Summary of TRANS1 INC - Yahoo! Finance

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

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.

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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 September 30, 2009, we had an accumulated deficit of $65.4 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

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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.

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Results of Operations
Comparison of the Three Months Ended September 30, 2008 and 2009 Revenue. Revenue increased from $6.0 million in the three months ended September 30, 2008 to $6.9 million in the three months ended September 30, 2009. The $0.9 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 had its full market release in the fourth quarter of 2008. Our revenues this quarter were impacted by continuing uncertainty in the marketplace surrounding reimbursement for our AxiaLIF procedure, which we are addressing with increased education and support resources for our current and prospective surgeon users. None of this increase was attributable to price increases. Domestically, sales of our AxiaLIF 2L product increased from $0.9 million in the three months ended September 30, 2008 to $1.8 million in the three months ended September 30, 2009 and sales of our AxiaLIF 360° product decreased from $2.0 million in the three months ended September 30, 2008 to $1.7 million in the three months ended September 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 $9,800 in the three months ended September 30, 2008 to approximately $10,400 in the three months ended September 30, 2009. In the three months ended September 30, 2008 and 2009, we recorded 555 and 606 domestic AxiaLIF cases, respectively, including 201 AxiaLIF 360° cases and 64 AxiaLIF 2L cases in the third quarter of 2008, and 169 AxiaLIF 360° cases and 138 AxiaLIF 2L cases in the third quarter of 2009. Additionally, during the three months ended September 30, 2008 and 2009, we generated $203,000 and $191,000, respectively, in revenues from stand alone sales of our percutaneous facet screw system. Revenue generated outside the United States increased from $354,000 in the three months ended September 30, 2008 to $402,000 in the three months ended September 30, 2009. There were no initial stocking shipments to new distributors outside the United States in the third quarter of 2008, compared to $35,000 in the third quarter of 2009. In the three months ended September 30, 2008 and 2009, 94% of our revenues were generated within the United States.
Cost of Revenue. Cost of revenue increased from $1.0 million in the three months ended September 30, 2008 to $1.4 million in the three months ended September 30, 2009. The $354,000 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 increased from 16.8% in the three months ended September 30, 2008 to 19.8% in the three months ended September 30, 2009. The increase in cost of revenue as a percent of revenue from 2008 to 2009 was primarily attributable to an inventory obsolescence reserve of $125,000 for discontinued product, which was recorded in the third quarter of 2009.
Research and Development. Research and development expenses increased from $910,000 in the three months ended September 30, 2008 to $1.4 million in the three months ended September 30, 2009. The $0.5 million increase in expense in 2009 compared to 2008 was primarily the result of an increase in project-related spending.

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Sales and Marketing. Sales and marketing expenses increased from $7.8 million in the three months ended September 30, 2008 to $8.1 million in the three months ended September 30, 2009. The increase in expenses from 2008 to 2009 of $0.3 million was primarily the result of increased personnel related costs, including commissions, as we continued to build out our sales and marketing organization in order to continue to drive global market acceptance of our AxiaLIF products.
General and Administrative. General and administrative expenses remained consistent at $1.7 million for the three months ended September 30, 2008 and 2009.
Interest Income. Interest income decreased from $589,000 in the three months ended September 30, 2008 to $54,000 in the three months ended September 30, 2009. The decrease of $535,000 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 Nine Months Ended September 30, 2008 and 2009 Revenue. Revenue increased from $18.0 million in the nine months ended September 30, 2008 to $23.5 million in the nine months ended September 30, 2009. The $5.5 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 remained consistent at $6.4 million in the nine months ended September 30, 2008 and 2009. Sales of our AxiaLIF 2L product, which had its full market release in the fourth quarter of 2008, increased from $1.3 million in the nine months ended September 30, 2008 to $6.5 million in the nine months ended September 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 nine months ended September 30, 2008 to approximately $10,600 in the nine months ended September 30, 2009. In the nine months ended September 30, 2008 and 2009, we recorded 1,629 and 2,028 domestic AxiaLIF cases, respectively, including 627 AxiaLIF 360° cases and 88 AxiaLIF 2L cases in 2008, and 629 AxiaLIF 360° cases and 481 AxiaLIF 2L cases in 2009. Additionally, during the nine months ended September 30, 2008 and 2009 we generated $644,000 and $699,000, respectively, in revenues from stand alone sales of our percutaneous facet screw system. Revenue generated outside the United States decreased from $1.8 million in the nine months ended September 30, 2008 to $1.4 million in the nine months ended September 30, 2009. $260,000 of this decrease was attributable to initial stocking shipments to new distributors in 2008. In the nine months ended September 30, 2008 and 2009, 90% and 94%, respectively, of our revenues were generated in the United States.
Cost of Revenue. Cost of revenue increased from $3.2 million in the nine months ended September 30, 2008 to $4.4 million in the nine months ended September 30, 2009. The $1.2 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 increased from 17.7% in the nine months ended September 30, 2008 to 18.8% in the nine months ended September 30, 2009. The increase in cost of revenue as a percent of revenue from 2008 to 2009 was primarily attributable to reserves for obsolete and excess inventory recorded in 2009.
Research and Development. Research and development expenses increased from $3.2 million in the nine months ended September 30, 2008 to $5.0 million in the nine months ended September 30, 2009. The $1.8 million increase in expense in 2009 compared to 2008 was primarily the result of an

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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 $0.8 million.
Sales and Marketing. Sales and marketing expenses increased from $20.7 million in the nine months ended September 30, 2008 to $26.2 million in the nine months ended September 30, 2009. The increase in expenses from 2008 to 2009 of $5.5 million was primarily the result of increased personnel related costs, including commissions, of $3.7 million, increased travel and entertainment expenses of $0.3 million related to the larger sales force, increased surgeon consulting expenses of $0.7 million and increased tradeshow and promotional expenses of $0.6 million.
General and Administrative. General and administrative expenses increased from $5.6 million in the nine months ended September 30, 2008 to $5.7 million in the nine months ended September 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 $0.3 million, partially offset by a decrease in consulting fees of $0.1 million.
Interest Income. Interest income decreased from $2.2 million in the nine months ended September 30, 2008 to $0.4 million in the nine months ended September 30, 2009. The decrease of $1.8 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 September 30, 2009, we had an accumulated deficit of $65.4 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 September 30, 2009, we did not have any outstanding debt financing arrangements, we had working capital of $69.1 million and our primary source of liquidity was $61.3 million in cash, cash equivalents and short-term investments. We currently invest our cash and cash equivalents in money market treasury funds and our short-term investments in U.S. agency backed debt instruments.
Cash, cash equivalents and short-term investments decreased from $77.3 million at December 31, 2008 to $61.3 million at September 30, 2009. The decrease of $16.0 million was primarily the result of net cash used in operating activities of $15.5 million and purchases of property and equipment of $553,000.

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Cash Flows
Net Cash Used in Operating Activities. Net cash used in operating activities was $15.5 million in the nine months ended September 30, 2009. This amount was attributable primarily to the net loss after adjustment for non-cash items, such as depreciation, stock-based compensation expense and inventory and receivable reserves, 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 provided by investing activities was $3.7 million in the nine months ended September 30, 2009. This amount reflected net purchases or sales and maturities of short-term investments of $4.2 million, offset by purchases of property and equipment of $553,000, 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 nine months ended September 30, 2009 was $92,000 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.

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New Accounting Standards
In June 2009, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Codification ("ASC") 105 (formerly SFAS 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles"). ASC 105 became the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernment entities. It also modifies the GAAP hierarchy to include only two levels of GAAP; authoritative and non-authoritative. ASC 105 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. We adopted ASC 105 during the third quarter of 2009. The adoption of this standard did not have a material impact on our financial statements.
In February 2008, the FASB issued ASC 820 (formerly Staff Position No. FAS 157-2, "Fair Value Measurements"), which delayed the effective date of ASC 820 for non-financial assets and liabilities to fiscal years beginning after November 15, 2008. We adopted ASC 820 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 ASC 855 (formerly SFAS No. 165, "Subsequent Events"), which establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. ASC 855 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 ASC 855 during the second quarter of 2009, and its application did not have a material impact on our financial statements. We performed this evaluation through November 6, 2009, the date the financial statements were issued.
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 September 30, 2009 is related to our investment portfolio. We invest our excess cash primarily in money market funds and in debt instruments of the U.S. government and its agencies. 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 . . .