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EX-31.2 - EX-31.2 - BAXANO SURGICAL, INC.g21114exv31w2.htm
EX-31.1 - EX-31.1 - BAXANO SURGICAL, INC.g21114exv31w1.htm
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2009
or
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period _______ to _______
Commission File Number 001-33744
TRANS1 INC.
(Exact name of Registrant as specified in its charter)
     
DELAWARE
(State or other jurisdiction of
incorporation or organization)
  33-0909022
(I.R.S. employer
identification no.)
411 LANDMARK DRIVE, WILMINGTON, NC 28412-6303
(Address of principal executive office)     (Zip code)
(910) 332-1700
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ     No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  o     No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o     No þ
The number of shares of the registrant’s common stock outstanding as of November 2, 2009 was 20,635,084 shares.
 
 

 


 

TRANS1 INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2009
TABLE OF CONTENTS
             
  FINANCIAL INFORMATION        
 
           
  Financial Statements (unaudited)        
 
  Statements of Operations     1  
 
  Balance Sheets     2  
 
  Statements of Cash Flows     3  
 
  Notes to Financial Statements     4  
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     8  
  Quantitative and Qualitative Disclosures About Market Risk     15  
  Controls and Procedures     16  
 
           
  OTHER INFORMATION        
 
           
  Unregistered Sales of Equity Securities and Use of Proceeds     16  
  Exhibits     17  
 
           
    18  
 
           
    19  
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2

 


Table of Contents

PART I. FINANCIAL INFORMATION
Item 1.   Financial Statements.
TranS1 Inc.
Statements of Operations
(in thousands, except per share amounts)
(Unaudited)
                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
    2009     2008     2009     2008  
 
                               
Revenue
  $ 6,912     $ 6,021     $ 23,528     $ 17,950  
Cost of revenue
    1,366       1,011       4,423       3,186  
 
                       
Gross profit
    5,546       5,010       19,105       14,764  
 
                       
 
                               
Operating expenses:
                               
Research and development
    1,362       910       5,047       3,241  
Sales and marketing
    8,126       7,782       26,219       20,680  
General and administrative
    1,683       1,671       5,714       5,563  
 
                       
 
                               
Total operating expenses
    11,171       10,363       36,980       29,484  
 
                       
 
                               
Operating loss
    (5,625 )     (5,353 )     (17,875 )     (14,720 )
Interest income
    54       589       382       2,218  
 
                       
 
                               
Net loss
  $ (5,571 )   $ (4,764 )   $ (17,493 )   $ (12,502 )
 
                       
 
                               
Net loss per common share — basic and diluted
  $ (0.27 )   $ (0.23 )   $ (0.85 )   $ (0.62 )
 
                       
 
                               
Weighted average common shares outstanding — basic and diluted
    20,630       20,474       20,591       20,206  
 
                       
The accompanying notes are an integral part of these financial statements.

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TranS1 Inc.
Balance Sheets
(in thousands)
(Unaudited)
                 
    September 30,     December 31,  
    2009     2008  
 
               
Assets
               
Current assets:
               
Cash and cash equivalents
  $ 30,298     $ 42,051  
Short-term investments
    30,969       35,215  
Accounts receivable, net
    4,168       4,812  
Inventory
    7,671       6,369  
Prepaid expenses and other assets
    433       632  
 
           
Total current assets
    73,539       89,079  
Property and equipment, net
    1,281       1,412  
 
           
Total assets
  $ 74,820     $ 90,491  
 
           
 
               
Liabilities and Stockholders’ Equity
               
Current liabilities:
               
Accounts payable
  $ 2,655     $ 2,896  
Accrued expenses
    1,780       2,009  
 
           
Total current liabilities
    4,435       4,905  
 
           
 
               
Stockholders’ equity:
               
Common stock
    2       2  
Additional paid-in capital
    135,796       133,507  
Accumulated other comprehensive income
    3        
Accumulated deficit
    (65,416 )     (47,923 )
 
           
Total stockholders’ equity
    70,385       85,586  
 
           
Total liabilities and stockholders’ equity
  $ 74,820     $ 90,491  
 
           
The accompanying notes are an integral part of these financial statements.

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TranS1 Inc.
Statements of Cash Flows
(in thousands)
(Unaudited)
                 
    Nine Months Ended September 30,  
    2009     2008  
Cash flows from operating activities:
               
Net loss
  $ (17,493 )   $ (12,502 )
Adjustments to reconcile net loss to net cash used in operating activities
               
Depreciation
    684       583  
Stock-based compensation
    2,200       2,598  
Allowance for excess and obsolete inventory
    541       376  
Provision for bad debts
    63       84  
Changes in operating assets and liabilities:
               
(Increase) decrease in accounts receivable
    581       (611 )
(Increase) decrease in inventory
    (1,843 )     (1,804 )
(Increase) decrease in prepaid expenses
    199       196  
Increase (decrease) in accounts payable
    (241 )     772  
Increase (decrease) in accrued expenses
    (229 )     412  
 
           
Net cash used in operating activities
    (15,538 )     (9,896 )
 
           
Cash flows from investing activities:
               
Purchases of property and equipment
    (553 )     (1,003 )
Purchases of investments
    (39,911 )     (50,826 )
Sales and maturities of investments
    44,157       39,791  
 
           
Net cash provided by (used in) investing activities
    3,693       (12,038 )
 
           
Cash flows from financing activities:
               
Proceeds from issuance of common stock
    92       188  
 
           
Net cash provided by financing activities
    92       188  
 
           
Net decrease in cash and cash equivalents
    (11,753 )     (21,746 )
Cash and cash equivalents, beginning of period
    42,051       64,676  
 
           
Cash and cash equivalents, end of period
  $ 30,298     $ 42,930  
 
           
The accompanying notes are an integral part of these financial statements.

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TranS1 Inc.
Notes to Financial Statements
(Unaudited)
1. Description of Business
TranS1 Inc., a Delaware corporation (the “Company”), was incorporated in May 2000 and is headquartered in Wilmington, North Carolina. The Company is a medical device company focused on designing, developing and marketing products that implement its proprietary minimally invasive surgical approach to treat degenerative disc disease and instability affecting the lower lumbar region of the spine. The Company operates in one business segment. The Company has developed and currently markets two single-level fusion products, AxiaLIF® and AxiaLIF 360°™, and a two-level fusion product, the AxiaLIF 2L™. All of the Company’s products are delivered using its pre-sacral approach. The AxiaLIF product was commercially released in January 2005 and the AxiaLIF 360° product was commercially released in July 2006. The AxiaLIF 2L™ product was commercially released in Europe in the fourth quarter of 2006 and in the United States in the second quarter of 2008. The Company generates revenue from the sale of implants and procedure kits. The Company sells its products directly to hospitals and surgical centers in the United States and certain European countries, and to independent distributors elsewhere.
The Company owns four trademark registrations in the United States and seven trademark registrations in the European Union. The Company also owns ten pending trademark applications in the United States and six pending trademark applications in Canada.
The Company is subject to a number of risks similar to other companies in the medical device industry. These risks include, without limitation, rapid technological change, uncertainty of market acceptance of our products, uncertainty of regulatory clearance or approval, uncertainty of reimbursement from third-party payors, competition from substitute products and larger companies, the need to obtain additional financing, compliance with government regulation, protection of proprietary technology, product liability, and the dependence on key individuals.
2. Basis of presentation
The Company has prepared the accompanying financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The financial statements are unaudited and reflect all adjustments (consisting of normal recurring adjustments) which are, in the opinion of the Company’s management, necessary for a fair statement of the Company’s financial position, results of operations and cash flows. These principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The principal estimates relate specifically to accounts receivable reserves, inventory reserves, stock-based compensation, accrued expenses and income tax valuations. Actual results could differ from those estimates. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the

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full year. The year end balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States.
In the second quarter of 2009, the Company revised the classification of patent-related legal costs from research and development expense to general and administrative expense as such costs typically would be excluded from research and development costs as defined by Accounting Standards Codification 730 (formerly Statement of Financial Accounting Standards No. 2, “Accounting for Research and Development Costs”). Amounts related to prior periods are not considered material to the financial statements taken as a whole, but were revised for purposes of comparability. Such amounts for the three and nine month periods ended September 30, 2008 were $253,000 and $699,000, respectively. The revision did not affect previously reported total operating expenses, net loss, loss per share, assets, liabilities, stockholders’ equity or cash flows.
Impact of Recently Issued 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. The Company adopted ASC 105 during the third quarter of 2009. The adoption of this standard did not have a material impact on the Company’s 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. The Company adopted ASC 820 for its non-financial assets and non-financial liabilities on January 1, 2009, and it did not have a material impact on the Company’s 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. The Company adopted ASC 855 during the second quarter of 2009, and its application did not have a material impact on the Company’s financial statements. The Company has 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 the Company.
3. Income taxes
No provision for federal or state income taxes has been recorded as the Company has incurred net operating losses since inception.

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4. Loss per share
Basic net loss per common share (“Basic EPS”) is computed by dividing the net loss by the weighted average number of common shares outstanding. Diluted net loss per common share (“Diluted EPS”) is computed by dividing the net loss by the weighted average number of common shares and potential dilutive common share equivalents then outstanding. The Company’s potential dilutive common shares, which consist of shares issuable upon the exercise of stock options, have not been included in the computation of diluted net loss per share for all periods as the result would be anti-dilutive.
The following table sets forth the potential shares of common stock that are not included in the calculation of diluted net loss per share as the result would be anti-dilutive as of the end of each period presented:
                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
    2009   2008   2009   2008
Weighted average stock options outstanding
    2,441,139       2,300,906       2,274,259       1,982,502  
 
                               
5. Cash, Cash Equivalents and Investments
The Company considers all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents include money market funds. Short-term investments consist of U.S. government securities.
At September 30, 2009, the Company holds certain assets that are required to be measured at fair value on a recurring basis. These assets include available for sale securities classified as cash equivalents and short-term investments. ASC 820 requires that fair value measurements be classified and disclosed in one of three tiers. These tiers are: Level 1, defined as quoted prices in active markets for identical assets or liabilities; Level 2, defined as valuations based on observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets, or other inputs that are observable or can be corroborated by observable input data; and Level 3, defined as valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants.
At September 30, 2009, all available for sale securities are classified as Level 1 assets with a fair value of $61.6 million, which included money market funds of $30.6 million and short-term investments of $31.0 million. At December 31, 2008, all available for sale securities were classified as Level 1 assets with a fair value of $76.8 million, which included money market funds of $41.6 million and short-term investments of $35.2 million. The Company had no Level 2 or Level 3 assets or liabilities at September 30, 2009 or December 31, 2008.
6. Accounts receivable, net

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The following table presents the components of accounts receivable:
                 
    September 30,     December 31,  
    2009     2008  
    (In thousands)  
Gross accounts receivable
  $ 4,350     $ 5,005  
Allowance for uncollectible accounts
    (182 )     (193 )
 
           
Total accounts receivable, net
  $ 4,168     $ 4,812  
 
           
7. Inventories
The following table presents the components of inventories:
                 
    September 30,     December 31,  
    2009     2008  
    (In thousands)  
Finished goods
  $ 3,503     $ 2,598  
Work-in-process
    3,852       3,334  
Raw materials
    316       437  
 
           
Total inventories
  $ 7,671     $ 6,369  
 
           
8. Accrued Expenses
The following table presents the components of accrued expenses:
                 
    September 30,     December 31,  
    2009     2008  
    (In thousands)  
Commissions
  $ 731     $ 1,178  
Vacation
    349       163  
Bonus
    307       270  
Legal and professional fees
    101       69  
Other
    292       329  
 
           
Total accrued expenses
  $ 1,780     $ 2,009  
 
           

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9. Comprehensive Loss
The following table presents the components of other comprehensive loss:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2009     2008     2009     2008  
Net loss
  $ (5,571 )   $ (4,764 )   $ (17,493 )   $ (12,502 )
Other comprehensive income ( loss):
                               
Translation adjustments
    (1 )           3        
 
                       
Total comprehensive loss
  $ (5,572 )   $ (4,674 )   $ (17,490 )   $ (12,502 )
 
                       
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 September 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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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 September 30, 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 September 30, 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.
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(b) Uses of Proceeds from Sale of Registered Securities
On October 22, 2007, we completed our initial public offering of 6,325,000 shares of common stock at the offering price of $15.00 per share. We effected the offering through a Registration Statement on Form S-1 (Registration No. 333-144802), which was declared effective by the SEC on October 16, 2007, and through a Registration Statement on Form S-1 filed pursuant to Rule 462(b) under the Securities Act (Registration No. 333-146753), which became effective upon filing on October 17, 2007 pursuant to Rule 462(b). The offering resulted in aggregate proceeds to us of approximately $86.7 million, net of underwriting discounts and commissions.
As of September 30, 2009, we had used approximately $73.8 million of the net proceeds for sales, marketing and general administrative activities and $10.0 million for research and development activities.

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We intend to use the remaining net proceeds of our initial public offering to support the commercialization of our existing and future products and to support our research and development activities, clinical trials, regulatory clearances or approvals and for capital expenditures, working capital and other general corporate purposes. We have invested the net proceeds from our initial public offering in money-market funds and short-term investment-grade interest-bearing securities. There has been no material change in the planned use of proceeds from our initial public offering as described in the final prospectus filed with the SEC on October 17, 2007 pursuant to Rule 424(b) under the Securities Act. As of the date of this report, we cannot specify with certainty all of the particular uses for the net proceeds received in connection with our initial public offering. The amounts and timing of our actual expenditures will depend on numerous factors, including the status of our product development efforts, sales and marketing activities, technological advances, amount of cash generated or used by our operations and competition. Accordingly, our management will have broad discretion in the application of the net proceeds and investors will be relying on the judgment of our management regarding the application of the proceeds of the offering.
Item 6. Exhibits
A list of the exhibits required to be filed as part of this report is set forth in the “Exhibit Index,” which immediately precedes such exhibits, and is incorporated herein by reference.

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SIGNATURES
     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  TranS1 Inc.
 
 
Date: November 6, 2009  By:   /s/ Richard Randall    
    Richard Randall   
    President and Chief Executive Officer   
 
     
Date: November 6, 2009  By:   /s/ Michael Luetkemeyer    
    Michael Luetkemeyer   
    Chief Financial Officer   

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TranS1 Inc.
Exhibit Index
     
Exhibit    
No.   Description
 
   
31.1
  Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934.
 
   
31.2
  Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934.
 
   
32.1
  Certification of Chief Executive Officer Pursuant to Rule 13a-14(b) / 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
 
   
32.2
  Certification of Chief Financial Officer Pursuant to Rule 13a-14(b) / 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

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