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| TSON > SEC Filings for TSON > Form 10-Q on 6-May-2009 | All Recent SEC Filings |
6-May-2009
Quarterly Report
From our incorporation in 2000 through 2004, we devoted substantially all of our
resources to research and development and start-up activities, consisting
primarily of product design and development, clinical trials, manufacturing,
recruiting qualified personnel and raising capital. We received 510(k) clearance
from the U.S. Food and Drug Administration, or FDA, for our AxiaLIF product in
the fourth quarter of 2004, and commercially introduced our AxiaLIF product in
the United States in the first quarter of 2005. We received FDA 510(k) clearance
for our AxiaLIF 360° product in the United States in the third quarter of 2005
and began commercialization in the United States in the third quarter of 2006.
We received a CE mark to market AxiaLIF in the European market in the first
quarter of 2005 and began commercialization in the first quarter of 2006. For
AxiaLIF 360°, we received a CE mark in the first quarter of 2006. We received a
CE mark for our AxiaLIF 2L product in the third quarter of 2006 and began
commercialization in the European market in the fourth quarter of 2006. We
received FDA 510(k) clearance for our AxiaLIF 2L product and began marketing
this product in the United States in the second quarter of 2008. We currently
sell our products through a direct sales force, independent sales agents and
international distributors.
We rely on third parties to manufacture most of our products and their
components. We believe these manufacturing relationships allow us to work with
suppliers who have the best specific competencies while we minimize our capital
investment, control costs and shorten cycle times, all of which allows us to
compete with larger volume manufacturers of spine surgery products.
Since inception, we have been unprofitable. As of March 31, 2009, we had an
accumulated deficit of $53.1 million.
We expect to continue to invest in creating a sales and marketing infrastructure
for our AxiaLIF, AxiaLIF 360° and AxiaLIF 2L products in order to gain wider
acceptance for these products. We also expect to continue to invest in research
and development and related clinical trials, and increase general and
administrative expenses as we grow. As a result, we will need to generate
significant revenue in order to achieve profitability.
Financial Operations
Revenue
We generate revenue from the sales of our procedure kits and implants used in
our AxiaLIF fusion procedure for the treatment of degenerative disc disease and
instability. Our revenue is generated by our direct sales force, independent
sales agents and independent distributors. Our sales representatives or
independent sales agents hand deliver the procedure kit to the customer on the
day of the surgery or several days prior to the surgery. The sales
representative or independent agent is then responsible for reporting the
delivery of the procedure kit, and the date of the operation to the corporate
office for proper revenue recognition. We recognize revenue upon the
confirmation that the procedure kit has been used in a surgical procedure. We
also generate revenue through sales to distributors outside the United States.
These distributors order multiple procedure kits at one time to have on hand.
These transactions require the customer to send in a purchase order before
shipment will be made to the customer. We determine revenue recognition on a
case-by-case basis dependent upon the terms and conditions of each individual
distributor agreement. Under the distributor agreements currently in place, a
distributor only has the right of return for defective products and,
accordingly, revenue is recognized upon shipment of
our products to our independent distributors. Although we intend to continue to
expand our international sales and marketing efforts, we expect that a
substantial amount of our revenues will be generated in the United States in
future periods.
Cost of Revenue
Cost of revenue consists primarily of material and overhead costs related to our
AxiaLIF, AxiaLIF 360° and AxiaLIF 2L instruments and implants. Cost of revenue
also includes facilities-related costs, such as rent, utilities and
depreciation.
Research and Development
Research and development expenses consist primarily of personnel costs,
including stock-based compensation expense, within our product development,
regulatory and clinical functions and the costs of clinical studies and product
development projects. Research and development expenses also include legal
expenses related to the development and protection of our intellectual property
portfolio and facilities-related costs. In future periods, we expect research
and development expenses to grow as we continue to invest in basic research,
clinical trials, product development and in our intellectual property.
Sales and Marketing
Sales and marketing expenses consist of personnel costs, including stock-based
compensation expense, sales commissions paid to our direct sales representatives
and independent sales agents, and costs associated with physician training
programs, promotional activities, and participation in medical conferences. In
future periods, we expect sales and marketing expenses to increase as we expand
our sales and marketing efforts.
General and Administrative
General and administrative expenses consist of personnel costs, including
stock-based compensation, related to the executive, finance, business
development, information technology and human resource functions, as well as
professional service fees, legal fees, accounting fees, insurance costs and
general corporate expenses. We expect general and administrative expenses to
increase as we grow our business and as we incur additional professional fees,
increased insurance costs and other general corporate expenses related to
operating as a public company.
Interest Income
Interest income is primarily composed of interest earned on our cash, cash
equivalents and available-for-sale securities.
Results of Operations
Comparison of the Three Months Ended March 31, 2008 and 2009
Revenue. Revenue increased from $6.0 million in the three months ended March 31,
2008 to $8.7 million in the three months ended March 31, 2009. The $2.7 million
increase in revenue from 2008 to 2009 was primarily attributable to an increase
in the number of AxiaLIF products sold, which we believe resulted from continued
market acceptance of our AxiaLIF and AxiaLIF 360° products, and the
commercialization of our AxiaLIF 2L product in the United States, which began in
the second quarter of 2008. None of this increase was attributable to price
increases. Domestically, sales of our AxiaLIF 360° product increased from
$2.2 million in the three months ended March 31, 2008 to $2.6 million in the
three months ended March 31, 2009 and sales of our AxiaLIF 2L product, which
began commercialization in the United States in the second quarter of 2008, were
$2.3 million in the three months ended March 31, 2009. As a result of the launch
of the AxiaLIF 2L, which has a higher selling price than our other products,
average selling prices in the United States increased from approximately $9,300
in the three months ended March 31, 2008 to approximately $10,600 in the three
months ended March 31, 2009. In the three months ended March 31, 2008 and 2009,
we recorded 533 and 751 domestic AxiaLIF cases, respectively, including 213
AxiaLIF 360° cases in the first quarter of 2008, and 261 AxiaLIF 360° cases and
168 AxiaLIF 2L cases in the first quarter of 2009. Additionally, during the
three months ended March 31, 2008 and 2009, we generated $266,000 and $297,000,
respectively, in revenues from stand alone sales of our percutaneous facet screw
system. Revenue generated outside the United States decreased from $753,000 in
the three months ended March 31, 2008 to $452,000 in the three months ended
March 31, 2009. In the first quarter of 2008 and 2009, initial stocking
shipments to new distributors outside the United States were $309,000 and
$97,000, respectively. In the three months ended March 31, 2008 and 2009, 87%
and 95%, respectively, of our revenues were generated in the United States.
Cost of Revenue. Cost of revenue increased from $1.0 million in the three months
ended March 31, 2008 to $1.5 million in the three months ended March 31, 2009.
The $0.5 million increase in cost of revenue resulted primarily from higher
material and overhead costs associated with increased sales volume for our
products.
Research and Development. Research and development expenses increased from
$1.2 million in the three months ended March 31, 2008 to $1.6 million in the
three months ended March 31, 2009. The $390,000 increase in expense in 2009
compared to 2008 was primarily the result of increased research and development
and clinical project-related spending of $192,000 and increased legal fess
related to maintaining our intellectual property of $184,000.
Sales and Marketing. Sales and marketing expenses increased from $5.7 million in
the three months ended March 31, 2008 to $9.2 million in the three months ended
March 31, 2009. The increase in expenses from 2008 to 2009 of $3.5 million was
primarily the result of increased personnel related costs, including commissions
and stock-based compensation expense, of $1.9 million, as we continued to build
out our sales and marketing organization in order to continue to drive global
market acceptance of our AxiaLIF products, increased travel and entertainment
expenses of $0.4 million related to the larger sales force, increased training
expenses of $0.5 million and increased tradeshow and promotional expenses of
$0.5 million.
General and Administrative. General and administrative expenses increased from
$1.4 million in the three months ended March 31, 2008 to $1.8 million in the
three months ended March 31, 2009. The
increase in expenses from 2008 to 2009 of $0.4 million was primarily due to
increased personnel related costs, including stock-based compensation expense,
of $0.3 million.
Interest Income. Interest income decreased from $940,000 in the three months
ended March 31, 2008 to $217,000 in the three months ended March 31, 2009. The
decrease of $723,000 in interest income from 2008 to 2009 was primarily due to
significantly lower interest rates and our lower average cash and investment
balances.
Liquidity and Capital Resources
Sources of Liquidity
Since our inception in 2000, we have incurred significant losses and, as of
March 31, 2009, we had an accumulated deficit of $53.1 million. We have not yet
achieved profitability, and anticipate that we will continue to incur losses in
the near term. As we continue to develop new products, drive global market
acceptance of our current AxiaLIF products and expand our sales and marketing
efforts, we expect that research and development, sales and marketing and
general and administrative expenses will continue to increase. As a result, we
will need to generate significant revenues to achieve profitability. To date,
our operations have been funded primarily with proceeds from the sale of
preferred stock and the net proceeds from our October 2007 initial public
offering. Gross proceeds from our preferred stock sales totaled $40.5 million to
date, and the net proceeds from our initial public offering were approximately
$86.7 million.
As of March 31, 2009, we did not have any outstanding debt financing
arrangements, we had working capital of $80.0 million and our primary source of
liquidity was $72.1 million in cash, cash equivalents and short-term
investments. We currently invest our cash and cash equivalents primarily in
money market treasury funds and high grade commercial paper. We currently place
our short-term investments primarily in U.S. agency backed debt instruments,
high grade corporate bonds and certificates of deposit.
Cash, cash equivalents and short-term investments decreased from $77.3 million
at December 31, 2008 to $72.1 million at March 31, 2009. The decrease of
$5.2 million was primarily the result of net cash used in operating activities
of $5.0 million and purchases of property and equipment of $277,000.
Cash Flows
Net Cash Used in Operating Activities. Net cash used in operating activities was
$5.0 million in the three months ended March 31, 2009. This amount was
attributable primarily to the net loss after adjustment for non-cash items, such
as depreciation and stock-based compensation expense, increases in accounts
receivable resulting from the growth in revenue and inventory as we prepare for
continued growth, partially offset by small changes in prepaid assets, accounts
payable and accrued expense due to the timing of activity in those accounts.
Net Cash Provided by Investing Activities. Net cash provided by investing
activities was $15.7 million in the three months ended March 31, 2009. This
amount reflected purchases or sales and maturities of
short-term investments of $15.9 million, offset by purchases of property and
equipment of $277,000, primarily for research and development and information
technology needs.
Net Cash Provided by Financing Activities. Net cash provided by financing
activities in the three months ended March 31, 2009 was $21,000, which
represented proceeds from the issuance of shares of our common stock upon the
exercise of stock options.
Operating Capital and Capital Expenditure Requirements
We believe that our existing cash, cash equivalents and short-term investments,
together with cash received from sales of our products, will be sufficient to
meet our cash needs for at least the next two years. We intend to spend
substantial sums on sales and marketing initiatives to support the ongoing
commercialization of our products and on research and development activities,
including product development, regulatory and compliance, clinical studies in
support of our currently marketed products and future product offerings, and the
enhancement and protection of our intellectual property. We may need to obtain
additional financing to pursue our business strategy, to respond to new
competitive pressures or to take advantage of opportunities that may arise. The
sale of additional equity or convertible debt securities could result in
dilution to our stockholders. If additional funds are raised through the
issuance of debt securities, these securities could have rights senior to those
associated with our common stock and could contain covenants that would restrict
our operations. Any additional financing may not be available in amounts or on
terms acceptable to us, if at all. If we are unable to obtain this additional
financing, we may be required to reduce the scope of our planned product
development and marketing efforts.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations
is based upon our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of financial statements requires management to make estimates and
judgments that affect the reported amounts of assets and liabilities, revenue
and expenses, and disclosures of contingent assets and liabilities at the date
of the financial statements. On an on-going basis, we evaluate our estimates,
including those related to revenue recognition, accounts receivable,
inventories, accrued expenses, income taxes and stock-based compensation. We use
authoritative pronouncements, historical experience and other assumptions as the
basis for making estimates. Actual results could differ from those estimates
under different assumptions or conditions.
For a description of our critical accounting policies and estimates, please
refer to the "Critical Accounting Policies and Estimates" section of the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section contained in our Annual Report on Form 10-K for the year
ended December 31, 2008. There have been no material changes in any of our
accounting policies since December 31, 2008.
New Accounting Standards
In February 2008, the Financial Accounting Standards Board issued Staff Position
No. FAS 157-2, which delayed the effective date of Statement of Financial
Accounting Standards No. 157, "Fair Value
Measurements", for non-financial assets and liabilities to fiscal years
beginning after November 15, 2008. We adopted SFAS 157 for our non-financial
assets and non-financial liabilities on January 1, 2009 and it did not have a
material impact on our financial statements.
No other recently issued, but not yet effective, accounting standards are
believed to have a material impact on us.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to interest rate risk at March 31, 2009 is related to our
investment portfolio. We invest our excess cash primarily in money market funds,
debt instruments of the U.S. government and its agencies and in high quality
corporate bonds, certificates of deposit and commercial paper. Due to the
short-term nature of these investments, we have assessed that there is no
material exposure to interest rate risk arising from our investments. Thus, a
hypothetical 100 basis point adverse move in interest rates along the entire
interest rate yield curve would not materially affect the fair market value of
our interest-sensitive financial investments. Declines in interest rates over
time will, however, reduce our investment income, while increases in interest
rates over time will increase our interest expense. Historically, and as of
March 31, 2009, we have not used derivative instruments or engaged in hedging
activities.
Although substantially all of our sales and purchases are denominated in U.S.
dollars, future fluctuations in the value of the U.S. dollar may affect the
competitiveness of our products outside the United States. We do not believe,
however, that we currently have significant direct foreign currency exchange
rate risk and have not hedged exposures denominated in foreign currencies.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and
principal financial officer, evaluated the effectiveness of 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, or the Exchange
Act) as of March 31, 2009. We maintain disclosure controls and procedures that
are designed to provide reasonable assurance that information required to be
disclosed in our reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms and that such information is accumulated and communicated
to our management, including our principal executive officer and principal
financial officer, as appropriate, to allow for timely decisions regarding
required disclosure. Our management recognizes that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving their objectives and management necessarily applies its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Based on the evaluation of our disclosure controls and procedures as of
March 31, 2009, our principal executive officer and principal financial officer
concluded that, as of such date, our disclosure controls and procedures were
effective and operating at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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