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| TSON > SEC Filings for TSON > Form 10-Q on 6-Aug-2009 | All Recent SEC Filings |
6-Aug-2009
Quarterly Report
The following discussion of our financial condition and results of operations
should be read in conjunction with our financial statements and the related
notes to our financial statements included in this report. In addition to
historical financial information, this report contains forward-looking
statements that have been made pursuant to the provisions of the Private
Securities Litigation Reform Act of 1995 and concern matters that involve risks
and uncertainties that could cause actual results to differ materially from
those projected in the forward-looking statements. All statements other than
statements of historical fact contained in this report, including statements
regarding future events, our future financial performance, business strategy and
plans and objectives of management for future operations, are forward-looking
statements. We have attempted to identify forward-looking statements by
terminology including "anticipates," "believes," "can," "continue," "could,"
"estimates," "expects," "intends," "may," "plans," "potential," "predicts,"
"should" or "will" or the negative of these terms or other comparable
terminology. Although we do not make forward-looking statements unless we
believe we have a reasonable basis for doing so, we cannot guarantee their
accuracy. Such forward-looking statements are subject to risks, uncertainties
and other factors that could cause actual results and the timing of certain
events to differ materially from future results expressed or implied by such
forward-looking statements. Readers are urged to carefully review and consider
the various disclosures made by us, which attempt to advise interested parties
of the risks, uncertainties, and other factors that affect our business,
operating results, financial condition and stock price, including without
limitation the disclosures made under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in this report and in
the financial statements and notes thereto included elsewhere in this report, as
well as the disclosures made under the captions "Management's Discussion and
Analysis of Financial Condition and Results of Operations", "Risk Factors",
"Financial Statements" and "Notes to Financial Statements" included in our
Annual Report on Form 10-K for the year ended December 31, 2008. Furthermore,
such forward-looking statements speak only as of the date of this report. We
expressly disclaim any intent or obligation to update any forward-looking
statements after the date hereof to conform such statements to actual results or
to changes in our opinions or expectations. References in this report to
"TranS1", "we", "our", "us", or the "Company" refer to TranS1 Inc.
Overview
We are a medical device company focused on designing, developing and marketing
products that implement our proprietary minimally invasive surgical approach to
treat degenerative disc disease and instability affecting the lower lumbar
region of the spine. Using this pre-sacral approach, a surgeon can access discs
in the lower lumbar region of the spine through a 1.5 cm incision adjacent to
the tailbone and can perform an entire fusion procedure through a small tube
that provides direct access to the degenerative disc. We developed our
pre-sacral approach to allow spine surgeons to access and treat degenerative
lumbar discs without compromising important surrounding soft tissue. We believe
this approach enables fusion procedures to be performed with low complication
rates, short procedure times, low blood loss, short hospital stays, fast
recovery times and reduced pain. We have developed and currently market in the
United States and Europe two single-level fusion products, AxiaLIF and AxiaLIF
360°, and a two-level fusion product, the AxiaLIF 2L. All of our products are
delivered using our pre-sacral approach.
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 June 30, 2009, we had an
accumulated deficit of $59.8 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
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 June 30, 2008 and 2009
Revenue. Revenue increased from $6.0 million in the three months ended June 30,
2008 to $7.9 million in the three months ended June 30, 2009. The $1.9 million
increase in revenue from 2009 to 2008 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 had its limited market release in May 2008. None of
this increase was attributable to price increases. Domestically, sales of our
AxiaLIF 2L product, increased from $356,000 in the three months ended June 30,
2008 to $2.3 million in the three months ended June 30, 2009 and sales of our
AxiaLIF 360° product decreased from $2.2 million in the three months ended
June 30, 2008 to $2.0 million in the three months ended June 30, 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 $9,500 in the three months ended June 30, 2008 to approximately
$10,700 in the three months ended June 30, 2009. In the three months ended
June 30, 2008 and 2009, we recorded 541 and 671 domestic AxiaLIF cases,
respectively, including 213 AxiaLIF 360° cases and 24 AxiaLIF 2L cases in the
second quarter of 2008, and 199 AxiaLIF 360° cases and 175 AxiaLIF 2L cases in
the second quarter of 2009. Additionally, during the three months ended June 30,
2008 and 2009, we generated $175,000 and $211,000, respectively, in revenues
from stand alone sales of our percutaneous facet screw system. Revenue generated
outside the United States decreased from $649,000 in the three months ended
June 30, 2008 to $565,000 in the three months ended June 30, 2009. In the second
quarter of 2008, initial stocking shipments to new distributors outside the
United States were $73,000. There were no initial stocking shipments to our
international distributors in the second quarter of 2009. In the three months
ended June 30, 2008 and 2009, 89% and 93%, respectively, of our revenues were
generated in the United States.
Cost of Revenue. Cost of revenue increased from $1.1 million in the three months
ended June 30, 2008 to $1.5 million in the three months ended June 30, 2009. The
$378,000 increase in cost of revenue resulted primarily from higher material and
overhead costs associated with increased sales volume for our products. As a
percentage of revenue, cost of revenue remained consistent at 19% in the three
months ended June 30, 2008 and 2009.
Research and Development. Research and development expenses increased from
$1.2 million in the three months ended June 30, 2008 to $2.4 million in the
three months ended June 30, 2009. The $1.2 million increase in expense in 2009
compared to 2008 was primarily the result of an expenditure of $1.0 million to
acquire the rights to develop a technology for future use, along with increased
research and development and clinical project-related spending of $316,000,
partially offset by a decrease in stock compensation expense of $147,000.
Sales and Marketing. Sales and marketing expenses increased from $7.2 million in
the three months ended June 30, 2008 to $8.9 million in the three months ended
June 30, 2009. The increase in expenses from 2008 to 2009 of $1.7 million was
primarily the result of increased personnel related costs, including
commissions, of $1.3 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 and increased tradeshow and promotional expenses of
$0.2 million.
General and Administrative. General and administrative expenses decreased from
$2.4 million in the three months ended June 30, 2008 to $2.0 million in the
three months ended June 30, 2009. The decrease in expenses from 2008 to 2009 of
$0.4 million was primarily due to decreased professional fees of $0.3 million.
Interest Income. Interest income decreased from $688,000 in the three months
ended June 30, 2008 to $111,000 in the three months ended June 30, 2009. The
decrease of $577,000 in interest income from 2008 to 2009 was primarily due to
significantly lower interest rates and our lower average cash and investment
balances.
Comparison of the Six Months Ended June 30, 2008 and 2009
Revenue. Revenue increased from $11.9 million in the six months ended June 30,
2008 to $16.6 million in the six months ended June 30, 2009. The $4.7 million
increase in revenue from 2008 to 2009 was primarily attributable to an increase
in the number of AxiaLIF products sold. None of this increase was attributable
to price increases. Sales of our AxiaLIF 360° product increased from
$4.3 million in the six months ended June 30, 2008 to $4.7 million in the six
months ended June 30, 2009. Sales of our AxiaLIF 2L product, which began
commercialization in the United States in the second quarter of 2008, increased
from $356,000 in the six months ended June 30, 2008 to $4.6 million in the six
months ended June 30, 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 $9,400 in the six months ended
June 30, 2008 to approximately $10,600 in the six months ended June 30, 2009. In
the six months ended June 30, 2008 and 2009 we recorded 1,074 and 1,422 domestic
AxiaLIF cases, respectively, including 426 AxiaLIF 360° cases and 24 AxiaLIF 2L
cases in 2008, and 460 AxiaLIF 360° cases and 343 AxiaLIF 2L cases in 2009.
Additionally, during the six months ended June 30, 2008 and 2009 we generated
$440,000 and $508,000, respectively, in revenues from stand alone sales of our
percutaneous facet screw system. Revenue generated outside the United States
decreased from $1.4 million in the six months ended June 30, 2008 to
$1.0 million in the six months ended June 30, 2009. $295,000 of this decrease
was attributable to initial stocking shipments to new distributors in 2008. In
the six months ended June 30, 2008 and 2009, 88% and 94%, respectively, of our
revenues were generated in the United States.
Cost of Revenue. Cost of revenue increased from $2.2 million in the six months
ended June 30, 2008 to $3.1 million in the six months ended June 30, 2009. The
$0.9 million increase in cost of revenue resulted primarily from higher material
and overhead costs associated with increased sales volume for our AxiaLIF
products. As a percentage of revenue, cost of revenue remained consistent at 18%
in the six months ended June 30, 2008 and 2009.
Research and Development. Research and development expenses increased from
$2.3 million in the six months ended June 30, 2008 to $3.7 million in the six
months ended June 30, 2009. The $1.4 million increase in expense in 2009
compared to 2008 was primarily the result of an expenditure of $1.0 million to
acquire the rights to develop a technology for future use, along with increases
in project related research and development and clinical trial costs of
$256,000.
Sales and Marketing. Sales and marketing expenses increased from $12.9 million
in the six months ended June 30, 2008 to $18.1 million in the six months ended
June 30, 2009. The increase in expenses from 2008 to 2009 of $5.2 million was
primarily the result of increased personnel related costs, including
commissions, of $3.2 million, increased travel and entertainment expenses of
$0.5 million related to the larger sales force, increased training of
$0.5 million and increased tradeshow and promotional expenses of $0.7 million.
General and Administrative. General and administrative expenses increased from
$3.9 million in the six months ended June 30, 2008 to $4.0 million in the six
months ended June 30, 2009. The increase in expenses from 2008 to 2009 of
$0.1 million was primarily due to increased personnel related costs, including
stock-based compensation expense, of $415,000, partially offset by a decrease in
professional fees of $212,000.
Interest Income. Interest income decreased from $1.6 million in the six months
ended June 30, 2008 to $328,000 in the six months ended June 30, 2009. The
decrease of $1.3 million 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
June 30, 2009, we had an accumulated deficit of $59.8 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 June 30, 2009, we did not have any outstanding debt financing
arrangements, we had working capital of $74.0 million and our primary source of
liquidity was $66.5 million in cash, cash equivalents and short-term
investments. We currently invest our cash and cash equivalents primarily in
money market treasury funds. We currently place our short-term investments
primarily in U.S. agency backed debt instruments and high grade corporate bonds.
Cash, cash equivalents and short-term investments decreased from $77.3 million
at December 31, 2008 to $66.5 million at June 30, 2009. The decrease of
$10.8 million was primarily the result of net cash used in operating activities
of $10.5 million and purchases of property and equipment of $410,000.
Cash Flows
Net Cash Used in Operating Activities. Net cash used in operating activities was
$10.5 million in the six months ended June 30, 2009. This amount was
attributable primarily to the net loss after adjustment for non-cash items, such
as depreciation and stock-based compensation expense, and an increase in
inventory as we prepare for continued growth, partially offset by small changes
in accounts receivable, prepaid assets, accounts payable and accrued expense due
to the timing of activity in those accounts.
Net Cash Used in Investing Activities. Net cash used in investing activities was
$2.5 million in the six months ended June 30, 2009. This amount reflected net
purchases or sales and maturities of short-term
investments of $2.1 million and purchases of property and equipment of $410,000,
primarily for research and development, surgical instrument kits and information
technology needs.
Net Cash Provided by Financing Activities. Net cash provided by financing
activities in the six months ended June 30, 2009 was $85,000, which primarily
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, or FASB, issued
Staff Position No. FAS 157-2, which delayed the effective date of Statement of
Financial Accounting Standards, or
SFAS, No. 157, "Fair Value Measurements", for non-financial assets and
liabilities to fiscal years beginning after November 15, 2008. We adopted SFAS
No. 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.
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events,", which
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before the financial statements are
issued or are available to be issued. SFAS No. 165 provides guidance on the
period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for potential
recognition or disclosure in the financial statements, the circumstances under
which an entity should recognize events or transactions occurring after the
balance sheet date in its financial statements and the disclosures that an
entity should make about events or transactions that occurred after the balance
sheet date. We adopted SFAS No. 165 during the second quarter of 2009, and its
application did not have a material impact on our financial statements. We
performed this evaluation through August 6, 2009, the date the financial
statements were issued.
In June 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles".
SFAS No. 168 establishes the FASB Accounting Standards Codification, or the
Codification, as the single source of authoritative nongovernmental U.S. GAAP.
The Codification is effective for interim and annual periods ending after
September 15, 2009. The adoption of this standard 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 June 30, 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. 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.
Historically, and as of June 30, 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.
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