effectiveness of vein grafts in CABG surgery and from the use of arteries as alternative conduits for CABG surgery.

 

 

We are aware of four companies that have, or are in the process of, developing support devices to be used on the outside of SVGs. Vascular Graft Solutions, or VGS, an Israeli company, is developing a product called the VEST expandable external support system which the company states, on its website, is designed to mitigate vein graft disease and improve the performance of vein grafts by preventing dilation, restraining wall tension and enhancing the diameter match of the vein graft used in CABG surgery. The Vest device received CE Mark approval in March 2013 and is commercially available in Europe. However, we are not aware of VGS publishing any clinical study results for the VEST device. Alpha Research, a Swiss company, has developed a product known as the Biocompound Graft for use in coronary and peripheral bypass operations. The product is a stainless steel braided mesh, indicated for use in coronary or peripheral bypass with patients who have irregularly shaped veins. B. Braun, a German company, has developed a product known as ProVena for use in peripheral bypass operations. The product is a woven polymer mesh, indicated for use in peripheral artery bypass operations using vein grafts.

 

We believe that Vascular Graft Solutions’ product is a direct competitor to our eSVS Mesh. We believe that the Alpha Research and B. Braun products are not currently direct competitors to our eSVS Mesh, and are not likely to become direct competitors in the near future, because the Biocompound Graft is intended for use only with irregularly shaped veins and the ProVena is intended for use with non-coronary procedures. However, it is possible that one or both of these companies, or other potential competitors, will seek approval to use these or similar devices for procedures with similar or identical indications for use as our eSVS Mesh.

 

A fourth company, Neograft Technologies, Inc., is developing a product named the Angioshield that it believes will serve as a structural, polymeric, support layer surrounding the vein that mechanically strengthens it against over-dilation from arterial pressure. We are not aware of Neograft conducting any pre-clinical or clinical studies with the Angioshield.

 

The key competitive factors affecting the success of our eSVS Mesh are likely to be the effectiveness, safety profile and price of our eSVS Mesh, as compared to existing methods for CABG surgery. We believe a potential disadvantage associated with our eSVS Mesh is the possibility of allergic reaction to the implant materials. According to a July 2009 article in the Journal of Invasive Cardiology, nickel allergy after implantation of a nitinol-containing device is rare. This article described the rate of nickel allergy in cardiovascular implants to be between 0.002% and 0.02%. The article also stated that the patients with nickel allergy symptoms responded to medical management at the time of the reaction, did not require device explant, and no longer require medications for the reaction. In order to safeguard against this rare occurrence, the eSVS Mesh instructions for use state that it is contraindicated for patients with a known allergy to nitinol. We believe another potential disadvantage associated with our eSVS Mesh is the possibility of damage to the saphenous vein during placement of our eSVS Mesh. If the physician does not select the proper size eSVS Mesh relative to the size of the vein graft, the SVG may be damaged while placing our eSVS Mesh over the vein graft. For example, if too small an eSVS Mesh is chosen, there could be damage to the SVG caused by stretching the vein graft while trying to place it inside our eSVS Mesh. We have provided specific directions in the eSVS Mesh instructions for use on how to properly size vein grafts and place vein grafts inside our eSVS Mesh. We provide a sizing tool with our eSVS Mesh to ensure proper vein graft sizing. The commercial success of our eSVS Mesh will depend upon the results of clinical trials of the eSVS Mesh and experience with the eSVS Mesh in the commercial marketplace.

 

In addition, if the commercialization of our eSVS Mesh technology is successful, we expect that other medical device companies, many of which are larger and have greater financial resources than we do, will seek to enter into this market by introducing competing technologies.

 

Manufacturing and Suppliers

 

We fabricate our eSVS Mesh both at our facility and at a contract manufacturer. We conduct final assembly and packaging inside a controlled environment area within our facility that satisfies the requirements of a Class 10,000 level clean room. We have implemented systems to ensure that our manufacturing operations comply with relevant U.S. and international Good Manufacturing Practices requirements.

 

 

We have vendors for all of our key components and outsourced processes. We have identified alternate suppliers for each key component and outsourced process; however, in some cases, components are provided by single source suppliers due to quality considerations, costs or regulatory requirements. We have established redundancy for custom equipment used in the manufacture of our eSVS Mesh. A third-party supplier performs sterilization services for our eSVS Mesh. We currently use four knitting machines that knit the mesh sleeve of our eSVS Mesh, with three located at our facility and the fourth located off-site. We believe that these four machines will produce sufficient quantities of our eSVS Mesh to meet our expected needs for the foreseeable future. In the event that one or all of our knitting machines were to become unavailable, we believe that we could obtain one or more replacement knitting machines, although the custom work required to enable the machines to produce our eSVS Mesh may result in some delays in our production process.

 

Research and Development

 

During 2013 and 2014, we incurred $3.1 million and $2.5 million, respectively, of research and development expenses. Research and development costs include the costs to design, develop, test, seek approval for, and enhance our eSVS Mesh and production process. Expenses related to research and development consist primarily of personnel costs, including salaries, benefits and stock-based compensation, product development, pre-clinical and clinical trials, professional service fees, materials and supplies, and facilities-related costs. While our research and development expenses in prior years have been incurred primarily on product development and evaluating the feasibility of our eSVS Mesh, costs incurred in support of our current trials comprise a significant percentage of our recent research and development expenses. We expect that costs incurred in support of our current and future clinical trials will continue to represent a significant percentage of our research and development expenses.

 

Employees

 

As of March 5, 2015, we had eight employees. We are currently focused on regulatory and clinical activities which further the clinical development of the eSVS Mesh and believe that our current staffing levels are sufficient for the near foreseeable future. However, in order to expand our clinical, research and development and/or commercialization activities, we would need to expand managerial, research and development and other functions. None of our employees is represented by a labor union, and we consider our relationship with our employees to be good.

 

Government Regulation

 

United States Medical Device Regulation

 

The Federal Food, Drug, and Cosmetic Act, or FDCA, and the FDA’s implementing regulations, govern medical device design and development, preclinical and clinical testing, pre-market clearance or approval, registration and listing, manufacturing, labeling, storage, advertising and promotion, sales and distribution, and post-market surveillance. Medical devices and their manufacturers are also subject to inspection by the FDA. The FDCA, supplemented by other federal and state laws, also provides civil and criminal penalties for violations of its provisions.

 

Our eSVS Mesh will require marketing authorization from the FDA prior to commercial distribution in the United States. The two primary types of FDA marketing authorization are pre-market notification (also called 510(k) clearance) and pre-market approval, or PMA. The type of marketing authorization applicable to a device—510(k) clearance or PMA—is generally linked to classification of the device. The PMA process is generally more stringent, time-consuming, lengthy and expensive than the 510(k) clearance process.

 

 

The FDA classifies medical devices into one of three classes, Class I, Class II or Class III, based on the degree of risk the FDA determines to be associated with a device and the extent of control deemed necessary to ensure the device’s safety and effectiveness. Devices requiring fewer controls because they are deemed to pose lower risk are placed in Class I or Class II. Class I devices are deemed to pose the least risk and are subject only to general controls applicable to all devices, such as requirements for device labeling, pre-market notification, and adherence to the FDA’s current Good Manufacturing Practice requirements, as reflected in its Quality System Regulation, or QSR. Class II devices are intermediate risk devices that are subject to general controls and may also be subject to special controls such as performance standards, product-specific guidance documents, special labeling requirements, patient registries or post-market surveillance. Class III devices are those for which insufficient information exists to assure safety and effectiveness solely through general or special controls, and include life-sustaining, life-supporting or implantable devices, and devices not ‘‘substantially equivalent’’ to a device that is already legally marketed.

 

Most Class I devices and some Class II devices are exempted by regulation from the 510(k) clearance requirement and can be marketed without prior authorization from the FDA. Class I and Class II devices that have not been so exempted are eligible for marketing through the 510(k) clearance pathway. By contrast, devices placed in Class III generally require PMA prior to commercial marketing. To obtain 510(k) clearance for a medical device, an applicant must submit a pre-market notification to the FDA demonstrating that the device is ‘‘substantially equivalent’’ to a predicate device legally marketed in the United States. A device is substantially equivalent if, with respect to the predicate device, it has the same intended use and (1) the same technological characteristics, or (2) has different technological characteristics and the information submitted demonstrates that the device is as safe and effective as a legally marketed device and does not raise different questions of safety or effectiveness. A showing of substantial equivalence sometimes, but not always, requires clinical data. Generally, the 510(k) clearance process can exceed 90 days and may extend to a year or more.

 

After a device has received 510(k) clearance for a specific intended use, any modification that could significantly affect its safety or effectiveness, such as a significant change in the design, materials, method of manufacture or intended use, will require a new 510(k) clearance or (if the device as modified is not substantially equivalent to a legally marketed predicate device) de novo or PMA approval. While the determination as to whether new authorization is needed is initially left to the manufacturer, the FDA may review this determination and evaluate the regulatory status of the modified product at any time and may require the manufacturer to cease marketing and recall the modified device until 510(k) clearance or de novo or PMA is obtained. The manufacturer may also be subject to significant regulatory fines or penalties.

 

If the FDA determines that a product does not qualify for 510(k) clearance, then the manufacturer would be required to make a submission for a de novo approval or a PMA before marketing can begin. The PMA process requires a manufacturer to provide clinical and laboratory data that establishes that the new device is safe and effective in an absolute sense as opposed to in a comparative sense as with a 510(k). The PMA can include post-approval conditions including, among other things, restrictions on labeling, promotion, sale and distribution, data reporting (surveillance), or requirements to do additional clinical studies post-approval. Even after approval of a PMA, a new PMA or PMA supplement is required to authorize certain modifications to the device, its labeling or its manufacturing process.

 

Another procedure for obtaining marketing authorization for a medical device is the “de novo classification” procedure, pursuant to which the FDA may authorize the marketing of a moderate to low risk device that has no predicate. These submissions typically require more information (i.e. non-clinical and/or clinical performance data) and take longer than a 510(k), but require less data and a shorter time period than a PMA approval. If the FDA grants the de novo request, the device is permitted to enter commercial distribution in the same manner as if 510(k) clearance had been granted, and the device becomes a 510(k) predicate for future devices seeking to call it a “predicate.”

 

The 510(k), de novo and PMA processes can be expensive, lengthy and sometimes unpredictable. The processes also entail significant user fees, unless exempt. The FDA’s 510(k) clearance process usually takes from six to 18 months, but may take longer if more data are needed. The de novo process can take one to two years or longer if additional data are needed. The PMA pathway is much more costly and uncertain than the 510(k) clearance process and it generally takes from one to five years, or even longer, from the time the application is filed with the FDA until an approval is obtained. The process of obtaining regulatory clearances or approvals to market a medical device can be costly, lengthy and unpredictable, and we may not be able to obtain these clearances or approvals on a timely basis, if at all.

 

 

Our coronary eSVS Mesh has been designated a Class III product by the FDA and will be required to go through the PMA process. Other indications of our eSVS Mesh, including peripheral and arteriovenous fistula applications, have not been classified at this time.

 

The FDA will require us to file a PMA application with respect to our eSVS Mesh and there is no assurance that PMA will be granted. PMA applications generally require the payment of significant user fees, and must establish reasonable assurance of safety and effectiveness and be supported by valid scientific evidence, which typically requires extensive data, including technical, preclinical, clinical and manufacturing data, to demonstrate to the FDA’s satisfaction the safety and effectiveness of the device. Small companies are not subject to user fees for the filing of their first PMA application. A PMA application also must include a complete description of the device and its components, a detailed description of the methods, facilities and controls used to manufacture the device, and proposed labeling. After a PMA application is submitted and found to be sufficiently complete, the FDA begins an in-depth review of the submitted information. During this review period, the FDA may request additional information or clarification of information already provided. Also during the review period, an advisory panel of experts from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. In addition, the FDA will conduct a pre-approval inspection of the manufacturing facility to ensure compliance with the QSR, which requires manufacturers to follow design, testing, control, documentation and other quality assurance procedures.

 

FDA review of a PMA application is required by statute to take no longer than 180 days, although the process typically takes significantly longer, and may require several years to complete, especially if the FDA asks for additional clinical or other data. The FDA can delay, limit or deny approval of a PMA application for many reasons, including:

 

 

the device may not be safe or effective to the FDA’s satisfaction;

 

 

the data from preclinical trials and clinical trials may be insufficient to support approval;

 

 

the manufacturing process or facilities used may not meet applicable requirements; and

 

 

changes in FDA approval policies or adoption of new regulations may require additional data.

 

If the FDA evaluations of both the PMA application and the manufacturing facilities are favorable, the FDA will either issue an approval letter, or an approvable letter, which usually contains a number of conditions that must be met in order to secure final approval of the PMA. When and if those conditions have been fulfilled to the satisfaction of the FDA, the agency will issue a PMA letter authorizing commercial marketing of the device for certain indications. If the FDA’s evaluation of the PMA application or manufacturing facilities is not favorable, the FDA will deny approval of the PMA application or issue a ‘‘not approvable’’ letter. The FDA may also determine that additional clinical trials are necessary, in which case the PMA may be delayed for several months or years while the additional trials are conducted and the data is later submitted in an amendment to the PMA application. The PMA process can be expensive, uncertain and lengthy and a number of devices for which FDA approval has been sought by other companies have never been approved for marketing. Even if a PMA application is approved, the FDA may approve the device with an indication that is narrower or more limited than originally sought. The agency can also impose restrictions on the sale, distribution, or use of the device as a condition of approval, or impose post-approval requirements such as continuing evaluation and periodic reporting on the safety, effectiveness and reliability of the device for its intended use.

 

New PMA applications or PMA supplements may be required for modifications to the manufacturing process, labeling, device specifications, materials or design of a device that is approved through the PMA process. PMA supplements often require submission of the same type of information as an initial PMA application, except that the supplement is limited to information needed to support any changes from the device covered by the original PMA application and may not require as extensive clinical data or the convening of an advisory panel.

 

 

Clinical trials are almost always required to support a de novo or PMA application and are sometimes required for a 510(k) clearance. These trials generally require submission of an application for an IDE to the FDA. The IDE application must be supported by appropriate data, such as animal and laboratory testing results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. The IDE application must be approved in advance by the FDA for a specified number of patients, unless the product is deemed a non-significant risk device and eligible for more abbreviated IDE requirements. Generally, clinical trials for a significant risk device may begin once the IDE application is approved by the FDA and the trial protocol and informed consent are approved by appropriate institutional review boards at the clinical trial sites.

 

FDA approval of an IDE allows clinical testing to go forward, however this approval only represents a determination that the study design has adequately protected the safety of trial subjects. Granting the IDE does not necessarily mean the FDA agrees that the study design will develop data sufficient to obtain the product approval sought. In addition, while the FDA will work with a sponsor to develop trial criteria that will, if successful, result in an approval, the IDE approval but does not bind the FDA to accept the results of the trial as sufficient to prove the product’s safety and effectiveness, even if the trial meets its intended success criteria. With certain exceptions, changes made to an investigational plan after an IDE is approved must be submitted in an IDE supplement and approved by the FDA (and by governing institutional review boards when appropriate) prior to implementation. All clinical trials must be conducted in accordance with regulations and requirements collectively known as Good Clinical Practice, or GCP. GCPs include the FDA’s IDE regulations, which describe the conduct of clinical trials with medical devices, including the recordkeeping, reporting and monitoring responsibilities of sponsors and investigators, and labeling of investigational devices. They also prohibit promotion, test marketing, or commercialization of an investigational device, and any representation that such a device is safe or effective for the purposes being investigated. GCPs also include the FDA’s regulations for institutional review board approval and for protection of human subjects (informed consent), as well as disclosure of financial interests by clinical investigators.

 

Required records and reports are subject to inspection by the FDA. The results of clinical testing may be unfavorable or, even if the intended safety and effectiveness success criteria are achieved, may not be considered sufficient for the FDA to grant approval or clearance of a product. The commencement or completion of a clinical trial may be delayed or halted, or be inadequate to support approval of a PMA application or clearance of a pre-market notification for numerous reasons, including, but not limited to, the following:

 

 

the FDA or other regulatory authorities do not approve a clinical trial protocol or a clinical trial (or a change to a previously approved protocol or trial that requires approval), or place a clinical trial on hold;

 

 

patients do not enroll in clinical trials or follow up at the rate expected;

 

 

institutional review boards and third-party clinical investigators may delay or reject a trial protocol or changes to a trial protocol;

 

 

third-party clinical investigators decline to participate in a trial or do not perform a trial on the anticipated schedule or consistent with the clinical trial protocol, investigator agreements, GCPs or other FDA requirements;

 

 

third-party organizations do not perform data collection and analysis in a timely or accurate manner;

 

 

regulatory inspections of clinical trials or manufacturing facilities, which may, among other things, require a manufacturer to undertake corrective action or suspend or terminate a clinical trial;

 

 

changes in governmental regulations or administrative actions;

 

 

the interim or final results of the clinical trial are inconclusive or unfavorable as to safety or effectiveness; and

 

 

the FDA concludes that the trial design is inadequate to demonstrate safety and effectiveness.

 

 

After a device is approved and placed in commercial distribution, numerous regulatory requirements apply. These include:

 

 

establishment registration and device listing;

 

 

the Quality System Regulation which requires manufacturers to follow design, testing, control, documentation and other quality assurance procedures;

 

 

labeling and claims regulations, which require that promotion is truthful, not misleading, fairly balanced and provide adequate directions for use and that all claims are substantiated, and also prohibit the promotion of products for unapproved or “off-label” uses and impose other restrictions on labeling;

 

 

FDA guidance on off-label dissemination of information and responding to unsolicited requests for information;

 

 

medical device reporting regulations, which require that manufacturers report to the FDA if a device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if malfunctions were to recur;

 

 

complaint handling regulations designed to track, monitor and resolve complaints related to products;

 

 

Part 806 reporting of certain corrections, removals, enhancements and recalls of products;

 

 

complying with the new federal law and regulations requiring Unique Device Identifiers (UDI) on devices and also requiring the submission of certain information about each device to the FDA’s Global Unique Device Identification Database (GUDID);

 

 

in some cases, ongoing monitoring and tracking of products’ performance and periodic reporting to the FDA of such performance results; and

 

 

corrections and removal reporting regulations, which require that manufacturers report to the FDA field corrections and product recalls or removals if undertaken to reduce a risk to health posed by the device or to remedy a violation of the FDCA caused by the device that may present a risk to health.

 

Also, the FDA may require a manufacturer to conduct post-market surveillance studies or order the establishment and maintenance of a system for tracking a product through the chain of distribution to the patient level. The FDA enforces regulatory requirements by conducting periodic, announced and unannounced inspections and market surveillance. Inspections may include the manufacturing facilities of subcontractors.

 

Failure to comply with applicable regulatory requirements, including those applicable to the conduct of our clinical trials, can result in enforcement action by the FDA, which may lead to any of the following sanctions:

 

 

warning letters or untitled letters;

 

 

fines and civil penalties;

 

 

unanticipated expenditures;

 

 

delays in clearing or approving or refusal to clear or approve products;

 

 

withdrawal or suspension of FDA approval;

 

 

product recall or seizure;

 

 

orders for physician notification or device repair, replacement, or refund;

 

 

production interruptions;

 

 

operating restrictions;

 

 

injunctions; and

 

 

criminal prosecution.

 

 

We and our contract manufacturers, specification developers and suppliers are also required to manufacture our eSVS Mesh in compliance with current Good Manufacturing Practice requirements set forth in the QSR. The QSR requires a quality system for the design, manufacture, packaging, labeling, storage, installation and servicing of marketed devices, and includes extensive requirements with respect to quality management and organization, device design, buildings, equipment, purchase and handling of components, production and process controls, packaging and labeling controls, device evaluation, distribution, installation, complaint handling, servicing and record keeping. The FDA enforces the QSR through periodic announced and unannounced inspections that may include the manufacturing facilities of our subcontractors. If the FDA believes that we or any of our contract manufacturers or regulated suppliers is not in compliance with these requirements, it can shut down our manufacturing operations, require recall of our eSVS Mesh, refuse to clear or approve new marketing applications, institute legal proceedings to detain or seize products, enjoin future violations, or assess civil and criminal penalties against us or our officers or other employees. Any such action by the FDA would have a material adverse effect on our business.

 

Fraud and Abuse

 

Our operations will be directly, or indirectly through our customers, subject to various U.S. federal and state fraud and abuse laws, including, without limitation, the FDCA, the federal Anti-Kickback Statute and the False Claims Act, as well as many similar state statutes. These laws may impact, among other things, our proposed sales, marketing and education programs. These laws are administered by, among others, the U.S. Department of Justice, the Office of Inspector General of the Department of Health and Human Services and state attorneys general. Many of these agencies have increased their enforcement activities with respect to medical device manufacturers in recent years. Violations of these laws are punishable by criminal and/or civil sanctions, including, in some instances, fines, imprisonment and exclusion from participation in federal government healthcare programs, including Medicare, Medicaid and Veterans Administration (VA) health programs. In addition, these laws require us to screen individuals and other companies, suppliers and vendors in order to ensure that they are not “debarred” by the federal government and therefore prohibited from doing business in the healthcare industry. The association or conduct of business with a “debarred” entity could be detrimental to our operations and result in a negative impact on our business. We are also subject to the U.S. federal Physician Payments Sunshine Act and various state laws on reporting remunerative relationships with healthcare customers.

 

The federal Anti-Kickback Statute prohibits persons from soliciting, offering, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing or arranging for a good or service, for which payment may be made under a federal healthcare program such as the Medicare and Medicaid programs. Several courts have interpreted the statute’s intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered business, the statute has been violated. The Anti-Kickback Statute is broad and prohibits many arrangements and practices that are lawful in businesses outside of the healthcare industry. Many states have also adopted laws similar to the federal Anti-Kickback Statute, some of which apply to the referral of patients for healthcare items or services reimbursed by any source, not only the Medicare and Medicaid programs.

 

The federal False Claims Act prohibits persons from knowingly filing or causing to be filed a false claim to, or the knowing use of false statements to obtain payment from, the federal government. States have also enacted laws modeled after the federal False Claims Act. The False Claims Act allows fines of up to $11,000 per claim plus treble, or triple, damages. The False Claims Act is often used by the federal government to address inappropriate upcoding, miscoding, “stretched” reimbursement coding, the use of inappropriate modifiers or encouraging use in inappropriate care settings, i.e. in-patient versus outpatient, and when reimbursement is sought for use in unapproved (off-label) uses of a device. The reimbursement coding advice medical device companies give cannot be inaccurate.

 

We are also subject to various U.S. federal and state laws that protect the confidentiality of certain patient health information, including patient medical records, and restrict the use and disclosure of patient health information by healthcare providers, such as the Health Insurance Portability and Accountability Act of 1996, or HIPAA. In addition to the laws described above, HIPAA created two new federal crimes: healthcare fraud and false statements relating to healthcare matters. The healthcare fraud statute prohibits knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private payors. The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services.

 

 

Voluntary industry codes, federal guidance documents and a variety of state laws address the tracking and reporting of marketing practices relative to gifts given and other expenditures made to doctors and other healthcare professionals. In addition to impacting our marketing and educational programs, internal business processes will be affected by the numerous legal requirements and regulatory guidance at the state, federal and industry levels. In 2010, Congress enacted a statute commonly known as the Sunshine Act, as part of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010. The Sunshine Act aims to promote transparency and requires manufacturers of drugs, medical devices, biologicals and medical supplies covered by Medicare, Medicaid or the Children’s Health Insurance Program to report annually to CMS any payments or other transfers of value made to physicians and teaching hospitals, with limited exceptions. Manufacturers must also disclose to CMS any physician ownership or investment interests. Failure to comply with the reporting requirement may result in substantial penalties.

 

If our operations are found to be in violation of any of the laws described above or other applicable U.S. federal and state fraud and abuse laws, we, as well as our employees, may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from government healthcare programs, and the curtailment or restructuring of our operations. Individual employees may need to defend such suits on behalf of us or themselves, which could lead to significant disruption in our present and future operations. We cannot assure you that we will be able to comply with the above laws and regulations.

 

European Medical Device Regulation

 

The European Union has adopted directives and numerous standards that govern and harmonize the national laws and standards regulating the design, manufacture, clinical trials, labeling, adverse event reporting and post-market surveillance activities for medical devices that are marketed in member states.

 

Compliance with voluntary harmonized standards including ISO 13485 issued by the International Organization for Standards establishes the presumption of conformity with the essential requirements for a CE Mark. ISO certification is commonly a pre-requisite to use of the CE Mark and indicates that a quality system complies with standards applicable to activities ranging from initial product design and development through production and distribution.

 

Devices that comply with the requirements of a relevant directive will be entitled to bear the CE Mark and, accordingly, can be commercially distributed throughout the member states of the European Union, and other countries that comply with or have adopted these directives. The method of assessing conformity varies depending on the type and class of the product, but typically involves a combination of self-assessment by the manufacturer and a third-party assessment by a “Notified Body,” an independent and neutral institution appointed to conduct conformity assessment. This third-party assessment consists of an audit of the manufacturer’s quality system and technical review of the manufacturer’s product. For most classes of medical devices, an assessment by a Notified Body residing within the European Union is required in order for a manufacturer to commercially distribute the product throughout the European Union. The manufacturer’s assessment will include a clinical evaluation of the conformity of the device with applicable regulatory requirements, which for our eSVS Mesh will include clinical study results. The clinical data presented by us must provide evidence that the products meet the performance specifications claimed by us, provide sufficient evidence of adequate assessment of unwanted side effects and demonstrate that the benefits to the patient outweigh the risks associated with the device. We are subject to continued surveillance by the Notified Body and are required to report any serious adverse incidents to the appropriate authorities of the European Union member states.

 

Products intended for sale must bear the CE mark to show compliance with the Medical Devices Directive, or MDD. If a Notified Body is involved in the approval, the number of the Notified Body must also appear adjacent to the CE Mark.

 

 

The routes to compliance under the MDD depend on the classification of the product:

 

 

Class I devices are low risk, such as stethoscopes, hospital beds and wheelchairs. The manufacturer must produce a technical file, including product test results compared to relevant standards. In addition, manufacturers of sterile products and devices with a measuring function must apply to a Notified Body for certification of the aspects of manufacture relating to sterility or measurement.

 

 

Class IIa devices are low to medium risk, such as hearing aids, electrocardiographs and ultrasonic diagnostic equipment. As with Class I devices, the manufacturer produces a technical file, but a conformity assessment must be carried out by a Notified Body, according to one of the following routes, at the manufacturer’s option:

 

 

o

examination and testing of each product or homogenous batch of products;

 

 

o

audit of the full quality assurance system;

 

 

o

audit of the production quality assurance system; or

 

 

o

audit of final inspection and testing.

 

 

Class IIb devices are medium-high risk devices, such as surgical lasers, infusion pumps, ventilators, intensive care monitoring equipment and many implantable devices. Routes to compliance are the same as for Class IIa devices, with the addition of required examination and testing of the product by the Notified Body; however, the full quality assurance route does not require type examination and testing.

 

 

Class III devices are high risk, such as balloon catheters and prosthetic heart valves. Our eSVS Mesh is classified as a Class III device. Routes to compliance are:

 

 

o

audit of the full quality assurance system and examination of a design dossier by the Notified Body. A design dossier is a submission similar to a PMA application with the FDA; or

 

 

o

examination and testing of the product, together with audit of the production quality assurance system.

 

We have obtained CE Mark approval to market our eSVS Mesh in the European Union and other countries that accept the CE Mark.

 

Third Party Coverage and Reimbursement

 

The availability of insurance coverage and reimbursement for newly approved medical devices is variable. The commercial success of our eSVS Mesh in both the United States and international markets will be substantially dependent on whether third-party coverage and reimbursement is available for patients receiving bypass grafts with our eSVS Mesh. Medicare, Medicaid, health maintenance organizations and other third-party payors are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement of new medical devices, and, as a result, they may not cover or provide additional payment for our eSVS Mesh. In order to position our device for coverage by third-party payors, we may have to agree to a lower net sales price than we might otherwise charge. The continuing efforts of governmental and commercial third-party payors to contain or reduce the costs of healthcare may limit our sales.

 

In many countries, including the United States, third-party payors consist of both government funded insurance programs and private insurance programs that cover a significant portion of a patient’s medical expenses. The trends toward managed healthcare in the United States and legislation intended to reduce the cost of government insurance programs will significantly influence the purchase of healthcare services and products, and could result in lower or no reimbursement for our eSVS Mesh. Even before reimbursement may be obtained for our eSVS Mesh in the United States, FDA approval will be required.

 

 

Providers have sought ways to manage costs, such as through the use of group purchasing organizations. It is our belief that the planned economic benefits provided by our eSVS Mesh to physicians and hospitals through lower revascularization costs (PCI and/or CABG) will be viewed by providers and third-party payors as cost-effective. However, there remains uncertainty regarding whether our eSVS Mesh will be viewed positively in a cost-avoidance model so as to warrant adequate coverage and reimbursement levels.

 

Outside of the United States, there are many reimbursement programs through private payors as well as government programs. In some countries, government reimbursement is the predominant program available to patients and hospitals. While the majority of countries have existing reimbursement for CABG procedures and products, a number of countries may require us to gather additional clinical data before recognizing coverage and reimbursement for our eSVS Mesh. It is our intent to complete the requisite clinical trials and obtain coverage and reimbursement approval in countries where it makes economic sense to do so.

 

European Union

 

Our reimbursement strategy for certain key European markets that we intend to initially pursue are briefly outlined below:

 

 

France. Initial sales of our eSVS Mesh in France likely will be in the private sector. Concurrently, we plan to conduct post-market studies intended to support the cost effectiveness of the device. These post-market studies will focus on the cost savings of decreased revascularization procedures versus the cost of the device in order to justify device cost. We expect that our distributors, on our behalf, will then submit this analysis to the French reimbursement evaluation committee to list our eSVS Mesh on the reimbursement list applicable to France.

 

 

Germany. In advance of, or while awaiting a Diagnosis-Related Group (“DRG”) code, a company can apply for a ‘‘Neue Untersuchungs und Behandlungsmethode’’ (‘‘NUB’’). This NUB allows payment for a new device or technology during the period in which the device or technology is used prior to placement into a DRG. The German reimbursement authority reviews NUB applications annually, publishing its decisions before March of each calendar year. Our most recent application was reviewed and denied with our eSVS Mesh technology being categorized as ‘‘not meeting the requirements for NUB reimbursement.’’ While approval of the NUB would have allowed for specific German hospitals to apply for eSVS Mesh reimbursement, we believe that customers interested in purchasing the eSVS Mesh can still do so by securing internal funding from discretionary budgets within the hospital. We have received an “OPS” code which, effective January 1, 2014, allows the German health system to track usage of the eSVS Mesh during CABG procedures. The ultimate goal being a decision by the German health systems to either institute a new reimbursement for the eSVS Mesh or adjust the existing reimbursement codes for CABG surgery to cover the cost of the eSVS Mesh.

 

 

Italy. Initially, we expect that our distributors will sell our eSVS Mesh in the private sector in Italy and concurrently attempt to fit our eSVS Mesh into an existing DRG code. If this is not effective in gaining public reimbursement, we expect that our distributors, on our behalf, may apply for a new DRG for our eSVS Mesh, utilizing the post-market study cost effectiveness data.

 

 

Spain. Initially, we expect that our distributors will sell our eSVS Mesh in the private sector in Spain and concurrently attempt to fit our eSVS Mesh into an existing DRG code. If this is not effective in gaining public reimbursement, we expect that our distributors, on our behalf, may apply for a new DRG for our eSVS Mesh, utilizing post-market study cost effectiveness data.

 

 

United Kingdom. Initially, we expect that our distributors will sell our eSVS Mesh in the private sector in the UK, then attempt to fit our eSVS Mesh into an existing DRG code. If this is not effective in gaining public reimbursement, we expect that our distributors, on our behalf, may apply for a new DRG for our eSVS Mesh, utilizing post-market study cost effectiveness data.

 

 

Switzerland. Initially, we expect that our distributors will sell our eSVS Mesh in the private sector in Switzerland and concurrently attempt to fit our eSVS Mesh into an existing DRG code. We have received a “CHOP” code which, effective January 1, 2014, allows the Swiss health system to track usage of the eSVS Mesh during CABG procedures. The ultimate goal being a decision by the Swiss health systems to either institute a new reimbursement for the eSVS Mesh or adjust the existing reimbursement codes for CABG surgery to cover the cost of the eSVS Mesh.

 

 

United States

 

In the United States, governmental and private sector payors have instituted initiatives to limit the growth of healthcare costs, using, for example, price regulation or controls and competitive pricing programs. Some third-party payors require pre-approval of coverage for new or innovative devices or therapies before they will reimburse healthcare providers who use such devices or therapies.

 

In the United States, CMS is the government entity responsible for oversight of the Medicare program. Medicare establishes coverage and reimbursement policies at a federal and local level for medical products and procedures, and such policies are periodically reviewed and updated. While private payors vary in their coverage and payment policies, the Medicare program is viewed as a benchmark.

 

There are established codes for CABG procedures and products that are payable for both Medicare and commercial payors. There are no assurances that our eSVS Mesh technology would fall under existing policies or reimbursement codes. There are also no assurances that existing payment rates for such reimbursement codes will continue to hold at the current levels, such as if regulatory changes are implemented regarding the methodology for calculating hospital payments for current inpatient procedures.

 

Medicare reimburses hospital inpatient stays under the Medicare Severity Diagnosis-Related Group (MS-DRG) system. The MS-DRG system assigns individual cases to an MS-DRG according to the patient’s diagnoses, the procedures performed, and the severity of a patient’s condition as identified by the presence or absence of complications and comorbidities, or CCs, or major CCs, or MCCs. MS-DRGs provide a single bundled payment which serves as reimbursement for all items and services provided to the Medicare beneficiary during a single hospitalization.

 

Additionally, a relative weight is calculated for each individual MS-DRG, which represents the average resources required to care for cases within a particular MS-DRG relative to the average resources required to treat cases in all MS-DRGs. Generally, MS-DRG relative weights are adjusted annually to reflect changes in medical practice in a budget neutral manner.

 

CMS has made no decisions with respect to MS-DRG assignment for patients who undergo CABG procedures in which our eSVS Mesh would be used, and there can be no assurance that the MS-DRG to which such patients will be assigned will result in Medicare payment levels that are considered by hospitals to be adequate to further support purchase of our eSVS Mesh. Under current CMS reimbursement policies, the agency offers a process to obtain add-on payment for a new medical technology when the existing MS-DRG prospective payment rate is inadequate. To obtain add-on payment, a technology must be considered “new,” demonstrate substantial improvement above the current standard of care and exceed certain payment thresholds. Add-on payments are made for no less than two years and no more than three years. Following FDA approval in the United States, we intend to pursue an application for a hospital inpatient new technology add-on payment with CMS. We must demonstrate the safety and effectiveness of our eSVS Mesh to the FDA in addition to the CMS requirements listed above before add-on payments will be approved. Should the clinical trial results or peer-reviewed publications prove that use of our eSVS Mesh results in a lowering of revascularization rates, we believe there is a reasonable chance that CMS will grant our request. If CMS grants our request, we expect it will approve an add-on payment equal to 50% of the cost of labor and materials incurred. We do not expect that failure to receive approval for an add-on payment would have an adverse impact on our business because existing MS-DRGs already reimburse CABG procedures at a high level, and we believe that physicians and hospitals would be willing to use our eSVS Mesh even if an add-on payment is not approved.

 

 

For reporting of physician services, the American Medical Association, or AMA, has developed a coding system known as Current Procedural Terminology, or CPT. CPT codes are established by the AMA and statutorily adopted by all government and commercial payors to describe and develop payment amounts for physician services. Physician services are reimbursed by Medicare based on a physician fee schedule whereby payment is based generally on the number of “relative value units” assigned by the AMA to each CPT code. No decision has been made concerning whether existing CPT codes would be appropriate for use in coding CABG procedures when our eSVS Mesh is used or if separate, new CPT codes are required. We cannot assure you that codes used for submitting claims for CABG procedures using our eSVS Mesh will result in incremental payment to physicians. Failure by physicians to receive what they consider to be adequate reimbursement for CABG procedures in which our eSVS Mesh is used could harm our business, financial condition and results of operations.

 

Available Information

 

We were incorporated in the state of Delaware on May 1, 2007. Our principal executive offices are located at 3405 Annapolis Lane North, Suite 200, Minneapolis, Minnesota 55447. Our telephone number is (763)-235-3540. Our website is located at www.KipsBayMedical.com. The information contained on or connected to our website is not a part of this report. We have included our website address as a factual reference and do not intend it to be an active link to our website.

 

We make available, free of charge and through our Internet web site, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to any such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC). Reports filed with the SEC may be viewed at www.sec.gov or obtained at the SEC Public Reference Room in Washington, D.C. Information regarding the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.

 

Executive Officers of the Registrant

 

The name, age and position of each of our executive officers as of March 5, 2015 are as follows:

 

Name

 

Age

 

Position

Manny Villafaña

 

74

 

Chairman of the Board and Chief Executive Officer

Scott Kellen

 

49

 

Chief Operating Officer, Chief Financial Officer and Secretary

Randall LaBounty

 

52

 

Vice President of Regulatory and Clinical Affairs

 

Manny Villafaña is our founder, and has been our Chairman of the Board and Chief Executive Officer since our inception in 2007. Prior to founding us and since 1999, Mr. Villafaña founded and served as Chairman of the Board and Chief Executive Officer of CABG Medical, Inc., formed to develop an artificial coronary graft for use in bypass surgery. From 1987 to 2004, Mr. Villafaña founded and served as Chairman of the Board and Chief Executive Officer of ATS Medical, Inc., which developed open-pivot mechanical heart valves. ATS Medical was subsequently acquired by Medtronic, Inc. From 1976 to 1982, Mr. Villafaña founded and served as President and Chairman of the Board of St. Jude Medical, Inc. From 1972 to 1976, Mr. Villafaña founded and served as President and Chairman of the Board of Cardiac Pacemakers, Inc., or CPI, a cardiac rhythm management company. CPI was ultimately acquired by Eli Lilly and Company, which spun out CPI as Guidant Corporation. Guidant was, in turn, purchased by Boston Scientific Corporation.

 

Mr. Villafaña has received numerous awards and honors, including the “Living Legend of Medicine” award from the International Society of Cardio Thoracic Surgeons, the Ellis Island Medal of Honor, the Grand Prize Recipient—Mediterranean Institute of Cardiology, the Ernst & Young LLP National Master Entrepreneur of the Year, the Boys and Girls Club of America Hall of Fame, induction into the Minnesota Business Hall of Fame and, in 2010, induction into the Minnesota Science and Technology Hall of Fame. In recognition of his many accomplishments, in May 2014 the University of Iowa bestowed on Mr. Villafaña an honorary Doctor of Science degree.

 

 

Scott Kellen joined us as Chief Financial Officer, Vice President of Finance, and Secretary in February 2010, and became our Chief Operating Officer in March 2012. Mr. Kellen served as Director of Finance from 2007 to 2009 and Chief Financial Officer from February 1, 2009 to May 1, 2009 for Transoma Medical, Inc., including during the preparation of its proposed initial public offering, which was withdrawn in February 2008 due to deteriorated market conditions. From 2005 to 2007, Mr. Kellen served as the Corporate Controller for ev3 Inc. during the company’s initial public offering and during additional follow-on offerings. From 2003 to 2005, Mr. Kellen served as Senior Audit Manager of Deloitte & Touche, LLP (now Deloitte LLP), providing auditing and consulting services to mid-size public companies. Mr. Kellen has spent almost 20 years in the medical device industry, serving early stage and growth companies that produced Class II and Class III devices. Mr. Kellen began his career with Deloitte & Touche in 1987. Mr. Kellen received a Bachelor of Science degree in Business Administration from the University of South Dakota and is a Certified Public Accountant, inactive.

 

Randall LaBounty joined us in May 2011 as our Vice President of Regulatory and Clinical Affairs. Mr. LaBounty has over 20 years of experience in medical device research with 16 years of experience in cardiovascular medical devices. Prior to joining us, Mr. LaBounty served as Vice President of Clinical Research at Osprey Medical, Inc., a company focused on preventing contrast-induced chronic kidney diseases in patients, from 2010 to 2011 and Vice President of Clinical and Regulatory Affairs at Lumen Biomedical, Inc. from 2005 to 2010. He has also held director-level positions at Atritech, Inc., ev3 Inc. and IntraTherapeutics, Inc. Mr. LaBounty has extensive experience with Class II and Class III medical products. He has been involved in all phases of the medical device approval process including the development of clinical and regulatory strategies, clinical trial execution, obtaining FDA IDEs, PMAs and 510(k) submissions. Internationally, he has successfully brought medical devices from initial clinical trials through to CE Mark approval. Mr. LaBounty has a Master of Science degree in Biostatistics and Bachelor of Science degree in Genetics and Cell Biology from the University of Minnesota.

 

Forward-Looking Statements

 

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created by those sections. In addition, we or others on our behalf may make forward-looking statements from time to time in oral presentations, including telephone conferences and/or web casts open to the public, in press releases or reports, on our Internet web sites or otherwise. All statements other than statements of historical facts 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, results of operations and business. In some cases, you can identify forward-looking statements by the following words: “believe,” “may,” “could,” “would,” “might,” “forecast,” “possible,” “potential,” “project,” “will,” “should,” “expect,” “intend,” “plan,” “predict,” “anticipate,” “estimate,” “approximate” or “continue,” or the negatives 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 the clinical development of our eSVS Mesh, the uses for and benefits of our eSVS Mesh, outlook for our industry and our markets, the timing of, strategy and expectations for regulatory approvals, reimbursement and product introductions and commercialization, levels of and use of research and development and SG&A expenditures, commencement, design, enrollment rate and cost of preclinical and clinical trials, intellectual property protection, future competition, adequacy of our manufacturing and supply operations, stock price and volatility expectations, dividend expectations, our expectations regarding future losses, future expenses and future financing, future tax benefits, use of proceeds from our January 2014 public offering, non-cash compensation expense expectations, future sales levels, the adequacy of our capital resources to fund future expenditures, 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. Forward-looking statements may be contained in the notes to our financial statements and elsewhere in this report, including under the heading “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

 

We caution readers not to place undue reliance on any forward-looking statement that speaks only as of the date made and to recognize that forward-looking statements are predictions of future results, which may not occur as anticipated. Actual results could differ materially from those anticipated in the forward-looking statements and from historical results, due to the risks and uncertainties described under the heading “Item 1A. Risk Factors” below, as well as others that we may consider immaterial or do not anticipate at this time. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we do not know whether our expectations will prove correct. Our expectations reflected in our forward-looking statements can be affected by inaccurate assumptions that we might make or by known or unknown risks and uncertainties, including those described below under the heading “Item 1A. Risk Factors.” The risks and uncertainties described under the heading “Item 1A. Risk Factors” below 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 forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements. We advise stockholders and investors to consult any further disclosures we may make on related subjects in our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K that we file with or furnish to the SEC.

 

Item 1A.     Risk Factors

 

You should carefully consider the following information about risks, together with the other information contained in this report before making an investment in our common stock. If any of the circumstances or events described below actually arises or occurs, our business, results of operations, cash flows and financial condition could be harmed.

 

Risks Related to Our Business and Strategy

 

We have a limited operating history, expect future losses, and may be unable to achieve or maintain profitability.

 

We were founded on May 1, 2007 and to date have engaged primarily in the development of and initial clinical trials of our eSVS Mesh. Accordingly, we have a limited operating history on which to base an evaluation of our business and prospects. As of December 31, 2014, we had an accumulated deficit of $41.5 million. We have incurred net losses in each year since our inception, and we expect to continue to incur operating losses for the foreseeable future. These losses, among other things, have had and will continue to have an adverse effect on our stockholders’ equity and working capital. Because of the numerous risks and uncertainties associated with developing medical devices, we are unable to predict the extent of any future losses or when we will become profitable, if at all. To date, we have not generated sufficient product sales to fund our operations and we have financed our operations and internal growth primarily through public common stock offerings completed in January 2014, December 2012 and February 2011 and private placements of equity securities and convertible promissory notes. We may not be successful in addressing the risks we will encounter, and our failure to do so would likely harm our business and our ability to continue to operate.

 

If the data from our current eMESH I clinical feasibility trial is not positive enough for us to proceed with our planned pivotal trial, we likely will cease operations and liquidate our company, which will likely result in our stockholders losing their entire investment in our company.

 

We are currently conducting a feasibility trial for the 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 and to support a future pivotal trial. The pivotal study is required to demonstrate clinical effectiveness and support a premarket approval application filing with the FDA seeking approval to sell the 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.

 

 

In March 2014, the FDA approved a combination of changes in the application of the eSVS Mesh to the SVG and to the surgical implant technique for the eSVS Mesh treated graft. These changes were based upon our consultations with medical advisors and several of the cardiac surgeons participating in the eMESH I clinical feasibility trial and our initial review of early results from the eMESH I trial. The changes are intended to reduce the variables in the study and the risk of early graft occlusion. We also believe these changes will simplify the process of applying and implanting the eSVS Mesh thereby reducing procedural costs. No assurance can be provided, however, that these changes will reduce the variables in the study and the risk of early graft occlusion or that the feasibility trial for the FDA will be successful. Due to our concern that the results of our feasibility trial prior to the change in the implant technique would not be adequate to allow us to obtain an IDE to perform a pivotal study and based upon our discussions with the FDA, we believe that the success of the feasibility trial is completely dependent upon the results from patients implanted with the eSVS Mesh using the new implant technique. Since enrollment using the new implant technique did not commence in earnest until October 2014, we do not expect to receive a meaningful number of follow-up angiographic results from the new implant technique patients until May or June 2015.

 

Enrollment in the eMESH I clinical feasibility trial has reached our targeted goal of 45 to 50 patients treated with the new surgical technique. As of March 5, 2015, 105 patients have been enrolled in the feasibility trial, including 49 patients enrolled with the new technique. No assurance can be provided that our eMESH I clinical feasibility trial will be successful, that the FDA will approve an IDE for a pivotal study or that once these studies are concluded, we will receive U.S. marketing approval for the eSVS Mesh. If these events do not occur, we may be forced to cease operations since we do not have any other products in development. In addition, we will need additional financing to continue our operations, and in particular, to complete our eMESH I clinical feasibility trial. If we do not receive such additional financing, we may be forced to cease operations and liquidate our company. If a decision is made to cease operations and liquidate our company our stockholders likely will lose their entire investment in our company.

 

Our data from our clinical trials may not be sufficient for us to proceed with our planned filing of our pre-market application for regulatory approval in the United States or application for regulatory approval in other major markets, which could delay or curtail our ability to commercialize our eSVS Mesh and could curtail our ability to remain in business.

 

Our time and financial resources since our inception have largely been devoted to the development of our eSVS Mesh. We are currently conducting a feasibility trial for the FDA. If the data from our eMESH I clinical feasibility trial is not adequate, we may not proceed with our planned future pivotal trial and the future filing of our pre-market application for regulatory approval in the United States or for regulatory approvals in other major markets in which the application is dependent upon us having received regulatory approval from the United States, or we may be forced to delay these filings. Even if we file an application for approval with favorable clinical data, the FDA or foreign regulatory authorities may not accept our filing, or may request additional information, including data from additional clinical trials. No assurance can be provided that our current feasibility trial or our anticipated larger pivotal trial will be successful, or that once these studies are concluded, we will ever receive U.S. marketing approval for our eSVS Mesh. 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. If our current feasibility trial or our anticipated larger pivotal trial is not successful, we may need to consider other strategic alternatives, including ceasing our operations and liquidating our company. If a decision is made to cease operations and liquidate our company, our stockholders likely will lose their entire investment.

 

 

The results of our initial human trial were inconclusive with respect to the efficacy of our eSVS Mesh and if we are unable to conclusively demonstrate the efficacy of our eSVS Mesh through additional human trials, including our current feasibility trial or anticipated future pivotal trial, we may be unable to commercialize our eSVS Mesh in the United States or other major markets or may experience significant delays in doing so.

 

We have only completed one prospective, randomized, human clinical trial of 90 patients for our eSVS Mesh, which was conducted outside of the United States. The safety data from this trial has indicated that our eSVS Mesh and implant procedure do not result in an increase in patient complications during or in the 30 days after surgery. However, the effectiveness data from the trial is inconclusive primarily due to two complicating factors. First, one of the centers participating in the trial used implant methods incompatible with our eSVS Mesh. Second, the amount of reduction in the diameter of the saphenous vein grafts, or downsizing, prescribed in our instructions for use and sizing tool was too aggressive, resulting in a higher than anticipated closure rate in saphenous vein grafts, or SVGs, utilizing our eSVS Mesh, particularly when our smallest device, 3.0 millimeters, was used. As a result, based on angiographic studies nine to 12 months following surgery, 49% (36 of 73) of the eSVS Mesh vessels were patent, or open, and 81% (59 of 73) of the untreated vessels were patent.

 

No assurance can be provided that our current feasibility trial or our anticipated larger pivotal trial will be successful, or that once these studies are concluded, we will ever receive U.S. marketing approval for our eSVS Mesh. Due to our concern that the results of our feasibility trial prior to the change in the implant technique would not be adequate to allow us to obtain an IDE to perform a pivotal study and based upon our discussions with the FDA, we believe the success of the feasibility trial is entirely dependent upon the performance of our eSVS Mesh in the new technique patients. 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, 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. 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. If our current feasibility trial or our anticipated larger pivotal trial is not successful, we may need to consider other strategic alternatives, including ceasing operations and liquidating our company. If a decision is made to cease operations and liquidate our company, our stockholders likely will lose their entire investment in our company.

 

Our sales of the eSVS Mesh to date have been limited and we expect sales to continue to be limited until additional positive clinical study data is available.

 

Our sales of the eSVS Mesh to date have been limited and we do not expect them to increase in the near future, especially since we have focused our efforts on clinical activities and not sales activities. Our net sales for the full year 2014 were $84,000 compared to $130,000 for the full year 2013. We believe that our sales have been adversely impacted by the limited amount of clinical data on the performance of the eSVS Mesh, limited reimbursements available to hospitals and the effects of budget difficulties in certain European countries. We do not expect our sales to be other than limited until additional positive clinical study data is available. If we do not receive additional positive clinical study data, then we may need to cease our sales activities and consider other strategic alternatives, including ceasing operations and liquidating our company.

 

We anticipate future losses and likely will require additional financing. Our failure to obtain additional financing when needed could force us to delay, reduce or eliminate our product development programs or commercialization efforts.

 

We expect to continue to incur losses for the foreseeable future and to require future additional financing in order to satisfy our capital requirements. In particular, we will need additional capital in order to continue to conduct the research and development and obtain regulatory clearances and approvals necessary to bring our eSVS Mesh to market in the United States and any future products to market and to establish effective marketing and sales capabilities for our eSVS Mesh or any future products. We believe our cash, cash equivalents and short-term investments as of December 31, 2014 will be sufficient to fund our planned operations through December 2015. However, we may require significant additional funds earlier than we currently expect in order to continue our feasibility trial for the FDA and plan for and conduct our anticipated larger pivotal trial.

 

 

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 is particularly true if investors are not confident in the future value of our company, the continued trading of our common stock on the OTCQB marketplace of the OTC Markets Group and/or economic and market conditions deteriorate. If adequate funds are not available on a timely basis, we may terminate or delay the further development of our eSVS Mesh and terminate commercial sales of the eSVS Mesh. If we terminate the commercialization of our eSVS Mesh, Medtronic, Inc. may cause the core intellectual property and patent rights related to our eSVS Mesh to revert to Medtronic. If the core intellectual property and patent right related to our eSVS Mesh revert to Medtronic or if we terminate the development of our eSVS Mesh, we may be forced to explore other strategic alternatives, such as selling or merging our company or ceasing operations and liquidating our company. In such case, our stockholders could lose some or all of their investment in our company.

 

Our future capital requirements will depend on many factors, including, but not limited to:

 

 

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

 

 

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 commercial operations, including selling and marketing efforts; and

 

 

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

 

To the extent that we raise additional capital through the sale of additional equity or convertible debt securities, the ownership interests of our stockholders could be diluted, and the terms may include liquidation or other preferences that adversely affect their rights as stockholders. If we issue preferred stock, it could affect the rights of our stockholders or reduce the value of our common stock. In particular, specific rights granted to future holders of preferred stock 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 product development 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, one of our principal stockholders, 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 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, 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 or consider other strategic alternatives, including ceasing our operations and liquidating our company.

 

We recently streamlined and scaled back our operations to focus our efforts and resources on regulatory and clinical activities which further the clinical development of the eSVS Mesh and to position us to limit our non-clinical operating expenses . This scale back, including in particular the termination of our sales personnel, may harm our business.

 

On January 5, 2015, we announced that we streamlined and scaled back our operations to focus our efforts and resources on regulatory and clinical activities which further the clinical development of the eSVS Mesh. As part of this reorganization, we reduced our personnel from thirteen to eight employees. These reductions included our two sales directors, two administrative positions and one operations position. In addition, our officers agreed to accept temporary salary reductions. We believe that these actions will reduce our monthly cash operating expenses, excluding costs related to our eMESH I clinical feasibility trial, to approximately $200,000. This scale back, including in particular the termination of our sales personnel, may harm our business, especially if we are unable to ramp up if needed in the future and unable to find a sufficient number of qualified personnel at that time. In addition, this scale back, including the temporary salary reductions, may cause us to lose personnel, which may harm our business.

 

If we are unable to commercialize our eSVS Mesh in the United States or other major markets or experience significant delays in doing so, our ability to generate sales will be significantly delayed and our business will be harmed.

 

If we are unable to demonstrate with human clinical data that our eSVS Mesh is safe and improves the long-term patency of SVGs as compared to traditional CABG surgery, we will be unable to obtain regulatory approval for, or successfully commercialize, our eSVS Mesh. 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.

 

Even if we receive regulatory approval, our eSVS Mesh may only be approved for very limited purposes with many restrictions on its use. Such restrictions would limit our ability to successfully commercialize our eSVS Mesh and our ability to generate sales would be significantly impaired.

 

Even if we receive regulatory approval of our eSVS Mesh, the FDA or foreign regulatory authorities may only approve our eSVS Mesh for very limited purposes with many restrictions on its use or in limited sizes. Although we have obtained CE Mark approval in Europe, and even if we receive FDA or additional foreign regulatory approval, we may be unable to successfully commercialize our eSVS Mesh in Europe, the United States or other major markets, and our ability to generate sales would be significantly impaired.

 

Our success depends on the coronary bypass graft market and the superior outcomes of coronary bypass surgery over competitive treatments or procedures, and such superior outcomes may not continue.

 

Physicians treat coronary artery disease with methods other than CABG surgery, including pharmaceutical therapy, balloon angioplasty, stenting with bare metal or drug-eluting stents, atherectomy catheters and lasers. Several of these alternative treatments are widely accepted in the medical community and have a long history of use. In addition, technological advances may result in improvements in these alternative treatments or new therapies that produce superior treatment outcomes as compared to CABG surgery. The medical device industry is highly competitive and subject to rapid and profound technological change. Our success depends, in part, upon physicians continuing to perform a significant number of CABG procedures and our ability to achieve and maintain a competitive position in the development of technologies and products in the coronary artery bypass field. If physicians, patients or hospitals opt to use methods other than CABG procedures or use our competitors’ products, our commercial opportunity will be reduced and our potential sales will suffer.

 

 

The market acceptance of new medical technologies is uncertain, and we may be unable to obtain market acceptance of our eSVS Mesh.

 

Even if our clinical trials demonstrate that the use of our eSVS Mesh provides equivalent or more effective results as compared to coronary bypass operations using only the unsupported saphenous vein grafts and even if all regulatory approvals are obtained, the success of our eSVS Mesh will depend upon the acceptance by cardiovascular and cardiothoracic surgeons of our eSVS Mesh as equivalent or better than the current procedure using unsupported saphenous veins and other available treatments. We believe that physicians’ recommendations will be essential for the development and successful marketing of our eSVS Mesh, and physicians will not begin to use our eSVS Mesh unless they determine that it is a safe and effective alternative to current treatment methods. The degree of physician and market acceptance of our eSVS Mesh will depend on a number of factors, including, but not limited to:

 

 

the perceived effectiveness of our eSVS Mesh relative to its cost;

 

 

the prevalence and severity of any side effects;

 

 

potential advantages over alternative treatments;

 

 

publication in peer-reviewed medical journals of data regarding the successful use and longer term clinical benefits of our eSVS Mesh;

 

 

development of new products and technologies by our competitors or new alternative treatments;

 

 

regulatory developments related to manufacturing, marketing and selling our eSVS Mesh both within and outside the United States;

 

 

perceived liability risks arising out of the use of new products;

 

 

the willingness of physicians to adopt new technologies and the ability of physicians to acquire the skills necessary to use our eSVS Mesh;

 

 

the effectiveness of our sales and marketing efforts; and

 

 

the adequacy of third-party coverage or reimbursement.

 

If our eSVS Mesh does not achieve an adequate level of acceptance by physicians, healthcare payors and patients, we may not generate meaningful sales and we may not become profitable. In addition, we have not yet determined pricing for our eSVS Mesh in the United States and our pricing policies could adversely impact market acceptance of our eSVS Mesh as compared to competing products and treatments. Any of the foregoing factors, or other factors, could limit or detract from market acceptance of our eSVS Mesh. If our eSVS Mesh is not accepted by the market, our business would be harmed.

 

We expect to face intense competition and the risk of obsolescence if our competitors develop products superior to our eSVS Mesh.

 

We face competition from established medical technology, pharmaceutical and biotechnology companies, as well as from academic institutions, government agencies and private and public research institutions in the United States and abroad. Companies that have significantly greater financial resources and expertise in research and development, manufacturing, pre-clinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products than us may be working on products similar to our eSVS Mesh. Our eSVS Mesh may not replace current surgical techniques and other products or techniques may render our eSVS Mesh obsolete. In addition, our distributors face competition from established companies with significantly greater financial and marketing resources. Our competitors may produce more advanced products than ours or demonstrate superior safety of their products. Our ability to effectively compete depends on our ability to innovate successfully. Demand for our eSVS Mesh could be diminished by equivalent or superior products and technologies offered by competitors. Smaller or early-stage companies also may prove to be significant competitors, particularly through collaborative arrangements with, or mergers with or acquisitions by, large and established companies or through the development of novel products and technologies.

 

 

We are aware of three companies that have developed support devices to be used on the outside of SVGs, one of which has begun sales activities and is a direct competitor to our eSVS Mesh. See “Business—Competition” for additional information.

 

Our competitive position also depends on:

 

 

obtaining any necessary U.S. or foreign marketing approvals;

 

 

widespread awareness, acceptance and adoption by the cardiovascular and cardiothoracic markets of our eSVS Mesh;

 

 

product coverage and reimbursement from third-party payors, insurance companies and others;

 

 

published studies supporting the effectiveness and safety and long-term clinical benefit of our eSVS Mesh;

 

 

properly identifying customer needs and delivering new products or product enhancements to address those needs;

 

 

limiting the time required from proof of feasibility to routine production;

 

 

limiting the timing and cost of regulatory approvals;

 

 

our ability to attract and retain qualified personnel;

 

 

the extent of our patent protection or our ability to otherwise develop proprietary products and processes;

 

 

our ability to maintain adequate manufacturing capacity and to source the materials and equipment required to manufacture our eSVS Mesh; and

 

 

securing sufficient capital resources to expand our research and development, sales and marketing efforts, and manufacturing capacity.

 

If our eSVS Mesh is not competitive based on these or other factors, our business would be harmed.

 

The market for our eSVS Mesh is rapidly changing and competitive, and new treatments which may be developed by others could impair our ability to maintain and grow our business and remain competitive.

 

The industry in which we operate has undergone, and is expected to continue to undergo, rapid and significant technological change, and we expect competition to intensify as technical advances are made. Our competitors may develop and commercialize medical devices that are safer or more effective, have fewer side effects or are less expensive than coronary artery bypass surgery. For example, we are aware of companies that are developing various other technologies for treating cardiovascular disease which are less invasive than coronary artery bypass surgery which could render our technology obsolete. We also compete in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and patient registration for clinical trials. All of these factors could impair our ability to maintain our technology.

 

We have limited manufacturing resources and experience, and if our manufacturing facilities are unable to provide an adequate supply of our eSVS Mesh, our growth could be limited and our business could be harmed.

 

We have limited experience in manufacturing our eSVS Mesh and rely on outside vendors for several materials and processes. We currently manufacture our eSVS Mesh for our clinical trials, research and development purposes and commercialization at our manufacturing facility in Minnesota. If our existing manufacturing facility experiences a disruption, we would have no other means of manufacturing our eSVS Mesh until we are able to restore the manufacturing capability at our current facility or develop alternative manufacturing facilities.

 

 

If we are unable to produce sufficient quantities of our eSVS Mesh for use in our current and planned clinical trials or for commercialization, or if our manufacturing process yields a substandard product, our regulatory, development and commercialization efforts would be delayed.

 

In order to produce our eSVS Mesh in the quantities that will be required for commercialization, we will have to increase, or “scale up,” the production process over the current level of production. Manufacturers often encounter difficulties in scaling up production, including problems involving yields, controlling and anticipating costs, quality control and assurance, supply and shortages of qualified personnel. If the scaled-up production process is not efficient or produces a product that does not meet quality and other standards, we may be unable to meet market demand and our sales, business and financial prospects would be adversely affected. The contract vendors with which we are and will be developing relationships may not have the ability to produce the quantities of the materials needed for human clinical trials or commercial sales or may not do so at prices that allow our eSVS Mesh to compete successfully in the market. Additionally, any damage to or destruction of our facilities or our equipment, prolonged power outage or contamination at our facilities would significantly impair our ability to produce our eSVS Mesh.

 

We depend upon third-party suppliers, making us vulnerable to supply problems and price fluctuations.

 

We rely on third-party suppliers to provide us certain components of our eSVS Mesh. We depend on these suppliers to provide us with materials in a timely manner that meet our quality, quantity and cost requirements. These suppliers may encounter problems during manufacturing for a variety of reasons, including unanticipated demand from larger customers, failure to follow specific protocols and procedures, failure to comply with applicable regulations, equipment malfunction, quality or yield problems, and environmental factors, any of which could delay or impede their ability to meet our demand. Our reliance on these outside suppliers also subjects us to other risks that could harm our business, including, but not limited to:

 

 

interruption of supply resulting from modifications to, or discontinuation of, a supplier’s operations;

 

 

delays in product shipments resulting from defects, reliability issues or changes in components from suppliers;

 

 

price fluctuations due to a lack of long-term supply arrangements for key components with our suppliers;

 

 

errors in manufacturing components, which could negatively impact the effectiveness or safety of our eSVS Mesh or cause delays in shipment of our eSVS Mesh;

 

 

discontinued production of components, which could significantly delay our production and sales and impair operating margins;

 

 

an inability to obtain adequate supplies in a timely manner or on commercially acceptable terms;

 

 

difficulty locating and qualifying alternative suppliers for our sole-source supplies;

 

 

delays in production and sales caused by switching components, which may require product redesign and new regulatory submissions;

 

 

delays due to evaluation and testing of products from alternative suppliers and corresponding regulatory qualifications;

 

 

non-timely delivery of components due to our suppliers manufacturing products for a range of customers; and

 

 

an inability of suppliers to fulfill orders and meet requirements because of supplier financial hardships.

 

 

Other than existing, unfulfilled purchase orders, our suppliers have no contractual obligations to supply us with, and we are not contractually obligated to purchase from them, any of our supplies. Any supply interruption from our suppliers or failure to obtain additional suppliers for any of the components used in our eSVS Mesh would limit our ability to manufacture our eSVS Mesh and could have a material adverse effect on our business, financial condition and results of operations. If we lost one of our suppliers and were unable to obtain an alternate source in a timely basis or on terms acceptable to us, our production schedules could be delayed, our margins could be negatively impacted, and we could fail to meet our customers’ demand. Our customers will rely upon our ability to meet committed delivery dates and any disruption in the supply of key components would adversely affect our ability to meet these dates and could result in legal action by our customers, cause us to lose customers or harm our ability to attract new customers, any of which could decrease our sales and negatively impact our growth. In addition, to the extent that our suppliers use technology or manufacturing processes that are proprietary, we may be unable to obtain comparable materials or components from alternative sources. Manufacturing operations are often faced with a supplier’s decision to discontinue manufacturing a component, which may force us to make last time purchases, qualify a substitute part, or make a design change which may divert engineering time away from the development of new products.

 

We may experience future manufacturing difficulties, and our clinical trials and our commercialization could be delayed by quality control issues in our supply and manufacturing processes.

 

Any difficulties in locating and hiring material manufacturers or in the ability of manufacturers to supply materials at the times and in the quantities we need, and at prices that allow us to compete, could have a material adverse effect on our business. Therefore, even if we are able to contract with manufacturers for key materials or supplies, we may experience future manufacturing difficulties.

 

The production of our eSVS Mesh must occur in a highly controlled, clean environment to minimize particles and other yield- and quality-limiting contaminants. In spite of stringent quality controls, weaknesses in process control or minute impurities in materials may cause a substantial percentage of defective products in a lot. In addition, we must meet certain lot release specifications before our eSVS Mesh can be shipped to our clinical trial sites or to commercial markets. If a particular lot fails to meet lot release specifications, we will not be able to ship that lot to our clinical trial sites or to commercial markets. If we are not able to maintain stringent quality controls, if contamination problems arise or if we are not able to meet our lot release specifications, our clinical trials or sales efforts could be delayed, which would harm our business and our results of operations.

 

We operate in foreign jurisdictions which exposes us to international business risks.

 

As part of our product development, regulatory and commercial strategy, we intend to continue to conduct clinical trials and market our eSVS Mesh internationally. There are a number of risks associated with conducting business internationally, including, but not limited to:

 

 

potential differences in treatment protocols and methods across the markets in which we expect to test or promote our eSVS Mesh;

 

 

potential differences in reimbursement levels and the requirements necessary to obtain such reimbursement;

 

 

general economic and political conditions in the markets in which we operate;

 

 

potential international conflicts, including terrorist acts;

 

 

potential increased costs associated with overlapping tax structures;

 

 

potential trade restrictions, exchange controls and legal restrictions on the repatriation of funds into the United States;

 

 

difficulties and costs associated with staffing and managing foreign operations, including risks of violations of local laws or the U.S. Foreign Corrupt Practices Act by employees overseas or the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions;

 

 

unexpected changes in regulatory requirements;

 

 

the difficulties of compliance with a wide variety of foreign laws and regulations;

 

 

unfavorable regulations in foreign jurisdictions regarding distributors;

 

 

 

longer accounts receivable cycles in certain foreign countries; and

 

 

import and export licensing requirements.

 

Any of these risks could adversely affect our international operations or financial results, which would harm our business.

 

We could become subject to product liability claims, product recalls, other field actions and warranty claims that could be expensive, divert managements attention and harm our business.

 

We face an inherent risk of exposure to product liability claims in the event that the use of our eSVS Mesh results or is alleged to have resulted in adverse effects to a patient. In many jurisdictions, producers of medical products are strictly liable for personal injuries caused by medical devices. We may be held liable if our eSVS Mesh causes injury or death or is found otherwise unsuitable during usage. Because our eSVS Mesh is designed to be used in complex surgical procedures, defects could result in a number of complications, including serious injury or death. It is also possible that defects in the design, manufacture or labeling of our eSVS Mesh might necessitate a product recall or other field corrective action, which may result in warranty claims beyond our expectations and may harm our reputation. We believe potential disadvantages associated with our eSVS Mesh include the possibility of allergic reaction to the implant materials and the possibility of damage to the saphenous vein during placement of our eSVS Mesh. A product liability claim, regardless of its merit or eventual outcome, and even if we are ultimately successful in defending it, could have a material adverse effect on our business, results of operations and reputation. For example, it could result in significant legal defense costs. The coverage limits of our insurance policies may not be adequate to cover future claims. We may be unable to maintain product liability insurance in the future at satisfactory rates or with adequate amounts. A product liability claim, any product recalls or other field actions or excessive warranty claims, whether arising from defects in design or manufacture or otherwise, could divert management’s attention from our core business, be expensive to defend and result in sizable damage awards against us, any of which could harm our reputation and business.

 

If third-party payors do not provide sufficient coverage or reimbursement to healthcare providers for the use of our eSVS Mesh, our acceptance in the marketplace would be harmed.

 

The availability of insurance coverage and reimbursement for newly approved medical devices and procedures is uncertain. Our success depends upon the use of our eSVS Mesh and whether third-party insurance coverage and reimbursement for the use of this product is available.

 

Our success in international markets depends upon the eligibility of reimbursement for our eSVS Mesh through government-sponsored healthcare payment systems and third-party payors or the willingness of hospitals to allocate budgets to cover the cost of our eSVS Mesh. Reimbursement and healthcare payment systems in international markets vary significantly by country and, within some countries, by region. In many international markets, payment systems may control reimbursement for procedures performed using new products as well as procurement of these products. As an example, we were denied government-sponsored supplemental reimbursement in Germany for our eSVS Mesh for 2014. In addition, as economies of emerging markets develop, these countries may implement changes in their healthcare delivery and payment or budget systems. Furthermore, healthcare cost containment efforts similar to those underway in the United States are prevalent in many of the countries in which we sell and intend to sell our eSVS Mesh and these efforts are expected to continue. Market acceptance of our eSVS Mesh in a particular country may depend on the availability and level of reimbursement or available budget in that country. In the event that our customers are unable to obtain adequate reimbursement for our eSVS Mesh in international markets in which we are seeking to sell our eSVS Mesh, market acceptance of our eSVS Mesh would be adversely affected.

 

In the United States, our eSVS Mesh would be purchased primarily by medical institutions, which would then bill various third-party payors, such as the Centers for Medicare & Medicaid Services, or CMS, which administers the Medicare program, and other government programs and private insurance plans, for the healthcare services provided to their patients. The process involved in applying for coverage and incremental reimbursement from CMS is lengthy and expensive. Even if our eSVS Mesh receives FDA and other regulatory approval, it may not be granted coverage and reimbursement in the foreseeable future, if at all. Moreover, many private payors look to CMS in setting their reimbursement policies and amounts. If CMS or other agencies limit coverage or decrease or limit reimbursement payments for doctors and hospitals, this may affect coverage and reimbursement determinations by many private payors.

 

 

CMS may not provide coverage and reimbursement for our eSVS Mesh. If a medical device does not receive incremental reimbursement from CMS, then a medical institution would have to absorb the cost of our eSVS Mesh as part of the cost of the procedure in which the products are used. Acute care hospitals are now generally reimbursed by CMS for inpatient operating costs under a Medicare hospital inpatient prospective payment system. Under the Medicare hospital inpatient prospective payment system, acute care hospitals receive a fixed payment amount for each covered hospitalized patient based upon the Diagnosis-Related Group, or DRG, to which the inpatient stay is assigned, regardless of the actual cost of the services provided. At this time, we do not know the extent to which medical institutions would consider insurers’ payment levels adequate to cover the cost of our eSVS Mesh. Failure by hospitals and physicians to receive an amount that they consider to be adequate reimbursement for procedures in which our eSVS Mesh is used could deter them from purchasing our eSVS Mesh and limit our sales growth. In addition, pre-determined DRG payments may decline over time, which could deter medical institutions from purchasing our eSVS Mesh. If medical institutions are unable to justify the costs of our eSVS Mesh, they may refuse to purchase it, which would significantly harm our business.

 

We are dependent upon our founder and Chairman and Chief Executive Officer and the loss of his services or our inability to attract and retain required management, financial, technical, regulatory and sales personnel may divert managements attention and negatively impact our operations.

 

We are highly dependent on our senior management, including in particular Manny Villafaña, our Chairman and Chief Executive Officer. If the initial results from our current eMESH I clinical feasibility trial are positive, we anticipate that we would hire a new Chief Executive Officer and that Mr. Villafaña would transition to the role of Executive Chairman. In the event Mr. Villafaña does not agree to serve as Executive Chairman, the loss of his services could impair our ability to obtain required regulatory approvals of and commercialize our eSVS Mesh and develop new products and could harm our business. Our future success may depend on our ability to retain Mr. Villafaña, hire a new Chief Executive Officer and retain our Chief Financial Officer and other senior management and attract and retain qualified personnel in the future. Competition for senior management personnel, as well as clinical and regulatory specialists, engineers and sales personnel is intense and we may not be able to retain our personnel. The loss of a member of our senior management or our professional staff would require the remaining senior executive officers to divert immediate and substantial attention to seeking a replacement. Each of our senior officers may terminate his employment at any time without notice and without cause or good reason. Because of our current regulatory position and financial position, including in particular the recent temporary decreases in base salaries to which our executive officers agreed, it is possible that one or more of our executive officers may choose to terminate their employment with us and secure alternative employment that may be more stable. We do not carry key person life insurance on any of our employees. If we lose the services of any key personnel, our business, financial condition and results of operations may suffer.

 

Consolidation in the healthcare industry could lead to demands for price concessions or to the exclusion of some suppliers from certain of our markets, which could have an adverse effect on our business, financial condition or operating results.

 

Because healthcare costs have risen significantly over the past decade, numerous initiatives and reforms initiated by legislators, regulators and third-party payors to curb these costs have resulted in a consolidation trend in the healthcare industry to create new companies with greater market power, including hospitals. As the healthcare industry consolidates, competition to provide products and services to industry participants has become and will continue to become more intense. This in turn has resulted and likely will continue to result in greater pricing pressures and the exclusion of certain suppliers from important market segments as group purchasing organizations, independent delivery networks and large single accounts continue to use their market power to consolidate purchasing decisions for some of our customers. We expect that market demand, government regulation, third-party reimbursement policies and societal pressures will continue to change the worldwide healthcare industry, resulting in further business consolidations and alliances among our customers, which may reduce competition, exert further downward pressure on the prices of our products and may adversely impact our business, financial condition or operating results. 

 

 

We will need to increase the size of our organization and we may experience difficulties managing growth. If we are unable to manage the anticipated growth of our business, our future sales and operating results may be adversely affected.

 

If our clinical trials our successful and we are successful in obtaining additional regulatory approvals for our eSVS Mesh and selling our eSVS Mesh, we would need to expand our sales support and marketing staff, and administrative and financial resources to meet anticipated growth in demand for our eSVS Mesh. We may face difficulties in recruiting, training, managing and retaining an adequate number of qualified personnel to support this growth. Expansion in personnel may mean that less experienced people could be providing clinical and sales and marketing support for our eSVS Mesh, and managing our administrative and financial functions, which could result in unanticipated costs and disruptions to our operations. If we cannot scale and manage our business appropriately, our anticipated growth may be impaired and our operating results will suffer.

 

Our status as a public company causes us to incur significant costs, places demands on our management and diverts managements attention from our core business.

 

The obligations of being a U.S. public reporting company, including substantial public reporting, auditing and corporate governance obligations, require significant expenditures, place demands on our management and divert management’s time and attention away from our core business. These obligations may require us to hire additional personnel in order to ensure compliance with the regulatory requirements of the Securities and Exchange Commission. We are required to report on our internal controls, as required by Section 404 of the Sarbanes-Oxley Act of 2002. Our management may not be able to effectively and timely implement controls and procedures that adequately respond to the increased regulatory compliance and reporting requirements that are applicable to us as a public company. If we fail to staff our accounting and finance function adequately or maintain internal controls adequate to meet the demands that are placed upon us as a public company, we may be unable to report our financial results accurately or in a timely manner and our business and stock price may suffer. The costs of being a public company, as well as diversion of management’s time and attention, may harm our business, financial condition and results of operations.

 

Risks Related to Our Intellectual Property

 

Our competitive position is contingent upon the protection of our intellectual property.

 

As of January 1, 2015, we had 14 issued patents covering the eSVS Mesh, including seven issued in the United States, two each issued in Canada, Japan and South Africa, and one issued European patent. The European patent has been validated and is enforceable in eight European countries. In addition, we have two patent applications pending in the United States and five patent applications pending in countries outside the United States covering various aspects of our eSVS Mesh.

 

Any patents we have or obtain in the future might be invalidated or circumvented by third parties. If any challenges are successful, competitors might be able to market products and use manufacturing processes that are substantially similar to ours. We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by consultants, vendors or former or current employees, despite the existence generally of confidentiality agreements and other contractual restrictions. Monitoring unauthorized use and disclosure of our intellectual property is difficult, and we do not know whether the steps we have taken to protect our intellectual property will be adequate. In addition, the laws of many foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States. If our intellectual property is not adequately protected against competitors’ products and methods, our competitive position could be adversely affected, as could our business.

 

 

Our commercial success, if any, will be significantly harmed if we infringe the patent rights of third parties or if we breach any agreements that we have entered into with regard to our technology or business. The medical device industry is characterized by frequent and extensive litigation regarding patents and other intellectual property rights. Many medical device companies with substantially greater resources than us have employed intellectual property litigation as a way to gain a competitive advantage. We may become involved in litigation, interference proceedings, oppositions, reexamination, protest or other potentially adverse intellectual property proceedings as a result of alleged infringement by us of the rights of others or as a result of priority of invention disputes with third parties. Third parties may also challenge the validity of any of our issued patents. Similarly, we may initiate proceedings to enforce our patent rights and prevent others from infringing our intellectual property rights. In any of these circumstances, we might have to spend significant amounts of money, time and effort defending our position and we may not be successful. In addition, any claims relating to the infringement of third-party proprietary rights or proprietary determinations, even if not meritorious, could result in costly litigation, lengthy governmental proceedings, divert management’s attention and resources, or require us to enter into royalty or license agreements that are not advantageous to us. We may not have sufficient resources to enforce our intellectual property rights or to defend our patents against a challenge.

 

Because we operate in the highly technical field of medical technology development, we rely in part on trade secret protection in order to protect our proprietary trade secrets and unpatented know-how. However, trade secrets are difficult to protect, and we cannot be certain that others will not develop the same or similar technologies on their own. We have taken steps, including entering into confidentiality agreements with our employees, consultants and corporate partners to protect our trade secrets and unpatented know-how. These agreements generally require that the other party keep confidential and not disclose to third parties any confidential information developed by the party or made known to the party by us during the course of the party’s relationship with us. We also typically obtain agreements from these parties which provide that inventions conceived by the party in the course of rendering services to us will be our exclusive property. However, these agreements may not be honored and may not effectively assign intellectual property rights to us. Enforcing a claim that a party illegally obtained and is using our trade secrets or know-how is difficult, expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States may be less willing to protect trade secrets or know-how. The failure to obtain or maintain trade secret protection could adversely affect our competitive position.

 

Claims of infringement or misappropriation of the intellectual property rights of others could prohibit us from protecting our rights to, or use and commercialization of, our eSVS Mesh, which could harm our business.

 

The medical device industry has been characterized by extensive litigation regarding patents and other intellectual property rights, and companies in the industry have used intellectual property litigation to gain a competitive advantage. We may become a party to patent infringement claims and litigation or interference proceedings declared by the U.S. Patent and Trademark Office to determine the priority of inventions. The defense and prosecution of these matters are both costly and time consuming.

 

Additionally, we may need to commence proceedings against others to enforce our patents, to protect our trade secrets or know-how or to determine the enforceability, scope and validity of the proprietary rights of others. These proceedings would result in substantial expense to us and significant diversion of effort by our technical and management personnel.

 

We are aware of patents issued to third parties that contain subject matter related to our technology. These or other third parties may assert that our eSVS Mesh infringes the claims in their patents or seek to expand their patent claims to cover aspects of our eSVS Mesh. An adverse determination in litigation or interference proceedings to which we may become a party could subject us to significant liabilities or require us to seek licenses. In addition, if we are found to willfully infringe third-party patents, we could be required to pay treble damages in addition to other penalties. Although patent and intellectual property disputes in the medical device area have often been settled through licensing or similar arrangements, costs associated with these arrangements may be substantial and could include ongoing royalties. We may be unable to obtain necessary licenses on satisfactory terms, if at all. If we do not obtain necessary licenses, we may be required to redesign our eSVS Mesh to avoid infringement, and it may not be possible to do so effectively. Adverse determinations in a judicial or administrative proceeding or failure to obtain necessary licenses could cause us to incur significant costs, place significant strain on our resources, divert management’s attention from our business and harm our reputation and prevent us from commercializing our eSVS Mesh or any other product we may develop, which would have a significant adverse impact on our business. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources.

 

 

Obtaining and maintaining our patent protection depends upon compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

 

The U.S. Patent and Trademark Office and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other provisions during the patent process. There are situations in which noncompliance can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to enter the market earlier than would otherwise have been the case.

 

If the core intellectual property relating to our eSVS Mesh reverts to Medtronic, our business will be adversely affected.

 

The core intellectual property relating to our eSVS Mesh, which constitutes most of our issued patents and our pending patent applications, was sold to us by Medtronic pursuant to an Assignment and License Agreement dated October 9, 2007. If we become insolvent, make an assignment for the benefit of creditors, go into liquidation or receivership or otherwise lose legal control of our business, all technology sold to us pursuant to our agreement with Medtronic, including the core intellectual property and patent rights related to our eSVS Mesh, may revert to Medtronic, upon notice by Medtronic. In addition, if we determine to cease commercializing our eSVS Mesh, Medtronic may cause the core intellectual property and patent rights related to our eSVS Mesh to revert to Medtronic.

 

Risks Related to Regulatory Approval and Other Governmental Regulations

 

The sale of our eSVS Mesh is subject to regulatory approvals and our business is subject to extensive regulatory requirements. If we fail to obtain and maintain regulatory approvals, or are unable to obtain, or experience significant delays in obtaining, FDA and other regulatory approvals for our eSVS Mesh and any other future products or product enhancements, our ability to commercially distribute and market these products could suffer.

 

Our eSVS Mesh and operations are subject to extensive regulation by the FDA and various other federal, state and foreign governmental authorities. Government regulation of medical devices is meant to assure their safety and effectiveness, and includes regulation of, among other things:

 

 

design, development and manufacturing;

 

 

testing, labeling, packaging, content and language of instructions for use, and storage;

 

 

clinical trials;

 

 

product safety;

 

 

premarket clearance and approval;

 

 

marketing, sales and distribution (including making product claims);

 

 

advertising and promotion;

 

 

product modifications;

 

 

recordkeeping procedures;

 

 

reports of corrections, removals, enhancements, recalls and field corrective actions;

 

 

 

post-market surveillance, including reporting of deaths or serious injuries and malfunctions that, if they were to recur, could lead to death or serious injury;

 

 

complying with the new federal law and regulations requiring Unique Device Identifiers (UDI) on devices and also requiring the submission of certain information about each device to the FDA’s Global Unique Device Identification Database (GUDID); and

 

 

product import and export.

 

Before a new medical device, or a new use of, or claim for, an existing product can be marketed in the United States, it must first receive either premarket clearance under Section 510(k) of the U.S. Federal Food, Drug and Cosmetic Act, a de novo approval or a pre-market approval, or PMA, from the FDA, unless an exemption applies. Our coronary eSVS Mesh has been designated a Class III product by the FDA and will be required to go through the PMA process. Other indications of our eSVS Mesh, including peripheral and arteriovenous fistula applications, have not been classified at this time.

 

The PMA pathway requires an applicant to demonstrate reasonable assurance of safety and effectiveness of the device for its intended use based, in part, on extensive data including, but not limited to, technical, preclinical, clinical trial, manufacturing and labeling data. The PMA process is typically required for devices that are deemed to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices. Products that are approved through a PMA application generally need FDA approval before they can be modified. The PMA pathway is much more costly and uncertain than the 510(k) clearance process and it generally takes from one to five years, or even longer, from the time the application is filed with the FDA until an approval is obtained. The process of obtaining a PMA and other regulatory clearances or approvals to market a medical device can be costly and time-consuming, and we may not be able to obtain approvals on a timely basis, if at all.

 

The FDA can delay, limit or deny approval of a device for many reasons, including:

 

 

we may not be able to demonstrate to the FDA’s satisfaction that our products are safe and effective for their intended uses;

 

 

the data from our pre-clinical studies (bench and/or animal) and clinical trials may be insufficient to support approval;

 

 

the manufacturing process or facilities we use may not meet applicable requirements; and

 

 

changes in FDA clearance or approval policies or the adoption of new regulations may require additional data.

 

Any delay in, or failure to receive or maintain, approvals for our eSVS Mesh or other products could prevent us from generating sales in the United States.

 

The FDA may not approve future investigational device exemption applications for our eSVS Mesh, which would prevent us from conducting our clinical trials in the United States, and even if the FDA does grant such approval, our clinical trials may be more costly and burdensome than we currently anticipate, which would limit or delay our ability to complete clinical trials and ultimately market our eSVS Mesh in the United States.

 

Assuming the results from our current feasibility trial are successful, we intend to submit an IDE application to conduct a larger pivotal trial. If the FDA approves an IDE application to conduct a pivotal trial, the clinical study we conduct may have unanticipated complications and delays and may be more costly than we currently anticipate. The FDA may approve our IDE application with conditions relating to the scope or design of our clinical trials for which we have not planned. These conditions may require us to collect additional data, enroll more patients, spend more time and expend more resources than we currently anticipate, and these conditions may make a clinical trial in the United States more costly and time consuming than we currently plan. Any unanticipated costs and length of U.S. clinical trials would delay our ability to market our eSVS Mesh in the United States, which would harm our business.

 

 

If the FDA does not approve our IDE application, we would be unable to conduct a pivotal trial of our eSVS Mesh in the United States. If we are unable to conduct a pivotal trial in the United States, we would not be able to submit a PMA application and we would be unable to market our eSVS Mesh in the United States, which would have an adverse effect on our business. 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 and we are unable to obtain regulatory approval and market it in the United States. If our current feasibility trial or our anticipated larger pivotal trial is not successful, we may need to consider other strategic alternatives, including ceasing our operations and liquidating our company. If a decision is made to cease operations and liquidate our company, our stockholders likely will lose their entire investment.

 

If we fail to obtain and maintain regulatory approvals from countries other than the United States, our ability to sell our products and generate sales will be materially harmed.

 

We currently market, and intend to continue to market, our eSVS Mesh outside the United States. To market and sell our eSVS Mesh in countries outside the United States, we must seek and obtain regulatory approvals, certifications or registrations and comply with the laws and regulations of those countries. These laws and regulations, including the requirements for approvals, certifications or registrations and the time required for regulatory review, vary from country to country. Obtaining and maintaining foreign regulatory approvals, certifications or registrations are expensive, and we cannot be certain that we will receive regulatory approvals, certifications or registrations in any foreign country in which we plan to market our products. The regulatory approval process outside the United States may include all of the risks associated with obtaining FDA approval in addition to other risks.

 

In order to market our products in the Member States of the European Economic Area, or EEA, our devices are required to comply with the essential requirements of the EU Medical Devices Directives (Council Directive 93/42/EEC of 14 June 1993 concerning medical devices, as amended. Compliance with these requirements entitles us to affix the CE conformity mark to our medical devices, without which they cannot be commercialized in the EEA. In order to demonstrate compliance with the essential requirements and obtain the right to affix the CE conformity mark we must undergo a conformity assessment procedure, which varies according to the type of medical device and its classification. Except for low risk medical devices (Class I), where the manufacturer can issue an EC Declaration of Conformity based on a self-assessment of the conformity of its products with the essential requirements of the Medical Devices Directives, a conformity assessment procedure requires the intervention of a Notified Body, which is an organization accredited by a Member State of the EEA to conduct conformity assessments. The Notified Body would typically audit and examine the quality system for the manufacture, design and final inspection of our devices before issuing a certification demonstrating compliance with the essential requirements. Based on this certification we can draw up an EC Declaration of Conformity, which allows us to affix the CE mark to our products. We received authorization to apply the CE Mark to our eSVS Mesh in May 2010 and in November 2013, we received an updated CE Mark expanding our ability to promote the eSVS Mesh for use with sequential grafts. We received an updated CE Mark approval in August 2014 for the new implant technique approved by the FDA in March 2014.

 

We may not obtain other regulatory approvals or certifications outside the United States on a timely basis, if at all. Approval by the FDA does not ensure approval or certification by regulatory authorities or Notified Bodies in other countries, and approval or certification by one foreign regulatory authority or Notified Body does not ensure approval by regulatory authorities in other countries or by the FDA. We may be required to perform additional pre-clinical or clinical studies even if FDA approval, or the right to bear the CE Mark, has been obtained. If we fail to obtain or maintain regulatory approvals, certifications or registrations in any foreign country in which we plan to market our products, our business, financial condition and operating results could be adversely affected.

 

Even if our eSVS Mesh is approved by regulatory authorities, if we fail to comply with ongoing regulatory requirements, or if we experience unanticipated problems with our eSVS Mesh, it could be subject to restrictions or withdrawal from the market and governmental authorities could take certain adverse actions against us.

 

Any product for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data and promotional activities for such product, will be subject to continual review and periodic inspections by the FDA and other regulatory bodies. Even if regulatory approval of our eSVS Mesh is granted in the United States, the approval may be subject to limitations on the indicated uses for which the product may be marketed or contain requirements for costly post-marketing testing and surveillance to monitor the safety or effectiveness of the product. Later discovery of previously unknown problems with our eSVS Mesh, including unanticipated adverse events or adverse events of unanticipated severity or frequency, manufacturer or manufacturing processes, or failure to comply with regulatory requirements, may result in restrictions on such products or manufacturing processes, withdrawal of the products from the market, voluntary or mandatory recall, fines, suspension of regulatory approvals, product seizures, injunctions or the imposition of civil or criminal penalties.

 

 

Our sales will initially be dependent upon sales of our eSVS Mesh outside the United States. Foreign regulatory bodies have established varying regulations governing product standards, packaging requirements, labeling requirements, import restrictions, tariff regulations, duties and tax requirements. We rely heavily upon independent foreign distributors to comply with such foreign regulatory requirements. Our inability or failure, or the inability or failure of such foreign distributors, to comply with varying foreign regulation or the imposition of new regulations could restrict the sale of our eSVS Mesh internationally and thereby harm our business.

 

In addition, although we do not provide healthcare services, submit claims for third-party reimbursement, or receive payments directly from Medicare, Medicaid or other third-party payors for our eSVS Mesh, healthcare regulation by federal, state and foreign governments could significantly impact our business. Healthcare fraud and abuse and health information privacy and security laws potentially applicable to our operations include, among others:

 

 

the federal Anti-Kickback Law, which constrains our marketing practices and those of our independent distributors, educational programs, pricing, bundling and rebate policies, grants for physician-initiated trials and CME, and other remunerative relationships with healthcare providers, by prohibiting, among other things, soliciting, receiving, offering or providing remuneration, intended to induce the purchase or recommendation of an item or service reimbursable under a federal healthcare program, such as the Medicare or Medicaid programs;

 

 

federal false claims laws (such as the federal False Claims Act) which prohibit, among other things, knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent, this impacts and regulates the reimbursement advice we give to our customers as it cannot be inaccurate and must relate to on-label uses of our products;

 

 

the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, and its implementing regulations, which created federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters and which also imposes certain regulatory and contractual requirements regarding the privacy, security and transmission of individually identifiable health information;

 

 

state laws analogous to each of the above federal laws, such as anti-kickback and false claims laws that may apply to items or services reimbursed by any third-party payor, including commercial insurers, and state laws governing the privacy and security of certain health information, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts; and

 

 

federal, state and international laws that impose reporting and disclosure requirements on device manufacturers for any “transfer of value” made or distributed to prescribers and other healthcare providers.

 

If our past or present operations, or those of our distributors or agents, are found to be in violation of any of such laws or any other governmental regulations that may apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from federal healthcare programs and the curtailment or restructuring of our operations. Similarly, if the healthcare providers or entities with whom we do business are found to be non-compliant with applicable laws, they may be subject to sanctions, which could also have a negative impact on us. Any penalties, damages, fines, curtailment or restructuring of our operations could adversely affect our ability to operate our business and our financial results. The risk of our company being found in violation of these laws is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Further, the 2010 U.S. healthcare law, among other things, amends the intent requirement of the federal anti-kickback and criminal health care fraud statutes. A person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. In addition, the 2010 U.S. healthcare law provides that the government may assert that a claim including items or services resulting from a violation of the federal anti-kickback statute constitutes a false or fraudulent claim for purposes of the false claims statutes. Any action against us for violation of these laws, even if we successfully defend against them, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business.

 

 

Failure to comply with the U.S. Foreign Corrupt Practices Act could subject us to, among other things, penalties and legal expenses that could harm our reputation and have a material adverse effect on our business, financial condition and operating results.

 

We are required to comply with the U.S. Foreign Corrupt Practices Act, or FCPA, which generally prohibits covered entities and their intermediaries from engaging in bribery or making other prohibited payments to foreign officials for the purpose of obtaining or retaining business or other benefits. In addition, the FCPA imposes accounting standards and requirements on publicly traded U.S. corporations and their foreign affiliates, which are intended to prevent the diversion of corporate funds to the payment of bribes and other improper payments, and to prevent the establishment of “off books” slush funds from which such improper payments can be made. We also are subject to similar anticorruption legislation implemented in Europe under the Organization for Economic Co-operation and Development’s Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. We either operate or plan to operate in a number of jurisdictions that pose a high risk of potential violations of the FCPA and other anticorruption laws, and we utilize a number of distributors for whose actions we could be held liable under the FCPA. We inform our personnel, distributors and agents of the requirements of the FCPA and other anticorruption laws, including, but not limited to their reporting requirements. We also have developed and will continue to develop and implement systems for formalizing contracting processes, performing due diligence on personnel, distributors and agents and improving our recordkeeping and auditing practices regarding these regulations. However, there is no guarantee that our personnel, distributors or agents have not or will not engage in conduct undetected by our processes and for which we might be held responsible under the FCPA or other anticorruption laws.

 

If our personnel, distributors or agents are found to have engaged in such practices, we could suffer severe penalties, including criminal and civil penalties, disgorgement and other remedial measures, including further changes or enhancements to our procedures, policies and controls, as well as potential personnel changes and disciplinary actions. During the past few years, the SEC has increased its enforcement of violations of the FCPA against companies, including several medical device companies. Although we do not believe we are currently a target, any investigation of any potential violations of the FCPA or other anticorruption laws by U.S. or foreign authorities also could have an adverse impact on our business, financial condition and operating results.

 

Certain foreign companies, including some of our competitors, are not subject to prohibitions as strict as those under the FCPA or, even if subjected to strict prohibitions, such prohibitions may be laxly enforced in practice. If our competitors engage in corruption, extortion, bribery, pay-offs, theft or other fraudulent practices, they may receive preferential treatment from personnel of some companies, giving our competitors an advantage in securing business, or from government officials, who might give them priority in obtaining new licenses, which would put us at a disadvantage.

 

The use, misuse or off-label use of our products may harm our image in the marketplace or result in injuries that lead to product liability suits, which could be costly to our business or result in sanctions if we are deemed to have engaged in improper promotion of our products.

 

Our promotional materials and training methods must comply with FDA and other applicable laws and regulations, including the prohibition on the promotion of a medical device for a use that has not been cleared or approved by the FDA. Use of a device outside of its cleared or approved indication is known as “off-label” use. We cannot prevent a surgeon from using our products or procedure for off-label use, as the FDA does not restrict or regulate a physician’s choice of treatment within the practice of medicine. However, if the FDA determines that our promotional materials, reimbursement advice or training of sales representatives or physicians constitute promotion of an off-label use, the FDA could request that we modify our training or promotional or reimbursement materials or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, disgorgement of profits, a civil fine and criminal penalties. Other federal, state or foreign governmental authorities also might take action if they consider our promotion or training materials to constitute promotion of an uncleared or unapproved use, which could result in significant fines or penalties under other statutory authorities, such as laws prohibiting false claims for reimbursement. In that event, our reputation could be damaged and adoption of the products would be impaired.

 

 

Further, the advertising and promotion of our products is subject to EEA Member States laws implementing Directive 93/42/EEC concerning Medical Devices, or the EU Medical Devices Directive, Directive 2006/114/EC concerning misleading and comparative advertising, and Directive 2005/29/EC on unfair commercial practices, as well as other EEA Member State legislation governing the advertising and promotion of medical devices. These laws may limit or restrict the advertising and promotion of our products to the general public and may impose limitations on our promotional activities with healthcare professionals. Our failure to comply with all these laws and requirements may harm our business and operating results.

 

If our eSVS Mesh is defective or otherwise poses safety risks, governmental authorities could require a recall, or we may initiate a recall of our products voluntarily.

 

The FDA and similar foreign governmental authorities may require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture or in the event that a product poses an unacceptable risk to health. Manufacturers, on their own initiative, may recall a product if any material deficiency in a device is found. A government-mandated or voluntary recall by us or one of our distributors could occur as a result of an unacceptable risk to health, component failures, manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls of our eSVS Mesh or any future product of ours would divert managerial and financial resources and have an adverse effect on our financial condition and operating results. Any recall could impair our ability to produce our eSVS Mesh in a cost-effective and timely manner in order to meet our customers’ demands. We also may be required to bear other costs or take other actions that may have a negative impact on our future sales and our ability to generate profits.

 

Under the FDA medical device reporting regulations, or MDR, we are required to report to the FDA any incident in which our product has or may have caused or contributed to a death or serious injury or in which our product malfunctioned and, if the malfunction were to recur, would likely cause or contribute to death or serious injury. If we fail to report these events to the FDA within the required timeframes, or at all, the FDA could take enforcement action against us. Any adverse event involving our products could result in future voluntary corrective actions, such as recalls or customer notifications, or agency action, such as inspection, mandatory recall or other enforcement action. Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require the dedication of our time and capital, distract management from operating our business, and may harm our reputation and financial results.

 

In the EEA we must comply with the EU Medical Device Vigilance System, the purpose of which is to improve the protection of health and safety of patients, users and others by reducing the likelihood of reoccurrence of incidents related to the use of a medical device. Under this system, incidents must be reported to the competent authorities of the Member States of the EEA. An incident is defined as any malfunction or deterioration in the characteristics and/or performance of a device, as well as any inadequacy in the labeling or the instructions for use which, directly or indirectly, might lead to or might have led to the death of a patient or user or of other persons or to a serious deterioration in their state of health. Incidents are evaluated by the EEA competent authorities to whom they have been reported, and where appropriate, information is disseminated between them in the form of National Competent Authority Reports, or NCARs. The Medical Device Vigilance System is further intended to facilitate a direct, early and harmonized implementation of Field Safety Corrective Actions, or FSCAs across the Member States of the EEA where the device is in use. An FSCA is an action taken by a manufacturer to reduce a risk of death or serious deterioration in the state of health associated with the use of a medical device that is already placed on the market. An FSCA may include the recall, modification, exchange, destruction or retrofitting of the device. FSCAs must be communicated by the manufacturer or its legal representative to its customers and/or to the end users of the device through Field Safety Notices.

 

 

We may initiate voluntary recalls involving our eSVS Mesh or any future product of ours in the future that we determine do not require notification to the FDA or other regulatory authorities. If the FDA or other regulatory authorities disagrees with our determinations, they could require us to report those actions as recalls. A future recall announcement could harm our reputation with customers and negatively affect our sales. In addition, the FDA or other regulatory authorities could take enforcement action for failing to report the recalls when they were conducted.

 

Our manufacturing operations require us to comply with the FDAs and other governmental authorities laws and regulations regarding the manufacture and production of medical devices, which is costly and could subject us to enforcement action.

 

We and certain of our third-party manufacturers are required to comply with the FDA’s current Good Manufacturing Program (cGMP) and Quality System Regulations, or QSR, which cover the methods of documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of our products. We and certain of our suppliers also are subject to the regulations of foreign jurisdictions regarding the manufacturing process for our products marketed outside of the United States. The FDA enforces the QSR through periodic announced and unannounced inspections of manufacturing facilities The failure by us or one of our suppliers to comply with applicable statutes and regulations administered by the FDA and other regulatory bodies, or the failure to timely and adequately respond to any adverse inspectional observations or product safety issues, could result in, among other things, any of the following enforcement actions:

 

 

untitled letters, warning letters, fines, injunctions, consent decrees, disgorgement of profits, criminal and civil penalties;

 

 

customer notifications or repair, replacement, refunds, recall, detention or seizure of our products;

 

 

operating restrictions or partial suspension or total shutdown of production;

 

 

refusing or delaying our requests for 510(k) clearance or PMA approval of new products or modified products;

 

 

withdrawing 510(k) clearances or PMAs that have already been granted;

 

 

refusal to grant export approval for our products; or

 

 

criminal prosecution.

 

Any of these actions could impair our ability to produce our products in a cost-effective and timely manner in order to meet our customers’ demands. We also may be required to bear other costs or take other actions that may have a negative impact on our future revenue and our ability to generate profits. Furthermore, our key component suppliers may not currently be or may not continue to be in compliance with all applicable regulatory requirements, which could result in our failure to produce our products on a timely basis and in the required quantities, if at all.

 

The results of our clinical trials may not support our product claims or may result in the discovery of adverse side effects.

 

Our ongoing research and development and clinical trial activities are subject to extensive regulation and review by numerous governmental authorities both in the United States and abroad. We are currently conducting clinical studies, including our feasibility trial in Europe and the United States, of our eSVS Mesh to gather additional information about our product’s safety, efficacy or optimal use. In the future we may conduct additional clinical trials to support approval of new products. Clinical studies must be conducted in compliance with FDA regulations or the FDA may take enforcement action. The data collected from these clinical trials may ultimately be used to support market approval for these products. Even if our clinical trials are completed as planned, we cannot be certain that their results will support our product claims or that the FDA or foreign authorities will agree with our conclusions regarding them. Success in pre-clinical testing and early clinical trials does not always ensure that later clinical trials will be successful, and we cannot be sure that the later trials will replicate the results of prior trials and studies. The clinical trial process may fail to demonstrate that our products are safe and effective for the proposed indicated uses, which could cause us to abandon a product and may delay development of others. Any delay or termination of our clinical trials will delay the filing of our product submissions and, ultimately, our ability to commercialize our products and generate sales. It is also possible that patients enrolled in clinical trials will experience adverse side effects that are not currently part of the product’s profile.

 

 

We are and will continue to be highly dependent on third-party institutions to conduct our clinical testing, and the results of such testing may delay or prevent regulatory approval of our eSVS Mesh.

 

We rely on clinical investigators and clinical trial sites to enroll patients in our clinical trials and other third parties to manage our trials and to perform related data collection and analysis. However, we are not able to control the amount and timing of resources that clinical trial sites devote to our clinical trials. If these clinical investigators and clinical trial sites fail to enroll a sufficient number of patients in our clinical trials or fail to ensure compliance by patients with clinical protocols, we will be unable to complete our planned trials, which could prevent us from obtaining regulatory approvals for our eSVS Mesh. Enrollment in our current eMESH I clinical feasibility trial has been slow and disappointing. Our agreements with clinical investigators and clinical trial sites for clinical testing place substantial responsibilities on these parties and, if these parties fail to perform as expected, our planned trials could be delayed or terminated. If these clinical investigators, clinical trial sites, or other third parties do not carry out their contractual duties or obligations or fail to meet expected deadlines, or if the quality or accuracy of the clinical data they obtain is compromised due to their failure to adhere to our clinical protocols, the FDA’s good clinical practice regulations or for other reasons, our clinical trials may be extended, delayed or terminated, and we may be unable to obtain regulatory approval for, or successfully commercialize, our eSVS Mesh. In addition, the data obtained from human clinical testing is subject to varying interpretations that could delay, limit or prevent regulatory approval, and delays or rejection may be encountered based upon changes in FDA policy for device approval during the period of development.

 

Future regulatory actions may adversely affect our ability to sell our products profitably.

 

From time to time, legislation is drafted and introduced that could significantly change the statutory provisions governing the approval, manufacture and marketing of a medical device. In addition, FDA and other regulations and guidance are often revised or reinterpreted in ways that may significantly affect our business and our products. It is impossible to predict whether legislative changes will be enacted or regulations, guidance or interpretations changed, and what the impact of such changes, if any, may be.

 

We may never obtain adequate coverage and reimbursement for our eSVS Mesh, which would adversely affect our sales and harm our business.

 

Even if third-party payors provide adequate coverage and reimbursement for our eSVS Mesh, adverse changes in third-party payors’ general policies toward reimbursement could preclude market acceptance for our eSVS Mesh and harm our potential sales and sales growth, which in turn would harm our business. Recently, healthcare reform legislation was signed into law in the United States and we expect that there will continue to be legislative proposals for governmental controls over healthcare in the United States and other countries. Some third-party payors also require pre-approval of coverage or companies to demonstrate the superiority of their product before they will reimburse healthcare providers who use such devices or procedures.

 

The trend toward managed healthcare in the United States and other countries and legislation intended to reduce the cost of government insurance programs will significantly influence the purchase of healthcare services and products, and could result in lower or no reimbursement for our eSVS Mesh. It is uncertain whether our eSVS Mesh will be viewed as sufficiently cost-effective to warrant adequate coverage and reimbursement levels.

 

Our operations involve hazardous materials, and we must comply with environmental laws and regulations.

 

We are subject to a variety of state and local regulations relating to the use, handling, storage, disposal and human exposure to hazardous and toxic materials. We currently generate small quantities of waste alcohol and acids, classifying us as a Very Small Quantity Generator with the Minnesota Pollution Control Agency, which requires us to comply with county and state registration requirements. We expect that compliance costs will be less than $5,000 for 2015. However, environmental laws could become more stringent over time, and we may increase the use of hazardous materials in our operations in the future, which could impose greater compliance costs on us and increase the risks and penalties associated with violations, any of which could harm our business. Compliance with future environmental and safety laws and regulations could restrict our ability to expand our facilities, impair our research, development or production efforts, or require us to incur other significant expenses. We could incur costs, fines and civil and criminal sanctions, third-party property damage or personal injury claims, or could be required to incur substantial investigation or remediation costs, if we were to violate or become liable under environmental laws. There can be no assurance that violations of environmental laws or regulations will not occur in the future as a result of the inability to obtain permits, human error, accident, equipment failure or other causes.

 

 

U.S. healthcare reform legislation includes provisions that may adversely affect our business and results of operations.

 

As the 2010 U.S. healthcare law continues to be phased in, we believe the law may have an impact on various aspects of our business operations. The law’s Medicare payment reforms, such as accountable care organizations and bundled payments, may provide incentives for healthcare providers to reduce spending on our eSVS Mesh and reduce utilization of hospital procedures that use our eSVS Mesh if and when our eSVS Mesh receives FDA approval. Accordingly, while it is still too early to fully understand and predict the ultimate impact of the law on our business, ongoing implementation of this legislation could have a material adverse effect on our results of operations and cash flows.

 

Risks Associated With Our Common Stock

 

Our common stock was delisted from The NASDAQ Capital Market, now trades on the OTCQB and is considered a “penny stock,” which may result in difficulty for our stockholders to buy or sell shares of our common stock.

 

As a result of the delisting of our common stock from The NASDAQ Capital Market, our common stock is subject to the “penny stock” rules adopted under Section 15(g) of the Exchange Act. The penny stock rules generally apply to companies whose common stock is not listed on The Nasdaq Stock Market or other national securities exchange and trades at less than $5.00 per share, other than companies that have had average revenue of at least $6,000,000 for the last three years or that have tangible net worth of at least $5,000,000 ($2,000,000 if the company has been operating for three or more years). The penny stock rules require, among other things, that brokers who trade penny stock to persons other than “established customers” complete certain documentation, make suitability inquiries of investors and provide investors with certain information concerning trading in the security, including a risk disclosure document and quote information under certain circumstances. Many brokers have decided not to trade penny stocks because of the requirements of the penny stock rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited. If we remain subject to the penny stock rules for any significant period, it could have an adverse effect on the market, if any, for our securities. If our securities are subject to the penny stock rules, our stockholders and investors will find it more difficult to buy or sell our securities.

 

We may experience volatility in our stock price, which may adversely affect the trading price of our common stock.

 

The market price of our common stock ranged from a low of $0.12 to a high of $0.99 per share during 2014, and it may continue to experience significant volatility from time to time. In addition to the risk factors discussed elsewhere in this report, the following factors, many of which are outside of our control, could cause the market price of our common stock to decrease significantly in the future:

 

 

inconclusive or failed clinical trial outcomes of our eSVS Mesh;

 

 

a decision to cease operations and liquidate our company;

 

 

failure to achieve required governmental approvals to market and sell our eSVS Mesh;

 

 

 

failure to achieve market acceptance for and significant sales of our eSVS Mesh;

 

 

inability to manufacture our eSVS Mesh in adequate quantities or to commercial standards;

 

 

loss or departure of key personnel;

 

 

inability to hire, train and retain necessary and qualified personnel;

 

 

variations in our quarterly operating results or those of companies that are perceived to be similar to us;

 

 

announcements by our competitors of significant technological developments;

 

 

changes in governmental regulations and standards;

 

 

litigation related to patent infringement and product liability claims;

 

 

changes to financial estimates by equity research analysts;

 

 

sales of common stock or other securities by us in the future;

 

 

decreases in market valuations of similar companies; and

 

 

fluctuations in stock market prices and volumes.

 

Each of these factors, among others, could cause the market price of our common stock to decline significantly in the future.

 

In addition, the stock markets have been extremely volatile. Securities class action litigation is often initiated against a company following a period of volatility in the market price of the company’s securities. If class action litigation is initiated against us, we would incur substantial costs and our management’s attention would be diverted from our operations.

 

Our outstanding options and warrants and the availability for resale of the underlying shares may adversely affect the trading price of our common stock.

 

As of March 5, 2015, we had outstanding stock options to purchase 2,237,501 shares of our common stock at a weighted-average exercise price of $1.83 per share and outstanding warrants to purchase 940,625 shares of common stock at a weighted-average exercise price of $1.85 per share. Our outstanding options and warrants could adversely affect our ability to obtain future financing or engage in certain mergers or other transactions, since the holders of these options and warrants can be expected to exercise them at a time when we may be able to obtain additional capital through an offering of securities on terms more favorable to us than the terms of outstanding options and warrants. For the life of the options and warrants, the holders have the opportunity to profit from a rise in the market price of our common stock without assuming the risk of ownership. The issuance of shares upon the exercise of outstanding options and warrants will also dilute the ownership interests of our existing stockholders.

 

Future sales of our common stock by our existing stockholders could cause our stock price to decline and cause you to lose part or all of your investment.

 

If our stockholders sell substantial amounts of our common stock in the public market, the market price of our common stock could decrease significantly. The perception in the public market that our stockholders might sell shares of our common stock could also depress the market price of our common stock. We may file registration statements with the SEC covering shares available for future issuance under Kips Bay Medical, Inc. 2013 Equity Incentive Plan or other shares to be sold by us or our stockholders.

 

Our directors, executive officers and significant stockholders have substantial control over us and could limit stockholders’ ability to influence the outcome of key transactions, including changes of control.

 

As of March 5, 2015, our directors and executive officers and their affiliated entities beneficially own 17.9% of our outstanding common stock. In addition, Kips Bay Investments, LLC beneficially owns 20.6% of our outstanding common stock. Manny Villafaña, our Chairman and Chief Executive Officer, beneficially owns 15.9% of our outstanding common stock. Our directors, executive officers, significant stockholders and affiliated entities, if acting together, will able to control all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other significant corporate transactions. These stockholders may have interests that differ from other stockholders, and they may vote in a way with which other stockholders disagree and that may be adverse to the interests of other stockholders. The concentration of ownership of our common stock may have the effect of delaying, preventing or deterring a change of control of our company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company, and may affect the market price of our common stock. This concentration of ownership of our common stock may also have the effect of influencing the completion of a change in control that may not necessarily be in the best interests of all of our stockholders.

 

 

A large percentage of our outstanding common stock is held by insiders, and, as a result, the trading market for our common stock is not as liquid as the stock of other public companies.

 

As of March 5, 2015, 38.5% of our outstanding common stock was beneficially owned by directors, executive officers, principal stockholders and their respective affiliates. The stock of companies with a substantial amount of stock held by insiders is usually not as liquid as the stock of other public companies where insider ownership is not as concentrated. Thus, the trading market for shares of our common stock may not be as liquid as the stock of other public companies.

 

One of our principal stockholders has a right of first offer if we receive an acquisition proposal, which could have the effect of delaying, preventing or deterring a change of control of our company.  

 

Under the terms of our investment agreement with Kips Bay Investments, LLC, we are obligated to give Kips Bay Investments notice within ten days after we receive any acquisition proposal that we intend to pursue, and to negotiate exclusively with Kips Bay Investments for terms under which it might acquire us for a period of twenty days after we provide notice.  If we do not reach agreement with Kips Bay Investments, we have a period of 180 days to reach agreement with a third party on terms that are more favorable to us than were proposed by Kips Bay Investments.  This right of first offer terminates if we complete an underwritten public offering that generates net proceeds to us of at least $20 million, if we are acquired, or if Kips Bay Investments, LLC no longer holds at least 10% of our voting stock.  This right of first offer held by Kips Bay Investments, LLC could have the effect of delaying, preventing or deterring a change of control of our company.

 

Our charter documents and Delaware law may inhibit a takeover that stockholders consider favorable.

 

Provisions of our certificate of incorporation and bylaws and applicable provisions of Delaware law may make it more difficult for or prevent a third party from acquiring control of us without the approval of our board of directors. These provisions:

 

 

set limitations on the removal of directors;

 

 

limit who may call a special meeting of stockholders;

 

 

establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon at stockholder meetings;

 

 

do not permit cumulative voting in the election of our directors, which would otherwise permit less than a majority of stockholders to elect directors;

 

 

prohibit stockholder action by written consent unless unanimous, thereby requiring all stockholder actions to be taken at a meeting of our stockholders; and

 

 

provide our board of directors the ability to designate the terms of and issue preferred stock without stockholder approval.

 

 

In addition, Section 203 of the Delaware General Corporation Law generally limits our ability to engage in any business combination with certain persons who own 15% or more of our outstanding voting stock or any of our associates or affiliates who at any time in the past three years have owned 15% or more of our outstanding voting stock. These provisions may have the effect of entrenching our management team and may deprive stockholders of the opportunity to sell their shares to potential acquirers at a premium over prevailing prices. This potential inability to obtain a control premium could reduce the price of our common stock.

 

Our certificate of incorporation allows us to authorize and issue preferred stock with rights and preferences superior to our common stock without stockholder approval, and the terms of any preferred stock issued may reduce the value of our common stock.

 

We are authorized to issue shares of preferred stock in one or more series. Our board of directors may determine the terms of future preferred stock offerings without further action by our stockholders, other than Kips Bay Investments, LLC. 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. If we issue preferred stock, it could affect your rights or reduce the value of our outstanding common stock. In particular, specific rights granted to future holders of preferred stock 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.

 

We do not intend to declare dividends on our common stock and stockholders should not expect to receive dividends on their common stock in the foreseeable future.

 

We currently intend to retain all future earnings for the operation and expansion of our business and, therefore, do not anticipate declaring or paying cash dividends on our common stock in the foreseeable future. Any payment of cash dividends on our common stock will be at the discretion of our board of directors and will depend upon our results of operations, earnings, capital requirements, financial condition, future prospects, contractual restrictions and other factors deemed relevant by our board of directors. Therefore, our stockholders should not expect to receive dividend income from shares of our common stock.

 

If we fail to maintain effective internal controls over financial reporting, the price of our common stock may be adversely affected.

 

We are required to establish and maintain appropriate internal controls over financial reporting. Failure to establish those controls, or any failure of those controls once established, could adversely impact our public disclosures regarding our business, financial condition or results of operations. Any failure of these controls could also prevent us from maintaining accurate accounting records and discovering accounting errors and financial fraud. Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act require annual assessment of our internal control over financial reporting.

 

In addition, management’s assessment of internal controls over financial reporting may identify additional weaknesses and conditions that need to be addressed or other potential matters that may raise concerns for investors. Any actual or perceived weaknesses and conditions that need to be addressed in our internal control over financial reporting or disclosure of management’s assessment of our internal controls over financial reporting may have an adverse impact on the price of our common stock.

 

Item 1B.     Unresolved Staff Comments

 

This Item 1B is inapplicable to us as a smaller reporting company.

 

 

Item 2.     Properties

 

We lease approximately 5,000 square feet of office, laboratory, manufacturing and warehouse space at 3405 Annapolis Lane North, Suite 200, Minneapolis, Minnesota. We also lease approximately 2,800 additional square feet of office space adjoining our current facility pursuant to a sublease agreement. The terms of both leases extend through September 30, 2017. Our corporate offices, research and development, prototype development, manufacturing, warehousing, and shipping operations are located at this facility.

 

Item 3.     Legal Proceedings

 

None.

 

Item 4.     Mine Safety Disclosures

 

Not applicable.

 

 

PART II

 

Item 5.     Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Market Information

 

Our common stock is quoted on the OTCQB marketplace of the OTC Market Groups, under the symbol “KIPS.” Until September 11, 2014, our common stock was traded on the NASDAQ Capital Market.

 

The following table sets forth the high and low daily sale prices for our common stock, as quoted by the NASDAQ for each calendar quarter during 2014 and 2013, prior to September 11, 2014 and the OTCQB thereafter. The over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

 

(Per share amounts)

 

First
Quarter

   

Second
Quarter

   

Third
Quarter

   

Fourth
Quarter

 

2014 High

  $ 0.99     $ 0.70     $ 0.65     $ 0.24  

2014 Low

    0.62       0.40       0.19       0.12  

2013 High

    1.45       1.74       1.06       0.90  

2013 Low

    0.63       0.95       0.65       0.69  

 

Holders of Record

 

As of March 5, 2015, there were 60 registered holders of our common stock.

 

Dividends

 

We have never paid cash dividends on any of our securities. We currently intend to retain any earnings for use in operations and do not anticipate paying cash dividends in the foreseeable future.

 

Recent Sales of Unregistered Equity Securities

 

During the fourth quarter of 2014, we did not issue or sell any equity securities of ours without registration under the Securities Act of 1933, as amended, except for the issuance of stock options to purchase an aggregate of 180,000 shares at an exercise price of $0.14 per share to three non-employee directors and one advisor under the Kips Bay Medical, Inc. 2013 Equity Incentive Plan. These options vest and become exercisable on the one-year anniversary of the grant date. All such options expire on December 9, 2024. These issuances were exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder. The offer and sale of the options were limited to these four individuals, and the agreements representing these securities bear a restrictive legend.

 

Purchases of Equity Securities by the Company

 

During the fourth quarter of 2014, we did not purchase any shares of our common stock or other equity securities of ours. Our Board of Directors has not authorized any repurchase plan or program for the purchase of shares of our common stock or other securities in the open market or otherwise.

 

 

Item 6.     Selected Financial Data

 

The following tables summarize our selected financial data for the periods and as of the dates indicated. The selected financial data should be read in conjunction with, and are qualified by reference to, our financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this report. The historical results are not necessarily indicative of results to be expected in any future period.

 

   

Year Ended December 31,

 
   

2014

   

2013

   

2012

   

2011

   

2010

 

Statements of Operations Data:

                                       

Net sales

  $ 84     $ 130     $ 226     $ 252     $ 223  

Cost of sales

    (44

)

    (63

)

    (98

)

    (91

)

    (77

)

Gross profit

    40       67       128       161       146  

Operating expenses:

                                       

Research and development

    2,503       3,075       2,483       1,675       2,521  

Selling, general and administrative

    3,150       3,068       3,167       2,755       1,326  

Milestone expense

                            5,000  

Operating loss

    (5,613

)

    (6,076

)

    (5,522

)

    (4,269

)

    (8,701

)

Interest income

    6       16       15       19       12  

Interest expense

                            (1

)

Realized gain on sale of short-term investments

                            46  

Change in fair value of investor stock purchase option

                            (2,290

)

Net loss before income taxes

    (5,607

)

    (6,060

)

    (5,507

)

    (4,250

)

    (10,934

)

Provision for income tax benefit

                            42  

Net loss

  $ (5,607

)

  $ (6,060

)

  $ (5,507

)

  $ (4,250

)

  $ (10,892

)

Basic and diluted net loss per share

  $ (0.17

)

  $ (0.23

)

  $ (0.34

)

  $ (0.27

)

  $ (0.81

)

Weighted average common shares outstanding—basic and diluted

    32,534,586       26,916,060       16,402,363       15,557,969       13,431,661  

 

(In thousands, except share and per share amounts)

 

   

As of December 31,

 
   

2014

   

2013

   

2012

   

2011

   

2010

 

Balance Sheet Data:

                                       

Cash, cash equivalents and short-term investments

  $ 3,595     $ 5,000     $ 10,350     $ 9,168     $ 3,784  

Working capital

    3,952       5,454       10,611       9,940       (18

)

Total assets

    4,738       6,309       11,856       10,667       6,172  

Total stockholders’ equity

    4,305       5,854       11,068       10,407       448  

 

(in thousands)

 

 

Item 7.     Managements 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 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 “Item 1A, Risk Factors and elsewhere in this report.

 

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, or CABG, surgery. Our eSVS Mesh is designed to be fitted like a sleeve on the outside of saphenous vein grafts (referred to as an SVG or vein graft) 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. In the near term, we are focused on and committed to spending substantially all of our resources on completing our current eMESH I clinical feasibility trial, and if that trial is successful, using the data from that study as the basis for the filing of a request for an investigational device exemption to perform a larger pivotal study. The pivotal study is required to demonstrate clinical effectiveness and support a premarket approval application filing with the U.S. Food and Drug Administration, or FDA, seeking approval to sell the eSVS Mesh in the United States. No assurance can be provided that the results from the feasibility trial will be sufficient to support a larger pivotal study.

 

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. In August 2014, we received an updated CE Mark incorporating changes in the application of our eSVS Mesh to the SVG and to the surgical implant technique for the eSVS Mesh treated graft that were approved by the FDA in March 2014 for use in our eMESH I clinical feasibility trial.

 

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 and we do not expect sales to improve in the near future until additional clinical data is available. We believe that sales of our eSVS Mesh have been, and will continue to be, adversely impacted by the limited amount of clinical data on the performance of the eSVS Mesh, limited reimbursements available to hospitals and the effects of economic difficulties in certain European countries. In November 2014, we reduced the price we charge our distributors from $1,200 to $700 per device. As announced in January 2015, we reorganized our operations by eliminating staff positions, instituting salary reductions and reducing our non-clinical related operating expenses, in order to conserve our capital while we pursue the completion of the eMESH I clinical feasibility trial. As a result, we are not focusing our efforts on sales of the eSVS Mesh, at least in the short term.

 

We are currently conducting a feasibility trial for the 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. Enrollments in eMESH I feasibility trial commenced internationally 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 objective of this study is to demonstrate to the FDA the initial safety and performance of the eSVS Mesh for use as an external saphenous vein graft support device during CABG surgery. If the feasibility trial is successful, we intend to use the data from this study as the basis for the filing of a request for an IDE to perform a larger pivotal study. The pivotal study is required to demonstrate clinical effectiveness and support a premarket approval application filing with the FDA seeking approval to sell the 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.

 

 

In March 2014, the FDA approved a combination of changes in the application of the eSVS Mesh to the SVG and to the surgical implant technique for the eSVS Mesh treated graft. These changes were based upon our consultations with medical advisors and several of the cardiac surgeons participating in the eMESH I clinical feasibility trial and our initial review of early results from the eMESH I trial. The changes are intended to reduce the variables in the study and the risk of early graft occlusion. We also believe these changes will simplify the process of applying and implanting the eSVS Mesh thereby reducing procedural costs. No assurance can be provided, however, that these changes will reduce the variables in the study and the risk of early graft occlusion or that the feasibility trial for the FDA will be successful.   Due to our concern that the results of our feasibility trial prior to the change in the implant technique would not be adequate to allow us to obtain an IDE to perform a pivotal study and based upon our discussions with the FDA, we believe that the success of the feasibility trial is completely dependent upon the results from patients implanted with the eSVS Mesh using the new implant technique. Since enrollment using the new implant technique did not commence in earnest until October 2014, we do not expect to receive a meaningful number of follow-up angiographic results from the new implant technique patients until May or June 2015.

 

Enrollment in the eMESH I clinical feasibility trial has reached our targeted goal of 45 to 50 patients treated with the new surgical technique. As of March 5, 2015, 105 patients have been enrolled in the feasibility trial, including 49 patients enrolled with the new technique. Based upon the progress in our enrollments, in December 2014, we terminated our clinical trial agreements with two U.S. sites that had not enrolled any patients. This reduced the U.S. study sites from seven to five. No assurance can be provided that our eMESH I clinical feasibility trial will be successful, that the FDA will approve an IDE for a pivotal study or that once these studies are concluded, we will receive U.S. marketing approval for the eSVS Mesh. If these events do not occur, we may be forced to cease operations since we do not have any other products in development. In addition, we need additional financing to continue our operations, and in particular, to complete our eMESH I clinical feasibility trial. If we do not receive such additional financing, we may be forced to cease operations and liquidate our company.

 

Financial Overview

 

The following are a few highlights of our 2014 financial performance:

 

 

Our net sales decreased to $84,000 in 2014, a decrease of 35.4% from $130,000 in 2013. This sales decrease reflects the negative impact of the limited amount of clinical data on the performance of the eSVS Mesh, limited reimbursements available to hospitals and the effects of economic difficulties in certain European countries. During the fourth quarter of 2014, we reduced the price we charge our distributors from $1,200 to $700 per device. In January 2015, we reorganized our operations which included terminating our two sales directors and reducing our non-clinical related operating expenses, in order to conserve our capital while we pursue the completion of the eMESH I clinical feasibility trial. As a result, we are not focusing our efforts on sales of the eSVS Mesh, at least in the short term, and therefore do not expect our sales to improve during the foreseeable future.

 

 

We incurred a net loss of $5.6 million and had negative cash flow from operating activities of $5.0 million for the year ended December 31, 2014. We expect our losses to continue, albeit at lower levels after our January 2015 reorganization in which we scaled back our operations to focus our efforts and resources on regulatory and clinical activities which further the clinical development of the eSVS Mesh.

 

 

Our cash, cash equivalents and short-term investments, as of December 31, 2014 totaled $3.6 million compared to $5.0 million as of December 31, 2013.

 

On January 5, 2015, we announced that we streamlined and scaled back our operations to focus our efforts and resources on regulatory and clinical activities which further the clinical development of the eSVS Mesh. We believe that these actions will reduce our monthly operating expenses, excluding costs related to our eMESH I clinical feasibility trial, to approximately $200,000. With our operating expense reductions, we expect that our available capital will be sufficient to fund our operations through December 2015. However, we may require significant additional funds earlier than we currently expect in order to continue our feasibility trial and plan for our anticipated larger pivotal study. 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.

 

 

Key Components of Our Results of Operations

 

Net Sales

 

We sell our eSVS Mesh to distributors who, in turn, sell to hospitals and clinics. The pricing in our distributor agreements is denominated in U.S. dollars and provides for the transfer of title when we ship our eSVS Mesh to the distributors. We invoice shipping charges to our distributors and include them in net sales. We expense shipping costs at the time we report the related revenue and record them in cost of sales.

 

Cost of Sales

 

We fabricate our eSVS Mesh both at our facility and at a contract manufacturer. We conduct final assembly and packaging at our facility. Our cost of sales consists primarily of purchased components, direct labor, allocated manufacturing overhead and royalties payable to Medtronic.

 

Research and Development Expenses

 

Since our inception, we have focused our activities on the development of our eSVS Mesh. We expense both internal and external research and development costs as incurred. Research and development costs include the costs to design, develop, test, seek approval for, and enhance our eSVS Mesh and production processes. Expenses related to research and development consist primarily of personnel costs, including salaries, benefits and stock-based compensation, product development, preclinical and clinical trials, professional service fees, materials and supplies and facilities-related costs. We expense amounts paid to obtain patents as the ultimate recoverability of the amounts paid is uncertain.

 

While our research and development expenses in prior years have been focused on product development and evaluating the feasibility of our eSVS Mesh, costs incurred in support of our current trials comprise a large percentage of our current-year research and development expenses . We expect that costs incurred in support of our current and future clinical trials will continue to represent a significant percentage of our research and development expenses. These expenditures are subject to numerous uncertainties in timing and costs to complete. As we obtain results from clinical trials, we may elect to discontinue, delay or alter the scope of our clinical trials. Completion of clinical trials may take several years or more, but the length of time generally varies according to the type, complexity, novelty and intended use of a product. The cost of clinical trials may vary significantly over the life of the trial as a result of differences arising during the clinical trial, including:

 

 

the number of sites included in the clinical trials;

 

 

the length of time required to enroll suitable patient subjects;

 

 

the number of patients that participate in the clinical trials;

 

 

the number of patients that complete follow-up procedures; and

 

 

the duration of patient follow-up.

 

Our reported expenses related to clinical trials are based on estimates of the services received and efforts expended pursuant to contracts with multiple clinical trial sites and by contract research organizations, or CROs, which provide support to us in the conduct of the clinical trials. The financial terms of these agreements are subject to negotiation and vary from contract to contract and may result in uneven payment flows. Generally, these agreements set forth the scope of work to be performed at a fixed fee or unit price. Payments under the contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial follow-up procedures. Expenses related to clinical trials generally are accrued based on contracted amounts and the occurrence of follow-up procedures, such as patient enrollments or the performance of follow-up procedures. If timelines or contracts are modified based upon changes to the clinical trial design or scope of work to be performed, we modify our estimates of accrued expenses accordingly.

 

 

Selling, General and Administrative Expenses

 

Our selling, general and administrative expenses consist primarily of salaries and benefits and other costs, including stock-based compensation, for our executive and administrative personnel; legal, accounting and other professional fees; travel, sales and marketing costs; insurance and other corporate costs.

 

Interest Income

 

Interest income consists of interest earned on investments in bank certificates of deposits, money market funds, commercial paper and corporate debt.

 

Critical Accounting Policies and Estimates

 

Our management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. On an ongoing basis, we evaluate these estimates and judgments, including those described below. We base our estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results and experiences may differ materially from these estimates. While our significant accounting policies are more fully described in Note 4 to our financial statements, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our reported financial results and affect the more significant judgments and estimates that we use in the preparation of our financial statements.

 

Revenue Recognition

 

We sell our eSVS Mesh to international distributors, which subsequently resell it to hospitals and clinics. We recognize revenue in accordance with generally accepted accounting principles as outlined in SEC Staff Accounting Bulletin No. 104, Revenue Recognition, and Accounting Standards Codification, or ASC, 605-10-S99, and thus when persuasive evidence of an arrangement exists, delivery of goods occurs through the transfer of title and risks and rewards of ownership, the selling price is fixed or determinable and collectability is reasonably assured. We recognize revenue as products are shipped based on agreements with each of our distributors, which provide that title and risk of loss pass to the distributor upon shipment of the products to the distributor and do not provide the distributors a right of return.

 

Research and Development Expenses

 

We expense research and development costs, including clinical trial costs, when incurred, consistent with the guidance of ASC 730, Research and Development. All of our clinical trials are performed at clinical trial sites and certain trials are administered by CROs. We accrue costs for clinical trials based on estimates of work performed under the contracts. Costs of setting up clinical trial sites are accrued immediately. Expenses related to clinical trials generally are accrued based on contracted amounts and the achievement of milestones, such as number of patients enrolled. All material clinical trial and CRO contracts are terminable by us upon written notice and we are generally only liable for actual effort expended by the CROs and certain non-cancelable expenses incurred at any point of termination.

 

 

Stock-Based Compensation

 

Stock-based incentive awards are accounted for under the provisions of FASB ASC 718, Compensation—Stock Compensation, which requires companies to measure and recognize the cost of employee and non-employee services received in exchange for awards of equity instruments based on the grant date fair value of those awards. Compensation cost is recognized ratably using the straight-line attribution method over the expected vesting period, which is considered to be the requisite service period. In addition, we are required to estimate the amount of expected forfeitures when calculating the compensation costs, instead of accounting for forfeitures as they occur. All of our previously awarded options were classified as equity instruments and continue to maintain their equity classification.

 

The fair value of options is estimated at the date of grant using the Black-Scholes option pricing model with the assumptions described in the following sentences. Risk free interest rates are based upon U.S. Treasury rates appropriate for the expected term. Expected volatility and forfeiture rates are based on the volatility rates of a set of guideline companies, which consist of public and recently public medical technology companies. The assumed dividend yield is zero, as we do not expect to declare any dividends in the foreseeable future. The expected term is determined using the simplified method allowed by SEC Staff Accounting Bulletin No. 110.

 

We grant options to employees and non-employees, including our directors. Option grants to employees generally vest over four years at the rate of 25% of the total shares underlying the option each year. Options granted to our non-employee directors generally vest in full on the one-year anniversary of the date of grant. Options granted to other non-employees generally vest over three years with 25% of the total shares underlying the option vesting on the date of grant and 25% of the total shares vesting in each of the next three years. All options generally have a maximum term of ten years.

 

Option grants to non-employees have been made in conjunction with their service as advisors to us. Certain of these advisors have also purchased shares of stock in our private placement offerings, but none beneficially own 5% or more of our outstanding common stock. The fair value of options granted to non-employees is measured at each reporting date until the option, or respective portion of the option, vests and the expense recorded by us is updated accordingly. See Note 12 to our financial statements included elsewhere in this report for additional information.

 

Results of Operations

 

Comparison of the Year Ended December 31, 2014 to the Year Ended December 31, 2013 (in thousands)

 

   

Year Ended
December 31,

    Percent  
   

2014

   

2013

    Change  

Net sales

  $ 84     $ 130       (35.4

)%

Cost of sales

    (44

)

    (63

)

    (30.2

)

Gross profit

    40       67       (40.3

)

Operating expenses:

                       

Research and development

    2,503       3,075       (18.6

)

Selling, general and administrative

    3,150       3,068       2.7  

Total operating expenses

    5,653       6,143       (8.0

)

Other income:

                       

Interest income

    6       16       (62.5

)

                         

Net loss before income tax

  $ (5,607

)

  $ (6,060

)

    (7.5

)%

 

 

Research and development expenses 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. The terms and vesting schedules for share-based awards vary by type of grant and the employment status of the grantee. The equity awards granted through December 31, 2014 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 operations for the years ended December 31, 2014 and 2013 (in thousands):

 

   

Year Ended

December 31,

 
   

2014

   

2013

 

Research and development

  $ 134     $ 152  

Selling, general and administrative

    281       379  

Total stock-based compensation

  $ 415     $ 531  

 

Net Sales and Gross Profit

 

Our net sales declined to $84,000 in 2014, a decrease of 35.4%, from $130,000 in 2012. Our gross profit declined to $40,000 in 2014, a decrease of 40.3%, from $67,000 in 2013. This sales decrease reflects the negative impact of the limited amount of clinical data on the performance of the eSVS Mesh, limited reimbursements available to hospitals and the effects of economic difficulties in certain European countries. During the fourth quarter of 2014, we reduced the price we charge our distributors from $1,200 to $700 per device, which further contributed to the decline in our sales and gross profit. In January 2015, we reorganized our operations, which included terminating our two sales directors as part of our plan to conserve our capital while we pursue the completion of the eMESH I clinical feasibility trial. As a result, in the near term we are not focusing our efforts on sales of the eSVS Mesh, and therefore do not expect our sales to improve in the near foreseeable future.

 

Research and Development

 

Our research and development expenses decreased 18.6% to $2.5 million in 2014 from $3.1 million in 2013. This decrease was due to a combination of factors, which included a reduction in expense incurred for product testing requested by the FDA in November 2012 and completed in 2013; a reduction in costs we incurred in supporting post-market studies of our eSVS Mesh; reduced professional service fees required to support our eMESH I clinical trial; and reduced patient enrollment costs in our eMESH I clinical feasibility trial as current year enrollments occurred in lower cost study sites. Other factors contributing to the current year decline included reduced patent related legal fees, lower stock-based compensation costs and lower staff levels. We expect that our research and development costs will decrease during 2015 periods compared to 2014 periods due to our focus on our eMESH I clinical feasibility trial and the effects of our January 2015 reorganization.

 

Selling, General and Administrative

 

Selling, general and administrative expenses increased 2.7% to $3.2 million in 2014 from $3.1 million in 2013. This increase was driven primarily by the increased personnel and travel costs associated with the expansion of our sales team from one to two people in the third quarter of 2013 and the addition of a contracted sales representative in Germany for six months, from May to October, of 2014. This increase was partially offset by reductions in the amount of stock-based compensation expense associated with our declining stock price, administrative travel expense and product liability and directors and officers insurance premiums. We expect that our selling, general and administrative expenses will decrease during 2015 periods compared to 2014 periods due to our focus on our eMESH I clinical feasibility trial and the effects of our January 2015 reorganization.

 

Interest Income

 

Interest income decreased to $6,000 in 2014 from $16,000 in 2013. This decrease resulted primarily from a reduction in the amount of our investments during 2014.

 

 

Comparison of the Year Ended December 31, 2013 to the Year Ended December 31, 2012 (in thousands)

 

   

Year Ended
December 31,

   

Percent

 
   

2013

   

2012

    Change  

Net sales

  $ 130     $ 226       (42.5

)%

Cost of sales

    (63

)

    (98

)

    (35.7

)

Gross profit

    67       128       (47.7

)

Operating expenses:

                       

Research and development

    3,075       2,483       23.8  

Selling, general and administrative

    3,068       3,167       (3.1

)

Total operating expenses

    6,143       5,650       8.7  

Other income:

                       

Interest income

    16       15       6.7  
                         

Net loss before income tax

  $ (6,060

)

  $ (5,507

)

    10.0

%

 

 

Cost of sales, research and development expenses 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. The terms and vesting schedules for share-based awards vary by type of grant and the employment status of the grantee. The equity awards granted during the years ended December 31, 2013 and 2012 vest upon time-based conditions. The following table summarizes the stock-based compensation expense in our statements of operations for the years ended December 31, 2013 and 2012 (in thousands):

 

   

Year Ended
December 31,

 
   

2013

   

2012

 

Manufacturing

  $     $ 29  

Research and development

    152       150  

Selling, general and administrative

    379       409  

Total stock-based compensation

  $ 531     $ 588  

 

Net Sales and Gross Profit

 

Our net sales declined to $130,000 in 2013, a decrease of 42.5%, from $226,000 in 2012. Our gross profit declined to $67,000 in 2013, a decrease of 47.7%, from $128,000 in 2012. This decrease in net sales reflects the negative impact of limited reimbursements and/or budgets 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. 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 director-level employees.

 

Research and Development

 

Our research and development expenses increased 23.8% to $3.1 million in 2013 from $2.5 million in 2012. This increase was due primarily to increased costs incurred in conjunction with increases in the number of study sites and patients enrolled in our eMESH I clinical feasibility trial during 2013. This increase was partially offset by reductions in product testing costs related to additional test work required by the FDA performed by us during 2012.

 

 

Selling, General and Administrative

 

Selling, general and administrative expenses decreased 3.1% to $3.1 million in 2013 from $3.2 million in 2012 primarily as a result of costs incurred during 2012 which did not recur in 2013. These costs during 2012 included professional service fees supporting our commercial sales activity, fees related to the filing of a registration statement for our former common stock purchase agreement with Aspire Capital Fund, LLC and costs associated with changing underwriters in our December 2012 public offering. This decrease was partially offset by increased costs related to investor relations activities and an increase in premiums for product liability and directors and officers liability insurance.

 

Interest Income

 

Interest income increased to $16,000 in 2013 from $15,000 in 2012. This increase resulted from realizing improved returns on our investable cash during 2013.

 

Liquidity and Capital Resources

 

The following table summarizes our liquidity and capital resources as of December 31, 2014 and 2013 and for each of fiscal years ended December 31, 2014, 2013 and 2012, and is intended to supplement the more detailed discussion that follows (in thousands):

 

   

December 31,

 

Liquidity and Capital Resources

 

2014

   

2013

 

Cash and cash equivalents

  $ 3,138     $ 2,316  

Short-term investments

    457       2,684  

Working capital

    3,952       5,454  

 

   

Year Ended December 31,

 

Cash Flow Data

 

2014

   

2013

   

2012

 

Cash provided by (used in):

                       

Operating activities

  $ (5,026

)

  $ (5,537

)

  $ (4,203

)

Investment activities

    2,205       (1,826

)

    1,818  

Financing activities

    3,643       276       5,577  

Net increase (decrease) in cash and cash equivalents

  $ 822     $ (7,087

)

  $ 3,192  

 

Working Capital

 

Our total cash resources, including short-term investments, as of December 31, 2014 totaled $3.6 million compared to $5.0 million as of December 31, 2013. As of December 31, 2014, we had $433,000 in current liabilities and $4.0 million in working capital, 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 $5.0 million in 2014, $5.5 million in 2013 and $4.2 million in 2012. The net cash used in each of these periods primarily reflects the net loss for those periods, offset in part by non-cash stock-based compensation, depreciation and the effects of changes in operating assets and liabilities.

 

 

Net Cash Provided by (Used in) Investment Activities

 

Net cash provided by (used in) investment activities was $2.2 million in 2014, $(1.8) million in 2013 and $1.8 million in 2012. Cash used in or provided by investment activities is primarily related to purchases and sales or maturities of short-term investments.

 

Net Cash Provided by Financing Activities

 

Net cash provided by financing activities was $3.6 million in 2014, $276,000 in 2013 and $5.6 million in 2012. Net cash provided by financing activities resulted primarily from proceeds of public offerings of our common stock.

 

Capital Requirements

 

We expect to incur substantial expenses and generate significant operating losses as we continue to execute our business strategy, and in the short-term complete our eMESH I clinical feasibility trial and plan for our anticipated pivotal trial.

 

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 clinical trials required to support our applications for regulatory approvals, including our human clinical trials in the United States and Europe;

 

 

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 commercial operations, including selling and marketing efforts; and

 

 

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

 

While our distributors continue to market our eSVS Mesh in select European and other international markets, our sales to date have been limited and negatively affected by the limited amount of clinical data on the performance of the eSVS Mesh, limited reimbursements available to hospitals and the effects of economic difficulties in certain European countries. We expect our sales to remain at limited levels until additional clinical study data is available, especially in light of our January 2015 decision to curtail our sales activities.

 

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.

 

 

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, resulting in net proceeds of $3.6 million, after deduction of underwriter discounts, commissions and related expenses.

 

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 December 31, 2014, after considering the effects of our January 2015 reorganization, will be sufficient to fund our planned operations through December 2015. However, we may require significant additional funds earlier than we currently expect in order to continue our feasibility trial and plan for our anticipated larger pivotal study. 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 December 31, 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 is particularly true if economic and market conditions deteriorate.

 

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. If we issue preferred stock, it could affect the rights of our stockholders or reduce the value of our common stock. In particular, specific rights granted to future holders of preferred stock 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 or consider other strategic alternatives, including ceasing operations and liquidating our company.

 

 

Contractual Obligations, Commitments and Contingencies

 

Our principal commitments consist of obligations under the lease for our facility in Minneapolis, Minnesota, certain office equipment and our clinical studies.

 

The following table summarizes our outstanding contractual obligations as of December 31, 2014 (in thousands):

 

   

Total

   

Less than
1 Year

   

1 - 3 Years

   

4 - 5 Years

   

After
5 Years

 

Operating lease obligations

  $ 238     $ 88     $ 150     $     $  

Clinical studies

    237       237                    

 

The operating lease obligations for our corporate facilities ends on September 30, 2017.

 

Our eMESH I clinical feasibility trial requires patients to be followed at regular intervals during the first year after implant and then annually out to five years. We are required to pay for patient follow up visits only to the extent they occur. In the event a patient does not attend a follow-up visit, we have no financial obligation. However, the estimates included above are based upon an assumption that all patients returning for all scheduled follow-up visits.

 

Royalty Payments

 

The core intellectual property relating to our eSVS Mesh was sold to us by Medtronic pursuant to an Assignment and License Agreement dated October 9, 2007. Pursuant to the Assignment and License Agreement, Medtronic also sold to us intellectual property relating to a brushed ePTFE vascular graft, or the Brushed Graft Product. As consideration for the sale of intellectual property relating to the eSVS Mesh and the Brushed Graft Product and other rights granted by the Assignment and License Agreement, we have agreed to pay Medtronic an aggregate of up to $20.0 million upon the achievement of certain sales milestones relating to our eSVS Mesh and the Brushed Graft Product and a royalty of 4% on sales of our eSVS Mesh and any future sales of the Brushed Graft Product. This royalty will terminate upon the earlier of the expiration of all of the patents and patent applications, or when the aggregate royalties paid reach $100.0 million. In June 2011, we paid the first $5.0 million milestone payment. In addition, we have recorded royalty expense of $3,000 and $5,000 for the years ended December 31, 2014 and 2013, respectively.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements, as defined by the rules and regulations of the SEC, that have or are reasonably likely to have a material effect on our financial condition, changes in 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.

 

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

 

This Item 7A is inapplicable to us as a smaller reporting company.

 

 

Item 8.     Financial Statements and Supplementary Data

 

Index To Financial Statements

 

    Page 

Report of Independent Registered Public Accounting Firm

 

F-1

Balance Sheets

 

F-2

Statements of Operations

 

F-3

Statements of Comprehensive Loss