Kips Bay Medical Provides FDA Update and Reports Third Quarter 2012 Results

  Kips Bay Medical Provides FDA Update and Reports Third Quarter 2012 Results

Business Wire

MINNEAPOLIS -- November 13, 2012

Kips Bay Medical, Inc. (NASDAQ: KIPS) along with Manny Villafaña, its Founder,
Chairman and CEO, provides an FDA update and announces financial results for
its third quarter ended September 29, 2012.

FDA Update

On November 8, 2012, the Company announced that the United States Food and
Drug Administration (“FDA”) has granted conditional approval of Kips Bay
Medical’s Investigational Device Exemption (“IDE”) to include four U.S. study
sites in the “eMESH I” clinical feasibility trial of its eSVS® Mesh. The
Company is currently working through the internal review and approval process
with a number of leading cardiac centers in the United States.

The eMESH I clinical feasibility trial is a multi-center, randomized study of
external saphenous vein support using Kips Bay Medical’s eSVS Mesh in CABG
Surgery. The enrollment of patients for this study commenced in Bern,
Switzerland on August 31, 2012. The objective of this study is to demonstrate
the initial safety and performance of the eSVS Mesh for use as an external
saphenous vein graft support device during coronary artery bypass grafting
(“CABG”) procedures sufficient to allow the FDA to approve an IDE for a
pivotal study in the U.S. The Company expects to enroll up to 120 patients in
the eMESH I trial, at eight European and four U.S. sites.

In its approval, the FDA indicated that it will allow a staged enrollment
within the United States starting with five patients. Kips Bay Medical will
provide six-month follow-up angiogram data for five U.S. patients or,
alternatively, a combination of 10 patients from inside and outside the United
States, for the FDA to review prior to approving the remaining 35 U.S.
patients initially requested by the Company.

In Europe, Kips Bay Medical continues to work through the ethics committee
review and approval process at its selected clinical study sites. Three sites
have received ethics committee approval and are in the process of recruiting
patients for the study.

“We are beginning to make progress in the U.S.,” commented Kips Bay Medical
Founder Manny Villafaña. “We are very excited that our U.S. surgeons will be
able to begin clinical evaluation of our eSVS Mesh and we expect that their
work will begin very soon.” Villafaña further stated, “We will continue to
work diligently with the FDA to secure approval for additional patient
enrollments in the U.S. in a timely manner.”

Financial Results

Net sales increased to $89,000 in the third quarter of 2012 from zero in the
third quarter of 2011. Gross profit increased to $52,000 in the third quarter
of 2012 from zero in the third quarter of 2011. Net loss in the third quarter
of 2012 was $1.4 million, or $0.08 per diluted share, compared to a net loss
of $1.2 million, or $0.08 per diluted share, in the third quarter of 2011. The
increase in net sales was caused by increased demand for the Company’s eSVS
Mesh in the countries in which the Company is actively selling. The increase
in net loss reflects higher costs associated with product development efforts
initiated by the Company to support expanding product labeling for the eSVS
Mesh and costs associated with training clinical study sites for the Company’s
eMESH I clinical feasibility trial in Europe.

Net sales increased 26.6% to $200,000 for the nine months ended September 29,
2012, from $158,000 for the same period in the prior year. The Company
achieved a gross margin of 56.5% compared to 63.3% for the first nine months
of 2012 and 2011, respectively. The net loss in the first nine months of 2012
was $4.0 million, or $0.25 per diluted share, compared to a net loss of $3.1
million, or $0.20 per diluted share, in the first nine months of 2011. The
overall increase in net sales for the nine months ended September 29, 2012
reflects the increased demand for the eSVS Mesh in the countries in which the
Company is actively selling. The increase in net loss for the current year
results from the increased product development and clinical study related
costs, as noted above, and the increased costs of compliance with public
company regulatory requirements.

Balance Sheet and Cash Flow

Cash, cash equivalents and short-term investments decreased to $5.6 million at
September 29, 2012 from $9.2 million at December 31, 2011. Total current
assets decreased to $7.0 million at September 29, 2012, from $10.2 million at
December 31, 2011. These decreases resulted primarily from the use of cash to
fund operations during the first nine months of 2012.

Current liabilities increased from $260,000 as of December 31, 2011 to
$427,000 as of September 29, 2012. This increase is primarily attributable to
the timing of payments at the end of the quarter and the accrual of costs
incurred in the preparation of the Company’s registration statement during the
second and third quarters of the current year.

Cash used in operations decreased from $7.3 million in the nine months ended
October 1, 2011 to $3.6 million in the nine months ended September 29, 2012.
This decrease is primarily attributed to the payment of the first $5.0 million
milestone obligation to Medtronic, Inc. in the third quarter of 2011,
partially offset by increased operating losses during the first nine months of
2012.

Looking Ahead

The Company expects that sales, general and administrative expenses will
remain stable as the Company continues to pursue its sales and marketing
activities. Research and development expenses are expected to grow slightly as
clinical study related activities increase. The Company’s ability to maintain
margins will be dependent upon both the pricing negotiated with distributors
and future production levels required to support commercial sales and clinical
trials.

About Kips Bay Medical

Kips Bay Medical, Inc., founded in 2007 and headquartered in Minneapolis,
Minnesota, is a medical device company focused on manufacturing and
commercializing its innovative external saphenous vein support technology, or
eSVS Mesh for use in coronary artery bypass grafting surgery. The eSVS Mesh is
a nitinol mesh sleeve that, when placed over a saphenous vein graft during
CABG surgery, is designed to improve the structural characteristics and
long-term performance of the saphenous vein graft. Additional information
about Kips Bay Medical, Inc. can be found at www.KipsBayMedical.com.

Safe Harbor

Certain statements in this news release are forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 and are
provided under the protection of the safe harbor for forward-looking
statements provided by that Act. For example, statements in this press release
regarding (i) the interest expressed by leading cardiac centers in the U.S. in
participating in the eMESH I study; (ii) the approval process at clinical
study sites in Europe and the United States; (iii) the number of patients
expected to be enrolled in the eMESH I study, (iv) expectations with regard to
the FDA review and approval process for the Company’s eMESH I study, and (v)
expectations regarding sales, general and administrative expenses, research
and development expenses and margins, are forward-looking statements. These
statements involve risks and uncertainties which could cause results to differ
materially from those projected, including but not limited to, the potential
for the FDA’s refusal to grant, or delays in granting, IDE approval; the
possibility that clinical study sites in Europe will not grant approval; and
other factors detailed from time to time in our SEC filings, including our
annual report on Form 10-K filed on March 15, 2012 and subsequent periodic
reports. We encourage you to consider all of these risks, uncertainties and
other factors carefully in evaluating the forward-looking statements contained
in this release. The forward-looking statements made in this release are made
only as of the date of this release, and we undertake no obligation to update
them to reflect subsequent events or circumstances.

Kips Bay Medical, Inc.
Statements of Comprehensive Income (unaudited)
(Dollars in thousands, except share and per share amounts)
                                                                                             
                    Three Months Ended                Percent   Nine Months Ended                 Percent
                    September 29,   October 1,       Change    September 29,   October 1,       Change
                    2012             2011                      2012             2011             
Net sales           $ 89             $ —              —         $ 200            $ 158            26.6  %
Cost of sales        (37        )    —             —         (87        )    (58        )   50.0  
Gross profit          52               —              —           113              100            13.0
Operating
expenses:
Research and          676              483            40.0  %     1,825            1,304          40.0
development
Selling, general
and                  745            711           4.8       2,320          1,952         18.9  
administrative
Total operating       1,421            1,194          19.0        4,145            3,256          27.3
expenses
                                                                                                  
Other income:
Interest income      4              6             (33.3 )    13             15            (13.3 )
Net loss            $ (1,365     )   $ (1,188     )   14.9  %   $ (4,019     )   $ (3,141     )   28.0  %
Basic and diluted
net loss per        $ (0.08      )   $ (0.08      )   —        $ (0.25      )   $ (0.20      )   25.0  
share
Weighted average
shares               16,345,579     15,756,346    3.7       16,310,967     15,366,841    6.1   
outstanding—basic
and diluted
                                                                                                  
Comprehensive       $ (1,364     )   $ (1,191     )   14.5     $ (4,016     )   $ (3,149     )   27.5  
loss
                                                                                                  

Kips Bay Medical, Inc.
Balance Sheets (unaudited)
(Dollars in thousands, except share and per share amounts)
                                                          
                                        September 29, 2012   December 31, 2011
ASSETS
Current assets:
Cash and cash equivalents               $     2,727          $     6,211
Short-term investments                        2,873                2,957
Accounts receivable, net of allowance
for doubtful accounts of $0 and $14           54                   40
as of September 29, 2012 and December
31, 2011, respectively
Inventories                                   950                  892
Prepaid expenses and other current           356                 100
assets
Total current assets                          6,960                10,200
Property and equipment, net                  450                 467
Total assets                            $     7,410          $     10,667
                                                                   
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable                        $     178            $     85
Accrued liabilities                           245                  171
Accrued milestone and royalties              4                   4
Total current liabilities                     427                  260
                                                                   
Stockholders’ equity:
Undesignated stock, $0.01 par value,
10,000,000 shares authorized, no
shares issued and outstanding as of           —                    —
September 29, 2011 and December 31,
2011, respectively
Common stock, $0.01 par value,
40,000,000 shares authorized,
16,345,579 and 16,245,579 issued and          163                  162
outstanding as of September 29, 2012
and December 31, 2011, respectively
Additional paid-in capital                    35,182               34,591
Accumulated other comprehensive loss          —                    (3)
Retained deficit                             (28,362)            (24,343)
Total stockholders’ equity                   6,983               10,407
Total liabilities and stockholders’     $     7,410          $     10,667
equity
                                                                   

Kips Bay Medical, Inc.
Statements of Cash Flows (unaudited)
(Dollars in thousands)
                                                  
                                                    Nine Months Ended
                                                    September 29,  October 1,
                                                    2012            2011
Cash flows from operating activities:
Net loss                                            $  (4,019  )    $ (3,141 )
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation expense                                   82             74
Stock-based compensation                               457            310
Amortization of premium on short-term investments      68             87
Other                                                  16             (27    )
Changes in operating assets and liabilities:
Accounts receivable                                    (14     )      40
Inventories                                            (58     )      (223   )
Prepaid expenses and other current assets              (256    )      1,055
Accounts payable                                       93             (170   )
Accrued liabilities                                    74             (293   )
Accrued milestone and royalties                       —            (5,005 )
Net cash used in operating activities                  (3,557  )      (7,293 )
Cash flows from investing activities:
Proceeds from sales and maturities of short-term       4,544          450
investments
Purchases of short-term investments                    (4,525  )      (6,868 )
Purchase of property and equipment                     (83     )      (111   )
Proceeds from the sale of property and equipment      2            —      
Net cash used in investing activities                  (62     )      (6,530 )
Cash flows from financing activities:
Proceeds from sale of common stock under common
stock purchase agreement, net of related costs of      135            —
$4
Proceeds from sale of common stock in IPO, net of      —              13,632
related costs of $2,868
Proceeds from the exercise of employee stock          —            88     
options
Net cash provided by financing activities              135            13,720
Net increase (decrease) in cash and cash               (3,484  )      (103   )
equivalents
Cash and cash equivalents at beginning of period      6,211        3,548  
Cash and cash equivalents at end of period          $  2,727       $ 3,445  

Contact:

Kips Bay Medical, Inc.
Manny Villafaña, +1-763-235-3540
Chairman and Chief Executive Officer
Email: Manny.Villafana@KipsBayMedical.com
or
Scott Kellen, +1-763-235-3540
Chief Operating Officer and Chief Financial Officer
Email: Scott.Kellen@KipsBayMedical.com