10-Q 1 kips20150331_10q.htm FORM 10-Q Table Of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

___________________

FORM 10-Q

___________________

(Mark One)

☒

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

For the quarterly period ended ~~September~~March 2728, ~~2014~~2015

☐

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

For the transition period from to .

Commission File No.: 001-35080

___________________

Kips Bay Medical, Inc.

(Exact name of registrant as specified in its charter)

Delaware		20-8947689
(State or other jurisdiction of		(IRS Employer
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)
incorporation or organization)		Identification No.)

3405 Annapolis Lane North, Suite 200

Minneapolis, Minnesota 55447

(Address of principal executive offices, including zip code)

(763) 235-3540

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark 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.

Large accelerated filer ☐		Accelerated filer ☐
Non-accelerated filer ☐		Smaller reporting company ☒

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

There were 33,014,079 shares of common stock, par value $0.01, Kips Bay Medical, Inc. outstanding as of the close of business on ~~November~~May 38, 2014.

Table Of Contents

Kips Bay Medical, Inc.
Quarterly Report on Form 10-Q

TABLE OF CONTENTS

Page

		Page

PART I.	FINANCIAL INFORMATION	1

Item 1.	Financial Statements	1
	Balance Sheets as of March 28, 2015 (unaudited) and December 31, 2014	1
	Statements of Comprehensive Loss (unaudited) for the three-month periods ended March 28, 2015 and March 29, 2014	2
	Statements of Cash Flows (unaudited) for the three-month periods ended March 28, 2015 and March 29, 2014	3
	Notes to Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21
Item 4.	Controls and Procedures	21

PART II.	OTHER INFORMATION	22

Item 1.	Legal Proceedings	22
Item 1A.	Risk Factors	22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 3.	Defaults Upon Senior Securities	23
Item 4.	Mine Safety Disclosures	23
Item 5.	Other Information	23
Item 6.	Exhibits	23

SIGNATURES		24

EXHIBIT INDEX		25

PART I. FINANCIAL INFORMATION		2
Item 1.	Financial Statements	2
	Balance Sheets as of September 27, 2014 (unaudited) and December 31, 2013	2
	Statements of Comprehensive Loss (unaudited) for the three and nine-month periods ended September 27, 2014 and September 28, 2013	3
	Statements of Cash Flows (unaudited) for the nine-month periods ended September 27, 2014 and September 28, 2013	4
	Notes to Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20
Item 4.	Controls and Procedures	20
PART II. OTHER INFORMATION		21
Item 1.	Legal Proceedings	21
Item 1A.	Risk Factors	21
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	21
Item 3.	Defaults Upon Senior Securities	21
Item 4.	Mine Safety Disclosures	21
Item 5.	Other Information	21
Item 6.	Exhibits	21
SIGNATURES		22
EXHIBIT INDEX		23

______________

This quarterly report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created by those sections. For more information, see “Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Special Note Regarding Forward-Looking Statements.”

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

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

Table Of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Kips Bay Medical, Inc.

Balance Sheets

(In thousands, except share and per share amounts)

	September 27, 2014			December 31, 2013
	March 28, 2015			December 31, 2014
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	42,~~061~~564		$	23,~~316~~138
Short-term investments, net		~~706~~50			~~2,684~~457
Accounts receivable		1311			288
Inventories		~~703~~668			~~793~~673
Prepaid expenses and other current assets		~~147~~286			88109
Total current assets		53,~~630~~579			54,~~909~~385
Property and equipment, net		~~363~~342			~~400~~353
Total assets	$	53,~~993~~921		$	64,~~309~~738
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	5446		$	~~141~~78
Accrued liabilities		~~420~~370			~~314~~355
Total current liabilities		~~474~~416			~~455~~433
Commitments and contingencies (Note 10)
Stockholders’ equity:
Undesignated stock, $0.01 par value, 10,000,000 shares authorized, no shares issued and outstanding as of September 27, 2014 and December 31, 2013, respectively		—			—
Undesignated stock, $0.01 par value, 10,000,000 shares authorized, no shares issued and outstanding as of March 28, 2015 and December 31, 2014, respectively		—			—
Common stock, $0.01 par value, 90,000,000 shares authorized as of September 27, 2014 and 40,000,000 shares authorized as of December 31, 2013, 33,014,079 and 26,979,079 shares issued and outstanding as of September 27, 2014 and December 31, 2013, respectively		330			270
Common stock, $0.01 par value, 90,000,000 shares authorized, 33,014,079 issued and outstanding as of March 28, 2015 and December 31, 2014, respectively		330			330
Additional paid-in capital		45,~~388~~536			4145,~~494~~492
Accumulated other comprehensive loss		—			—
Accumulated deficit		(42,361	)		(41,517	)
Accumulated deficit		(40,199	)		(35,910	)
Total stockholders’ equity		3,505			4,305
Total stockholders’ equity		5,519			5,854
Total liabilities and stockholders’ equity	$	3,921		$	4,738
Total liabilities and stockholders’ equity	$	5,993		$	6,309

See accompanying notes to financial statements.

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Kips Bay Medical, Inc.

Statements of Comprehensive Loss

(In thousands, except share and per share amounts)

(Unaudited)

	Three Months Ended						~~Nine Months Ended~~
	September 27, 2014			September 28, 2013			September 27, 2014			September 28, 2013
	March 28, 2015			March 29, 2014
Net sales	$	138		$	1326		$	71		$	89
Cost of sales		(84	)		(712	)		~~(35~~	)		~~(42~~	)
Gross profit		54			614			36			47
Operating expenses:
Research and development		~~604~~386			~~840~~639			~~1,896~~			~~2,302~~
Selling, general and administrative		~~826~~463			~~736~~814			~~2,434~~			~~2,283~~
Operating loss		(~~1,425~~845	)		(1,~~570~~439	)		~~(4,294~~	)		~~(4,538~~	)
Interest income		1			42			5			12
Net loss	$	(~~1,424~~844	)	$	(1,~~566~~437	)	$	~~(4,289~~	)	$	~~(4,526~~	)
Basic and diluted net loss per share	$	(0.0403	)	$	(0.0605	)	$	~~(0.13~~	)	$	~~(0.17~~	)
Weighted average shares outstanding — basic and diluted		33,014,079			2630,~~979~~881,~~079~~161			~~32,292,084~~			~~26,888,695~~
Comprehensive loss	$	(~~1,424~~844	)	$	(1,~~563~~437	)	$	~~(4,289~~	)	$	~~(4,526~~	)

See accompanying notes to financial statements.

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Kips Bay Medical, Inc.

Statements of Cash Flows

(In thousands)

(Unaudited)

	Nine Months Ended
	Three Months Ended
	September 27, 2014			September 28, 2013
	March 28, 2015			March 29, 2014
Cash flows from operating activities:
Net loss	$	(~~4,289~~844	)	$	(41,~~526~~437	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation expense		399			4113
Stock-based compensation		~~311~~44			~~431~~121
Amortization of premium on short-term investments		18			62
Loss on disposal of assets		2			—
Other		—			17
Amortization of premium on short-term investments		—			8
Changes in operating assets and liabilities:
Accounts receivable		15(3	)		181
Inventories		905			9515
Prepaid expenses and other current assets		(59177	)		(60184	)
Accounts payable		(8732	)		(~~309~~82	)
Accrued liabilities		~~106~~15			~~(86~~183	)
Net cash used in operating activities		(~~3,856~~981	)		(41,~~317~~362	)
Cash flows from investing activities:
Proceeds from sales and maturities of short-term investments		~~3,176~~406			21,~~233~~970
Purchases of short-term investments		~~(1,216~~—	)		(51,~~625~~216	)
Purchase of property and equipment		(2	)		(17	)
Proceeds from the sale of property and equipment		1			—
Proceeds from the sale of property and equipment		—			2
Net cash provided by investing activities		407			754
Net cash provided by (used in) investing activities		1,958			(3,407	)
Cash flows from financing activities:
Proceeds from sale of common stock in a public offering, net of related costs of $581		3,643			—
Proceeds from sale of common stock in a public offering, net of issuance costs of $581		—			3,644
Proceeds from sale of common stock in a public offering, net of related costs of $33		—			276
Net cash provided by financing activities		—			3,644
Net cash provided by financing activities		3,643			276
Net (decrease) increase in cash and cash equivalents		(574	)		3,036
Net increase (decrease) in cash and cash equivalents		1,745			(7,448	)
Cash and cash equivalents at beginning of period		3,138			2,316
Cash and cash equivalents at beginning of period		2,316			9,403
Cash and cash equivalents at end of period	$	2,564		$	5,352
Cash and cash equivalents at end of period	$	4,061		$	1,955

See accompanying notes to financial statements.

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Kips Bay Medical, Inc.

Notes to Financial Statements

1. Business

Kips Bay Medical, Inc. (“we”, “us” or “our”) is a medical device company focused on developing, manufacturing and commercializing our external saphenous vein support technology, or eSVS® Mesh, for use in coronary artery bypass grafting, or CABG, surgery. Our eSVS Mesh is designed to be fitted like a sleeve on the outside of a saphenous vein ~~grafts~~graft, or ~~SVGs~~SVG, to strengthen ~~SVGs~~an SVG used in coronary artery bypass graft surgery. By strengthening the SVG and preventing the damaging expansion of the vein graft, we hope to reduce or prevent the resulting injury which can lead to SVG failure and potentially costly and complicated re-interventions for patients undergoing CABG surgery. In the near term, we are focused on and committed to spending substantially all of our resources on completing our current eMESH I clinical feasibility trial.

2. Risks and Uncertainties

WeOn ~~received~~January ~~authorization~~5, to2015, ~~apply~~we ~~the~~reorganized CEour ~~Mark~~operations toby ~~our~~eliminating ~~eSVS~~staff ~~Mesh~~positions, ininstituting ~~May~~salary ~~2010~~reductions and ~~began~~reducing ~~marketing~~our ~~and~~non-clinical ~~commenced~~related ~~shipments~~operating expenses, in ~~select~~order ~~international~~to ~~markets~~conserve inour ~~June~~capital ~~2010~~while we pursue the completion of the eMESH I clinical feasibility trial. ToAs ~~date~~a result, ~~sales~~we incurred a net loss of ~~our~~$844,000 ~~eSVS~~and ~~Mesh~~negative ~~have~~cash ~~been~~flows ~~limited~~from operating activities of $1.0 million for the quarter ended March 28, 2015, which is down from a net loss of $1.4 million and wenegative docash ~~not~~flows ~~expect~~from ~~sales~~operating toactivities ~~improve~~of in$1.4 million for the ~~near~~prior ~~future~~year quarter ended March 29, 2014. We ~~believe~~expect ~~sales~~to ofcontinue ~~our~~to ~~eSVS~~incur ~~Mesh~~substantial ~~have been~~losses, ~~and~~which will continue to ~~be,~~generate ~~adversely~~negative ~~impacted~~net bycash ~~the~~flows ~~limited~~from ~~amount~~operating ofactivities as we continue to develop additional clinical data, onpursue ~~the~~U.S. ~~performance~~marketing approval of ~~the~~our eSVS Mesh, ~~limited~~and ~~reimbursements~~market ~~available to hospitals~~ and ~~the~~sell ~~effects~~our ofeSVS ~~economic~~Mesh ~~difficulties~~ in ~~certain~~ European ~~countries~~and other international markets.

We ~~are~~received ~~currently~~CE ~~conducting~~Mark aapproval ~~feasibility~~in ~~trial~~May ~~for~~2010 ~~the~~based ~~U.S.~~upon ~~Food~~our ~~and~~international ~~Drug~~human ~~Administration,~~clinical ~~or FDA~~trial. ~~This~~We ~~trial~~began ismarketing aand ~~multi-center,~~commenced ~~randomized~~shipments ~~study~~ of ~~external saphenous vein support using~~ our eSVS Mesh in ~~CABG~~select ~~surgery~~European ~~and~~markets isin ~~titled~~June ~~the “eMESH I” clinical feasibility trial~~2010. ~~The~~In ~~objective~~November of2013, ~~this~~we ~~trial~~received isan toupdated ~~demonstrate~~CE ~~the~~Mark ~~initial~~expanding ~~safety~~our ~~and~~ability ~~performance~~to ofmarket the eSVS Mesh for use aswith ansequential ~~external~~grafts. ~~saphenous~~In ~~vein~~August ~~graft~~2014, ~~support~~we ~~device~~received ~~during~~an ~~CABG~~updated ~~surgery.~~CE ~~The~~Mark ~~trial~~incorporating ischanges ~~being conducted~~ in ~~both Europe and~~ the ~~United~~application ~~States. However, the FDA’s approval~~ of our ~~investigational~~eSVS ~~device~~Mesh ~~exemption, or IDE,~~ to ~~conduct~~the ~~our~~SVG ~~clinical~~and ~~feasibility trial limits us~~ to ~~enrolling~~the 27surgical ~~patients~~implant attechnique upfor ~~to 10 sites in~~ the ~~United~~eSVS ~~States.~~Mesh Wetreated ~~intend~~graft tothat ~~enroll~~were ~~the~~approved ~~balance~~by of the ~~patients in Europe~~U.S. ~~The~~Food ~~primary~~and ~~safety~~Drug ~~endpoint~~Administration, ~~for~~or ~~the~~FDA, ~~feasibility~~in ~~trial~~March is2014 ~~the~~for ~~30-day~~use ~~rate~~in ofour ~~MACE,~~eMESH ~~defined~~I asclinical ~~the~~feasibility ~~rate~~trial. ofWe ~~the~~believe ~~composite~~sales of ~~total~~our ~~mortality,~~eSVS ~~myocardial~~Mesh ~~infarction~~have ~~(heart attack)~~been, and~~/or~~ ~~coronary~~will ~~target~~continue ~~vessel~~to ~~revascularization~~be, ~~(percutaneous~~adversely ~~coronary~~impacted ~~intervention~~by orthe ~~CABG)~~limited ~~within~~amount ~~30 days~~ of ~~the~~clinical ~~procedure.~~data ~~The~~on ~~eSVS~~the ~~Mesh~~ performance ~~will be evaluated based upon the angiographic patency rate~~ of the ~~enrolled~~eSVS ~~grafts~~Mesh, ~~where~~limited ~~patency~~reimbursements isavailable ~~defined~~to ashospitals ~~less~~and ~~than~~the ~~50%~~effects ~~stenosis, or blockage,~~ of ~~the~~economic ~~SVG~~difficulties atin ~~six~~certain ~~months~~European ~~after surgery~~countries. WeAs ~~also~~part ~~expect~~of toour ~~use~~reorganization ~~the~~on ~~data~~January ~~from~~5, ~~eMESH~~2015, Iwe ~~clinical~~terminated ~~feasibility~~our ~~trial~~two assales ~~the~~directors. ~~basis~~In ~~for~~ the ~~filing~~near ofterm, awe ~~request~~are ~~for~~not anfocusing ~~IDE~~our toefforts ~~perform~~on asales ~~pivotal trial which is required to demonstrate clinical effectiveness~~ of the eSVS Mesh, and totherefore, ~~support~~do anot ~~request~~expect ~~for~~our ~~approval~~sales to ~~sell the eSVS Mesh~~ improve in the ~~United~~foreseeable ~~States~~future.

~~Enrollments~~We inare ~~our~~currently conducting the eMESH I clinical feasibility trial, ~~commenced~~the inobjective ~~Europe~~of inwhich ~~late~~is ~~August~~to ~~2012~~demonstrate the initial safety and inperformance of the ~~United~~eSVS ~~States~~Mesh infor ~~February~~use ~~2013~~as an external saphenous vein graft support device during CABG surgery. ~~During~~In March 2014, wethe ~~requested~~FDA ~~and~~approved ~~received~~a ~~approval~~combination ~~from~~of changes in the ~~FDA~~application of the eSVS Mesh to ~~make~~the ~~certain~~SVG ~~changes~~and into the surgical implant technique for the eSVS Mesh treated graft. ~~These~~As ~~changes~~of ~~were~~May ~~based~~8, ~~upon~~2015, ~~consultations~~we ~~with~~had ~~medical~~received ~~advisors~~the ~~and~~results ~~several~~ of ten patients who had an eSVS Mesh implanted using the ~~cardiac~~new ~~surgeons~~surgical ~~participating~~implant technique. The SVGs supported with an eSVS Mesh in ~~the~~seven ~~eMESH~~of Ithese ~~clinical~~new ~~feasibility~~technique ~~trial~~patients ~~and~~were ~~our~~not ~~initial~~patent ~~review~~at the time of ~~early~~their ~~results~~six-month ~~from~~follow-up angiogram and did not perform as well as the ~~eMESH~~unsupported, Ior control, SVGs in the trial. ~~The~~We ~~changes~~intend ~~are~~to ~~intended~~closely tomonitor ~~reduce~~the results of additional patients who had an eSVS Mesh implanted using the ~~variables~~new surgical implant technique in the ~~study~~feasibility trial and will reserve a final decision regarding the ~~risk~~future of ~~early~~the ~~graft~~feasibility ~~occlusion~~trial until sufficient meaningful data has been received. We ~~also~~acknowledge ~~believe~~that ~~these~~based ~~changes~~upon ~~will~~the ~~simplify~~results from the ~~process~~angiograms of ~~applying~~the ~~and~~initial ~~implanting~~10 new technique patients, the ~~eSVS~~results ~~Mesh~~from ~~thereby~~the ~~reducing~~angiograms ~~procedural~~of ~~costs.~~the Onremaining ~~August~~new ~~20,~~technique ~~2014,~~patients wewould ~~received~~need anto ~~updated~~be CEhighly ~~Mark~~compelling ~~approval~~to ~~allowing~~justify ~~our~~a ~~European~~decision ~~study~~by ~~sites~~us to ~~enroll~~continue ~~patients~~to move forward in ~~the~~seeking ~~eMESH~~U.S. Imarketing ~~trial~~approval ~~using~~for the ~~new~~eSVS Mesh. In the meantime, we intend to evaluate our strategic alternatives. Possible strategic alternatives include: further modification of our eSVS Mesh device and implant technique.; Asthe sale of ~~November~~the 3,Company ~~2014~~or our assets, ~~ten~~including ~~sites~~our inintellectual ~~Europe~~property ~~and~~portfolio; ~~seven~~or ~~sites~~an inorderly ~~the~~wind-down ~~United~~of ~~States~~our ~~are~~operations. ~~able~~No toassurance ~~enroll~~can ~~patients~~be inprovided ~~the~~that our eMESH I clinical feasibility trial ~~using~~will be successful, that the ~~new~~FDA ~~implant~~will ~~technique.~~approve Asan ofIDE ~~November~~for 3,a ~~2014~~required future pivotal trial or that once these studies are concluded, 79we ~~patients~~will ~~had~~receive ~~been~~U.S. ~~enrolled~~marketing inapproval for the eSVS Mesh. If the eMESH I clinical feasibility trial is not successful, ~~which~~or isif upthe ~~from~~FDA 56does ~~patients~~not ~~enrolled~~approve asan ofIDE ~~August~~for 1a pivotal study, ~~2014.~~we Wewould ~~estimate~~be ~~that~~forced to cease operations since we ~~need~~do ~~approximately~~not 25have ~~more~~any ~~patients,~~other ~~for~~products ain ~~targeted~~development. ~~total~~In ofaddition, 45 we need additional financing to 50continue our operations, and in particular, to complete ~~enrollment~~the ~~for~~eMESH ~~this~~I clinical feasibility trial. If we do not receive such additional financing, we would be forced to cease operations.

No assurance can be provided that we will obtain our enrollment goals, that our eMESH I clinical feasibility trial will be successful, that the FDA will approve an IDE for a pivotal study or that once these studies are concluded, we will receive U.S. marketing approval for the eSVS Mesh. If these events do not occur, we may be forced to cease operations since we do not have any other products in development. In addition, we need additional financing to continue our operations, and in particular, to complete our eMESH I clinical feasibility trial. If we do not receive such additional financing, we may be forced to cease operations. See note 4 ~~entitled “Liquidity and Management’s Plans.”~~

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5As of March 28, 2015, we did not have any existing credit facilities under which we could borrow funds. We historically have financed our operations principally from the sale of convertible debt and equity securities. While we have been successful in the past in obtaining the necessary capital to support our operations, and have similar future plans to obtain additional financing, there is no assurance that we will be able to obtain additional financing under commercially reasonable terms and conditions, or at all. If we do not receive such additional financing, we would be forced to cease operations and liquidate our company.

The accompanying financial statements have been prepared assuming that we will continue as a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business and do not include any adjustments relating to the recoverability or classification of assets or the amounts of liabilities that might result from the outcome of these uncertainties. Our ability to continue as a going concern, realize the carrying value of our assets and discharge our liabilities in the ordinary course of business is dependent upon a number of factors, including our ability to obtain additional financing to fund our operations until we ultimately generate profitable operations, the results of our current eMESH I clinical feasibility trial and a required future pivotal trial, our ability to obtain U.S. marketing approval for our eSVS Mesh and our ability to market and sell our eSVS Mesh. These factors, among others, raise substantial doubt about our ability to continue operations as a going concern. See note 4 entitled “Liquidity and Management’s Plans.”

3. Basis of Presentation

We have prepared the accompanying unaudited interim financial statements in accordance with accounting principles generally accepted in the United States (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. These interim financial statements reflect all adjustments consisting of normal recurring accruals, which, in the opinion of management, are necessary to present fairly our financial position, results of operations and cash flows for the interim periods presented. Our fiscal year ends on December 31. The balance sheet as of December 31, ~~2013~~2014 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. These interim financial statements should be read in conjunction with the annual financial statements and the notes thereto included in our most recent annual report on Form 10-K for the fiscal year ended December 31, ~~2013~~2014, as filed with the SEC on March 12, ~~2014~~2015. The nature of our business is such that the results of any interim period may not be indicative of the results to be expected for the entire year.

Use of Estimates

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements and accompanying notes. Actual results could differ from those estimates.

Recently Issued Accounting Pronouncements

In ~~August~~May 2014, the Financial Accounting Standards Board (the “FASB”) issued ~~Accounting~~Revenue ~~Standards~~from ~~Update~~Contracts ~~(“ASU”)~~with ~~2014-15~~Customers, ~~Presentation~~Topic of606 ~~Financial~~(Accounting ~~Statements~~Standards –Update ~~Going~~No. ~~Concern~~2014-09 (~~Subtopic~~ASU ~~205~~2014-4009):), ~~Disclosure~~which ofprovides ~~Uncertainties about an Entity’s Ability to Continue as~~ a ~~Going~~framework ~~Concern.~~for ~~The~~the ~~guidance~~recognition ~~requires~~of ~~an entity to evaluate whether there are conditions or events~~revenue, inwith the ~~aggregate,~~objective that ~~raise~~recognized ~~substantial~~revenues ~~doubt~~properly ~~about~~reflect ~~the~~amounts an entity’s ~~ability~~is entitled to ~~continue~~receive asin aexchange ~~going~~for ~~concern~~goods ~~within~~and ~~one~~services. ~~year~~This ~~after~~guidance ~~the~~will ~~date~~be ~~that~~effective ~~the~~for ~~financial~~interim ~~statements~~and ~~are~~annual ~~issued~~reporting orperiods ~~available~~beginning toafter beDecember ~~issued~~15, ~~and~~2016 to(our ~~provide~~fiscal ~~related~~2017), ~~footnote~~although ~~disclosures~~the inFASB ~~certain~~has ~~circumstances.~~voted ~~The~~to ~~guidance~~propose isa ~~effective~~deferral ~~for~~of the ~~annual~~effective ~~period~~date ~~ending~~of ~~after~~the ~~December~~standard ~~15, 2016, and~~ for ~~annual~~one ~~and interim periods thereafter (our fiscal 2016)~~year. ~~Early~~We ~~application~~are iscurrently ~~permitted~~evaluating ~~and~~the weimpact ~~have~~of ~~adopted~~adopting ~~this~~ASU ~~guidance~~2014-09 ~~for~~on ~~the~~our ~~current~~financial ~~period presented~~statements.

In May 2014, FASB issued Revenue from Contracts with Customers, Topic 606 (Accounting Standards Update No. 2014-09 (ASU 2014-09)), which provides a framework for the recognition of revenue, with the objective that recognized revenues properly reflect amounts an entity is entitled to receive in exchange for goods and services. This guidance will be effective for interim and annual reporting periods beginning after December 15, 2016 (our fiscal 2017). We are currently evaluating the impact of adopting ASU 2014-09 on our financial statements.

4. Liquidity and Management’s Plans

~~The~~On ~~accompanying~~March ~~unaudited~~24, ~~interim~~2015, ~~financial~~we ~~statements~~entered ~~have~~into ~~been~~a ~~prepared~~securities ~~assuming~~purchase ~~that~~agreement wewith ~~will~~several ~~continue~~investors, asincluding aManny ~~going~~Villafaña, ~~concern~~our ~~which~~Chairman ~~contemplates~~and ~~the~~Chief ~~realization~~Executive ofOfficer, ~~assets~~ and ~~liquidation~~Kips Bay Investments, LLC, one of ~~liabilities~~our inprincipal ~~the~~stockholders, ~~normal~~pursuant ~~course~~to ofwhich ~~business.~~we ~~Our~~agreed ~~ability~~to sell and the investors agreed to ~~continue~~purchase asin a ~~going~~private ~~concern,~~placement ~~realize~~up ~~the~~to ~~carrying~~$3.25 ~~value~~million in shares of our ~~assets~~common ~~and~~stock ~~discharge~~in ~~our~~four ~~liabilities~~separate inequal ~~the~~tranches. ~~ordinary~~Under ~~course~~the terms of ~~business~~the securities purchase agreement, the first tranche is ~~dependent~~scheduled ~~upon~~to aoccur ~~number~~as ofsoon ~~factors,~~as ~~including~~reasonably ~~our~~practicable ~~ability~~after towe ~~obtain~~have ~~additional~~received ~~financing~~ten toangiograms ~~fund~~from patients enrolled in our ~~operations~~eMESH ~~until~~I weclinical ~~ultimately~~feasibility ~~generate~~trial ~~profitable~~who ~~operations~~have had an eSVS Mesh implanted using the new surgical implant technique. The second, third and fourth tranches are scheduled to occur on or about the ~~results~~90th, 180th and 270th day thereafter. Each of ~~our~~the tranches is subject to customary closing conditions and a condition that the clinical data received then to date by us from the eMESH I clinical feasibility trial ~~and~~demonstrates, ~~anticipated~~to ~~pivotal~~the ~~study~~reasonable satisfaction of each investor, ~~our~~together ~~ability~~with any then recent communications with or from the FDA, that it is advisable for Kips Bay to ~~obtain~~continue ~~U.S.~~with the feasibility trial and to continue to pursue marketing approval by the FDA for ~~our~~the eSVS Mesh. ~~and~~The per share purchase price of the shares of our ~~ability~~common stock to ~~market~~be ~~and~~purchased ~~sell~~by ~~our~~investors ~~eSVS~~will ~~Mesh~~be equal to the lesser of $0.14 ~~These~~per ~~factors,~~share ~~among~~or ~~others~~the closing sale price on the trading day immediately prior to the closing of any tranche. In addition, ~~raise~~each ~~substantial~~investor ~~doubt~~will ~~about~~receive ~~our~~a ~~ability~~five-year warrant to ~~continue~~purchase ~~operations~~one asshare of our common stock for each two shares purchased by the investor at each tranche closing. The warrants will have a ~~going~~per ~~concern~~share exercise price equal to 125% of the per share purchase price at the applicable closing. In light of the disappointing feasibility trial results received to date, we believe it is unlikely that we will be able to access funds under this bridge financing arrangement.

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We agreed to use the net proceeds from the offering for working capital and general corporate purposes, including primarily funding the process of seeking regulatory approval to market the eSVS Mesh in the United States and abroad, including continuing human clinical trials. We agreed not to use any of the net proceeds to hire any sales personnel unless a decision is made by our Board of Directors to do so and Kips Bay Investments, LLC consents thereto, which consent may not be unreasonably withheld. We also agreed in the securities purchase agreement to limit our cash operating expenses (other than expenses directly attributable to, and reasonably necessary for the feasibility trial or pivotal trial and certain other specified expenses) to no more than an average of $208,000 per month, evaluated on a three-month rolling average basis, commencing on February 1, 2015, and continuing until the completion by us of an additional financing in an amount equal to at least $3.0 million. See note 12 entitled “Stockholders’ Equity.”

As of March 28, 2015, we had $2.6 million of cash, cash equivalents and short-term investments. We believe our cash, cash equivalents and short-term investments as of March 28, 2015, will be sufficient to fund our planned operations through December 2015.

We may seek to raise additional funds through various sources, such as equity and debt financings, or through strategic collaborations and license agreements. We can give no assurances that we will be able to secure additional sources of funds to support our operations, or if such funds are available to us, that such additional financing will be sufficient to meet our needs or on terms acceptable to us. This risk would increase if our clinical data is not positive or economic and market conditions deteriorate. Prior to issuing any capital stock we must obtain the consent of Kips Bay Investments, LLC, one of our significant stockholders, and no assurance can be provided that Kips Bay Investments, LLC would provide such consent, which could limit our ability to raise additional financing.

If we are unable to obtain additional financing when needed, we would need to terminate, significantly modify or delay development or commercialization of our eSVS Mesh, license to third parties the rights to commercialize the eSVS Mesh or new applications for the eSVS Mesh that we would otherwise seek to pursue, or cease operations.

Our future success is dependent upon our ability to obtain additional financing, the success of our current eMESH I clinical feasibility trial and a required future pivotal trial, our ability to obtain U.S. marketing approval for our eSVS Mesh and our ability to market and sell our eSVS Mesh. If we are unable to obtain additional financing when needed, if our eMESH I clinical feasibility trial is not successful, if the FDA does not approve an IDE for a pivotal trial or if once these studies are concluded, we do not receive U.S. marketing approval for the eSVS Mesh, we would not be able to continue as a going concern and would be forced to cease operations and liquidate our company.

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For the nine months ended September 27, 2014 and September 28, 2013, we incurred net losses of $4.3 million and $4.5 million, respectively, and negative cash flows from operating activities of $3.9 million and $4.3 million, respectively. We expect to continue to incur substantial losses, which will continue to generate negative net cash flows from operating activities as we continue to develop additional clinical data, pursue U.S. marketing approval of our eSVS Mesh, and market and sell our eSVS Mesh in European and other international markets.

As of September 27, 2014, we had $4.8 million of cash, cash equivalents and short-term investments. If we do not raise additional financing, we estimate that we will have sufficient funds to continue our planned operations into mid-2015. We will need additional funds to continue our operations thereafter and execute our business plan, including completing our eMESH I clinical feasibility trial, planning for our anticipated pivotal study and marketing and selling our eSVS Mesh in European and other international markets. As of September 27, 2014, we did not have any existing credit facilities under which we could borrow funds. We historically have financed our operations principally from the sale of convertible debt and equity securities. While we have been successful in the past in obtaining the necessary capital to support our operations, and have similar future plans to obtain additional financing, there is no assurance that we will be able to obtain additional financing under commercially reasonable terms and conditions, or at all.

We may seek to raise additional funds through various sources, such as equity and debt financings, or through strategic collaborations and license agreements. We can give no assurances that we will be able to secure additional sources of funds to support our operations, or if such funds are available to us, that such additional financing will be sufficient to meet our needs or on terms acceptable to us. This risk may increase if economic and market conditions deteriorate. Prior to issuing any capital stock we must obtain the consent of Kips Bay Investments, LLC, one of our significant stockholders, and no assurance can be provided that Kips Bay Investments, LLC would provide such consent, which could limit our ability to raise additional financing.

If we are unable to obtain additional financing when needed, we may need to terminate, significantly modify or delay development or commercialization of our eSVS Mesh, license to third parties the rights to commercialize the eSVS Mesh or new applications for the eSVS Mesh that we would otherwise seek to pursue, or cease operations. If we terminate the commercialization of our eSVS Mesh, Medtronic, Inc. may cause the core intellectual property and patent rights related to our eSVS Mesh to revert to Medtronic.

Our future success is dependent upon our ability to obtain additional financing, the success of our eMESH I clinical feasibility trial and our anticipated pivotal study, our ability to obtain U.S. marketing approval for our eSVS Mesh and our ability to market and sell our eSVS Mesh. If we are unable to obtain additional financing when needed, if our eMESH I clinical feasibility trial is not successful, if the FDA does not approve an IDE for a pivotal study or if once these studies are concluded, we do not receive U.S. marketing approval for the eSVS Mesh, we may not be able to continue as a going concern and may be forced to cease operations. The accompanying unaudited interim financial statements have been prepared assuming that we will continue as a going concern and do not include any adjustments relating to the recoverability or classification of assets or the amounts of liabilities that might result from the outcome of these uncertainties.

5. Inventories

Inventories include purchased materials, labor and manufacturing overhead and are stated at the lower of cost (first-in, first-out method) or market. Appropriate consideration is given to deterioration, obsolescence and other factors in evaluating net realizable value.

Inventories, net, consist of the following (in thousands):

	September 27, 2014		December 31, 2013
	March 28, 2015		December 31, 2014
Raw materials	$	80	$	8180
Work in process		~~308~~304		~~333~~306
Finished goods		~~315~~284		~~379~~287
Total	$	~~703~~668	$	~~793~~673

76. Net Loss per Share

6. Net Loss Per Share

The following table summarizes our calculation of net loss per common share for each of the periods presented (in thousands, except share and per share data):

	Three Months Ended						~~Nine Months Ended~~
	September 27, 2014			September 28, 2013			September 27, 2014			September 28, 2013
	March 28, 2015			March 29, 2014
Net loss	$	(~~1,424~~844	)	$	(1,~~566~~437	)	$	~~(4,289~~	)	$	~~(4,526~~	)
Weighted average shares outstanding—basic and diluted		33,014,079			2630,~~979~~881,~~079~~161			~~32,292,084~~			~~26,888,695~~
Basic and diluted net loss per share	$	(0.0403	)	$	(0.0605	)	$	~~(0.13~~	)	$	~~(0.17~~	)

The following outstanding potential common shares are not included in diluted net loss per share calculations as their effects would have been anti-dilutive:

Three Months Ended

~~Nine Months Ended~~

September 27, 2014

September 28, 2013

September 27, 2014

September 28, 2013

March 28, 2015

March 29, 2014

Employee and non-employee stock options

12,~~934~~442,~~250~~501

1,~~386~~589,250

~~1,934,250~~

~~1,386,250~~

Common shares issuable to underwriters under option purchase agreements

865,625

~~603~~865,~~125~~625

~~865,625~~

~~603,125~~

Common shares issuable to outside consultant under common stock purchase warrant

75,000

~~75,000~~

7. Cash, Cash Equivalents and Short-Term Investments

Cash, cash equivalents and short-term investments consist of the following (in thousands):

	September 27, 2014		December 31, 2013
	March 28, 2015		December 31, 2014
Cash and cash equivalents
Cash	$	~~631~~128	$	~~366~~508
Money market funds		32,~~179~~185		12,~~699~~379
Bank certificate of deposit		251		251
Total cash and cash equivalents	$	42,~~061~~564	$	23,~~316~~138
Short-term investments
Commercial paper	$	200	$	250
Bank certificate of deposit	$	50	$	50
Corporate debt		406		2,083
Commercial paper		—		407
Bank certificate of deposit		100		351
Total short-term investments	$	50	$	457
Total short-term investments	$	706	$	2,684

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8. Fair Value of Financial Instruments

We apply the provisions of FASB Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement, which defines fair value, establishes a framework for measuring fair value under US GAAP, and enhances disclosures about fair value measurements.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between knowledgeable and willing market participants. Valuation techniques used to measure fair value, as required by ASC Topic 820, must maximize the use of observable inputs and minimize the use of unobservable inputs.

The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value. Our assessment of the significance of a particular input to the fair value measurements requires judgment, and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy. The three levels of input are:

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Our cash, cash equivalents and short-term investments consist of bank deposits, bank certificates of deposit, money market funds and, ~~commercial~~as ~~paper~~of ~~and~~December 31, 2014, corporate debt securities. Our money market funds are traded in active markets and are recorded at fair value based upon quoted market prices.

We determine the fair value of our bank certificates of deposit, commercial paper and corporate debt securities using other observable inputs which may include quoted prices for similar assets in active markets, quoted prices for identical or similar assets in markets which are not active, other quoted prices which are directly observable and/or market inputs that are not directly observable, but are derived from or corroborated by other observable market data. Accordingly, we have classified the valuation of these securities as Level 2.

Other financial instruments, including accounts receivable, accounts payable and accrued liabilities, are carried at cost, which we believe approximates fair value because of the short-term maturity of these instruments.

A summary of financial assets measured at fair value on a recurring basis at ~~September~~March 2728, ~~2014~~2015 and December 31, ~~2013~~2014 is as follows (in thousands):

	September 27, 2014								December 31, 2013
	March 28, 2015								December 31, 2014
	Total		Quoted PricesIn ActiveMarkets(Level 1)		Other Observable Inputs (Level 2)		SignificantUnobservableInputs(Level 3)		Total		Quoted PricesIn ActiveMarkets(Level 1)		Other Observable Inputs (Level 2)		SignificantUnobservableInputs(Level 3)
Money market funds	$	32,~~179~~185	$	32,~~179~~185	$	—	$	—	$	12,~~699~~379	$	12,~~699~~379	$	—	$	—
Bank certificate of deposit		351		—		351		—		602		—		602		—
Bank certificates of deposit		301		—		301		—		301				301		—
Commercial paper		200		—		200		—		250		—		250		—
Corporate debt securities		—		—		—		—		407				407		—
Corporate debt securities		406		—		406		—		2,083		—		2,083		—
Total	$	2,486	$	2,185	$	301	$	—	$	3,087	$	2,379	$	708	$	—
Total	$	4,136	$	3,179	$	957	$	—	$	4,634	$	1,699	$	2,935	$	—

As of ~~September~~March 2728, ~~2014~~2015 and December 31, ~~2013~~2014, the remaining contractual maturities of all short-term investments were less than 12six months. Due to the short-term nature of our investments, amortized cost approximates fair value for all investments.

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9. Property and Equipment

Property and equipment consist of the following (in thousands):

	September 27, 2014			December 31, 2013
	March 28, 2015			December 31, 2014
Furniture and fixtures	$	58		$	58
Machinery, equipment and tooling		505			505
Computers and software		~~193~~185			~~191~~193
Leasehold improvements		90			90
Accumulated depreciation		(~~483~~496	)	$	(~~444~~493	)
Property and equipment, net	$	~~363~~342		$	~~400~~353

Depreciation expense for the three months ended March 28, 2015 and March 29, 2014 was $9,000 and $13,000, respectively.

Depreciation expense was $39,000 and $41,000 for the nine months ended September 27, 2014 and September 28, 2013, respectively.

10. Commitments and Contingencies

Royalty Payments

The core intellectual property relating to our eSVS Mesh was acquired from Medtronic, Inc. pursuant to an Assignment and License Agreement dated October 9, 2007. As consideration for the assignment of such intellectual property, we have agreed to pay Medtronic, Inc. a royalty of 4% on sales of our eSVS Mesh. Royalty obligations are payable 60 days after the end of each fiscal quarter, are recorded as a component of our cost of sales and will terminate upon the earlier of the expiration of all of the patents and patent applications acquired from Medtronic, Inc., or when the aggregate royalties paid reaches $100.0 million. We recognized royalty expense of $~~3,000~~300 and $41,000 for the ~~nine~~three months ended ~~September~~March 2728, ~~2014~~2015 and ~~September~~March 2829, ~~2013~~2014, respectively.

Villafaña New Employment Agreement

During the three months ended March 28, 2015, we entered into a new employment agreement with Manny Villafaña, Chairman and Chief Executive Officer of the Company. The new employment agreement will be effective as of July 1, 2015 and will replace in its entirety our current employment agreement with Mr. Villafaña dated July 25, 2012, which by its terms will expire on July 1, 2015. The new employment agreement will automatically terminate on June 30, 2017.

The new employment agreement contemplates a succession plan for Mr. Villafaña and provides that Mr. Villafaña will continue in his current positions as our Chairman of the Board, Chief Executive Officer and President, unless and until such time as the Board of Directors notifies Mr. Villafaña of his transition to the position of Executive Chairman of the Board. The new employment agreement provides for an annual base salary equal to Mr. Villafaña’s current and recently reduced salary of $215,000, provided, however, that in the event Mr. Villafaña becomes Executive Chairman, we will pay Mr. Villafaña (i) a base salary of $150,500 per year for the first 12 months that Mr. Villafaña serves as Executive Chairman, and (ii) a base salary of $107,500 per year thereafter until the earlier of: June 30, 2017 or the date of termination, in either event prorated to the amount of time in each period actually spent employed as Executive Chairman. In the event that the new employment agreement is terminated by us without cause, upon Mr. Villafaña’s death, or by Mr. Villafaña for good reason, Mr. Villafaña will be entitled to severance pay comprised of Mr. Villafaña’s ending base salary through June 30, 2017 and the pro-rata amount of any annual target incentive bonus that Mr. Villafaña would have been paid had he remained employed. These payments are conditioned upon our receipt of a separation agreement and a release of claims from Mr. Villafaña and Mr. Villafaña’s agreement to provide consulting and advisory services to us without additional pay, from time to time as needed by us during the severance period. In the event that the new employment agreement is terminated by us for cause, by us upon a Board determination to cease operations, upon Mr. Villafaña’s disability, by Mr. Villafaña without good reason, or automatically on June 30, 2017, Mr. Villafaña will not be entitled to any severance or additional payments or benefits.

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11. Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

	September 27, 2014		December 31, 2013
	March 28, 2015		December 31, 2014
Clinical study related expense	$	232	$	216
Clinical trial related expense	$	270	$	256
Professional services		~~119~~59		6154
Payroll and related expenses		4724		3536
Other		2217		29
Total accrued liabilities	$	420	$	314
Accrued liabilities	$	370	$	355

12. Stockholders’ Equity

~~Authorized~~Bridge ~~Common Stock~~Financing

On ~~February~~March 424, ~~2014~~2015, we entered into a ~~special~~securities ~~meeting~~purchase agreement with several investors, including Manny Villafaña, our Chairman and Chief Executive Officer, and Kips Bay Investments, LLC, one of our principal stockholders, ~~was~~pursuant ~~held~~to ~~during~~ which we agreed to sell and the ~~stockholders~~investors ~~approved~~agreed anto ~~amendment~~purchase in a private placement up to $3.25 million in shares of our ~~Certificate~~common stock in four separate equal tranches. Under the terms of ~~Incorporation~~the securities purchase agreement, the first tranche is scheduled to ~~increase~~occur as soon as reasonably practicable after we have received ten angiograms from patients enrolled in our eMESH I clinical feasibility trial who have had an eSVS Mesh implanted using the ~~number~~new ofsurgical ~~authorized~~implant ~~shares~~technique. The second, third and fourth tranches are scheduled to occur on or about the 90th, 180th and 270th day thereafter. Each of ~~common~~the ~~stock~~tranches is subject to customary closing conditions and a condition that the clinical data received then to date by us from 40the eMESH I clinical feasibility trial demonstrates,~~000,000~~ to 90the reasonable satisfaction of each investor,~~000~~ together with any then recent communications with or from the FDA,~~000~~ that it is advisable for Kips Bay to continue with the feasibility trial and to continue to pursue marketing approval by the FDA for the eSVS Mesh. WeThe ~~filed~~per ashare ~~Certificate~~purchase price of ~~Amendment~~the toshares of our ~~Certificate~~common stock to be purchased by investors will be equal to the lesser of ~~Incorporation~~$0.14 ~~with~~per share or the ~~Secretary~~closing sale price of ~~State~~our common stock on the trading day immediately prior to the closing of any tranche. In addition, each investor will receive a five-year warrant to purchase one share of our common stock for each two shares purchased by the ~~State~~investor at each tranche closing. The warrants will have a per share exercise price equal to 125% of ~~Delaware~~the onper ~~February~~share 4purchase price at the applicable closing. In light of the disappointing feasibility trial results received to date, ~~2014~~we believe it is unlikely that we will be able to ~~effect~~access funds under this ~~amendment~~bridge financing arrangement.

We also agreed to increase the size of our board of directors and provide Kips Bay Investments, LLC with the right to designate two individuals for election to our Board of Directors (in addition to its current right to have two observers) and the investors party to the securities purchase agreement agreed to vote all of their shares of our common stock in favor of the election of such two director designees. To date, Kips Bay Investments, LLC has not designated two director nominees.

Common Stock Offering

On January 29, 2014, we completed a public offering of 6,035,000 shares of our common stock at a purchase price of $0.70 per share. All shares sold in the offering were newly issued by us. Gross proceeds from the offering were $4.2 million. After deducting the underwriting discounts and commissions and other expenses, we realized net proceeds of approximately $3.6 million. As additional consideration, we issued warrants to purchase an aggregate of 262,500 shares of our common stock to the underwriter and its designees. The warrants have a five-year term, an exercise price of $0.875 per share, or 125% of the purchase price of shares sold in the offering, and ~~become~~became exercisable on January 23, 2015, one year after the effective date of the offering.

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13. Stock-Based Compensation

2013 Equity Incentive Plan

The Kips Bay Medical, Inc. 2013 Equity Incentive Plan (the “2013 Plan”) was adopted by the Board of Directors in March 2013 and approved by our stockholders at our annual meeting of stockholders held on May 22, 2013. The 2013 Plan permits the granting of incentive and non-statutory stock options, restricted stock, stock appreciation rights, performance units, performance shares and other stock awards to eligible employees, directors and consultants. We grant options to purchase shares of common stock under the 2013 Plan at no less than the fair market value of the underlying common stock as of the date of grant. Options granted under the 2013 Plan have a maximum term of ten years and generally vest over one to four years for employees, at the rate of 25% of total shares underlying the option each year, and over one to three years for non-employees. Under the 2013 Plan, a total of 2,500,000 shares of common stock have been reserved for issuance. As of ~~September~~March 2728, ~~2014~~2015, options to purchase ~~645~~1,190,000 shares of common stock ~~had~~were ~~been~~outstanding ~~granted~~ under the 2013 Plan.

2007 Long-Term Incentive Plan

The Kips Bay Medical, Inc. 2007 Long-Term Incentive Plan (the “2007 Plan”) was adopted by the Board of Directors in July 2007. In conjunction with stockholder approval of the 2013 Plan, the Board terminated the 2007 Plan, although awards outstanding under the 2007 Plan will remain outstanding in accordance with and pursuant to the terms thereof. Options granted under the 2007 Plan have terms similar to those used under the 2013 Plan. As of ~~September~~March 2728, ~~2014~~2015, options to purchase an aggregate of 1,~~289~~252,~~250~~501 shares of our common stock and restricted stock awards for 6240,~~500~~000 shares of our common stock remained outstanding under the 2007 Plan.

AThe ~~summary~~amount of ~~option~~stock-based ~~activity~~compensation ~~for~~recognized is based on the ~~nine~~value ~~months~~of ~~ended~~the ~~September~~portion 27of awards that are ultimately expected to vest. Guidance requires forfeitures to be estimated at the time of grant and revised, ~~2014~~if necessary, in subsequent periods if actual forfeitures differ from those estimates. The term “forfeitures” is distinct from “cancellations” or “expirations” and represents only the unvested portion of a surrendered option. We will re-evaluate this estimate periodically and adjust the forfeiture rate on a prospective basis as ~~follows:~~ necessary. Ultimately, the actual expense recognized over the vesting period will only be for those shares that actually vest.

	Number of Shares			Weighted Average Fair Value Per Share
Options outstanding at December 31, 2013		1,609,250		$	2.56
Granted		355,000			0.51
Exercised		—			—
Cancelled		(30,000	)		4.51
Options outstanding at September 27, 2014		1,934,250		$	2.15

Restricted Stock Awards

A summary of restricted stock award activity is as follows:

	Number of Shares			Weighted Average Fair Value Per Share
Awards outstanding at December 31, 2013		105,000		$	4.13
Granted		—			—
Vested		(42,500	)		4.81
Cancelled		—			—
Awards outstanding at September 27, 2014		62,500		$	3.67

The fair value of each restricted stock award is equal to the fair market value of our common stock at the date of grant. Restricted stock awards vest over a period of time that varies with the purpose of the individual award. As of September 27, 2014, outstanding awards vest over periods of one to four years. The estimated fair value of restricted stock awards, including the effect of estimated forfeitures, is recognized on a straight-line basis over the restricted stock’s vesting period. We recorded stock-based compensation expense for restricted stock grants of $153,000 and $177,000 for the nine months ended September 27, 2014 and September 28, 2013, respectively.

Stock-based compensation expense for each of the periods presented is as follows (in thousands):

	Three Months Ended				~~Nine Months Ended~~
	September 27, 2014		September 28, 2013		September 27, 2014		September 28, 2013
	March 28, 2015		March 29, 2014
Research and development	$	327	$	3437	$	~~101~~	$	~~120~~
Selling, general and administrative		5837		7784		~~210~~		~~272~~
Total stock-based compensation	$	9044	$	~~111~~121	$	~~311~~	$	~~392~~

A summary of option activity for the three months ended March 28, 2015 is as follows:

	Shares Underlying Options			Weighted Average Exercise Price Per Share
Options outstanding at December 31, 2014		2,114,250		$	1.98
Granted		500,000			0.21
Exercised		—			—
Forfeitures		(171,749	)		0.85
Cancelled		—			—
Options outstanding at March 28, 2015		2,442,501		$	1.70

Current year grants include options to purchase an aggregate of 410,000 shares of our common stock that were granted to our officers and certain employees to compensate them, in part, for temporary decreases in their base salaries in connection with our January 2015 reorganization.

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Restricted Stock Awards

A summary of restricted stock award activity is as follows:

	Number of Shares		Weighted Average Fair Value Per Share
Awards outstanding at December 31, 2014		62,500	$	3.67
Granted		—		—
Vested		22,500		8.00
Cancelled		—		—
Awards outstanding at March 28, 2015		40,000	$	1.23

The fair value of each restricted stock award is equal to the fair market value of our common stock at the date of grant. Restricted stock awards vest over a period of time that varies with the purpose of the individual award. As of March 28, 2015, outstanding awards vest over a period of three years. The estimated fair value of restricted stock awards, including the effect of estimated forfeitures, is recognized on a straight-line basis over the restricted stock’s vesting period. We recorded stock-based compensation expense for restricted stock grants of $28,000 and $51,000 for the three months ended March 28, 2015 and March 29, 2014, respectively.

Other Stock-Based Payments

In conjunction with the completion of our public offering in January 2014, we issued to the underwriter and its designees warrants to purchase an aggregate of 262,500 shares of our common stock at an exercise price of $0.875 per share, or 125% of the purchase price of shares sold in the public offering. These warrants have a five-year term and ~~become~~became exercisable on January 23, 2015, one year after the effective date of the public offering. These warrants were not issued under the 2013 Plan. See note 12 entitled “Stockholders’ Equity” above for additional information.

14. Employee Benefit Plan

We sponsor an employee 401(k) retirement savings plan. We recorded contribution expenses of $4710,000 and $16,000 for the ~~nine~~three months ended ~~September~~March 2728, ~~2014~~2015 and ~~September~~March 2829, ~~2013~~2014, respectively.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of financial condition and results of operations together with our unaudited financial statements and the related notes included elsewhere in this report. This discussion and analysis contains forward-looking statements about our business and operations, based on current expectations and related to future events and our future financial performance, that involve risks and uncertainties. Our actual results may differ materially from those we currently anticipate as a result of many important factors, including the factors we describe below under the heading “Special Note Regarding Forward-Looking Statements.”

Business Overview

We are a medical device company focused on developing, manufacturing and commercializing our external saphenous vein support technology, the eSVS® Mesh, for use in coronary artery bypass ~~graft~~, or CABG, surgery. Our eSVS Mesh is designed to be fitted like a sleeve on the outside of saphenous vein grafts (referred to as ~~SVGs~~an SVG or vein ~~grafts~~graft) to strengthen SVGs used in CABG surgery. By strengthening the SVG and preventing the damaging expansion of the vein graft, we hope to reduce or prevent the resulting injury which can lead to SVG failure and potentially costly and complicated re-interventions for patients undergoing CABG surgery. In the near term, we are focused on and committed to spending substantially all of our resources on completing our current eMESH I clinical feasibility trial.

WeOn ~~received~~January ~~authorization~~5, to2015, ~~apply~~we ~~the~~reorganized ~~CE Mark to~~ our ~~eSVS~~operations ~~Mesh~~by ineliminating ~~May~~staff ~~2010~~positions, ~~and~~instituting ~~began~~salary ~~marketing~~reductions and ~~commenced~~reducing ~~shipments~~our innon-clinical ~~select~~related ~~international~~operating ~~markets~~expenses, in ~~June~~order ~~2010.~~to Inconserve ~~November~~our ~~2013,~~capital while we ~~received~~pursue anthe ~~updated~~completion CEof ~~Mark~~the ~~expanding~~eMESH ~~our~~I ~~ability~~clinical tofeasibility ~~promote~~trial. ~~the~~As ~~eSVS~~part ~~Mesh~~of ~~for~~this ~~use~~reorganization, ~~with~~we ~~sequential~~reduced ~~grafts.~~our Onpersonnel ~~August~~from ~~11,~~thirteen ~~2014,~~to weeight ~~received~~employees. anThese ~~updated~~reductions CEincluded ~~Mark~~our ~~incorporating~~two ~~the~~sales ~~changes~~directors, intwo ~~the~~administrative ~~application~~positions ofand ~~our~~one ~~eSVS~~operations ~~Mesh~~position. toIn ~~the~~addition, ~~SVG~~our ~~and~~officers tohave ~~the~~agreed ~~surgical~~to ~~implant~~accept ~~technique~~temporary ~~for~~salary ~~the~~reductions. ~~eSVS~~We ~~Mesh~~believes ~~treated~~that ~~graft~~these ~~that~~actions ~~were~~will ~~approved~~reduce byour ~~the~~monthly ~~FDA~~cash inoperating ~~March~~expenses, ~~2014~~excluding ~~for~~costs ~~use~~related into our eMESH I clinical feasibility trial, to approximately $200,000.

WeOn ~~sell~~March 24, 2015, we entered into a securities purchase agreement with several investors, including Manny Villafaña, our ~~eSVS~~Chairman ~~Mesh~~and toChief ~~distributors~~Executive ~~who~~Officer, inand ~~turn~~Kips Bay Investments, ~~sell~~LLC, one of our principal stockholders, pursuant to ~~hospitals~~which we agreed to sell and ~~clinics~~the ~~primarily~~investors agreed to purchase in ~~the~~a ~~European~~private ~~Union~~placement up to $3.25 ~~Our~~million ~~eSVS~~in ~~Mesh~~shares isof aour ~~novel~~common ~~product~~stock ~~and~~in wefour ~~are~~separate ~~not~~equal ~~aware~~tranches. ofUnder the ~~establishment~~terms of ~~any~~the ~~specific~~securities orpurchase ~~supplemental~~agreement, ~~reimbursements~~the ~~for~~first ~~it.~~tranche Tois ~~date,~~scheduled ~~sales~~to ofoccur as soon as reasonably practicable after we have received ten angiograms from patients enrolled in our eMESH I clinical feasibility trial who have had an eSVS Mesh ~~have~~implanted ~~been~~using ~~limited~~the ~~and~~new wesurgical doimplant ~~not~~technique. ~~expect~~The ~~sales~~second, third and fourth tranches are scheduled to ~~improve~~occur inon or about the ~~near~~90th, ~~future~~180th ~~until~~and ~~additional~~270th ~~clinical~~day ~~data~~thereafter. Each of the tranches is ~~available.~~subject Weto ~~believe~~customary closing conditions and a condition that ~~sales~~the clinical data received then to date by us from the eMESH I clinical feasibility trial demonstrates, to the reasonable satisfaction of ~~our~~each ~~eSVS~~investor, ~~Mesh~~together ~~have~~with ~~been~~any then recent communications with or from the FDA, that it is advisable for Kips Bay to continue with the feasibility trial and ~~will~~to continue to ~~be,~~pursue ~~adversely~~marketing ~~impacted~~approval by the ~~limited~~FDA ~~amount~~for the eSVS Mesh. The per share purchase price of ~~clinical~~the ~~data~~shares onof our common stock to be purchased by investors will be equal to the ~~performance~~lesser of $0.14 per share or the ~~eSVS~~closing ~~Mesh~~sale price on the trading day immediately prior to the closing of any tranche. In addition, ~~limited~~each ~~reimbursements~~investor ~~available~~will receive a five-year warrant to ~~hospitals~~purchase ~~and~~one share of our common stock for each two shares purchased by the ~~effects~~investor at each tranche closing. The warrants will have a per share exercise price equal to 125% of ~~economic~~the ~~difficulties~~per inshare ~~certain~~purchase ~~European~~price ~~countries~~at the applicable closing. In light of the disappointing feasibility trial results received to date, we believe it is unlikely that we will be able to access funds under this bridge financing arrangement.

We ~~are~~agreed ~~currently~~to ~~conducting~~use athe ~~feasibility~~net ~~trial~~proceeds ~~for~~from the ~~FDA.~~offering ~~This~~for ~~trial~~working iscapital aand ~~multi-center~~general corporate purposes, ~~randomized~~including ~~study~~primarily funding the process of ~~external~~seeking ~~saphenous~~regulatory ~~vein~~approval ~~support~~to ~~using~~market ~~our~~the eSVS Mesh in ~~CABG~~the ~~surgery~~United States and isabroad, ~~titled~~including ~~the~~continuing ~~“eMESH~~human I”clinical ~~study~~trials. ~~The~~We ~~objective~~agreed ofnot ~~this study is~~ to ~~demonstrate~~use toany ~~the~~of ~~FDA~~ the ~~initial~~net ~~safety~~proceeds ~~and~~to ~~performance~~hire ofany ~~the~~sales ~~eSVS~~personnel ~~Mesh~~unless ~~for~~a ~~use~~decision asis anmade ~~external~~by ~~saphenous~~our ~~vein~~Board ~~graft~~of ~~support~~Directors ~~device~~to ~~during~~do ~~CABG~~so ~~surgery.~~and IfKips ~~the~~Bay ~~feasibility~~Investments, ~~trial~~LLC isconsents ~~successful~~thereto, wewhich ~~intend~~consent tomay ~~use~~not ~~the~~be ~~data~~unreasonably ~~from~~withheld. ~~this~~We ~~study~~also asagreed ~~the~~in ~~basis for~~ the ~~filing~~securities ofpurchase aagreement ~~request for an IDE~~ to ~~perform~~limit aour ~~larger~~cash ~~pivotal~~operating ~~study.~~expenses ~~The~~(other ~~pivotal~~than ~~study~~expenses isdirectly ~~required~~attributable to, ~~demonstrate clinical effectiveness~~ and ~~support~~reasonably anecessary ~~premarket~~for ~~approval application filing with~~ the ~~FDA~~feasibility ~~seeking~~trial ~~approval~~or topivotal ~~sell~~trial ~~the~~and ~~eSVS~~certain ~~Mesh~~other inspecified ~~the~~expenses) ~~United~~to ~~States.~~no ~~Patients~~more inthan ~~the~~an ~~eMESH~~average Iof ~~clinical~~$208,000 ~~feasibility~~per ~~trial will be followed through hospital discharge~~month, ~~with~~evaluated ~~additional~~on ~~follow~~a three-upmonth ~~visits~~rolling ataverage ~~30 days~~basis, ~~three~~commencing ~~months,~~on ~~six~~February ~~months~~1, ~~one~~2015, ~~year~~ and ~~yearly~~continuing ~~thereafter~~until ~~through five years. However, only~~ the ~~results~~completion ~~through~~by ~~the~~us ~~six-month follow-up visit will be submitted to the FDA as part~~ of an ~~application~~additional ~~for~~financing in an ~~IDE~~amount equal to ~~conduct~~at aleast ~~pivotal~~$3.0 ~~trial in the United States~~million.

In March 2014, the FDA approved a combination of changes in the application of the eSVS Mesh to the SVG and to the surgical implant technique for the eSVS Mesh treated graft. These changes were based upon our consultations with medical advisors and several of the cardiac surgeons participating in the eMESH I clinical feasibility trial and our initial review of early results from the eMESH I trial. The changes are intended to reduce the variables in the study and the risk of early graft occlusion. We also believe these changes will simplify the process of applying and implanting the eSVS Mesh thereby reducing procedural costs. No assurance can be provided, however, that these changes will reduce the variables in the study and the risk of early graft occlusion or that the feasibility trial for the FDA will be successful.

As of November 3, 2014, ten sites in Europe and seven sites in the United States are able to enroll patients in the trial using the new implant technique. The pace of enrollment in the eMESH I clinical feasibility trial has increased significantly during the past two months. As of November 3, 2014, 79 patients had been enrolled in the eMESH I clinical feasibility trial, which is up from 56 patients enrolled as of August 1, 2014. We estimate that we need approximately 25 more patients, for a targeted total of 45 to 50, to complete enrollment for this trial. No assurance can be provided that we will obtain our enrollment goals, that our eMESH I clinical feasibility trial will be successful, that the FDA will approve an IDE for a pivotal study or that once these studies are concluded, we will receive U.S. marketing approval for the eSVS Mesh. If these events do not occur, we may be forced to cease operations since we do not have any other products in development. In addition, we need additional financing to continue our operations, and in particular, to complete our eMESH I clinical feasibility trial. If we do not receive such additional financing, we may be forced to cease operations.

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We received authorization to apply the CE Mark to our eSVS Mesh in May 2010 and began marketing and commenced shipments in select international markets in June 2010. In November 2013, we received an updated CE Mark expanding our ability to promote the eSVS Mesh for use with sequential grafts. On August 11, 2014, we received an updated CE Mark incorporating the changes in the application of our eSVS Mesh to the SVG and to the surgical implant technique for the eSVS Mesh treated graft that were approved by the FDA in March 2014 for use in our eMESH I clinical feasibility trial.

We sell our eSVS Mesh to distributors who, in turn, sell to hospitals and clinics primarily in the European Union. Our eSVS Mesh is a novel product and we are not aware of the establishment of any specific or supplemental reimbursements for it. To date, sales of our eSVS Mesh have been limited and we do not expect sales to improve in the future until additional clinical data is available. We believe that sales of our eSVS Mesh have been, and will continue to be, adversely impacted by the limited amount of clinical data on the performance of the eSVS Mesh, limited reimbursements available to hospitals and the effects of economic difficulties in certain European countries. In November 2014, we reduced the price we charge our distributors from $1,200 to $700 per device. In addition, with our January 2015 reorganization, we terminated our two sales directors. As a result, we are not focusing our efforts on sales of the eSVS Mesh.

We are currently conducting the eMESH I clinical feasibility trial, the objective of which is to demonstrate the initial safety and performance of the eSVS Mesh for use as an external saphenous vein graft support device during CABG surgery. In March 2014, the FDA approved a combination of changes in the application of the eSVS Mesh to the SVG and to the surgical implant technique for the eSVS Mesh treated graft. During the first quarter of 2015, enrollment in the eMESH I clinical feasibility trial reached our targeted goal of 50 patients treated with the new surgical technique. As of March 28, 2015, 106 patients had been enrolled in the feasibility trial, including 50 patients implanted with the eSVS Mesh using the new surgical technique. As of May 8, 2015, we had received the results of ten patients who had an eSVS Mesh implanted using the new surgical implant technique. The SVGs supported with an eSVS Mesh in seven of these new technique patients were not patent at the time of their six-month follow-up angiogram and did not perform as well as the unsupported, or control, SVGs in the trial. We intend to closely monitor the results of additional patients who had an eSVS Mesh implanted using the new surgical implant technique in the feasibility trial and will reserve a final decision regarding the future of the feasibility trial until sufficient meaningful data has been received. We acknowledge that based upon the results from the angiograms of the initial 10 new technique patients, the results from the angiograms of the remaining new technique patients would need to be highly compelling to justify a decision by us to continue to move forward in seeking U.S. marketing approval for the eSVS Mesh. In the meantime, we intend to evaluate our strategic alternatives. Possible strategic alternatives include: further modification of our eSVS Mesh device and implant technique; the sale of the Company or our assets, including our intellectual property portfolio; or an orderly wind-down of our operations. No assurance can be provided that our eMESH I clinical feasibility trial will be successful, that the FDA will approve an IDE for a pivotal trial or that once these studies are concluded, we will receive U.S. marketing approval for the eSVS Mesh. If the eMESH I clinical feasibility trial is not successful, or if the FDA does not approve an IDE for a pivotal study, we would be forced to cease operations since we do not have any other products in development. In addition, we need additional financing to continue our operations, and in particular, to complete our eMESH I clinical feasibility trial. If we do not receive such additional financing, we would be forced to cease operations.

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Financial Overview

Our net sales ~~were unchanged in the third quarter of 2014, and~~ decreased 2069.2% to $718,000 induring the first ~~nine~~quarter ~~months~~ of ~~2014~~2015, as compared with the ~~same~~first ~~periods~~quarter inof ~~the prior year~~2014. We believe that sales of our eSVS Mesh have been, and will continue to be, adversely impacted by the limited amount of clinical data on the performance of the eSVS Mesh, limited reimbursements available to hospitals and the effects of economic difficulties in certain European countries. For the ~~nine~~three months ended ~~September~~March 2728, ~~2014~~2015 and ~~September~~March 2829, ~~2013~~2014, we incurred net losses of $~~4.3~~844,000 ~~million~~ and $41.54 million, respectively, and negative cash flows from operating activities of $31.90 million and $41.34 million, respectively. We expect our losses to continue, asalbeit weat ~~work~~lower tolevels ~~develop~~after ~~additional~~our ~~clinical~~January ~~data,~~2015 ~~pursue~~reorganization ~~U.S.~~in ~~marketing~~which ~~approval~~we ofscaled back our ~~eSVS~~operations ~~Mesh,~~in ~~and~~order ~~market~~to ~~and~~conserve ~~sell~~ our ~~eSVS~~capital ~~Mesh~~while inwe ~~European~~pursue ~~and~~the ~~other~~completion ~~international~~of ~~markets~~the eMESH I clinical feasibility trial.

Our cash, cash equivalents and short-term investments, were $2.6 million as of ~~September~~March 2728, ~~2014~~2015, ~~were $4.8 million~~ compared to $53.06 million as of December 31, ~~2013~~2014. We ~~expect this balance to decrease as we continue to use cash to fund our operations. We~~ believe our cash, cash equivalents and short-term investments as of ~~September~~March 2728, ~~2014~~2015, will be sufficient to fund our planned operations ~~into~~through ~~mid-~~December 2015. We will need additional funds to continue our operations thereafter and execute our business plan, including completing our eMESH I clinical feasibility trial, planning for our anticipated pivotal study and marketing and selling our eSVS Mesh in European and other international markets. We historically have financed our operations principally from the sale of equity securities. While we have been successful in the past in obtaining the necessary capital to support our operations, and have similar future plans to obtain additional financing, there is no assurance that we will be able to obtain additional financing under commercially reasonable terms and conditions, or at all. If we are unable to obtain additional financing when needed, we may need to terminate, significantly modify or delay development or commercialization of our eSVS Mesh, license to third parties the rights to commercialize the eSVS Mesh or new applications for the eSVS Mesh that we would otherwise seek to pursue, or cease operations.

We will need additional funds to continue our operations thereafter and execute our business plan, including completing our current eMESH I clinical feasibility trial, planning for a required future pivotal trial and marketing and selling our eSVS Mesh in European and other international markets. We historically have financed our operations principally from the sale of equity securities. While we have been successful in the past in obtaining the necessary capital to support our operations, and have similar future plans to obtain additional financing, there is no assurance that we will be able to obtain additional financing under commercially reasonable terms and conditions, or at all. If we are unable to obtain additional financing when needed, we would need to terminate, significantly modify or delay development or commercialization of our eSVS Mesh, license to third parties the rights to commercialize the eSVS Mesh or new applications for the eSVS Mesh that we would otherwise seek to pursue, or cease operations.

Results of Operations

Comparison of the ~~three~~Three ~~and~~Months ~~nine months~~ ended ~~September~~March 2728, ~~2014~~2015 to the ~~three~~Three ~~and~~Months ~~nine months~~ ended ~~September 28~~March 29, ~~2013~~2014 (in thousands):

	Three Months Ended									~~Nine Months Ended~~
	September 27, 2014			September 28, 2013			Percent Change			September 27, 2014			September 28, 2013			Percent Change
	March 28, 2015			March 29, 2014			Percent Change
Net sales	$	138		$	1326			—(69.2	)%	$	71		$	89			~~(20.2~~	)%
Cost of sales		(84	)		(712	)		14(66.37	)		~~(35~~	)		~~(42~~	)		~~(16.7~~	)
Gross profit		54			614			(1671.74	)		36			47			~~(23.4~~	)
Operating expenses:
Research and development		~~604~~386			~~840~~639			(2839.16	)		~~1,896~~			~~2,302~~			~~(17.6~~	)
Selling, general and administrative		~~826~~463			~~736~~814			12(43.21	)		~~2,434~~			~~2,283~~			~~6.6~~
Total operating expenses		~~1,430~~849			1,~~576~~453			(941.36	)		~~4,330~~			~~4,585~~			~~(5.6~~	)
Other income:
Interest income		1			42			(7550.0	)		5			12			~~(58.3~~	)
Net loss	$	(~~1,424~~844	)	$	(1,~~566~~437	)		(941.13	)%	$	~~(4,289~~	)	$	~~(4,526~~	)		~~(5.2~~	)%

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Research and development and selling, general and administrative expenses include non-cash stock-based compensation expense as a result of our issuance of stock options, warrants and restricted stock grants. We expense the fair value of equity awards over their ~~respective~~ 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 ~~September~~March 2728, ~~2014~~2015 vest upon time-based conditions. We expect to record additional non-cash stock-based compensation expense in the future, which may be significant. The following table summarizes the stock-based compensation expense in our statements of comprehensive loss for the three ~~and nine~~ months ended ~~September~~March 2728, ~~2014~~2015 and ~~September~~March 2829, ~~2013~~2014 (in thousands):

	Three Months Ended				~~Nine Months Ended~~
	September 27, 2014		September 28, 2013		September 27, 2014		September 28, 2013
	March 28, 2015		March 29,2014
Research and development	$	327	$	3437	$	~~101~~	$	~~120~~
Selling, general and administrative		5837		7784		~~210~~		~~272~~
Total stock-based compensation	$	9044	$	~~111~~121	$	~~311~~	$	~~392~~

Net Sales and Gross Profit

Our net sales ~~were~~declined ~~unchanged~~to $8,000 in the ~~third~~first quarter of ~~2014~~2015, ~~and~~a ~~decreased~~decrease 20of 69.2%, tofrom $7126,000 in the first ~~nine~~quarter ~~months~~ of 2014~~, as compared with the same periods in the prior year~~. Our gross profit ~~decreased~~declined ~~16.7%~~ to $54,000 in the ~~third~~first quarter of ~~2014~~2015, ~~and~~a ~~decreased~~decrease ~~23.4~~of 30%, tofrom $3614,000 in the first ~~nine~~quarter ~~months~~ of 2014,. asThis ~~compared~~decrease ~~with the same periods~~ in ~~the~~net ~~prior~~sales ~~year.~~reflects ~~These decreases reflect~~ the ~~negative~~effects ~~impact~~ of ~~the~~our ~~limited~~January ~~amount~~2015 ofreorganization ~~clinical~~in ~~data~~which onwe ~~the~~eliminated ~~performance~~our oftwo ~~our~~sales ~~eSVS~~directors ~~Mesh,~~and ~~limited~~focused ~~reimbursements~~our ~~available~~efforts toon ~~hospitals~~completing ~~and~~our ~~the~~current ~~effects~~eMESH ofI ~~economic~~clinical ~~difficulties~~feasibility intrial. ~~certain~~As ~~European~~a ~~countries.~~result, Wewe doare not ~~expect~~focusing ~~our~~on sales toof ~~improve~~the ineSVS ~~future~~Mesh, ~~periods~~at ~~until~~least ~~additional~~not ~~clinical~~in ~~study~~the ~~data~~near isforeseeable ~~available~~future.

Research and Development

Our research and development expenses decreased 2839.16% to $~~604~~386,000 in the ~~third~~first quarter of ~~2014~~2015, down from $~~840~~639,000 in the ~~third~~first quarter of ~~2013~~2014. ~~Research~~This ~~and~~decrease ~~development~~was ~~expenses~~due ~~decreased~~primarily ~~17.6%~~ to ~~$1.9~~cost ~~million~~reductions inrealized ~~the~~from ~~nine~~our ~~months~~January ~~ended September 27~~5, ~~2014~~2015 ~~down~~reorganization ~~from $2.3 million~~ in ~~the~~which ~~nine~~we ~~months~~eliminated ~~ended~~staff ~~September 28~~positions, ~~2013.~~instituted ~~These~~salary ~~decreases~~reductions ~~were~~and ~~due~~reduced ~~primarily~~our ~~to lower~~ non-clinical ~~activity~~related ~~levels~~operating inexpenses. ~~the~~In ~~current~~addition, ~~year periods compared to~~ the ~~respective~~costs ~~prior~~we ~~year~~incurred ~~periods.~~for ~~Patient enrollments in~~ our eMESH I clinical feasibility trial declined during the current year ~~periods~~period ~~compared to the respective prior year periods~~ as our ~~European~~enrollment ~~study~~was ~~sites~~nearly ~~waited for the updated CE Mark approval allowing the use of our new implant techniques approved by the FDA in March 2013. Enrollments in our post-market studies were substantially~~ completed last year resulting in reduced activity and lower costs during the current year periods. In addition, we incurred certain non-recurring costs during the prior year periods related to additional design testing required by the FDA as ~~part~~ of ~~our~~December ~~November~~31, ~~2012 IDE approval with conditions~~2014. We expect ~~that~~ our research and development ~~costs~~expenses ~~will~~to ~~increase~~decrease ascompared weto ~~resume~~ the ~~enrollment~~prior ofyear ~~patients~~periods indue ~~the~~to ~~eMESH~~our IJanuary ~~clinical~~2015 ~~feasibility trial in Europe~~reorganization.

Selling, General and Administrative

Our selling, general and administrative (“SG&A”) expenses ~~increased~~decreased 1243.21% to $~~826~~463,000 in the ~~third~~first quarter of ~~2014~~2015, updown from $~~736~~814,000 in the ~~third~~first quarter of ~~2013. SG&A expenses increased 6.6% to $2.4 million in the nine months ended September 27,~~ 2014 ~~from $2~~.3 ~~million~~This indecrease ~~the~~was ~~nine months ended September 28, 2013. These increases were~~ due primarily to ~~higher~~cost ~~costs~~reductions ~~associated~~implemented ~~with~~as ~~expanding~~part of our ~~sales~~January ~~team~~5, ~~from~~2015 ~~one~~reorganization toin ~~two~~which ~~individuals~~we ~~during~~eliminated ~~the~~staff ~~third~~positions, ~~quarter~~instituted ofsalary ~~2013.~~reductions ~~These~~and ~~increases~~reduced ~~were partially offset by decreases in~~ our ~~stock~~non-~~based~~clinical ~~compensation~~related ~~expense~~operating ~~which resulted from our decreased stock price~~expenses. We expect SG&A expenses to ~~increase~~decrease ~~slightly~~compared ~~as we continue~~ to ~~actively~~the ~~pursue~~prior ~~increased~~year ~~enrollments~~periods indue to our ~~feasibility~~January ~~trial~~2015 reorganization.

Interest Income

Interest income decreased to $31,000 in the ~~third~~first quarter of ~~2014~~2015 ~~and~~from ~~decreased~~ $72,000 ~~during~~in the first ~~nine~~quarter ~~months~~ of 2014~~, compared to the same periods in the prior year~~. ~~These~~This ~~decreases~~decrease resulted from ~~both~~ a ~~reduction~~decrease in ~~earnings~~total oninvestments ~~our~~and ~~investments~~reduced earnings thereon as the average time to maturity for our investments ~~has~~ decreased in the current year ~~and from a reduction in our total cash, cash equivalents and short-term investments~~period.

Liquidity and Capital Resources

The following table summarizes our liquidity and capital resources as of ~~September~~March 2728, ~~2014~~2015 and December 31, ~~2013~~2014 and our cash flow data for the ~~nine~~three months ended ~~September~~March 2728, ~~2014~~2015 and ~~September~~March 2829, ~~2013~~2014 and is intended to supplement the more detailed discussion that follows (in thousands):

Liquidity and Capital Resources	~~September~~March 2728, ~~2014~~2015		December 31, ~~2013~~2014
Cash and cash equivalents	$	42,~~061~~564	$	23,~~316~~138
Short-term investments		~~706~~50		~~2,684~~457
Working capital		53,~~156~~163		53,~~454~~952

	Nine Months Ended
	Three Months Ended
Cash Flow Data	~~September~~March 2728, ~~2014~~2015			~~September~~March 2829, ~~2013~~2014
Cash provided by (used in):
Operating activities	$	(~~3,856~~981	)	$	(41,~~317~~362	)
Investing activities		~~1,958~~407			~~(3,407~~754	)
Financing activities		~~3,643~~—			~~276~~3,644
Net increase (decrease) in cash and cash equivalents	$	1,745		$	(7,448	)
Net (decrease) increase in cash and cash equivalents	$	(574	)	$	3,036

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Working Capital

Our total cash resources, including short-term investments, totaled $2.6 million as of ~~September~~March 2728, ~~2014~~2015, ~~totaled $4.8 million~~ compared to $53.06 million as of December 31, ~~2013~~2014. AsWe ~~of September 27, 2014, we~~ had $~~474~~416,000 in current liabilities, and $53.2 million in working capital as of March 28, 2015, compared to $~~455~~433,000 in current liabilities and $54.50 million in working capital as of December 31, ~~2013~~2014.

Cash Flows

Net Cash Used in Operating Activities

Net cash used in operating activities was $31.90 million in the ~~nine~~three months ended ~~September~~March 2728, ~~2014~~2015 compared to $41.34 million in the ~~nine~~three months ended ~~September~~March 2829, ~~2013~~2014. The net cash used in each of these periods primarily reflects the net loss for these periods, offset in part by non-cash stock-based compensation, depreciation and the effects of changes in operating assets and liabilities. ~~Net cash used in the nine months ended September 28, 2013 also includes the payment of $400,000 of costs related to our December 2012 public offering of common stock.~~

Net Cash ~~Used~~Provided inby Investing Activities

Net cash provided by investing activities was $~~2.0~~407,000 ~~million~~ in the ~~nine~~three months ended ~~September~~March 2728, ~~2014~~2015 compared to ~~net cash used by investing activities of~~ $~~3.4~~754,000 ~~million~~ in the ~~nine~~three months ended ~~September~~March 2829, ~~2013~~2014. Cash provided by ~~or used in~~ investing activities is primarily related to ~~purchases~~maturities ~~and sales~~ of short-term investments.

Net Cash Provided by Financing Activities

~~Net~~There ~~cash provided by financing activities~~ was ~~$3.6~~no ~~million~~cash used in ~~the~~or ~~nine~~provided ~~months~~by ~~ended~~financing ~~September~~activities ~~27, 2014 compared to $276,000~~ in the ~~nine~~first ~~months~~quarter ~~ended~~of ~~September 28, 2013~~2015. Net cash provided by financing activities ~~during the current year~~ was ~~solely~~$3.6 ~~attributable~~million toin ~~proceeds~~the ~~from~~three ~~our~~months ~~January~~ended ~~2014~~March ~~underwritten~~29, ~~public offering of common stock~~2014. Net cash provided by financing activities in the prior year period ~~resulted~~was ~~from~~comprised ~~the sale~~ of ~~common~~net ~~stock~~proceeds tofrom ~~the underwriter of~~ our ~~December~~January ~~2012~~2014 underwritten public offering, ~~pursuant to the underwriter’s partial exercise~~ of ~~its~~common ~~over-allotment option~~stock.

Capital Requirements

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

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

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

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

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

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

● implementing new operational, financial and management systems to comply with SEC requirements.

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

● the progress of ~~preclinical and~~ clinical trials required to support our applications for regulatory approvals, including our human clinical trials in the United States, and more specifically, in the short-term, our eMESH I clinical feasibility trial;

●

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

●

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

●

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

●

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

●

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

●

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

●

the effect of competing technological and market developments;

●

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

●

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

●

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

●

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

We expect to continue to incur substantial losses, which will continue to generate negative net cash flows from operating activities as we continue to develop additional clinical data, pursue regulatory approvals and continue the process of commercialization in international markets for our eSVS Mesh. While we continue to market our eSVS Mesh in select European and other international markets, our sales to date have been limited and negatively affected by the limited amount of clinical data on the performance of the eSVS Mesh, limited reimbursements available to hospitals and the effects of economic difficulties in certain European countries. We do not expect our sales to improve in future periods until additional clinical study data is available.

To date, we have used primarily equity and convertible debt financings to fund our ongoing business operations and short-term liquidity needs, and we expect to continue this practice for the foreseeable future. On January 29, 2014, we completed a public offering of 6,035,000 shares of our common stock at a purchase price of $0.70 per share under our shelf registration statement, resulting in net proceeds of $3.6 million, after deduction of underwriting discounts, commissions and related expenses. We intend to use the net proceeds from this offering for working capital and general corporate purposes, including funding the process of seeking regulatory approval to market our eSVS Mesh in the United States and abroad, including continuing our human clinical trials.

We believe our cash, cash equivalents and short-term investments as of September 27, 2014 will be sufficient to fund our planned operations into mid-2015. We will need additional financing to continue our operations thereafter and execute our business plan, including completing our eMESH I clinical feasibility trial, planning for our anticipated pivotal study and marketing and selling our eSVS Mesh in European and other international markets.

As of September 27, 2014, we did not have any existing credit facilities under which we could borrow funds. We historically have financed our operations principally from the sale of equity securities. While we have been successful in the past in obtaining the necessary capital to support our operations, and have similar future plans to obtain additional financing, there is no assurance that we will be able to obtain additional financing under commercially reasonable terms and conditions, or at all.

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WeWhile ~~may~~our ~~seek~~distributors continue to ~~raise~~market ~~additional~~our ~~funds~~eSVS ~~through~~Mesh ~~various~~in ~~sources,~~select ~~such~~European ~~as equity~~ and ~~debt~~other ~~financings~~international markets, orour ~~through~~sales ~~strategic~~to ~~collaborations~~date ~~and~~have ~~license~~been ~~agreements.~~limited Weand ~~can~~negatively ~~give~~affected noby ~~assurances~~the ~~that~~limited weamount ~~will~~of beclinical ~~able~~data toon ~~secure~~the ~~additional~~performance ~~sources~~ of ~~funds~~the toeSVS ~~support our operations~~Mesh, orlimited ifreimbursements ~~such funds are~~ available to ~~us,~~hospitals ~~that~~and ~~such~~the ~~additional~~effects ~~financing~~of ~~will~~economic bedifficulties ~~sufficient~~in tocertain ~~meet~~European ~~our~~countries. ~~needs~~We orexpect onour ~~terms~~sales ~~acceptable~~ to ~~us.~~remain ~~This~~at ~~risk~~limited ~~may~~levels ~~increase~~until ifadditional ~~economic~~clinical ~~and~~study ~~market~~data ~~conditions~~is ~~deteriorate. Prior to issuing any capital stock with rights~~available, ~~preferences~~especially orin ~~limitations~~light ~~equal~~of ~~or superior to~~ our ~~common~~January ~~stock~~2015 ~~owned~~decision ~~by Kips Bay Investments, LLC or debt securities convertible into capital stock with rights, preferences or limitations equal or superior~~ to curtail our ~~common~~sales ~~stock~~activities ~~owned~~and ~~by Kips Bay Investments, LLC, we must obtain~~ the ~~consent~~covenant ofin ~~Kips Bay Investments, LLC, one of~~ our ~~significant~~March ~~stockholders~~24, ~~and~~2015 nosecurities ~~assurance~~purchase ~~can~~agreement ~~be provided~~ that ~~Kips~~prohibits ~~Bay~~us ~~Investments,~~from ~~LLC~~hiring ~~would~~any ~~provide~~sales ~~such consent, which could limit our ability to raise additional financing~~personnel.

To ~~the extent that we raise additional capital through the sale of common stock~~date, ~~the interests of our current stockholders may be diluted. If~~ we ~~issue~~have ~~preferred~~used ~~stock~~primarily orequity ~~convertible~~and ~~debt securities, it could affect the rights of our common stockholders or reduce the value of our common stock. In particular, specific rights granted to future holders of preferred stock or~~ convertible debt ~~securities~~financings ~~may include voting rights, preferences as~~ to ~~dividends and liquidation, conversion and redemption rights, sinking~~ fund ~~provisions, and restrictions on~~ our ~~ability~~ongoing tobusiness ~~merge~~operations ~~with~~and orshort-term ~~sell~~liquidity ~~our assets to a third party. Debt financing~~needs, ifand 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. If we ~~raise~~expect ~~additional funds through collaboration, licensing or other similar arrangements, it may be necessary~~ to ~~relinquish~~continue ~~valuable~~this ~~rights~~practice tofor ~~our~~the ~~proprietary~~foreseeable ~~technologies, or grant licenses on terms that are not favorable~~future. ~~Any of these events could adversely affect our ability to achieve our regulatory approvals and commercialization goals and harm our business.~~

~~There~~On ~~can~~March be24, no2015, ~~assurance~~we ~~that~~entered weinto ~~will~~a besecurities ~~successful~~purchase inagreement ~~obtaining~~with ~~additional~~several ~~financing~~investors, onincluding ~~favorable~~Manny ~~terms~~Villafaña, orour atChairman ~~all.~~and IfChief weExecutive ~~are~~Officer, ~~unable~~and toKips ~~obtain~~Bay ~~additional~~Investments, ~~financing~~LLC, ~~when~~one ~~needed~~of our principal stockholders, pursuant to which we ~~may~~agreed ~~need~~to sell and the investors agreed to ~~terminate,~~purchase ~~significantly~~in ~~modify~~a orprivate ~~delay~~placement ~~development~~up orto ~~commercialization~~$3.25 million in shares of our common stock in four separate equal tranches. Under the terms of the securities purchase agreement, the first tranche is scheduled to occur as soon as reasonably practicable after we have received ten angiograms from patients enrolled in our eMESH I clinical feasibility trial who have had an eSVS Mesh implanted using the new surgical implant technique. The second, ~~license~~third and fourth tranches are scheduled to ~~third~~occur ~~parties~~on or about the ~~rights~~90th, 180th and 270th day thereafter. Each of the tranches is subject to ~~commercialize~~customary closing conditions and a condition that the ~~eSVS~~clinical ~~Mesh~~data orreceived ~~new~~then ~~applications~~to ~~for~~date by us from the ~~eSVS~~eMESH ~~Mesh~~I clinical feasibility trial demonstrates, to the reasonable satisfaction of each investor, together with any then recent communications with or from the FDA, that weit ~~would~~is ~~otherwise~~advisable ~~seek~~for Kips Bay to continue with the feasibility trial and to continue to pursue, ormarketing ~~cease~~approval ~~operations~~by the FDA for the eSVS Mesh. IfThe weper ~~terminate~~share purchase price of the ~~commercialization~~shares of our ~~eSVS~~common ~~Mesh,~~stock ~~Medtronic,~~to ~~Inc~~be purchased by investors will be equal to the lesser of $0.14 ~~may~~per ~~cause~~share or the ~~core~~closing ~~intellectual~~sale ~~property~~price ~~and~~on ~~patent~~the ~~rights~~trading ~~related~~day immediately prior to the closing of any tranche. In addition, each investor will receive a five-year warrant to purchase one share of our ~~eSVS~~common ~~Mesh~~stock for each two shares purchased by the investor at each tranche closing. The warrants will have a per share exercise price equal to ~~revert~~125% of the per share purchase price at the applicable closing. In light of the disappointing feasibility trial results received to ~~Medtronic~~date, we believe it is unlikely that we will be able to access funds under this bridge financing arrangement.

~~Our~~We ~~future~~agreed ~~success is dependent upon our ability~~ to ~~obtain~~use ~~additional financing,~~ the ~~success~~net ofproceeds ~~our~~from ~~eMESH~~the Ioffering ~~clinical~~for ~~feasibility~~working ~~trial~~capital and ~~our~~general ~~anticipated~~corporate ~~pivotal study~~purposes, ~~our~~including ~~ability~~primarily tofunding ~~obtain~~the ~~U.S.~~process ~~marketing~~of seeking regulatory approval ~~for~~to ~~our~~market the eSVS Mesh ~~and~~in ~~our~~the ~~ability~~United toStates ~~market~~ and ~~sell~~abroad, ~~our~~including ~~eSVS~~continuing ~~Mesh.~~human Ifclinical wetrials. ~~are~~We ~~unable~~agreed not to ~~obtain~~use ~~additional~~any ~~financing~~of ~~when~~the ~~needed,~~net ifproceeds ~~our~~to ~~eMESH~~hire Iany ~~clinical~~sales ~~feasibility~~personnel ~~trial~~unless isa ~~not~~decision ~~successful,~~is ifmade ~~the~~by ~~FDA~~our ~~does~~Board ~~not~~of ~~approve~~Directors anto ~~IDE~~do ~~for~~so aand ~~pivotal~~Kips ~~study~~Bay orInvestments, ifLLC ~~once~~consents ~~these studies are concluded~~thereto, wewhich doconsent may not ~~receive~~be Uunreasonably withheld.S. ~~marketing~~We ~~approval~~also ~~for~~agreed in the ~~eSVS~~securities ~~Mesh,~~purchase weagreement ~~may~~to ~~not~~limit beour ~~able~~cash tooperating ~~continue~~expenses as(other athan ~~going~~expenses ~~concern~~directly ~~and~~attributable ~~may~~to, beand ~~forced~~reasonably tonecessary ~~cease~~for ~~operations.~~the ~~The~~feasibility ~~unaudited~~trail ~~interim~~or ~~financial~~pivotal ~~statements~~trial ~~included~~and ~~this~~certain ~~report~~other ~~have~~specified ~~been~~expenses) ~~prepared~~to ~~assuming~~no ~~that~~more wethan ~~will~~an ~~continue~~average asof a$208,000 ~~going~~per ~~concern~~month, ~~and~~on doa ~~not~~three-month ~~include~~rolling ~~any~~average ~~adjustments~~basis, ~~relating~~commencing toon ~~the~~February ~~recoverability~~1, or2015, ~~classification~~and ofcontinuing ~~assets~~until or the ~~amounts~~completion by us of ~~liabilities~~an ~~that~~additional ~~might~~financing ~~result~~in ~~from~~an ~~the~~amount ~~outcome~~equal ofto ~~these~~at ~~uncertainties~~least $3.0 million.

Our cash, cash equivalents and short-term investments were $2.6 million as of March 28, 2015, compared to $3.6 million as of December 31, 2014. We believe our cash, cash equivalents and short-term investments as of March 28, 2015 will be sufficient to fund our planned operations through December 2015.

As of March 28, 2015, we did not have any existing credit facilities under which we could borrow funds. We historically have financed our operations principally from the sale of equity securities. While we have been successful in the past in obtaining the necessary capital to support our operations, and have similar future plans to obtain additional financing, there is no assurance that we will be able to obtain additional financing under commercially reasonable terms and conditions, or at all.

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We will need additional funds to continue our operations thereafter and execute our business plan, including completing our current eMESH I clinical feasibility trial, planning for a required future pivotal trial and marketing and selling our eSVS Mesh in European and other international markets. We historically have financed our operations principally from the sale of equity securities. While we have been successful in the past in obtaining the necessary capital to support our operations, and have similar future plans to obtain additional financing, there is no assurance that we will be able to obtain additional financing under commercially reasonable terms and conditions, or at all. If we are unable to obtain additional financing when needed, we would be required to terminate, significantly modify or delay our clinical programs, reduce our planned commercialization efforts, or obtain funds through collaborators that may require us to relinquish rights to our technologies or product candidates that we might otherwise seek to develop or commercialize independently or consider other strategic alternatives, including ceasing operations and liquidating our company.

To the extent that we raise additional capital through the sale of equity or convertible debt securities, the interests of our current stockholders would be diluted, and the terms may include liquidation or other preferences that adversely affect the rights of our current stockholders. If we issue preferred stock, it could affect the rights of our stockholders or reduce the value of our common stock. In particular, specific rights granted to future holders of preferred stock may include voting rights, preferences as to dividends and liquidation, conversion and redemption rights, sinking fund provisions, and restrictions on our ability to merge with or sell our assets to a third party. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Any of these events could adversely affect our ability to achieve our regulatory approvals and commercialization goals and harm our business.

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

Critical Accounting Policies and Estimates

Our critical accounting policies and estimates are disclosed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Note 2 to our audited financial statements, included in Part II, Item 8, of our annual report on Form 10-K for the fiscal year ended December 31, ~~2013~~2014. There have been no material changes to our critical accounting policies and estimates.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements as defined in Regulation S-K Item 303(a)(4), that have or are reasonably likely to have a material effect on our financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources. As a result, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these arrangements.

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Special Note Regarding Forward-Looking Statements

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact included in this report that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements including, in particular, the statements about our plans, objectives, strategies and prospects regarding, among other things, our financial condition, operating results and business. In some cases, you can identify forward-looking statements by the following words: “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would,” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. The use of future dates also may indicate a forward-looking statement. The forward-looking statements in this report include, but are not limited to, statements regarding uses for and benefits of our technology, the timing of and strategy for governmental approvals and product introductions, the commencement and cost of clinical trials and post-market studies, our expectations regarding ~~continued~~the ~~and~~success ~~increasing~~of our eMESH I clinical feasibility trial, continued operating losses, future sales levels, research and development expenses and SG&A expenses, continued negative net cash flow from operations, recording additional non-cash compensation expenses, the adequacy of our capital resources to fund planned operations, our need for and ability to raise additional financing and operating and capital requirement expectations. Although we believe that we have a reasonable basis for each forward-looking statement contained in this report, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain. These statements involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s results, levels of activity, performance or achievements to be materially different from the information expressed or implied by our forward-looking statements. These risks and uncertainties include, among others:

● the status of our eMESH I clinical feasibility trial, including enrollment, completion and the results, and our actions and the actions of the FDA in response to the results from our feasibility trial, including ~~approval~~whether ofto ~~future~~continue ~~increases in~~ the ~~number~~feasibility oftrial, ~~U.S.~~commence ~~subjects~~a ~~and~~pivotal ~~U.S.~~trial, ~~sites~~or in the ~~trial~~case ~~and~~of the FDA, approval of a future pivotal ~~study~~trial;

●

our need for and ability to obtain additional capital when needed or on acceptable terms, and the terms of any such additional financing, which could be highly dilutive and adversely affect the rights of its current stockholders;

● our ability to sustain our operations if we are unable to obtain additional financing when needed or if the results of our eMESH I clinical feasibility trial are not sufficient to allow us to proceed to a pivotal ~~study~~trial;

●

our ability to commercialize and market acceptance of our eSVS Mesh technology and our ability to sell our eSVS Mesh in Europe and other international countries where we have received required regulatory approvals;

●

our ability to demonstrate with human clinical data that our eSVS Mesh is safe and improves the long term patency of saphenous vein grafts as compared to traditional CABG surgery;

●

our ability to obtain and maintain foreign and domestic regulatory approvals of our eSVS Mesh technology;

●

our ability to obtain coverage and reimbursement from third-party payors for our eSVS Mesh technology and the extent of such coverage;

●

the successful development of our distribution and marketing capabilities;

●

our ability to attract and retain scientific, regulatory, and sales and marketing support personnel;

●

our ability to obtain and maintain intellectual property protection for our eSVS Mesh technology;

●

any future litigation regarding our business, including product liability claims;

●

changes in governmental laws and regulations relating to healthcare;

●

the availability and cost of third-party products and the ability of our suppliers to timely meet our demands;

●

changes affecting the medical device industry;

●

general and economic business conditions; and

● the other risks described under “Part I - Item 1A. Risk Factors” in our annual report on Form 10-K for the year ended December 31, ~~2013~~2014.

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For more information regarding these and other uncertainties and factors that could cause our actual results to differ materially from what we have anticipated in our forward-looking statements or otherwise could materially adversely affect our business, financial condition or operating results, see the information under the heading “Part I – Item 1A. Risk Factors” of our annual report on Form 10-K for the year ended December 31, ~~2013~~2014. The risks and uncertainties described above and under the heading “Part I — Item 1A. Risk Factors” in our annual report on Form 10-K for the year ended December 31, ~~2013~~2014 are not exclusive and further information concerning us and our business, including factors that potentially could materially affect our financial results or condition, may emerge from time to time. We assume no obligation to update, amend or clarify forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements. We advise you, however, to consult any further disclosures we make on related subjects in our future annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K we file with or furnish to the Securities and Exchange Commission.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

This Item 3 is not applicable to us as a smaller reporting company and has been omitted.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of ~~September~~March 2728, ~~2014~~2015, our disclosure controls and procedures were effective in ensuring that information relating to Kips Bay Medical, Inc. required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, including ensuring that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the quarter ended ~~September~~March 2728, ~~2014~~2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

Not applicable.

Item 1A. Risk Factors.

This Item 1A is not applicable to us as a smaller reporting company and has been omitted.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Unregistered Sales of Equity Securities

During the ~~third~~first quarter of ~~2014~~2015, we ~~did~~entered ~~not~~into ~~issue~~a orsecurities purchase agreement with several investors, including Manny Villafaña, our Chairman and Chief Executive Officer, and Kips Bay Investments, LLC, one of our principal stockholders, pursuant to which we agreed to sell and the investors agreed to purchase in a private placement up to $3.25 million in shares of our common stock in four separate equal tranches. The per share purchase price of the shares of our common stock to be purchased by investors will be equal to the lesser of $0.14 per share or the closing sale price on the trading day immediately prior to the closing of any ~~equity~~tranche. ~~securities~~In addition, each investor will receive a five-year warrant to purchase one share of ~~ours~~our ~~without~~common ~~registration~~stock for each two shares purchased by the investor at each tranche closing. The warrants will have a per share exercise price equal to 125% of the per share purchase price at the applicable closing. All of the investors in the private placement are institutional and other accredited investors, as defined in Rule 501 of Regulation D promulgated under the Securities Act of 1933, as amended (the “Securities Act”). The offer of these securities was made and the sale of the securities will be made to these investors in reliance upon exemptions from the registration requirements pursuant to Section 4(a)(2) under the Securities Act and Regulation D promulgated thereunder. There was no general solicitation or advertising with respect to the private placement and each of the investors provided written representations of an intent to acquire the securities for investment only and not with a view to or for sale in connection with any distribution of the securities. We will place appropriate legends on the share certificates representing any shares issued in the private placement.

During the first quarter of 2015, we issued stock options to purchase an aggregate of 410,000 shares at a weighted average exercise price of $0.22 per share to five employees under the Kips Bay Medical, Inc. 2013 Equity Incentive Plan to compensate them, in part, for temporary decreases in their base salaries in connection with our January 2015 reorganization. These options vest and become exercisable on the one-year anniversary of the grant date. All such options expire on the ten-year anniversary of the grant date. These issuances were exempt from registration under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder. The offer and sale of the options were limited to these five individuals, and the agreements representing these securities bear a restrictive legend.

During the first quarter of 2015, we issued stock options to purchase an aggregate of 90,000 shares at a weighted average exercise price of $0.18 per share to employees under the Kips Bay Medical, Inc. 2013 Equity Incentive Plan. These options vest and become exercisable four equal installments beginning on the one-year anniversary of the grant date and continuing for the next three anniversaries of the grant date. All such options expire on the ten-year anniversary of the grant date. These issuances were exempt from registration under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder. The offer and sale of the options were limited to employees and the agreements representing these securities bear a restrictive legend.

During the first quarter of 2015, we did not issue or sell any other equity securities of ours without registration under the Securities Act of 1933, as amended.

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Issuer Purchasers of Equity Securities

During the ~~third~~first quarter of ~~2014~~2015, we did not purchase any shares of our common stock or other equity securities of ours. Our Board of Directors has not authorized any repurchase plan or program for the purchase of shares of our common stock or other securities in the open market or otherwise.

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Not applicable.

Item 6. Exhibits.

See attached exhibit index.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	KIPS BAY MEDICAL, INC.
Date: November 6, 2014	/s/ Manny Villafaña
Date: May 12, 2015	/s/ Manny Villafaña
	Manny Villafaña Chairman of the Board and Chief Executive Officer
	(Principal Executive Officer)
	/s/ Scott Kellen
	Scott Kellen Chief Operating Officer and Chief Financial Officer
	(Principal Financial Officer and Principal Accounting Officer)

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KIPS BAY MEDICAL, INC.
FORM 10-Q

EXHIBIT INDEX

Exhibit Number	~~Description~~	Description
31.1+	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a) Under the Securities Exchange Act of 1934, as Amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
10.1		Securities Purchase Agreement, dated as of March 24, 2015, among Kips Bay Medical, Inc. and the Investors party thereto —incorporated by reference to Exhibit 10.1 to the Registrant’s current report on Form 8-K filed with the SEC on March 24, 2015 (File No. 001-35080).
31.2+	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a) Under the Securities Exchange Act of 1934, as Amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
10.2		Registration Rights Agreement, dated as of March 24, 2015, among Kips Bay Medical, Inc. and the Investors party thereto —incorporated by reference to Exhibit 10.2 to the Registrant’s current report on Form 8-K filed with the SEC on March 24, 2015 (File No. 001-35080).
32.1++	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
10.3		Form of Warrant to Purchase Shares of Common Stock of Kips Bay Medical, Inc. —incorporated by reference to Exhibit 4.1 to the Registrant’s current report on Form 8-K filed with the SEC on March 24, 2015 (File No. 001-35080).
32.2++	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
10.4		Employment Agreement, effective as of July 1, 2015, by and between Kips Bay Medical, Inc. and Manuel A. Villafaña —incorporated by reference to Exhibit 10.3 to the Registrant’s current report on Form 8-K filed with the SEC on March 24, 2015 (File No. 001-35080).
101+	Financial statements from the quarterly report on Form 10-Q of Kips Bay Medical, Inc. for the quarter ended September 27, 2014, formatted in XBRL: (i) the Balance Sheets, (ii) the Statements of Comprehensive Loss, (iii) the Statements of Cash Flows, and (iv) the Notes to Financial Statements.
31.1+		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a) Under the Securities Exchange Act of 1934, as Amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2+		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a) Under the Securities Exchange Act of 1934, as Amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1++		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2++		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101+		Financial statements from the quarterly report on Form 10-Q of Kips Bay Medical, Inc. for the quarter ended March 28, 2015, formatted in XBRL: (i) the Balance Sheets, (ii) the Statements of Comprehensive Loss, (iii) the Statements of Cash Flows, and (iv) the Notes to Financial Statements.

_________________________

+ Filed herewith.

++ Furnished herewith.

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Filing Compare · Kips Bay Medical, Inc.