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TSON > SEC Filings for TSON > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for TRANS1 INC

Form 10-Q for TRANS1 INC


8-Nov-2012

Quarterly Report


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 consolidated financial statements and the related notes to our consolidated financial statements included in this report. In addition to historical financial information, this report contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, that concern matters that involve risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact contained in this report, including statements regarding future events, our future financial performance, our future 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 captions "Management's Discussion and Analysis of Financial Condition and Results of Operations", "Consolidated Financial Statements" and "Notes to Consolidated Financial Statements" 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", "Consolidated Financial Statements" and "Notes to Consolidated Financial Statements" included in our Annual Report on Form 10-K for the year ended December 31, 2011, and in other filings we make with the SEC. 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 expectationsexcept as required by applicable law or the rules of the NASDAQ Stock Market. 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 to treat degenerative conditions of the spine affecting the lower lumbar region. We are committed to delivering minimally invasive surgical technologies that enhance patient clinical care while providing sustained value for our customers. Using our pre-sacral approach, a surgeon can access discs in the lower lumbar region of the spine through an incision adjacent to the tailbone and can perform an entire interbody fusion procedure through instrumentation that provides direct access to the intervertebral space. We developed our pre-sacral approach to allow spine surgeons to access and treat intervertebral spaces without compromising important surrounding soft tissue, nerves and bone structures. We currently market the AxiaLIF family of products for single and two level lumbar fusion, the VEO lateral access and interbody fusion system, the Vectre lumbar posterior fixation system and Bi-Ostetic bone void filler, a biologics product. Wealso market products that may be used with our AxiaLIF surgical approach, including bowel retractors, a bone graft harvesting system and additional discectomy tools. Our philosophy of continuous improvement is driven by ongoing research and development investment in our core technologies. We support this investment by diligently expanding, maintaining, and protecting our significant patent portfolio.

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 FDA for our AxiaLIF 1L product in the fourth quarter of 2004, and commercially introduced our AxiaLIF 1L product in the United States in the first quarter of 2005. We received a CE mark to market our AxiaLIF 1L product in the European market in the first quarter of 2005 and began commercialization 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. The AxiaLIF 2L product was discontinued in 2010 after we launched our AxiaLIF 2L+ product in July 2010, for which we had received FDA 510(k) clearance in January 2010. We commercially launched our next generation Vectre facet screw system in April 2010. In the first quarter of 2010, we entered into an agreement to distribute Bi-Ostetic bone void filler, a biologics product. We commercially launched our AxiaLIF 1L+ product in September 2011, for which we had received FDA 510(k) clearance in March 2011. In 2010, we received 510(k) clearance for our VEO lateral access and interbody fusion system, which was commercially launched in November 2011 and in July 2012 we received a CE mark for our VEO lateral access and interbody fusion system and began commercialization in the European market. We currently sell our products through a direct sales force, independent sales agents and international distributors.

In March 2012, we announced that the Current Procedural Terminology ("CPT") Editorial Panel, or the Panel, voted to approve an application for a new Category I CPT code, 22586, for L5/S1 spinal fusion utilizing our AxiaLIF implant when performing a pre-sacral interbody fusion. In addition, the Panel voted to establish a new Category III CPT code, 0309T, as an add-on code to the new Category I code for use with 22586 when performing L4/5 spinal fusion. The new CPT codes were announced on the American Medical Association's website on March 2, 2012, and will become effective on January 1, 2013. The Medicare final rule was released in November 2012, which stated avaluation of the Category I CPT code 22586 for pre-sacral interbody single level spinal fusion at L5-S1, and will become effective January 1, 2013. This CPT code, which applies to our AxiaLIF 1L+ device, is a bundled lumbar arthrodesis procedure that includes bone graft, posterior instrumentation and fixation.

We rely on third parties to manufacture all of our products and their components, except for our nitinol nucleus cutter blades, which we manufacture at our facility in Wilmington, North Carolina. Our outsourcing partners are manufacturers that meet FDA, International Organization for Standardization or other internal quality standards, where applicable. 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.

Since inception, we have been unprofitable. As of September 30, 2012, we had an accumulated deficit of $126.8 million.

We expect to continue to invest in sales and marketing infrastructure for our products in order to gain wider acceptance for them. 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.

On September 26, 2011, we completed a public offering of 6,200,000 shares of our common stock at an offering price of $3.25 per share. The offering resulted in aggregate proceeds to us of approximately $18.2 million, net of underwriting discounts, commissions and offering expenses.

Financial Operations



                                 Three Months Ended September 30,                 Nine Months Ended September 30,
                              2012              2011          % change          2012             2011         % change
                                                                ($'s in thousands)
Revenue                    $     3,198       $     4,696          -31.9 %   $     10,441       $  15,163          -31.1 %
Cost of revenue                    838             1,044          -19.7 %          2,747           3,513          -21.8 %
Gross margin %                    73.8 %            77.8 %         -5.1 %           73.7 %          76.8 %         -4.0 %
Total operating expenses         8,111             6,947           16.8 %         25,464          25,019            1.8 %
Net loss                        (5,865 )          (3,327 )        -76.3 %        (17,916 )       (13,362 )        -34.1 %

Revenue

We generate revenue from the sales of our implants and disposable surgical instruments. We have two distinct sales methods. The first method is when implants and/or disposable surgical instruments are sold directly to hospitals or surgical centers for the purpose of conducting a scheduled surgery. Our sales representatives or independent sales agents hand deliver the products to the customer on or before the day of the surgery. The sales representative or independent agent is then responsible for reporting the delivery of the products and the date of the operation for proper revenue recognition. We recognize revenue upon the confirmation that the products have been used in a surgical procedure. The second sales method is for sales to distributors outside the United States. These transactions require the customer to send in a purchase order before shipment and the customer only has the right of return for defective products. We primarily recognize revenue upon the shipment of the product to distributors outside the United States. We expect that a substantial portion of our revenues will continue to 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 products, including reusable kit depreciation and product royalties. Overhead costs include facilities-related costs, such as rent and utilities.

Research and Development

Research and development expenses consist primarily of personnel costs within our product development, regulatory and clinical functions and the costs of clinical studies, product development projects and technology licensing 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 intellectual property.

Sales and Marketing

Sales and marketing expenses consist of personnel costs, 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.

General and Administrative

General and administrative expenses consist of personnel costs related to the executive, finance, business development, and human resource functions, as well as professional service fees, legal fees, accounting fees, insurance costs and general corporate expenses.

Other Income (Expense), Net

Other income (expense), net is primarily composed of interest earned on our cash, cash equivalents and available-for-sale securities and the gain or loss on disposal of fixed assets.

Results of Operations

Comparison of the Three Months Ended September 30, 2011 and 2012

Revenue Revenue decreased from $4.7 million in the three months ended September 30, 2011 to $3.2 million in the three months ended September 30, 2012. The $1.5 million decrease in revenue from 2011 to 2012 was primarily a result of a lower number of AxiaLIF cases performed in 2012, which was due primarily to physician reimbursement limitations and insurance denials for lumbar fusion surgery due to medical necessity. Domestically, sales of our AxiaLIF 1L and AxiaLIF 1L+ products decreased from $2.2 million in the three months ended September 30, 2011 to $1.2 million in the three months ended September 30, 2012, and sales of our AxiaLIF 2L+ products decreased from $1.3 million in the three months ended September 30, 2011 to $0.7 million in the three months ended September 30, 2012. In the three months ended September 30, 2012, average revenue per AxiaLIF case increased, primarily as a result of a price increase effective April 1, 2012, the release of new AxiaLIF products and penetration into existing cases by our other products. In the three months ended September 30, 2011 and 2012, we recorded 304 and 164 domestic AxiaLIF cases, respectively, including 88 AxiaLIF 2L+ cases in the three months ended September 30, 2011, and 46 AxiaLIF 2L+ cases in the three months ended September 30, 2012. During the three months ended September 30, 2011 we generated $0.2 million in revenue from our VEO lateral access and interbody fusion system, which was commercially launched in November 2011, compared to $0.5 million in the three months ended September 30, 2012. During both the three months ended September 30, 2011 and 2012 we generated $0.2 million, in revenues from sales of our posterior fixation systems. Sales of our Bi-Ostetic bone void filler decreased from $0.3 million in the three months ended September 30, 2011 to $0.2 million in the three months ended September 30, 2012, primarily due to the decrease in AxiaLIF cases. Revenue generated outside the United States decreased from $0.4 million in the three months ended September 30, 2011 to $0.3 million in the three months ended September 30, 2012. Effective January 1, 2012, we replaced our direct sales representatives in Europe with an independent sales agent, comprised of former employees of our direct sales organization. There were no initial stocking shipments to new distributors outside the United States in the three months ended September 30, 2011 compared to $85,000 in initial stocking shipments to new distributors in the three months ended September 30, 2012. In both the three months ended September 30, 2011 and 2012, 91% of our revenues were generated in the United States.

Cost of Revenue Cost of revenue decreased from $1.0 million in the three months ended September 30, 2011 to $0.8 million in the three months ended September 30, 2012. Gross margin decreased from 77.8% in the three months ended September 30, 2011 to 73.8% in the three months ended September 30, 2012. The decrease in gross margin was due to a higher percentage of sales being derived from ancillary and distributed products in 2012 as compared to 2011, which have a lower gross margin than our AxiaLIF products, increased depreciation expense on reusable kits, primarily due to building reusable kits as we launched the VEO product, increased inventory obsolescence reserves taken and royalty expense.

Research and Development Research and development expenses increased from $1.0 million in the three months ended September 30, 2011 to $1.4 million in the three months ended September 30, 2012. The increase in expenses of $0.4 million from 2011 to 2012 was primarily related to increased clinical trials expense of $0.2 million and an increase in personnel-related costs of $0.2 million as we increased our headcount in our regulatory and clinical functions.

Sales and Marketing Sales and marketing expenses decreased from $4.6 million in the three months ended September 30, 2011 to $4.5 million in the three months ended September 30, 2012. The decrease in expenses from 2011 to 2012 of $0.1 million was primarily due to lower personnel-related costs of $0.4 including lower commissions of $0.3 million as our revenues declined, partially offset by an increase in training expenses of $0.1 million to train surgeons on our new products and an increase to travel and entertainment expense of $0.1 million.

General and Administrative General and administrative expenses increased from $1.3 million in the three months ended September 30, 2011 to $2.3 million in the three months ended September 30, 2012. The increase in expenses from 2011 to 2012 of $1.0 million was primarily due to an increase in legal fee expense of $0.7 million, primarily related to the investigation being conducted by the Department of Health and Human Services, Office of Inspector General and a restructuring expense of $0.3 million for establishing a reserve related to underutilized office space in our Wilmington facility.

Other Income (Expense), Net Other income (expense), net, increased from $32,000 in expense in the three months ended September 30, 2011 to $114,000 in expense in the three months ended September 30, 2012. The change of $82,000 from 2011 to 2012 was primarily related to a loss on the disposal of fixed assets in the three months ended September 30, 2012 from the disposal of obsolete components of certain reusable instrument kits and a decrease in interest income earned on cash and cash equivalents.

Comparison of the Nine Months Ended September 30, 2011 and 2012

Revenue Revenue decreased from $15.2 million in the nine months ended September 30, 2011 to $10.4 million in the nine months ended September 30, 2012. Consistent with the third quarter comparison, the $4.8 million decrease in revenue from 2011 to 2012 was primarily a result of a lower number of AxiaLIF cases performed in 2012, which was due primarily to physician reimbursement limitations and insurance denials for lumbar fusion surgery due to medical necessity. Domestically, sales of our AxiaLIF 1L and AxiaLIF 1L+ products decreased from $7.4 million in the nine months ended September 30, 2011 to $4.3 million in the nine months ended September 30, 2012, and sales of our AxiaLIF 2L+ products decreased from $4.2 million in the nine months ended September 30, 2011 to $2.6 million in the nine months ended September 30, 2012. In the nine months ended September 30, 2012, average revenue per AxiaLIF case increased, primarily as a result of a price increase effective April 1, 2012, the release of new AxiaLIF products and penetration into existing cases by our other products. In the nine months ended September 30, 2011 and 2012, we recorded 1,041 and 579 domestic AxiaLIF cases, respectively, including 280 AxiaLIF 2L+ cases in the nine months ended September 30, 2011, and 174 AxiaLIF 2L+ cases in the nine months ended September 30, 2012. During the nine months ended September 30, 2011 and 2012, we generated $0.3 million and $1.2 million in revenue from our VEO lateral access and interbody fusion system, which was commercially launched in November 2011. For the nine months ended September 30, 2011 and 2012 we generated $1.0 million and $0.6 million, respectively, in revenues from sales of our posterior fixation systems. Sales of our Bi-Ostetic bone void filler decreased from $0.8 million in the nine months ended September 30, 2011 to $0.6 million in the nine months ended September 30, 2012, primarily due to the decrease in AxiaLIF cases. Revenue generated outside the United States decreased from $1.4 million in the nine months ended September 30, 2011 to $0.8 million in the nine months ended September 30, 2012. Effective January 1, 2012, we replaced our direct sales representatives in Europe with an independent sales agent, comprised of former employees of our direct sales organization. In the nine months ended September 30, 2011 and 2012, there were $47,000 and $110,000, respectively, in initial stocking shipments to new distributors outside the United States. In the nine months ended September 30, 2011 and 2012, 91% and 92%, respectively, of our revenues were generated in the United States.

Cost of Revenue Cost of revenue decreased from $3.5 million in the nine months ended September 30, 2011 to $2.7 million in the nine months ended September 30, 2012. Gross margin decreased from 76.8% in the nine months ended September 30, 2011 to 73.7% in the nine months ended September 30, 2012. The decrease in gross margin was due to a higher percentage of sales being derived from ancillary and distributed products in 2012 as compared to 2011, which have a lower gross margin than our AxiaLIF products, increased depreciation expense on reusable kits, primarily due to building reusable kits as we launched the VEO product, and royalty expense. These decreases in gross margin were partially offset by lower inventory obsolescence reserves taken in the current year.

Research and Development Research and development expenses increased from $3.8 million in the nine months ended September 30, 2011 to $3.9 million in the nine months ended September 30, 2012. The $0.1 million increase in expenses from 2011 to 2012 was primarily related to an increase in personnel-related expense of $0.2 million as we increased our headcount in regulatory and clinical functions and an increase in travel and entertainment expenses of $0.1 million, partially offset by a decrease in project and clinical study expense of $0.2 million.

Sales and Marketing Sales and marketing expenses decreased from $16.7 million in the nine months ended September 30, 2011 to $15.1 million in the nine months ended September 30, 2012. The decrease in expenses from 2011 to 2012 of $1.6 million was primarily due to lower personnel-related costs of $1.3 million as we reduced our direct sales headcount, lower commissions of $0.8 million as our revenues declined and decreased travel and entertainment expenses of $0.2 million related to the lower headcount, partially offset by an increase in consulting and training expenses of $0.7 million.

General and Administrative General and administrative expenses increased from $4.5 million in the nine months ended September 30, 2011 to $6.4 million in the nine months ended September 30, 2012. The increase in expenses from 2011 to 2012 of $1.9 million was primarily related to an increase in legal fee expense of $2.0 million, primarily related to the investigation being conducted by the Department of Health and Human Services, Office of Inspector General.

Other Income (Expense), Net Other income (expense), net, decreased from $7,000 in income in the nine months ended September 30, 2011 to expense of $146,000 in the nine months ended September 30, 2012. The change of $153,000 from 2011 to 2012 was primarily related to a loss on the disposal of fixed assets in the nine months ended September 30, 2012 from the disposal of obsolete components of certain reusable instrument kits and a decrease in interest income earned on cash and cash equivalents.

Liquidity and Capital Resources

Sources of Liquidity

Since our inception in 2000, we have incurred significant losses and, as of September 30, 2012, we had an accumulated deficit of $126.8 million. We have not yet achieved profitability, and we cannot assure investors that we will achieve profitability with our existing capital resources. We expect to continue to fund research and development, sales and marketing and general and administrative expenses at similar to current levels or higher and, as a result, we will need to generate significant revenues to achieve profitability. Prior to our October 2007 initial public offering, our operations were funded primarily with the gross proceeds from the sale of preferred stock of $40.5 million. The net proceeds from our October 2007 initial public offering of $86.7 million and the net proceeds of our September 2011 stock offering of $18.2 million have funded our operations since then.

In May 2011, we filed a "universal shelf" Registration Statement on Form S-3 (Filing No. 333-174255) (the "Shelf Registration Statement") with the Securities and Exchange Commission ("SEC"), which became effective on August 1, 2011. The Shelf Registration Statement allowed us to raise up to $50 million through the sale of debt securities, common stock, preferred stock, or warrants, or any combination thereof. On September 21, 2011, we entered into a purchase agreement with Piper Jaffray & Co. as the lead underwriter, to sell 6,200,000 shares of our common stock in a public offering. The shares were offered and sold pursuant to a prospectus supplement dated September 21, 2011 and an accompanying base prospectus dated August 1, 2011, in connection with a "takedown" offering pursuant to the Shelf Registration Statement. On September 26, 2011, the shares were sold to the public at a price of $3.25 per share. The net proceeds, after deducting underwriting discounts, commissions and offering expenses, were $18.2 million. As a result of the public offering of the shares, we are currently authorized to issue up to $29.85 million of our securities pursuant to the Shelf Registration Statement (which amount may be subject to increase in accordance with SEC rules). The timing and terms of any additional financing transactions pursuant to the Shelf Registration Statement, or otherwise, have not yet been determined. Any additional financing may not be available in amounts or on terms acceptable to us, if at all.

As of September 30, 2012, we did not have any outstanding debt financing arrangements, other than capital lease obligations, we had working capital of $30.5 million and our primary source of liquidity was $27.2 million in cash and cash equivalents. We currently invest our cash and cash equivalents primarily in money market treasury funds.

Cash, cash equivalents and short-term investments decreased from $44.8 million at December 31, 2011 to $27.2 million at September 30, 2012. The decrease of $17.6 million was primarily the result of net cash used in operating activities of $15.8 million and purchases of property and equipment of $1.8 million.

Cash Flows

Net Cash Used in Operating Activities.Net cash used in operating activities was $15.8 million in the nine months ended September 30, 2012. This amount was attributable primarily to the net loss after adjustment for non-cash items, such as depreciation, stock-based compensation expense, inventory, and bad debt reserves, and the loss on disposal of fixed assets, combined with changes in working capital requirements to support the market acceptance of our products.

Net Cash Provided by Investing Activities.Net cash provided by investing activities was $4.2 million in the nine months ended September 30, 2012. This amount reflected sales and maturities of short-term investments of $6.0 million, offset by the purchases of property and equipment of $1.8 million, primarily for reusable instrument kits used in the field and up-fitting our new training facility.

Net Cash Provided by Financing Activities.Net cash provided by financing activities in the nine months ended September 30, 2012 was $68,000, which represented proceeds from the issuance of shares of common stock under our employee stock purchase program and upon the exercise of stock options.

Operating Capital and Capital Expenditure Requirements

We believe that our existing cash and cash equivalents, together with cash received from sales of our products, will be sufficient to meet our anticipated cash needs for at least the next twelve months. We intend to spend substantial amounts 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. To the extent our . . .

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