As filed with the Securities and Exchange Commission on April 8, 2010

Registration No. 333-     

 

 

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

 

 

 

 

Form S-1

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

 

 

 

 

KIPS BAY MEDICAL, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

 

3405 Annapolis Lane North, Suite 200
Minneapolis, Minnesota 55447
(763) 235-3540
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

 

 

Manny Villafaña
Chairman and Chief Executive Officer
Kips Bay Medical, Inc.
3405 Annapolis Lane North, Suite 200

Minneapolis, Minnesota 55447
(763) 235-3540
(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

 

 

 

 

 

Approximate date of commencement of proposed sale to the public:  As soon as practicable after the effective date of this registration statement.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box.  o

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

 

 

CALCULATION OF REGISTRATION FEE

 

 

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

SUBJECT TO COMPLETION, DATED APRIL 8, 2010

 

Preliminary Prospectus

 

          Shares

 

Kips Bay Medical, Inc.

 

 

 

Common Stock

 

We are offering           shares of our common stock. This is our initial public offering, and no public market currently exists for our common stock. We expect that the initial public offering price will be between $      and $      per common share. We have applied for listing of our common stock on the NASDAQ Global Market under the symbol “KIPS.”

 

Investing in our common stock involves a high degree of risk. Please read “Risk Factors” beginning on page 6.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

Delivery of the shares of common stock is expected to be made on or about          , 2010. We have granted the underwriters an option for a period of 30 days to purchase, on the same terms and conditions set forth above, up to an additional           shares of our common stock to cover overallotments. If the underwriters exercise the option in full, the total underwriting discounts and commissions payable by us will be $      and the total proceeds to us, before expenses, will be $     .

 

Sole Book-Running Manager

 

Jefferies & Company

 

Prospectus dated          , 2010

Our External Saphenous Vein Support Technology, or eSVS MESH, is a nitinol mesh sleeve that is placed over the saphenous vein graft during coronary artery bypass grafting, or CABG surgery. We believe the use of our eSVS MESH with saphenous vein grafts in CABG surgery could improve the long-term outcome of CABG procedures, including improved openness and improved blood flow through the saphenous vein graft, resulting in a reduced need for costly and potentially complicated reoperations or revascularization procedures.

Caution: Investigational device. Limited by law to investigational use and not approved for commercial sale by any regulatory agency.

 

Table of Contents

 

 

Until          , 2010 (25 days after the date of this prospectus), all dealers that buy, sell, or trade the common shares, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

We have not authorized anyone to give any information or to make any representations other than those contained in this prospectus. Do not rely upon any information or representations made outside of this prospectus. This prospectus is not an offer to sell, and it is not soliciting an offer to buy, (1) any securities other than our common shares or (2) our common shares in any circumstances in which our offer or solicitation is unlawful. The information contained in this prospectus may change after the date of this prospectus. Do not assume after the date of this prospectus that the information contained in this prospectus is still correct.

 

Prospectus Summary

	•	Structural support designed to inhibit vessel expansion and resulting damage to the vessel, which can prevent a thickening of the vessel wall over time, or hyperplasia, and resulting graft failure.
	•	Radial constriction designed to cause the diameter of the graft, or lumen, to be consistent in size and more closely match the diameter of the target coronary artery to which it is attached, thereby increasing blood flow velocities, reducing the potential for clot formation, and inhibiting vein wall thickening.
	•	Compatibility with current CABG procedures, including on-pump or off-pump procedures, and open or endoscopic vein harvest methods. Except for the placement of our eSVS MESH on the saphenous vein graft, the surgical steps to use a saphenous vein graft with our eSVS MESH are the same as would be performed for any coronary artery bypass procedure utilizing unsupported saphenous vein grafts. We do not expect, nor have we seen, a significant increase in CABG procedure time due to eSVS MESH use.

	•	Work with respected medical centers and key thought leaders to demonstrate and communicate the potential benefits of our eSVS MESH.
	•	Commercialize our eSVS MESH in select European markets.
	•	Obtain regulatory approval and commercialize our eSVS MESH in the United States.
	•	Conduct trials to expand indications for our eSVS MESH.

	•	We have a limited operating history, expect future losses, and may be unable to achieve or maintain profitability.
	•	We may be unable to successfully complete our clinical trials and commercialize our eSVS MESH, or we may experience significant delays in doing so.
	•	We may be unable to obtain market acceptance of our eSVS MESH.
	•	Third-party payors may not provide sufficient coverage or reimbursement to healthcare providers for the use of our eSVS MESH.
	•	We may be unable to protect our intellectual property rights, and claims of infringement or misappropriation of the intellectual property rights of others could prohibit us from commercializing our eSVS MESH.
	•	We will be subject to U.S. and foreign government regulation.

Common stock offered by us		shares
Common stock to be outstanding immediately after this offering		shares

	•	783,000 shares of common stock issuable upon the exercise of outstanding stock options as of March 1, 2010 at a weighted average exercise price of $4.01 per share; and
	•	1,216,000 additional shares of common stock reserved and available for future issuances under our 2007 Long-Term Incentive Plan.

		Period from May 1,												Period from May 1,
		2007 (Date of												2007 (Date of
		Inception) to												Inception) to
		December 31,				Year Ended December 31,								December 31,
		2007				2008				2009				2009
Statements of Operations Data:
Operating expenses:
Research and development		$	196			$	2,635			$	3,004			$	5,835
Selling, general and administrative			381				754				779				1,914
Operating loss			(577	)			(3,389	)			(3,783	)			(7,749	)
Interest income			65				52				17				134
Interest expense			(164	)			(390	)			(181	)			(735	)
Impairment of available for sale securities			—				(85	)			—				(85	)
Change in fair value of investor stock purchase option			—				—				610				610
Net loss		$	(676	)		$	(3,812	)		$	(3,337	)		$	(7,825	)
Basic and diluted net loss per share		$	(0.16	)		$	(0.62	)		$	(0.30	)
Weighted average common shares			4,106,557				6,100,767				11,069,342
outstanding—basic and diluted
						(In thousands, except share and per share amounts)

		As of December 31, 2009
		Actual				As Adjusted(1)
Balance Sheet Data:
Cash, cash equivalents and short term investments		$	3,417			$
Working capital			2,226
Total assets			3,740
Long-term debt, net			—
Total stockholders’ equity			2,512
							(In thousands	)

(1)		As adjusted to reflect the sale of           shares of our common stock in this offering at an assumed initial public offering price of $      per share, the midpoint of the range on the front cover of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase or decrease in the assumed initial public offering price of $      per share would increase or decrease cash and cash equivalents, working capital, total assets and total stockholders’ equity by $      million, assuming the number of shares offered by us, as set forth on the front cover of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

You should carefully consider the following information about risks, together with the other information contained in this prospectus, 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. In any such case, the market price of our common stock could decline, and you may lose all or part of your investment.

 

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 we have engaged primarily in development of and initial clinical trials of our external saphenous vein support system, or eSVS MESH. Accordingly, we have limited operating history on which to base an evaluation of our business and prospects. As of December 31, 2009, we had an accumulated deficit of $9.2 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 any product revenues and we have financed our operations and internal growth primarily through private placements of equity securities and convertible promissory notes. Our prospects must be considered in light of the significant risks, expenses, and difficulties frequently encountered by medical device companies in their early stage of development. 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 we are unable to successfully complete our clinical trials and commercialize our eSVS MESH in Europe, the United States, or other major markets or experience significant delays in doing so, our ability to generate revenue will be significantly delayed and our business will be harmed.

 

Our time and financial resources since our inception have largely been devoted to the development of our eSVS MESH. We have conducted only one human clinical trial of our eSVS MESH that was conducted outside the United States, and as of the date of this prospectus, our eSVS MESH has been implanted in only 90 patients. Our ability to generate revenues depends on the receipt of regulatory approvals and the successful development and commercialization of our eSVS MESH in select markets in Europe, in the United States, and in other major markets. If we are unable to prove the safety and effectiveness of our eSVS MESH through clinical trials, we will not receive marketing approvals from the FDA or foreign health regulatory authorities, and we will be unable to sell 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 our eSVS MESH receives CE Mark approval in the European Union, if the data from our clinical trials is not satisfactory, we may not proceed with our planned filing of applications for regulatory approvals in the United States or other major markets, or we may be forced to delay the filings. Even if we file an application for approval with satisfactory clinical data, the FDA or foreign regulatory authorities may not accept our filing, or may request additional information, including data from additional clinical trials. Delays in collecting or analyzing our clinical trial data could result in delays in filing regulatory applications with the FDA or other regulatory authorities. The FDA or foreign regulatory authorities may also approve our eSVS MESH for very limited purposes with many restrictions on its use or in limited sizes, may delay approvals, or ultimately may not grant marketing approval for our eSVS MESH. Even if we do receive CE Mark, FDA, or other foreign regulatory approval, we may be unable to successfully commercialize our eSVS MESH in the European Union, the United States, or other major markets, and our ability to generate revenue will be significantly impaired.

 

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

 

Physicians treat coronary artery disease with methods other than CABG procedures, including interventional

techniques such as balloon angioplasty with or without the use of stents, pharmaceuticals, 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 our competitors’ products, our commercial opportunity will be reduced and our potential revenues 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 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 saphenous vein procedure 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:

 

 

If our eSVS MESH does not achieve an adequate level of acceptance by physicians, healthcare payors, and patients, we may not generate meaningful revenue and we may not become profitable. In addition, we have not yet determined pricing for our eSVS MESH 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 will be subject to 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. 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 device or pharmaceutical products 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 less-invasive technologies for treating cardiovascular disease, which could make 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, as well as in acquiring technologies and technology licenses complementary to our programs or advantageous to our business.

 

Furthermore, companies with 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 we have 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 will also 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. There are few barriers that would prevent new or existing competitors from developing products that compete directly with ours. Demand for our eSVS MESH could be diminished by equivalent or superior products and technologies offered by competitors.

 

Smaller or early-stage companies may also 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.

 

Our competitive position also depends on:

 

 

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

 

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 and for research and development purposes 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 would be required for commercialization, we would 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 revenues, 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:

 

 

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. We have no reason to believe that any of our current suppliers could not be replaced if they were unable to deliver components to us in a timely manner or at an acceptable price and level of quality. However, if we lost one of these suppliers and were unable to obtain an alternate source on 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 revenue 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.

 

Quality issues in our manufacturing processes could delay our clinical trials and our commercialization.

 

Even if we are able to contract with manufacturers for key materials or supplies, we may experience future manufacturing difficulties. 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.

 

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. If a particular lot fails to meet lot release specifications, we will not be able to ship that lot to our clinical trial sites. 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 could be delayed, which would harm our business and our results of operations.

 

Our business is subject to risks relating to operating internationally.

 

As part of our product development and regulatory strategy, we intend to market our eSVS MESH internationally following CE Mark approval. There are a number of risks associated with conducting business internationally, including:

 

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 management’s 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. A product liability claim against us, even if we are ultimately successful in defending it, could have a material adverse effect on our business, results of operations and reputation.

 

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. A product liability claim, regardless of its merit or eventual outcome, 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. 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. In addition, as economies of emerging markets develop, these countries may implement changes in their healthcare delivery and payment systems. Furthermore, healthcare cost containment efforts similar to those underway in the United States are prevalent in many of the other countries in which we 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 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 administer 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 revenue 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 may not be able to attract and retain the technical, regulatory, and sales personnel necessary for our success, which may divert management’s attention and negatively impact our operations.

 

We are highly dependent on our senior management, specifically Manny Villafaña, our Chairman and Chief Executive Officer, and Michael Winegar, our Chief Operating Officer and Vice President of Regulatory Affairs. The loss of services of either of these individuals would impair our ability to commercialize our eSVS MESH and develop new products and would harm our business. Our success will depend on our ability to retain our senior management and to 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. 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.

 

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 revenue and operating results may be adversely affected.

 

We expect to significantly expand our manufacturing operations, 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. Rapid expansion in personnel may mean that less experienced people could be manufacturing and 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 financial results will suffer.

 

Becoming a public company will cause us to incur increased costs and demands on our management and divert management’s attention from our core business.

 

The obligations of being a public company, including substantial public reporting and auditing obligations, will require significant additional expenditures, place additional demands on our management and divert management’s time and attention away from our core business. These additional obligations will require us to hire additional personnel in order to ensure compliance with the regulatory requirements of the Securities and Exchange Commission and the NASDAQ Global Market. We will be required to report on our internal controls, as required by Section 404 of the Sarbanes-Oxley Act, beginning with our annual report for the year ending December 31, 2011. We cannot be certain as to the timing of completion of our evaluation, testing and remediation actions relating to our internal controls or the impact of the same on our operations. 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 will be 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 will be placed upon us as a public company, including the requirements of the Sarbanes-Oxley Act, 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

 

If we are unable to protect our intellectual property rights, our ability to compete will be harmed.

 

We rely upon patents, trade secret laws and confidentiality agreements to protect our technology. We have six patent applications pending in the United States and nine patent applications pending in countries outside the United States on our eSVS MESH. We also have one international patent application pending, which gives us the opportunity to file in more individual countries. Some of our pending patent applications have been examined and currently stand rejected. We will continue to pursue obtaining patents from these applications, but it is possible that our pending patent applications may not issue as patents or, if issued, may not issue in a form that will be advantageous to us. We expect to launch our eSVS MESH in Europe before any of our pending European patent applications issue as patents. Any patents we 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. To the extent that our intellectual property protection is inadequate, we are exposed to a greater risk of direct competition. In addition, competitors could purchase our eSVS MESH and attempt to replicate some or all of the competitive advantages we derive from our development efforts or attempt to design around our protected technology. If our intellectual property is not adequately protected against competitors’ products and methods, our competitive position could be adversely affected, as could our business.

 

The laws of some foreign countries may not protect our intellectual property rights to the same extent as do the laws of the United States. In the event a competitor infringes upon our patent or other intellectual property rights, enforcing those rights may be difficult and time consuming. Even if successful, litigation to enforce our intellectual property rights or to defend our patents against challenge could be expensive and time consuming and could divert our management’s attention. We may not have sufficient resources to enforce our intellectual property rights or to defend our patents against a challenge.

 

We also rely upon trade secrets, technical know-how and continuing technological innovation to develop and maintain our competitive position. We require our employees to execute appropriate confidentiality and assignment-of-inventions agreements with us. These agreements typically provide that all materials and confidential information developed or made known to the individual during the course of the individual’s relationship with us be kept confidential and not disclosed to third parties except in specific circumstances and that all inventions arising out of the individual’s relationship with us shall be our exclusive property. Additionally, we seek to have our consultants and advisors execute similar confidentiality and assignment-of-inventions agreements with us, but in some instances these agreements have not included assignment-of-invention provisions. These agreements may be breached, and in some instances, we may not have an appropriate remedy available for breach of the agreements. Furthermore, our competitors may independently develop substantially equivalent proprietary information and techniques, reverse engineer our information and techniques, or otherwise gain access to our proprietary technology.

 

Claims of infringement or misappropriation of the intellectual property rights of others could prohibit us from commercializing our eSVS MESH and 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.

 

Risks Related to Regulatory Approval and Other Government Regulations

 

We will be subject to government regulation, and we may not receive approval for our eSVS MESH on a timely basis, if at all.

 

Our eSVS MESH, product development activities and manufacturing processes are, and will continue to be, subject to extensive and rigorous scrutiny and regulation by the FDA and by comparable agencies in foreign countries. In the United States, the FDA regulates the introduction of medical devices, as well as manufacturing, labeling and record keeping procedures for such products. The process of obtaining marketing clearance or approval for new medical products from the FDA is costly and time consuming, and there can be no assurance that such approval will be granted for our eSVS MESH on a timely basis, if at all, or that the FDA review will not involve delays that would adversely affect our ability to commercialize our eSVS MESH. Even if regulatory clearance or approval to market a product is obtained from the FDA, this clearance or approval may entail limitations on the indicated uses of the product. Marketing clearance or approval can also be withdrawn by the FDA due to failure to comply with regulatory standards or the occurrence of unforeseen problems following initial clearance.

 

The FDA will require us to file a Pre-Market Approval, or PMA, application with regard to our eSVS MESH, and there is no assurance whatsoever that approval will be obtained. Even if approval is obtained, the process of obtaining a PMA is expensive, uncertain and lengthy, frequently requiring several years from the date of submission. Changing FDA policies and requirements for PMA products may add additional uncertainty. Significant delay or failure to obtain FDA approval to market our eSVS MESH would harm our business.

 

The FDA may not approve our investigational device exemption application 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.

 

The FDA is reviewing our application for an investigational device exemption, or IDE, which, if granted, will allow us to begin clinical trials of our eSVS MESH in the United States. The FDA has not yet approved our application for an IDE and may never grant such approval.

If the FDA approves our IDE application, the clinical trials 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 clinical trials of our eSVS MESH in the United States. If our IDE application is not approved and we are unable to conduct U.S. clinical trials, 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.

 

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.

 

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, 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.

 

We will 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. 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.

 

Our facilities will be subject to inspection by the FDA and international authorities, and we could face penalties if we are found to be non-compliant with the regulations of the FDA or international authorities.

 

The FDA and various other authorities will inspect our facilities from time to time to determine whether we are in compliance with regulations relating to medical device manufacturing, including regulations concerning design, manufacturing, testing, quality control, product labeling, distribution, promotion, and record keeping practices. A

determination that we are in material violation of such regulations could lead to the imposition of civil penalties, including fines, product recalls, product seizures or, in extreme cases, criminal sanctions. Even if regulatory approvals to market a product are obtained from the FDA, such approvals may contain limitations on the indicated uses of our eSVS MESH. The FDA could also limit or prevent the manufacture or distribution of our eSVS MESH and has the power to require the recall of products. FDA regulations depend heavily on administrative interpretation, and there can be no assurance that the future interpretations made by the FDA or other regulatory bodies with possible retroactive effect will not adversely affect us.

 

Our promotional and marketing activities will be subject to regulation by the FDA and international authorities, and we could face severe penalties if we are found to be promoting our eSVS MESH for an unapproved use.

 

If the FDA or international authorities determine that our promotional materials or activities constitute promotion of our eSVS MESH for an unapproved use, it could demand that we cease the use of or modify our promotional materials or subject us to regulatory enforcement actions, including the issuance of a warning letter, injunction, civil fine and criminal penalties. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider promotional or other materials to constitute promotion of our eSVS MESH for an unapproved use, which could result in significant fines or penalties under other statutory authorities, such as laws prohibiting false claims for reimbursement.

 

Our success will also be dependent on complying with foreign regulatory requirements, and our inability to do so could result in sales of our eSVS MESH being restricted internationally.

 

Our revenues 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 will 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.

 

Proposed legislation may negatively affect coverage and reimbursement levels for our eSVS MESH.

 

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 revenue 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 could significantly influence the purchase of healthcare services and products, and may result in necessary price reductions for our eSVS MESH or the exclusion of our eSVS MESH from reimbursement programs. 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, which can be expensive, time consuming, and may impair our operations.

 

We are subject to a variety of federal, state and local regulations relating to the use, handling, storage, disposal and human exposure to hazardous and toxic materials. 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. We do not have insurance for environmental liabilities and liability under environmental laws can be joint and several and without regard to comparative fault. Environmental laws could become more stringent over time, imposing greater compliance costs

and increasing risks and penalties associated with violations, which could harm our business. Compliance with current or 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. 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.

 

Risks Related to Our Common Stock and this Offering

 

Because there has not been a public market for our common stock and our stock price may be volatile, you may not be able to resell your shares at or above the initial public offering price.

 

Prior to this initial public offering there has not been a public market for our common stock. We cannot predict the extent to which investors’ interests will lead to an active trading market for our common stock or whether the market price of our common stock will be volatile following this offering. If an active trading market does not develop or is not sustained, you may have difficulty selling any of our common stock that you buy. The initial public offering price for our common stock will be determined by negotiations between representatives of the underwriters and us and may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell our common stock at prices equal to or greater than the price you paid in this offering. In addition to the risk factors discussed elsewhere in this section, the following factors, most of which are outside of our control, could cause the market price of our common stock to decrease significantly from the price you pay in this offering:

 

 

Each of these factors could cause the market price of our stock to decline, and you may lose some or all of your investment.

 

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.

 

If equity research analysts do not publish research or reports about our business or if they issue unfavorable research or downgrade our common stock, the price of our common stock could decline.

 

The trading market for our common stock will rely in part on the research and reports that equity research analysts publish about us and our business. We do not control these analysts. Equity research analysts may elect not to provide research coverage of our common stock, which may adversely affect the market price of our common stock. If equity research analysts do provide research coverage of our common stock, the price of our common stock could decline if one or more of these analysts downgrade our common stock or if they issue other

unfavorable commentary about us or our business. If one or more of these analysts ceases coverage of our company, we could lose visibility in the market, which in turn could cause our stock price to decline.

 

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. Substantially all of our existing stockholders prior to this offering are subject to lock-up agreements that restrict their ability to transfer their shares of our common stock for at least 180 days after the date of this prospectus, subject to certain exceptions. Upon expiration of the lock-up period, shares of our common stock will be eligible for sale in the public market. In addition, we intend to file registration statements with the SEC covering (a) any shares of our common stock acquired upon option exercises prior to the closing of this offering, (b) all of the shares subject to options outstanding, but not exercised, as of the closing of this offering and (c) all of the shares available for future issuance under our stock incentive plan upon the closing of this offering. The market price of shares of our common stock may decrease significantly when the restrictions on resale by our existing stockholders lapse and our stockholders, warrant holders and option holders are able to sell shares of our common stock into the market. A decline in the price of shares of our common stock might impede our ability to raise capital through the issuance of additional shares of our common stock or other equity securities, and may cause you to lose part or all of your investment in our shares of common stock.

 

We have broad discretion in the use of the proceeds of this offering and may apply the proceeds in ways with which you do not agree or which cause our stock price to decline.

 

A significant portion of our net proceeds from this offering will be used, as determined by management in its sole discretion, for working capital and general corporate purposes. Our management will have broad discretion over the use and investment of these net proceeds, and, accordingly, you will have to rely upon the judgment of our management with respect to our use of these net proceeds, with only limited information concerning management’s specific intentions. You will not have the opportunity, as part of your investment decision, to assess whether we use the net proceeds from this offering appropriately. We may place the net proceeds in investments that do not produce income or that lose value, which may cause our stock price to decline.

 

Our directors, executive officers and significant stockholders will continue to have substantial control over us after this offering and could limit your ability to influence the outcome of key transactions, including changes of control.

 

We anticipate that our directors and executive officers and their affiliated entities will, in the aggregate, beneficially own     % of our outstanding common stock following the completion of this offering, assuming the underwriters do not exercise their option to purchase additional shares. In addition, Kips Bay Investments, LLC will beneficially own     % and Mr. Villafaña, our Chairman and Chief Executive Officer, will beneficially own     % of our outstanding common stock following the completion of this offering, and together will be able to control or influence significantly all matters requiring approval by our stockholders. Our directors, executive officers, significant stockholders and affiliated entities, if acting together, would be able to control or influence significantly 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 yours, and they may vote in a way with which you disagree and that may be adverse to your interests. 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.

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

 

Upon the closing of this offering, provisions of our certificate of incorporation and amended and restated 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:

 

 

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 you of the opportunity to sell your 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.

 

You will experience immediate and substantial dilution in the net tangible book value of the common stock you purchase in this offering.

 

If you purchase common stock in this offering, you will incur immediate dilution of $      in as adjusted net tangible book value per share of common stock, based on an assumed initial public offering price of $ per share, the midpoint of the range on the front cover of this prospectus, because the price that you pay will be substantially greater than the as adjusted net tangible book value per share of common stock that you purchase. This dilution is due in large part to the fact that our earlier investors paid substantially less than the price of the shares being sold in this offering when they purchased their shares of our common stock. In addition, if outstanding options to purchase our common stock are exercised, you will experience additional dilution.

 

We do not intend to declare dividends on our common stock after this offering, and you should not expect to receive dividends on your common stock for 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, you should not expect to receive dividend income from shares of our common stock.

 

We anticipate future losses and may require additional financing, and 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 incur losses for the foreseeable future, and we may require financing in addition to the proceeds of this offering in order to satisfy our capital requirements. In particular, we may require additional capital in order to continue to conduct the research and development and obtain regulatory clearances and approvals necessary to bring any future products to market and to establish effective marketing and sales capabilities for existing and future products. Additional funds may not be available when we need them on terms that are acceptable to us, or

at all. If adequate funds are not available on a timely basis, we may terminate or delay the development of our eSVS MESH, or delay establishment of sales and marketing capabilities or other activities necessary to commercialize our eSVS MESH.

 

Our future capital requirements will depend on many factors, including:

 

 

Raising additional capital may cause dilution to our stockholders or restrict our operations.

 

To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms may include liquidation or other preferences that adversely affect your rights as a stockholder. 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.

 

 

This prospectus, including the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” contains forward-looking statements that involve risks and uncertainties. In some cases, you can identify forward-looking statements by the following words: “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would,” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. These statements involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this prospectus, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain. Many important factors affect our ability to achieve our objectives, including:

 

 

These factors could cause actual results to differ materially from the results anticipated by these forward-looking statements. You should read these risk factors and the other cautionary statements made in this prospectus as being applicable to all related forward-looking statements wherever they appear in this prospectus. We cannot assure you that the forward-looking statements in this prospectus will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, if at all.

 

You should read this prospectus completely. Other than as required by law, we undertake no obligation to update these forward-looking statements, even though our situation may change in the future. We qualify all the forward-looking statements contained in this prospectus by the foregoing cautionary statements.

 

Information and management estimates contained in this prospectus concerning the medical device industry and the coronary artery bypass graft market, including our general expectations and market position, market opportunity and market share, are based on publicly available information, such as clinical studies, academic research reports and other research reports. The management estimates are also derived from our internal research, using assumptions made by us that we believe to be reasonable and our knowledge of the industry and markets in which we operate and expect to compete. None of the sources cited in this prospectus has consented to the inclusion of any data from its reports, nor have we sought their consent. Our internal research has not been verified by any independent source, and we have not independently verified any third-party information. In addition, while we believe the market position, market opportunity and market share information included in this prospectus is generally reliable, such information is inherently imprecise. Such data involves risks and uncertainties and are subject to change based on various factors, including those discussed under the heading “Risk Factors.”

 

 

Assuming an initial public offering price of $      per share, the midpoint of the range on the front cover of this prospectus, we estimate our net proceeds from the sale of          shares of our common stock in this offering will be $      million, after deducting the estimated underwriting discounts and commissions and our estimated offering expenses payable by us.

 

If the underwriters exercise their option to purchase additional shares in full, we estimate that our net proceeds from this offering will be $      million, after deducting the estimated underwriting discounts and estimated offering expenses payable by us. A $1.00 increase or decrease in the assumed initial public offering price of $      per share would increase or decrease the net proceeds to us from this offering by $      million, assuming the number of shares offered by us, as set forth on the front cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

We intend to use the net proceeds from this offering primarily for the following purposes:

 

 

The amounts we actually expend in these areas may vary significantly from our expectations and will depend on a number of factors, including operating costs and capital expenditures. Accordingly, management will retain broad discretion in the allocation of the net proceeds of this offering. You will not have the opportunity to evaluate the economic, financial or other information on which we base our decisions on how to use the proceeds. A portion of the net proceeds may also be used to acquire or invest in complementary businesses, technologies, services or products. We have no current plans, agreements or commitments with respect to any such acquisition or investment, and we are not currently engaged in any negotiations with respect to any such transaction.

 

 

We have never declared or paid cash dividends on our capital stock. Following the completion of this offering, we intend to retain our future earnings, if any, to finance the further development and expansion of our business and do not expect to pay cash dividends in the foreseeable future. Payment of future cash dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs, outstanding indebtedness and plans for expansion and restrictions imposed by lenders, if any.

 

The following table sets forth our capitalization as of December 31, 2009 on:

 

 

You should read this capitalization table together with our financial statements and the related notes appearing elsewhere in this prospectus, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial information included in this prospectus.

 

 

 

 

 

The outstanding share information in the table above is based on the number of shares outstanding as of December 31, 2009, and excludes:

 

 

 

If you invest in our common stock, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the as adjusted net tangible book value per share of our common stock immediately after completion of this offering.

 

As of December 31, 2009, we had a net tangible book value of $2.5 million, or $0.20 per share of common stock. Net tangible book value per share is equal to our total tangible assets (total assets less intangible assets) less our total liabilities divided by the number of shares of common stock outstanding.

 

After giving effect to our sale of shares of common stock at an assumed initial public offering price of $      per share, the midpoint of the range on the front cover of this prospectus, deducting the estimated underwriting discounts and commissions and offering expenses, the as adjusted net tangible book value of our common stock, as of December 31, 2009, would have been $      million, or $      per share. This amount represents an immediate increase in net tangible book value to our existing stockholders of $      per share and an immediate dilution to new investors of $      per share.

 

The following table illustrates this dilution on a per share basis:

 

 

A $1.00 increase or decrease in the assumed initial public offering price of $      per share would increase or decrease, respectively, our as adjusted net tangible book value by $      million, the as adjusted net tangible book value per share by $      per share and the dilution in the net tangible book value to investors in this offering by $      per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

The following table summarizes, as of December 31, 2009, on an as adjusted basis, the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid by our existing stockholders and by new investors, based upon an assumed initial public offering price of $      per share, the midpoint of the range on the front cover of this prospectus, and before deducting estimated underwriting discounts and commissions and offering expenses payable by us.

 

 

A $1.00 increase or decrease in the assumed initial public offering price of $      per share would increase or decrease, respectively, total consideration paid by new investors and total consideration paid by all stockholders by approximately $      million, assuming that the number of shares offered by us, as set forth on the front cover of this prospectus, remains the same.

 

In the preceding tables, the shares of common stock outstanding exclude, as of December 31, 2009:

 

 

 

If the underwriters exercise their option to purchase additional shares in full:

 

 

Because we expect the exercise prices of the outstanding options to be significantly below the assumed initial public offering price of $      per share, the midpoint of the range on the front cover of this prospectus, investors purchasing common stock in this offering will suffer additional dilution when and if these options are exercised. If the options exercisable for 598,000 shares of common stock were exercised prior to this offering, but assuming no exercise of the underwriters’ option to purchase additional shares, our existing stockholders would, after this offering, own     % of the total number of outstanding shares of our common stock while contributing     % of the total consideration for all shares, and our new investors would own     % of the total number of outstanding shares of our common stock while contributing     % of the total consideration for all shares.

 

Selected Financial Data

 

 

The following table summarizes 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 prospectus. The statements of operations data for the period from May 1, 2007 (inception) through December 31, 2007, the years ended December 31, 2008 and 2009, and the period from May 1, 2007 (inception) through December 31, 2009, and the balance sheet data at December 31, 2008 and 2009, are derived from the audited financial statements included elsewhere in this prospectus. The balance sheet data at December 31, 2007 is derived from audited financial statements not included in this prospectus. The historical results are not necessarily indicative of results to be expected in any future period.

 

 

 

 

The following discussion of our financial condition and results of operations should be read in conjunction with the “Selected Financial Data” and our financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements, which are based on our assumptions about the future of our business. Our actual results will likely differ materially from those contained in the forward-looking statements. Please read “Special Note Regarding Forward-Looking Statements” included elsewhere in this prospectus for additional information regarding forward-looking statements used in this prospectus.

 

Overview

 

We are a medical device company focused on developing, manufacturing and commercializing our innovative external saphenous vein support technology, or eSVS MESH, for use in coronary artery bypass grafting, or CABG, surgery. Our eSVS MESH is a nitinol mesh sleeve that, when placed over a saphenous vein graft during CABG surgery, is designed to improve the structural characteristics and long-term performance of the vein graft. CABG surgery is one of the most commonly performed surgeries in the United States, with the American Heart Association estimating that 448,000 CABG procedures were performed in the United States in 2006. In addition, the Millennium Research Group estimates that there will be 165,000 CABG procedures per year in Europe by 2013. In CABG procedures, surgeons harvest blood vessels, including the internal mammary artery from the chest and the saphenous vein from the leg, and attach the harvested vessels to bypass, or provide blood flow around, blocked coronary arteries. We believe the use of our eSVS MESH with saphenous vein grafts in CABG surgery will improve the long-term outcome of CABG procedures, including improved openness, or patency, and improved blood flow characteristics through the saphenous vein graft, resulting in a reduced need for costly and potentially complicated reoperations or revascularization procedures.

 

We have completed enrollment in a 90 patient multi-center clinical trial conducted outside the United States. The primary effectiveness endpoint of this trial is statistical non-inferiority of the patency of eSVS MESH vessels as compared to control vessels at nine-months post-implant. Effectiveness data, which is based on angiographic patency, is being collected at this time. Preliminary safety data has indicated that our eSVS MESH and implant procedure do not result in an increase in patient complications during or after surgery. We completed enrollment in this trial in July 2009, and as of March 1, 2010, all 90 patients have been implanted for six months or more, 83 patients have been implanted for nine months or more, and 50 patients have been implanted for 12 months or more. This trial formed the basis for our CE Mark application submitted in February 2010.

 

We expect to receive CE Mark approval and to begin marketing our eSVS MESH in select European Union markets in the second half of 2010. The U.S. Food and Drug Administration, or FDA, is reviewing our application for an investigational device exemption, or IDE, which, if granted, will allow us to begin clinical trials of our eSVS MESH in the United States. We are currently amending our IDE application and anticipate obtaining IDE approval in the first half of 2010, and if approved, we expect to commence enrollment in our IDE trial in the second half of 2010. We anticipate beginning enrollment in a United States IDE trial in the second half of 2010. We could be delayed by adverse clinical results or regulatory complications, and we may never receive marketing approval.

 

We were incorporated and commenced operations in May 2007. Since our inception, we have generated losses. From inception to December 31, 2009, we had an accumulated deficit of $9.2 million. We have not generated any revenue from operations to date and we will not generate any revenue from operations until we receive our CE Mark and begin selling our eSVS MESH in select European Union markets. We expect to incur losses for the foreseeable future as we pursue the development and commercialization of our eSVS MESH. Our activities since inception have consisted principally of acquiring product and technology rights, raising capital, performing research and development and conducting preclinical and clinical trials. Accordingly, we are considered to be a development stage company as of December 31, 2009. Successful completion of our development programs and, ultimately, the attainment of profitable operations are dependent on future events, including, among other things, our ability to obtain regulatory approval and achieve commercial adoption of our eSVS MESH.

Key Components of Our Results of Operations

 

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 or acquire licenses, as the ultimate recoverability of the amounts paid is uncertain.

 

While our research and development expenses to date have been focused on product development and evaluating the feasibility of our eSVS MESH, we expect that a large percentage of our research and development expenses in the future will be incurred in support of our current and future clinical trials. 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 or delay clinical trials for certain product applications or programs in order to focus our resources on more promising product applications. 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:

 

 

Our 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 contract research organizations, or CROs, that administer clinical trials on our behalf. 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 milestones. Expenses related to clinical trials generally are accrued based on contracted amounts and the achievement of milestones, such as number of patients enrolled. 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.

 

We anticipate the cost of completing our U.S. clinical trial will be approximately $15.0 million, based upon our current expectation for the trial design. Because of the numerous risks and uncertainties associated with developing medical devices, we are unable to determine the duration and completion costs of our development projects or when and to what extent sales of our eSVS MESH will commence and become significant.

 

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 and other professional fees; business development; insurance and other corporate costs. After completion of this offering, we anticipate incurring a significant increase in general and administrative expenses as we operate as a public company. These increases will likely include increased costs for insurance, costs related to the hiring of additional personnel and payments to outside consultants, lawyers and accountants. We also expect to incur significant costs to comply with the corporate governance, internal controls and similar requirements applicable to public companies. While our selling, general and administrative expenses to date have been primarily comprised of general and administrative costs, we expect that we will incur significant additional sales and marketing expenses as we prepare for and commence commercialization of our eSVS MESH.

Interest Income

 

Interest income consists of interest earned on investments in certificates of deposits and money market accounts.

 

Interest Expense

 

Interest expense results from interest associated with secured convertible notes in the aggregate principal amount of $3.0 million, or the Notes. Our reported interest expense includes interest payable in cash based upon the stated rate in the Notes and the amortization of discount recorded on the Notes created by the allocation of a portion of the Note proceeds to the fair value of the stock purchase options granted in conjunction with the issuance of the Notes and due to the beneficial conversion feature specified in the Notes. Beneficial conversion feature accounting rules require the recognition of the intrinsic value of the conversion feature at the time of the Notes’ issuance, which is then amortized as additional interest expense over the life of the Notes.

 

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 2 to our financial statements included at the end of this prospectus, 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.

 

Research and Development Expenses

 

We expense research and development costs, including clinical trial costs, when incurred, consistent with the guidance of FASB ASC 730, Research and Development. All of our clinical trials are performed at clinical trial sites and are administered by CROs. We accrue costs for clinical trials performed by CROs 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 incurred. All of our options previously awarded 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. The fair market value of the common stock underlying the stock options has been determined by our board of directors at each award grant date based upon a variety of factors, as discussed below. If we had made different assumptions and estimates, the amount of our recognized and to be recognized stock-based compensation expense could have been materially different. We believe that we have used reasonable methodologies, approaches and assumptions in determining the fair market value of our common stock.

 

Significant Factors, Assumptions and Methodologies Used in Determining Fair Market Value of Common Stock

 

The following table summarizes by ranges of grant date, the number of shares subject to options granted in 2007, 2008 and 2009 and the associated per share exercise price, estimated fair market value and ASC Topic 718 Black-Scholes Value. The exercise prices were set by our board of directors at prices believed to equal the fair market value of our common stock at each of the grant dates, taking into account all information available at those times. We did not obtain any third party contemporaneous valuations.

 

 

A brief narrative of the factors considered in estimating the fair market value of our common stock as of the date of each grant and the option exercise price is set forth below. The factors generally included, but were not limited to, the most recent purchase prices of our common stock issued to third parties in arms-length transactions, the lack of marketability of our common stock, the progress of our product development, the progress of our preclinical and clinical testing, and the risks associated with the completion of our business plan.

 

September 2007 through February 2008

 

The estimated fair market value of our common stock as determined by our board of directors was $1.00 from September 2007 through February 2008. The estimated fair value of $1.00 primarily reflects the issuance of the Notes in July 2007, which were convertible into common stock at $0.625 per share, and continued progress towards the product development of our eSVS MESH, including the first successful manufacturing of our eSVS MESH and the commencement of negotiations for our Assignment and License Agreement with Medtronic.

 

March 2008

 

The estimated fair market value of our common stock as determined by our board of directors was $2.00 per share in March 2008. The increase in the estimated fair market value primarily reflects continued progress toward the product development of our eSVS MESH, including the first successful implants of our eSVS MESH in a preclinical trial in February 2008.

 

June 2008 through January 2009

 

The estimated fair market value of our common stock as determined by our board of directors was $5.83 per share from June 2008 through January 2009. The increase in the estimated fair market value reflects the exercise in May 2008 of a stock purchase option by a third party, pursuant to which we issued 600,000 shares of common stock at a purchase price of $5.83 per share. We issued this stock purchase option in July 2007, and it became exercisable by its terms following our determination that our eSVS MESH was suitable for human implantation. Please see

“Certain Relationships and Related Party Transactions—Investment Agreement with Kips Bay Investments, LLC” for a description of the stock purchase option.

 

September 2009

 

The estimated fair market value of our common stock as determined by our board of directors was $6.00 per share in September 2009. The increase in estimated fair market value reflects the sale of 516,241 shares of common stock to third party investors in August 2009 at $6.00 per share.

 

Results of Operations

 

Comparison of the Year Ended December 31, 2008 with the Year Ended December 31, 2009

 

 

Research and development and selling, general and administrative expenses include non-cash compensation expense as a result of our issuance of stock options. We expense the fair value of stock options over their vesting periods. The terms and vesting schedules for share-based awards vary by type of grant and the employment status of the grantee. The awards granted through December 31, 2009 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 statement of operations for 2008 and 2009:

 

 

Research and Development

 

Our research and development expenses increased 14.0% from $2.6 million in 2008 to $3.0 million in 2009. This increase was caused primarily by an increase of approximately $350,000 from 2008 to 2009 in the expenses associated with our international feasibility trial for our eSVS MESH, which began enrolling patients in August 2008. These expenses include per patient and per procedure fees payable to the clinical trial sites, clinical trial administration costs payable to a CRO, and costs related to the set-up of clinical trial sites and training of medical staff.

 

Selling, General and Administrative

 

Selling, general and administrative expenses increased 3.3% from $754,000 in 2008 to $779,000 in 2009. This

increase was the result of an increase in salary expense related to the temporary addition of an individual performing marketing related work, partially offset by reduced travel expenses and professional fees.

 

Interest Income

 

Interest income declined from $52,000 in 2008 to $17,000 in 2009. This decline resulted primarily from decline in short-term interest rates from 2008 to 2009.

 

Interest Expense

 

Interest expense declined from $390,000 in 2008 to $181,000 in 2009. The Notes were converted into shares of common stock in February 2009, resulting in only two months of interest expense in 2009, as compared with a full year of interest in 2008. This decline was offset by the write-off of the $138,000 balance in unamortized discount on the Notes at the time of the conversion.

 

Comparison of the Period from May 1, 2007 (Date of Inception) to December 31, 2007 with the Year Ended December 31, 2008

 

 

The following table summarizes the stock-based compensation expense in our statement of operations for 2007 and 2008:

 

 

Research and Development

 

Our research and development expenses increased from $196,000 in 2007 to $2.6 million in 2008. Research and development expenses in 2007 were primarily comprised of personnel expenses of $150,000. In 2008, we operated for a full year and also expanded our research and development staff, which resulted in our personnel expenses, including stock-based compensation, increasing by approximately $1.2 million. The balance of the increase related to expenses for the development of our eSVS MESH and the initiation of our international clinical trial. These expenses included product development, preclinical trials, clinical trial site selection, training and operation of our international clinical trial and intellectual property related costs.

Selling, General and Administrative

 

Selling, general and administrative expenses increased 97.9% from $381,000 in 2007 to $754,000 in 2009. This increase was primarily a function of having 12 months of operations in 2008, compared with seven months in 2007. In addition, we incurred approximately $80,000 in fees for an outside consultant working on certain marketing matters.

 

Interest Income

 

Interest income declined 20.0% from $65,000 in 2007 to $52,000 in 2008. This decline resulted from a decline in available cash and equivalents and short-term investments, which more than offset our having a full 12 months during which interest was earned in 2008.

 

Interest Expense

 

Interest expense increased 137.8% from $164,000 in 2008 to $390,000 in 2009. This increase resulted from the Notes being outstanding for the entire year in 2008, as compared with slightly more than five months in 2007.

 

Impairment of Available for Sale Investments

 

In conjunction with a simplified employee retirement plan that we maintain for the benefit of our employees, we invested $250,000 in a mutual fund under an arrangement that resulted in reduced maintenance and transaction costs for our employees. Due primarily to the significant decline in the U.S. stock market and the accompanying declines in the U.S. economy during 2008, we concluded as of December 31, 2008 that the value of this mutual fund investment was impaired and that this decline in value was other than temporary. We recorded a charge of $85,000, which resulted in a new adjusted cost basis for this investment. We had no other realized gains or losses in 2007 or 2008.

 

Income Taxes

 

Since inception, we have incurred operating losses and, accordingly, have not recorded a provision for income taxes for any of the periods presented. As of December 31, 2009, we had net operating loss carryforwards for federal and state income tax purposes of approximately $6.5 million. We also had federal research and development tax credit carryforwards of approximately $400,000. If not utilized, the federal net operating loss and tax credit carryforwards will expire beginning in 2027. Utilization of net operating loss and credit carryforwards may be subject to a substantial annual limitation due to limitations provided by the Internal Revenue Code of 1986, as amended, that are applicable if we experience an “ownership change” that may occur, for example, as a result of this offering aggregated with certain other sales of our stock before or after this offering. If not utilized, the state net operating loss carryforward will expire beginning in 2022. The annual limitation may result in the expiration of our net operating loss and tax credit carryforwards before they can be used.

 

Liquidity and Capital Resources

 

The following table summarizes our liquidity and capital resources as of and for each of the last two fiscal years, and is intended to supplement the more detailed discussion that follows:

 

 

 

Cash and Cash Equivalents

 

Our total cash resources, excluding short-term investments, as of December 31, 2009 were $2.5 million, compared to $943,000 as of December 31, 2008. As of December 31, 2009, we had approximately $1.2 million in current liabilities and $2.2 million in net working capital. We incurred a net loss of $3.3 million and had negative cash flow from operating activities of $3.4 million for the year ended December 31, 2009. Since May 1, 2007 (date of inception) through December 31, 2009, we had an accumulated deficit of $9.2 million, while negative cash flow from operating activities has amounted to $6.7 million. The difference between our accumulated deficit and negative cash flow from operations results primarily from the adoption of FASB ASC 815-40 on January 1, 2009. Under the provisions of FASB ASC 815-40, certain instruments previously reported as equity are now accounted for as derivative instruments. These provisions were initially applied by recording a non-cash, cumulative effect adjustment of $1.4 million to retained earnings. Our accumulated deficit also includes non-cash charges for stock based compensation and depreciation of $791,000 and $118,000, respectively, and approximately $217,000 of accrued interest expense which was settled through conversion into our common stock.

 

As we continue to pursue regulatory approvals, prepare for commercialization in international markets, develop our manufacturing capabilities and develop additional applications for our eSVS MESH, we expect to continue to incur substantial and increasing losses, which will continue to generate negative net cash flows from operating activities.

 

To date, we have funded our operations primarily through private sales of common stock and convertible debt. As of December 31, 2009, we had received net proceeds of approximately $7.6 million from the sale of equity securities, and net proceeds of approximately $3.0 million from the issuance of the Notes, all of which have been converted into common stock. We have not generated any revenue from operations to date and we will not generate any revenue from operations until we receive approval from the FDA, or an equivalent foreign regulatory body, to begin selling our eSVS MESH. We intend to use the net proceeds of this offering to seek regulatory approval to market our technology in the United States and abroad, including human clinical trials in the United States; to develop and test additional applications of our eSVS MESH; to make certain milestone payments for our acquired intellectual property; and for working capital and general corporate purposes. We may seek to raise additional funds through various sources, such as equity and debt financings, or through strategic collaborations and license agreements. We can give no assurances that we will be able to secure such additional sources of funds to support our operations, or if such funds are available to us, that such additional financing will be sufficient to meet our needs.

 

Net Cash Used in Operating Activities

 

Net cash used in operating activities was $505,000 in 2007, $2.8 million in 2008, and $3.4 million in 2009. From May 1, 2007 (date of inception) to December 31, 2009, net cash used in operating activities was $6.7 million. The net cash used in each of these periods primarily reflects the net loss for those periods, offset in part by depreciation, non-cash stock-based compensation and the effects of changes in operating assets and liabilities.

Net Cash Provided by (Used in) Investment Activities

 

Net cash provided by (used in) investment activities was $(760,000) in 2007, $196,000 in 2008, and $(840,000) in 2009. From May 1, 2007 (date of inception) to December 31, 2009, net cash used in investment activities was $1.4 million. Cash used in investment activities is related to purchases and sales of short-term investments and purchases of property and equipment.

 

Net Cash Provided by Financing Activities

 

Net cash provided by financing activities was $3.1 million in 2007, $1.8 million in 2008, $5.7 million in 2009. From May 1, 2007 (date of inception) to December 31, 2009, net cash provided by financing activities was $10.6 million. Net cash provided by financing activities was primarily attributable to proceeds from issuances of the Notes and from private sales 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 including:

 

 

Our future capital uses and requirements depend on numerous forward-looking factors. These factors include the following:

 

 

We have not generated any revenue from operations to date. We do not expect to generate revenue unless or until we obtain regulatory approval of and commercialize our eSVS MESH. While there can be no guarantee, we anticipate commencing sales in select international markets by the end of the current fiscal year. However, we do not expect to generate meaningful sales in the current fiscal year and we expect our operating losses and negative

cash flows from operations to continue for the foreseeable future. Our future capital requirements will depend upon a number of factors as indicated above.

 

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

 

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

 

Contractual Obligations, Commitments and Contingencies

 

To date, we have not entered into long-term minimum purchase commitments with suppliers. Our principal commitments consist of obligations relating to our international clinical trial and obligations under the lease for our facility in Minneapolis, Minnesota, and certain office equipment.

 

The following table summarizes our outstanding contractual obligations as of December 31, 2009:

 

 

 

 

Royalty Payments

 

The core intellectual property relating to our eSVS MESH, including five patent applications pending in the United States and nine patent applications pending in countries outside the United States, was acquired from Medtronic, Inc. pursuant to an Assignment and License Agreement dated October 9, 2007. Pursuant to the Assignment and License Agreement, Medtronic has also assigned to us certain patents relating to a brushed ePTFE

vascular graft, or the Brushed Graft Product, and licensed to us certain technology to produce platelet-poor plasma for use in connection with the Brushed Graft Product.

 

As consideration for the assignment of intellectual property relating to the eSVS MESH and the Brushed Graft Product, 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.

 

In the recitals to the Assignment and License Agreement, we stated that we would use our reasonable best efforts to develop and commercialize both the Brushed Graft Product and the eSVS MESH. While we have undertaken activities to develop and commercialize the Brushed Graft Product, we are currently primarily focused on the development of our eSVS MESH for use in CABG surgery and additional applications of our eSVS MESH. Any or all licenses granted to us pursuant to our agreement with Medtronic may be terminated and potentially all of the core intellectual property and patent rights related to our eSVS MESH shall revert to Medtronic, upon notice by Medtronic, (i) 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; and (ii) if we determine to cease commercializing either the Brushed Graft Product or our eSVS MESH, then Medtronic may terminate our license to patent rights related to the Brushed Graft Product or the patent rights related to our eSVS MESH, as applicable. If we cease commercialization of the Brushed Graft Product and not the eSVS MESH, we believe that Medtronic is entitled to terminate only the license to patent rights related to the Brushed Graft Product and not the patent rights related to the eSVS MESH. Similarly, if we cease commercialization of the eSVS MESH but not the Brushed Graft Product, we believe that Medtronic is entitled to cause the reversion of the patent rights related to the eSVS MESH but not terminate our license to patent rights related to the Brushed Graft Product. We recognize, however, that the terms of our agreement with Medtronic are susceptible to differing interpretations.

 

Off-Balance Sheet Arrangements

 

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

 

Recent Accounting Pronouncements

 

In June 2009, the FASB issued FASB ASC 105, Generally Accepted Accounting Principles, which establishes the FASB Accounting Standards Codification as the sole source of authoritative generally accepted accounting principles. Pursuant to the provisions of FASB ASC 105, we have updated references to GAAP in our financial statements issued for the period ended December 31, 2009. The adoption of FASB ASC 105 did not impact our financial position or results of operations.

 

In June 2008, the FASB issued FASB ASC 815-40, Derivatives and Hedging, which provides guidance on how to determine if certain instruments (or embedded features) are considered indexed to a company’s own stock, including instruments similar to warrants to purchase the company’s stock. FASB ASC 815-40 clarifies the determination of whether equity-linked instruments (or embedded features), such as our convertible notes or options to purchase our common stock, are considered indexed to our own stock, which would qualify as a scope exception and therefore be exempt from the application of FASB ASC 815. FASB ASC 815-40 became effective January 1, 2009. Any outstanding instrument at the date of adoption requires a retrospective application of the accounting through a cumulative effect adjustment to retained earnings upon adoption. Our adoption of this guidance had a material impact on our financial position and results of operations, as described in Note 6 to our financial statements.

 

Overview

 

We are a medical device company focused on developing, manufacturing and commercializing our innovative external saphenous vein support technology, or eSVS MESH, for use in coronary artery bypass grafting, or CABG, surgery. Our eSVS MESH is a nitinol mesh sleeve that, when placed over a saphenous vein graft during CABG surgery, is designed to improve the structural characteristics and long-term performance of the vein graft. CABG is one of the most commonly performed surgeries in the United States, with the American Heart Association estimating that 448,000 CABG procedures were performed in the United States in 2006. In addition, the Millennium Research Group, an independent market research firm, estimates that there will be 165,000 CABG procedures per year in Europe by 2013. In CABG procedures, surgeons harvest blood vessels, including the internal mammary artery from the chest and the saphenous vein from the leg, and attach the harvested vessels to bypass, or provide blood flow around, blocked coronary arteries. The effectiveness of the procedure, however, is often limited by the failure rate of saphenous vein grafts, which has been shown in various studies to range from 6% to 30% one year after surgery and 60% ten years after surgery. Failure of these grafts, typically evidenced by partial or complete blockage and reduced or stopped blood flow, can lead to the need for further coronary interventions up to and including additional CABG procedures. We believe the use of our eSVS MESH with saphenous vein grafts in CABG surgery could improve the long-term outcome of CABG procedures, including improved openness, or patency, and improved blood flow through the saphenous vein graft, resulting in a reduced need for costly and potentially complicated reoperations or revascularization procedures.

 

According to the American Heart Association, approximately 17.6 million people in the United States have coronary artery disease, and approximately 587,000 people in the United States die each year as a result of the disease. In addition, according to a 2007 World Health Organization report, approximately 7.2 million people worldwide died of coronary heart disease in 2002. The direct and indirect cost of coronary artery disease to the U.S. economy is estimated to be over $177 billion in 2010. 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, and CABG procedures, with the selection often depending upon the stage of the disease and the age of the patient. An independent study comparing CABG and implantation of drug-eluting stents shows that CABG is the more effective long-term treatment for coronary artery disease, achieving the best long-term patient outcomes as measured by survival rate and need for re-intervention 12 months after surgery. Moreover, patients with severe and multi-vessel coronary artery disease often cannot be effectively treated with methods other than CABG. The prevalence of coronary artery disease and the success rates for CABG procedures versus other treatments for coronary artery disease has made CABG surgery one of the most commonly performed surgeries in the United States. Based on a report published by the Millennium Research Group, moderate growth in coronary artery bypass procedures is expected in the United States through 2012 and in Europe through 2013, largely due to the increase in procedure volumes caused by rising rates of coronary artery disease and the need for repeat revascularizations.

 

According to results published in the European Journal of Cardio-Thoracic Surgery in 2006, each CABG procedure involves an average of 3.3 bypass grafts, typically consisting of the left internal mammary artery, or LIMA, for one graft and the saphenous vein for the remaining 2.3 grafts per procedure. Saphenous vein grafts fail more frequently than LIMA grafts due to differences in structure and size of saphenous vein grafts as compared to LIMA grafts. Unlike the LIMA, which is a thick-walled artery intended to handle the high pressure blood flow from the heart, saphenous veins are thin-walled vessels that are intended for a low-pressure venous environment. Saphenous veins are also typically larger than the coronary arteries to which they are attached and this difference in size slows blood flow, adding stress to the vessel wall and increasing the risk of thrombosis, or blood clotting. When the vein grafts used to bypass a blocked artery are exposed to the high pressure of arterial flow, there is significant stress on the thin wall of the veins. The vein responds to this injury by causing its walls to thicken in a manner that often leads to failure of the bypass graft.

 

Our eSVS MESH is a nitinol mesh sleeve that is placed over the saphenous vein graft during CABG surgery and is designed to constrict the vein and prevent expansion of the vein graft and resulting injury due to increased

pressure. The constriction of the vein graft also causes the diameter of the graft, or lumen, to more closely match the diameter of the target coronary artery to which it is attached, thereby reducing blood flow disruption. Our eSVS MESH is designed to be applied quickly and is compatible with most current CABG surgery protocols. In addition, nitinol is commonly used in many other implantable medical devices.

 

We have completed enrollment in a 90 patient multi-center clinical trial conducted outside the United States. The primary effectiveness endpoint of this trial is statistical non-inferiority of the patency of eSVS MESH vessels as compared to control vessels at nine-months post-implant. Effectiveness data, which is based on angiographic patency, is being collected at this time. Preliminary safety data has indicated that our eSVS MESH and implant procedure do not result in an increase in patient complications during or after surgery. We completed enrollment in this trial in July 2009, and as of March 1, 2010, all 90 patients have been implanted for six months or more, 83 patients have been implanted for nine months or more, and 50 patients have been implanted for 12 months or more. This trial formed the basis for our CE Mark application submitted in February 2010.

 

We expect to receive CE Mark approval and to begin marketing our eSVS MESH in select European Union markets in the second half of 2010. The U.S. Food and Drug Administration, or FDA, is reviewing our application for an investigational device exemption, or IDE, which, if granted, will allow us to begin clinical trials of our eSVS MESH in the United States. We anticipate beginning enrollment in a United States IDE trial in the second half of 2010. We could be delayed by adverse clinical results or regulatory complications, and we may never receive marketing approval.

 

We are pursuing additional applications for our eSVS MESH, including applications for use in peripheral artery bypass surgery, for use with coronary allografts, and for use in arteriovenous, or AV, fistula dialysis applications. In peripheral artery bypass surgery, saphenous vein grafts are used to bypass obstructed arterial vessels in the legs. Coronary allografts are saphenous veins obtained from cadavers that are used in CABG procedures for patients who do not have appropriate arterial or venous conduits. An AV fistula is a surgically created connection, or fistula, between an artery and a vein used to provide access to the circulatory system of patients with kidney disease for chronic dialysis treatment. We believe that these applications could have significant commercial potential.

 

Our Strategy

 

Our objective is to 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:

 

 

 

Treatment of Coronary Artery Disease

 

According to the American Heart Association, approximately 17.6 million people in the United States have coronary artery disease, and approximately 587,000 people in the United States die each year as a result of the disease. In addition, according to a 2007 World Health Organization report, approximately 7.2 million people worldwide died of coronary heart disease in 2002. The direct and indirect cost of coronary artery disease to the U.S. economy is estimated to be over $177 billion in 2010. Primary treatment options for coronary artery disease are pharmaceutical therapy, balloon angioplasty, intravascular stents, and CABG surgery. A description of each of these options is provided below:

 

Pharmaceutical Therapy

 

In patients with less severe disease, pharmaceuticals remain the primary treatment approach and include drugs such as platelet adhesion inhibitors or drugs that reduce the blood cholesterol or triglyceride levels. For more serious disease, however, pharmacological therapy alone is often inadequate.

 

Balloon Angioplasty

 

Percutaneous transluminal coronary angioplasty, commonly referred to as balloon angioplasty, is a surgical procedure that involves the dilation of the obstructed artery with a balloon catheter. Angioplasty is generally successful in increasing immediate blood flow and, relative to current surgical procedures, offers the benefits of shorter periods of hospitalization, quicker recovery times, reduced patient discomfort and lower cost. However, according to a trial published in the journal Circulation in 2006, over 40% of vessels treated with balloon angioplasty return to their pre-treatment, narrowed size, a process known as restenosis, within six months following the procedure.

 

Intravascular Stents

 

High rates of restenosis following treatment by balloon angioplasty led to the introduction of stents, mesh-like metallic tubes that are placed within the narrowed portion of the coronary vessel to hold the vessel open after the angioplasty balloon has been removed. Although clinical outcomes for procedures using stents reflect an improvement over balloon angioplasty alone, the effectiveness of stents is still limited by restenosis, which for bare metal stents occurs in about 20% of cases within six months of the procedure.

 

Drug eluting stents are coated with specially formulated, slow-release drugs designed to prevent restenosis. According to the FDA in 2008, drug eluting stents were shown in clinical trials to reduce the rate of restenosis within one year after placement to 10%. Drug eluting stents are widely used, with a current market share relative to total stent usage in the range of 70%. However, some studies have been presented that associate drug eluting stents with late stage thrombosis, or clotting, which can be an adverse event.

 

Despite the advancements and market success of drug-eluting stents and angioplasty therapies, these interventional procedures may be less effective than surgical procedures in addressing diffuse progressive coronary artery disease. In this advanced stage of coronary artery disease, intervention is required for multiple vessels, many of which are less than two millimeters in internal diameter, a diameter currently unsuitable for angioplasty and stenting. In addition, stents have been shown to be difficult to place in patients with coronary lesions in sections with vessel branches and in patients with narrowings in the left main coronary artery. In a study published in the New England Journal of Medicine in January 2008 that compared drug-eluting stents with CABG in multivessel coronary disease, death rates and revascularization rates were higher in patients receiving drug-eluting stents than in patients receiving CABG, even though the cohort of patients receiving CABG was older and had more severe coronary disease.

CABG Surgery

 

Coronary Artery Bypass Grafting involves the construction of an alternative path to bypass a narrowed or occluded coronary artery and restore blood flow from the aorta to an area past the occlusion. This procedure is normally accomplished using saphenous veins from the leg and the LIMA from the chest as bypass grafts. Most commonly, the LIMA is utilized for bypassing the left anterior descending artery of the heart, or LAD, while saphenous veins are utilized for bypassing other coronary arteries.

 

For vein grafts, one end of the harvested vessel is then generally attached to the aorta for blood inflow, and the opposite end is attached to the target coronary vessel. If a mammary artery is used as the bypass graft, it must be dissected from the chest wall, leaving one end in place on the aorta, while the opposite end is attached to the target vessel, providing uninterrupted blood flow from the arterial circulation. Once in place, these grafts provide sufficient blood flow to bypass the narrowed or occluded portion of the coronary artery. The following diagram illustrates the use of the internal mammary artery graft and saphenous vein graft in CABG surgery:

 

 

Current Disadvantages of Saphenous Vein Grafts

 

Since its first successful use in the 1960’s, the saphenous vein graft has been 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:

 

 

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 and graft failure over time. The failure rates of saphenous vein grafts

in CABG procedures is well documented in the scientific literature. A sampling of data from some of the larger benchmark studies is provided below:

 

 

 

* 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, congestive heart failure, irregular heart beat, myocardial infarction, or MI, 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 improve the long-term outcome of CABG procedures by addressing limitations of unsupported saphenous veins. Our eSVS MESH is a highly flexible, semi-compliant, kink-resistant extravascular tubular prosthesis made of knitted nickel/titanium, or nitinol, wire mesh. Our eSVS MESH is designed to be fitted like a sleeve over vein grafts, thereby providing the vein graft with physiological attributes similar to those of an artery.

 

An artery has a thick muscular wall to handle 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. Although we are pursuing commercialization of a 3.0 mm diameter eSVS MESH in select European markets, in the United States we will initially only be pursuing eSVS MESH diameters of 3.5, 4.0 and 4.5 mm.

 

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

 

 

Our eSVS MESH technology consists of the following:

 

 

 

 

 

 

 

 

 

Clinical Development of our eSVS MESH

 

International Human Clinical Trial

 

The first human clinical trial of our eSVS MESH is a prospective, randomized, controlled non-inferiority trial, where each patient is randomized to receive a saphenous vein graft with our eSVS MESH to bypass either the right coronary artery, or RCA, or the circumflex artery, or Cx, two arteries commonly bypassed during CABG. The RCA or Cx saphenous vein graft not chosen to receive our eSVS MESH serves as the control artery. To ensure Good Clinical Practices compliance, outside resources are utilized for data collection and analysis, including a contract research organization 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 saphenous vein graft patency.

 

Seven international centers enrolled 90 patients in this trial. Enrollment in this trial closed on July 21, 2009. As of March 1, 2010, all 90 patients have been implanted for six months or more, 83 patients have been implanted for nine months or more, and 50 patients have been implanted for 12 months or more.

 

The international sites involved in this trial, and the number of patients enrolled at each site, is provided below:

 

The primary safety endpoint of this trial is statistical non-inferiority based on the total rate of major adverse cardiac and cerebral events, or MACCE, at 30-days post-implant as compared to published literature. MACCE is a composite of MI, stroke, revascularization, 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 protocol objective performance criteria, or OPC. OPC are performance criteria based on broad sets of data from historical databases, such as literature or registries, that are generally recognized as acceptable values. For this trial, the OPC utilized was a 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. In addition, none of the adverse events were determined to be “Definitely Device Related” or “Probably Device Related.”

 

A table summarizing these results is shown below:

 

 

 

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

 

The primary effectiveness endpoint of this trial is statistical non-inferiority of angiographic stenosis, or patency, of eSVS MESH vessels as compared to control vessels at nine-months post-implant. A vessel is considered to be patent if there is less than 50% stenosis. Collection of this data is ongoing.

 

We have made the following observations during this trial that have led to improvements in the device and implant procedure:

 

 

United States IDE Trial

 

The FDA is reviewing our application for an IDE which, if granted, will allow us to begin clinical trials of our eSVS MESH in the United States. We are currently amending our IDE application and anticipate obtaining IDE approval in the first half of 2010, and if approved, we expect to commence enrollment in our IDE trial in the second half of 2010. The FDA has not approved our IDE submission and the summary below of the trial design is based upon our current expectations of the IDE protocol. The ultimate trial design, if and when approved by the FDA, may be materially different than our expectations set forth below.

 

We expect that the FDA will require a feasibility phase as part of our IDE trial. We are proposing that the first 60 patients enrolled in the trial will have a 90-day post-implant assessment of device patency, in addition to normal follow-ups prescribed in the clinical trial protocol. We are also proposing that success criteria for this

feasibility analysis be non-inferiority. Once the 90-day follow-up is completed and the data is reported to the FDA, subject to FDA consent, we expect to continue enrollment at all sites and these feasibility phase patients will be included in the IDE trial data set. The feasibility phase will delay completion of our IDE trial by at least five to six months compared to a trial that does not incorporate a feasibility phase.

 

The primary safety endpoint of the IDE trial is expected to be statistical non-inferiority based on the total rate of major adverse cardiac events, or MACE, at 30-days post-implant as compared to published literature. The primary effectiveness endpoint of this trial is expected to be statistical superiority of the patency of eSVS MESH vessels as compared to control vessels at nine-months post-implant. This effectiveness endpoint is more rigorous than the effectiveness endpoint of our international trial, which was a non-inferiority comparison. The IDE protocol reflects our prior observations from the international trial. For example, the IDE protocol will only include eSVS MESH sizes of 3.5 mm or greater in diameter and will include detailed instruction regarding preparation of anastomotic sites. We expect the IDE trial to require enrollment of 366 patients and include up to 20 clinical trial sites. Of these 366 patients, we expect that we will be required to perform nine-month post-implant angiograph procedures on at least 293 patients. We would be dependent upon our clinical sites and enrolled subjects for compliance in returning and agreeing to the nine-month angiograms and expect that a certain percent of subjects will either not return or will refuse the nine-month angiogram. We are in discussions with 12 clinical trial sites to participate in our IDE trial, six of which have been engaged as of April 1, 2010. We expect to commence enrollment in the IDE trial, in the second half of 2010.

 

Enrollment in the IDE trial is expected to take approximately 18 months, and follow-up is expected to take up to an additional year from the completion of enrollment. Prior to commercializing our eSVS MESH in the United States, we will be required to submit a Pre-Market Approval, or PMA, application to the FDA. Approval of a PMA by the FDA generally takes approximately one year after the application. We could be delayed by adverse clinical results or regulatory complications, and we may never receive marketing approval.

 

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, or UCT, 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 showed a statistically significant decrease in intimal hyperplasia after six months of implantation. In addition to these trials, Medtronic, Inc. and UCT 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, Inc. 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 a saphenous vein graft in CABG procedures. However, sheep arterial pressures and vasculature differ from humans, and human clinical studies may not be consistent with animal trial results.

Additional eSVS MESH Applications

 

Additional development projects based on our eSVS MESH technology that we are exploring and may advance include:

 

Peripheral Grafts

 

In this clinical application, saphenous vein grafts are used to bypass obstructed arterial vessels in the legs. We have conducted initial preclinical trials for this application, utilizing saphenous vein grafts with our eSVS MESH in place. We plan to conduct further preclinical trials of this application in 2010, in support of future potential regulatory submissions.

 

Coronary Allografts

 

In this clinical application, cadaver, or allograft, saphenous vein grafts are used in CABG procedures for patients who do not have appropriate arterial or venous conduits. We have had discussions with suppliers of this allograft material to determine usage patterns. We plan to conduct initial preclinical trials of this application in 2010.

 

Arteriovenous Fistula

 

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. We plan to conduct initial preclinical trials of this application in 2010.

 

Sales and Marketing

 

Europe and Other International Markets

 

We have submitted an application to obtain the CE Mark for our eSVS MESH. If approved, the CE Mark will allow us to sell our eSVS MESH for use in CABG procedures in 32 countries within the European Union, the European Economic Area, and the European Free Trade Association. Provided we receive CE Mark approval, we plan to begin sales in select European nations beginning in the second half of 2010. Our plan is to utilize independent distributors to commercialize our technology in Europe, and we have identified independent distributors that may be contracted to conduct sales in these markets. These distributors will be supported by our U.S.-based staff with regard to training and promotional materials. We intend to work with our distributors with respect to product reimbursement and have also identified other third parties that may be contracted to assist in obtaining country-specific product reimbursement.

 

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.

 

We will be an active participant in post-market clinical trials aimed at validating the long-term outcomes of patients who receive our eSVS MESH. These studies will be designed to show that eSVS MESH patients require less revascularization procedures than standard CABG patients, thereby also reducing the costs associated with revascularization procedures for eSVS MESH patients. We envision that the results of these studies will be presented at scientific sessions and presented in peer-reviewed journals, thereby increasing the visibility and adoption of our eSVS MESH. These studies will also be used to support applications for public hospital reimbursement in those countries that require outcomes data for such reimbursement.

 

We believe that the CE Mark will also be a gateway approval that will allow us to begin regulatory submissions to obtain marketing approval in other select markets, including South Africa, Canada, Australia, New Zealand and Argentina.

 

United States

 

We are required to conduct a PMA IDE trial in the United States. Enrollment in this trial, follow-up of trial patients, and subsequent PMA approval are anticipated to take approximately three years. If the U.S. IDE trial is

successful and our resulting PMA is approved, we expect to launch our eSVS MESH in the United States no sooner than 2013.

 

Based upon the 2009 Society of Thoracic Surgeons Adult Cardiac Surgery Database, we believe CABG surgeries were performed in approximately 1,150 U.S. hospitals in 2009.

 

According to an article published in the journal Health Affairs in 2007, the volume of CABG surgeries performed per U.S. hospital in 2003 was:

 

 

Based upon this information, approximately 545 hospitals in the United States perform at least 200 CABG surgeries each year. Of these, approximately 310 hospitals perform more than 315 surgeries each year. Our initial marketing focus will be on these 300 to 500 hospitals.

 

Our plan is to utilize independent distributors to commercialize our eSVS MESH in the U.S., and we have identified independent distributors that may be contracted to conduct sales. These distributors will be supported by Kips Bay staff with regard to training and promotional materials. We have contracted outside reimbursement experts to assist in obtaining Centers for Medicare & Medicaid Services, or CMS, product reimbursement.

 

Intellectual Property

 

As of December 31, 2009, we had six patent applications pending in the United States and nine patent applications pending in countries outside the United States covering various aspects of our eSVS MESH. We also have one international patent application pending, which gives us the opportunity to file in more individual countries. Some of our pending patent applications have been examined, and currently stand rejected. We will continue to pursue obtaining patents from these applications, but it is possible that our pending patent applications may not issue as patents or, if issued, may not issue in a form that will be advantageous to us. We expect to launch our eSVS MESH in Europe before any of our pending European patent applications issue as patents.

 

The core intellectual property relating to our eSVS MESH, including five patent applications pending in the United States and nine patent applications pending in countries outside the United States, was acquired from Medtronic, Inc. pursuant to an Assignment and License Agreement dated October 9, 2007. Pursuant to the Assignment and License Agreement, Medtronic has also assigned to us certain patent rights relating to a brushed ePTFE vascular graft, or the Brushed Graft Product, and licensed to us certain technology to produce platelet-poor plasma for use in connection with the Brushed Graft Product.

 

As consideration for the assignment of intellectual property relating to the eSVS MESH and the Brushed Graft Product, 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. There is no assurance that any of these patent applications will issue as patents or that any such patent(s) will be effective to prevent a competitor from developing and using substantially equivalent technology.

 

In the recitals to the Assignment and License Agreement, we stated that we would use our reasonable best efforts to develop and commercialize both the Brushed Graft Product and the eSVS MESH. While we have undertaken activities to develop and commercialize the Brushed Graft Product, we are currently primarily focused on the development of our eSVS MESH for use in CABG surgery and additional applications of our eSVS MESH. Any or all licenses granted to us pursuant to our agreement with Medtronic may be terminated and potentially all of

the core intellectual property and patent rights related to our eSVS MESH shall revert to Medtronic, upon notice by Medtronic, (i) 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; and (ii) if we determine to cease commercializing either the Brushed Graft Product or our eSVS MESH, then Medtronic may terminate our license to patent rights related to the Brushed Graft Product or the patent rights related to our eSVS MESH, as applicable. If we cease commercialization of the Brushed Graft Product and not the eSVS MESH, we believe that Medtronic is entitled to terminate only the license to patent rights related to the Brushed Graft Product and not the patent rights related to the eSVS MESH. Similarly, if we cease commercialization of the eSVS MESH but not the Brushed Graft Product, we believe that Medtronic is entitled to cause the reversion of the patent rights related to the eSVS MESH but not terminate our license to patent rights related to the Brushed Graft Product. We recognize, however, that the terms of our agreement with Medtronic are susceptible to differing interpretations.

 

Competition

 

The development and commercialization of medical devices to treat cardiovascular disease is a highly competitive industry. If approved, our eSVS MESH will compete with current forms of treatment, including pharmaceutical treatment, balloon angioplasty, coronary stents and conventional CABG surgery.

 

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 the prevention or treatment of cardiovascular disease. The commercial success of our eSVS MESH will depend upon the results of clinical trials of the technology and experience with the technology in the commercial marketplace.

 

If the commercialization of our eSVS MESH technology is successful, it can be expected that other medical device companies, many of whom are larger and have greater financial resources than us, 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 United States and International Good Manufacturing Practices requirements.

 

We have vendors for all of our key components and outsourced processes. We have no sole source suppliers and have identified alternate suppliers for each key component and outsourced process; however, in some cases, components are provided by single source suppliers at this time 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 two knitting machines that knit the mesh sleeve of our eSVS MESH, with one located at our facility and the other located off-site. We intend to order two additional knitting machines in the first half of 2010. 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 can obtain one or more replacement knitting machines, although the custom work required to enable the machines to produce our eSVS MESH would likely result in some delays in our production process.

 

Research and Development

 

During 2007, 2008 and 2009, we incurred approximately $196,000, $2.6 million and $3.0 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, materials and supplies, and facilities-related costs. While our research and development expenses to date have been focused on product development and evaluating the feasibility of our eSVS MESH, we expect that a large percentage of our research and development expenses in the future will be incurred in support of our current and future clinical trials. As we develop further applications for

our eSVS MESH, we intend to utilize internal resources, outside contract resources and facilities, and our Scientific Advisory Board.

 

Employees

 

As of March 1, 2010, we had ten employees. We plan to continue to expand our research and development and commercialization activities. To support this growth, we will need to expand managerial, research and development, operations and other functions. None of our employees is represented by a labor union, and we consider our relationship with our employees to be good.

 

Facilities

 

We lease approximately 5,000 square feet of office, laboratory, manufacturing and warehouse space at 3405 Annapolis Lane North, Suite 200, Minneapolis, Minnesota. The term of our lease expires on August 31, 2010. Negotiations are underway to extend this lease and to secure additional space. Our corporate offices, research and development facilities, prototype development, manufacturing, warehousing, and shipping facilities are located at this facility.

 

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, premarket 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. We intend to manufacture and market a medical device that is regulated by the FDA, comparable state agencies and regulatory bodies in other countries.

 

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 premarket notification (also called 510(k) clearance) and premarket approval (also called PMA approval). The type of marketing authorization applicable to a device—510(k) clearance or PMA approval—is generally linked to classification of the device. The PMA approval process is generally more stringent, time-consuming and expensive than the 510(k) clearance process.

 

The FDA classifies medical devices into one of three classes (Class I, II or III) based on the degree of risk 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 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, premarket 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 postmarket 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 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 approval prior to commercial marketing. To obtain 510(k) clearance for a medical device, an applicant must submit a premarket 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) 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 PMA approval is obtained. The manufacturer may also be subject to significant regulatory fines or penalties.

 

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 approval will be granted. A PMA application requires the payment of significant User Fees, and must 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. 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. The FDA can delay, limit or deny approval of a PMA application for many reasons, including:

 

 

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 approval letter authorizing commercial marketing of the device for certain indications. If the FDA’s evaluation of the PMA or manufacturing facilities is not favorable, the FDA will deny approval of the PMA or issue a not approvable letter. The FDA may also determine that additional clinical trials are necessary, in which case the PMA approval may be delayed for several months or years while the trials are conducted and then the data submitted in an amendment to the PMA. 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 approval 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 PMA application and are sometimes required for a 510(k) clearance. These trials generally require submission of an application for an investigational device exemption, or 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, 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 investigation 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 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 any of our clinical trials may be delayed or halted, or be inadequate to support approval of a PMA application or clearance of a premarket notification for numerous reasons, including, but not limited to, the following:

 

 

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

 

 

Also, the FDA may require us to conduct postmarket surveillance studies or order us to establish and maintain a system for tracking our eSVS MESH 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 our 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:

 

 

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 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 state and federal fraud and

abuse laws, including, without limitation, the FDCA, federal Anti-Kickback Statute and False Claims Act. These laws may impact, among other things, our proposed sales, marketing and education 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.

 

The federal Anti-Kickback Statute prohibits persons from knowingly and willfully 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. Various states have also enacted laws modeled after the federal False Claims Act.

 

In addition to the laws described above, the Health Insurance Portability and Accountability Act of 1996 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.

 

If our operations are found to be in violation of any of the laws described above or other applicable state and federal 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 13845 issued by the International Organization for Standards establishes the presumption of conformity with the essential requirements for a CE Mark. The International Organization for Standardization, or ISO, is a worldwide federation of national standards bodies from some 130 countries, established in 1947. The mission of the ISO is to promote the development of standardization and related activities in the world with a view to facilitating the international exchange of goods and services. 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. 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.

 

The Medical Devices Directive, or MDD, covers the regulatory requirements of the European Union for medical devices. Compliance with the requirements of the MDD is declared by placing the CE Mark on the product and supplying the device with a declaration of conformity, in which the manufacturer certifies that its product complies with the MDD.

 

Products intended for sale must bear the CE mark to show compliance with the 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:

 

 

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:

 

 

We are seeking approval to apply the CE Mark to our eSVS MESH in order to market our eSVS MESH in the European Union and other countries that accept the CE Mark.

 

Third Party Reimbursement

 

The availability of insurance coverage and reimbursement for newly approved medical devices is variable. The commercial success of our eSVS MESH in both domestic 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 revenue.

 

In many countries including the United States, third-party payors consist of both government funded insurance programs and private insurance programs who cover a significant portion of a patient’s medical expenses. The trends toward managed healthcare in the U.S., and proposed legislation intended to reduce the cost of government insurance programs, could significantly influence the purchase of healthcare services and products, and may result in lower prices for our eSVS MESH or the exclusion of our eSVS MESH from reimbursement programs. Even before reimbursement may be obtained for our eSVS MESH in the United States, FDA approval will be required.

 

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 payment rates have decreased approximately 10% to 14% for those procedures using drug eluting stents. The reductions are being transitioned over a three-year period that began in fiscal year 2007. In 2007, CMS also implemented a revised payment methodology that more accurately reflects the severity of the patient’s condition.

 

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.

 

Providers have also 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 whether our eSVS MESH will be viewed positively in a cost-avoidance model so as to warrant adequate coverage and reimbursement levels.

 

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. 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.

 

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 have a material adverse effect on our business, financial condition and results of operations.

 

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.

 

Post-FDA approval in the United States, we intend to pursue an application for a hospital inpatient New Technology Add-On Payment. This will allow facilities to be paid an additional amount to account for the cost of our eSVS MESH device on top of the MS-DRG for the CABG procedure. Should the clinical trial results continue to prove a lowering of revascularization rates, we believe there is a reasonable chance that CMS will grant our request.

 

Legal Proceedings

 

We are not a party to any pending or threatened litigation.

 

Scientific Advisory Board

 

Our Scientific Advisory Board is currently comprised of the following five practicing cardiac surgeons and one practicing cardiologist, who provide feedback on disease states, product concepts, product requirements, and preclinical/clinical trial designs.

 

William Cohn, M.D.: Dr. Cohn is the Director of Minimally Invasive Surgical technology at the Texas Heart Institute. His specialties include adult cardiac surgery, minimally invasive cardiac surgery, off-pump coronary artery bypass surgery, and minimally invasive valve surgery. He has been involved with the development of numerous products, including many products for minimally invasive cardiac surgery.

 

Robert Emery, M.D.: Dr. Emery has been a cardiovascular and thoracic surgeon for more than 25 years and is presently a senior partner of Cardiac Surgical Associates, P.A. with practices at St. Josephs Hospital in St. Paul, Minnesota, where he is Medical Director of Cardiovascular Surgery. Dr. Emery has contributed more than 175 articles and 140 scientific abstracts to medical literature and has lectured in many parts of the United States and around the world. He is active in several professional societies, including the American College of Chest Physicians, The Society of Thoracic Surgeons, and is the past president of the International Society for Minimally Invasive Cardiac Surgery.

 

Richard Gray, M.D.: Dr. Gray has been a cardiologist since 1975. He is currently a Medical Director with Tyler Heart Institute at Community Hospital of Monterey Peninsula, California. His specialties include valvular heart disease, artificial heart valves, coronary artery disease, and preventive cardiology. Dr. Gray has been a cardiologist

with California Pacific Medical Center in San Francisco, California, Director of Cardiovascular Services for HealthPartners Medical Group, Minneapolis, Minnesota, Chief of Cardiology for Regions Hospital, St. Paul, Minnesota, Chairman of the University of North Dakota School of Medicine Department of Medicine, Director, Surgical Cardiology, Division of Cardiology for Cedars-Sinai Medical Center, Los Angeles, California, and Medical Director, Heart Transplant Program at Cedars-Sinai Medical Center, Los Angeles, California. He has also acted as principal investigator on several cardiac research programs over his career.

 

Stuart Jamieson, M.D.: Dr. Jamieson is the Endowed Chair, Distinguished Professor of Surgery and Chief of the Division of Cardiothoracic Surgery for the University of California, San Diego School of Medicine. He is also Director of the California Heart and Lung Institute. He is known throughout the world for his pioneering research and innovative surgical therapy. Internationally recognized for his expertise in pulmonary thromboendarterectomy, or PTE, he has performed more of these specialized operations than all other surgeons in the world combined. He is also well known for his skill in both adult and pediatric cardiac surgery. The longest surviving heart-lung and double lung transplanted patients in the world are patients of Dr. Jamieson.

 

Uwe Klima, M.D.: Dr. Klima is Chief of Cardiothoracic Surgery at the American Hospital in Dubai, UAE. Prior to his current position, he was Professor of Surgery for Singapore National University Hospital’s Department of Cardiac, Thoracic and Vascular Surgery and Associate Professor of Surgery at Hanover Medical School. He started his training in cardiothoracic surgery in Austria. He completed residencies at Harvard Medical School and Vienna General Hospital. His specialties include adult cardiac surgery, general thoracic surgery, minimally invasive surgery, beating heart surgery, and peripheral vascular surgery. Dr. Klima is also the author or co-author of over 300 publications.

 

Theo Kofidis, MD, Ph.D, FAHA: Dr. Kofidis is the Associate Professor of Surgery for National University Hospital in Singapore. He is also Director of the Robotic Surgery Program for National University Hospital. His specialties include adult cardiac surgery, transplantation, heart failure surgery, cardiac assist devices, minimally invasive cardiac surgery, and arrhythmia surgery. He has been recipient of many professional honors, holds several patents, and has been author/co-author on nearly 100 papers and books in the field of cardiothoracic surgery.

 

Our Scientific Advisory Board members have each received nonqualified stock options to purchase 50,000 shares of our common stock, which generally vest 25% at grant and 25% each year over the subsequent three years on the anniversary of the grant date.

 

 

The name, age and position of each of our directors and executive officers as of March 1, 2010, and the names of certain persons who have agreed to serve as directors upon the closing of the offering are as follows:

 

Executive Officers and Directors

 

 

 

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 the latest generation of open-pivot mechanical heart valves. From 1976 to 1982, Mr. Villafaña founded and served as President and Chairman of the Board of St. Jude Medical, Inc., leading the company’s development of a novel heart valve that still dominates the mechanical valve replacement market. 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 that introduced a long life lithium iodine pacemaker that became and continues to be the standard of care in the pacemaker market. 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 Top 100 Hispanics in the USA, the Boys and Girls Club of America Hall of Fame, and induction into the Minnesota Business Hall of Fame. We believe that Mr. Villafaña’s nearly 40 years of experience in healthcare, his proven and respected leadership, and his deep commitment to us as our founder will be valuable in helping to guide us in the years ahead.

 

Michael P. Winegar joined us as Chief Operating Officer and Vice President of Regulatory Affairs in September 2007. From 2006 to September 2007, Mr. Winegar was the Vice President of Regulatory and Quality at Enpath Medical, Inc., up to and through the company’s acquisition by Greatbatch, Inc. While at Enpath, Mr. Winegar oversaw the regulatory and quality functions of various Class II and III devices and coordinated relevant functions for facility consolidations. From 2001 to 2005, Mr. Winegar was a founding employee of ev3 Inc., holding various management positions in the Regulatory Affairs, Clinical Research, and Quality Assurance departments. From 2000 to 2001, Mr. Winegar was the Vice President of Regulatory Affairs, Clinical Research, and Quality Assurance for Myocor, Inc., where he oversaw the first chronic implants of Myocor heart failure therapy technologies.

Mr. Winegar began his career with positions at Medical Incorporated, Medtronic, Inc., SciMed Life Systems Inc., and Boston Scientific Corporation. Mr. Winegar has also acted as a medical device industry consultant in the areas of regulatory affairs, quality assurance, and clinical research. Mr. Winegar has agreed to join our board of directors upon the closing of this offering. We believe that Mr. Winegar’s experience in the regulatory affairs and clinical research fields, coupled with his knowledge of our eSVS MESH technology, will bring valuable insight to our board.

 

Scott Kellen joined us as Chief Financial Officer, Vice President of Finance, and Secretary in February 2010. From 2007 to 2009, Mr. Kellen served as Director of Finance 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 after the passage of the Sarbanes-Oxley Act. Altogether, Mr. Kellen has spent more than 12 years in the medical device industry, serving early stage and growth companies that produced Class II and III devices. Mr. Kellen began his career with Deloitte & Touche in 1987.

 

Arch C. Smith is currently, and has been since April 2005, a Venture Partner at Sight Line Partners, a venture capital firm focused on investments in later stage private medical device companies. From 1984 to 2003, Mr. Smith worked for Piper Jaffray, a Minneapolis-based investment bank. Mr. Smith contributed in roles of increasing responsibility and most recently as a senior healthcare analyst and Managing Director for equity research, specializing in medical technology companies. Mr. Smith initially covered large capitalization stocks in the cardiovascular device arena, but later shifted the focus of his practice to small capitalization medical technology companies where he was responsible for identifying many of the new and emerging technologies that have changed the way healthcare is delivered today. Mr. Smith served on the board of directors for CABG Medical, Inc. from 2004 to 2006. Mr. Smith serves on the board of the Minneapolis Heart Institute Foundation. Mr. Smith has agreed to join our board of directors upon the closing of this offering. We believe that, as a successful venture capitalist, Mr. Smith will bring important strategic insight to our board, as well as a wealth of experience working with the investment community.

 

Robert E. Munzenrider is a retired financial and operating executive. From 2000 to 2002, Mr. Munzenrider was President of Harmon AutoGlass, a subsidiary of Apogee Enterprises, Inc. In 1999, he served as Vice President and Chief Financial Officer of the Glass Services Segment of Apogee Enterprises. He also served as Executive Vice President and Chief Financial Officer of Eliance Corp., an e-commerce service provider, during part of 1999. From 1998 to 1999, Mr. Munzenrider served as Vice President and Chief Financial Officer of St. Jude Medical, Inc. Mr. Munzenrider has served on the board of directors for ATS Medical, Inc. since 2003 and on the board of directors for Viad Corp since 2004. Mr. Munzenrider also served on the board of directors for Criticare Systems, Inc. from 2007 to 2008 and the board of directors for CABG Medical, Inc. from 2004 to 2006. He is also a Trustee Emeritus on the University of Montana Foundation. Mr. Munzenrider has agreed to join our board of directors upon the closing of this offering. We believe that Mr. Munzenrider’s significant leadership experience in consumer-focused industries will add valuable expertise and insight to our board.

 

Robert J. Sheehy is a retired health insurance industry executive. From 2007 to 2008, Mr. Sheehy served as Senior Vice President for UnitedHealth Group, Inc. From 2000 to 2007, Mr. Sheehy served as Chief Executive Officer of UnitedHealthcare, Inc., a division of UnitedHealth Group. From April 1998 to December 2000, Mr. Sheehy was President of UnitedHealthcare. Prior to April 1998, Mr. Sheehy served in various capacities with UnitedHealth Group. Mr. Sheehy has agreed to join our board of directors upon the closing of this offering. We believe that Mr. Sheehy will bring strategic insight and leadership and a wealth of experience in healthcare to our board, as well as knowledge of regulations and issues facing healthcare providers and medical device companies.

 

Director Independence

 

Our board of directors has reviewed the materiality of any relationship that each of our directors and prospective directors has with us, either directly or indirectly. Based on this review, our board has determined that the following prospective directors will be “independent directors” as defined by Rule 5605(a)(2) of the Marketplace

Rules of The NASDAQ Stock Market, or NASDAQ, at the time they become directors upon the closing of the offering: Messrs. Smith, Munzenrider, and Sheehy.

 

Committees of the Board of Directors

 

Our board of directors has provided for the establishment of an audit committee, a compensation committee and a nominating and governance committee effective upon the closing of this offering. The composition and function of each of these committees is described below.

 

Audit Committee

 

Our audit committee will be comprised of Mr. Munzenrider (chairman), Mr. Smith and Mr. Sheehy. Our board of directors has determined that Mr. Munzenrider is an audit committee financial expert, as defined by the rules of the Securities and Exchange Commission. Our audit committee will be authorized to: