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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 March 31, 2010
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.)
     
301 GOVERNMENT CENTER DRIVE, WILMINGTON, NC 28403
(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). Yeso   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   Smaller reporting company o
        (Do not check if a smaller reporting company)    
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 May 3, 2010 was 20,656,793 shares.
 
 

 


 

TRANS1 INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2010
TABLE OF CONTENTS
         
  FINANCIAL INFORMATION    
 
       
  Consolidated Financial Statements (unaudited)    
 
  Consolidated Statements of Operations   1
 
  Consolidated Balance Sheets   2
 
  Consolidated Statements of Cash Flows   3
 
  Notes to Consolidated Financial Statements   4
  Management’s Discussion and Analysis of Financial Condition and Results of Operations   8
  Quantitative and Qualitative Disclosures About Market Risk   13
  Controls and Procedures   14
 
       
  OTHER INFORMATION    
 
       
  Exhibits   14
 
       
SIGNATURES   15
 
       
EXHIBIT INDEX   16
Exhibit 31.1
   
Exhibit 31.2
   
Exhibit 32.1
   
Exhibit 32.2
   
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2

 


Table of Contents

PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
TranS1 Inc.
Consolidated Statements of Operations
(in thousands, except per share amounts)
(Unaudited)
                 
    Three Months Ended March 31,  
    2010     2009  
Revenue
  $ 6,713     $ 8,678  
Cost of revenue
    1,429       1,542  
 
           
Gross profit
    5,284       7,136  
 
           
 
               
Operating expenses:
               
Research and development
    1,255       1,326  
Sales and marketing
    7,697       9,150  
General and administrative
    2,639       2,041  
 
           
Total operating expenses
    11,591       12,517  
 
           
Operating loss
    (6,307 )     (5,381 )
Interest and other income (loss)
    (49 )     217  
 
           
Net loss
  $ (6,356 )   $ (5,164 )
 
           
 
               
Net loss per common share — basic and diluted
  $ (0.31 )   $ (0.25 )
 
           
 
               
Weighted average common shares outstanding — basic and diluted
    20,655       20,552  
 
           
The accompanying notes are an integral part of these financial statements.

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TranS1 Inc.
Consolidated Balance Sheets
(in thousands)
(Unaudited)
                 
    March 31,     December 31,  
    2010     2009  
Assets
               
Current assets:
               
Cash and cash equivalents
  $ 28,751     $ 29,298  
Short-term investments
    20,960       25,953  
Accounts receivable, net
    4,577       3,926  
Inventory
    6,856       7,325  
Prepaid expenses and other assets
    658       676  
 
           
Total current assets
    61,802       67,178  
Property and equipment, net
    1,776       1,813  
 
           
Total assets
  $ 63,578     $ 68,991  
 
           
 
               
Liabilities and Stockholders’ Equity
               
Current liabilities:
               
Accounts payable
  $ 2,141     $ 2,442  
Accrued expenses
    1,980       1,269  
 
           
Total current liabilities
    4,121       3,711  
 
           
 
               
Stockholders’ equity
               
Common stock
    2       2  
Additional paid-in capital
    136,943       136,402  
Accumulated other comprehensive income (loss)
    (13 )     (5 )
Accumulated deficit
    (77,475 )     (71,119 )
 
           
Total stockholders’ equity
    59,457       65,280  
 
           
Total liabilities and stockholders’ equity
  $ 63,578     $ 68,991  
 
           
The accompanying notes are an integral part of these financial statements.

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TranS1 Inc.
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
                 
    Three Months Ended March 31,  
    2010     2009  
Cash flows from operating activities:
               
Net loss
  $ (6,356 )   $ (5,164 )
Adjustments to reconcile net loss to net cash used in operating activities
               
Depreciation
    231       229  
Stock-based compensation
    530       643  
Allowance for excess and obsolete inventory
    276       35  
Provision for bad debts
    18       24  
Loss on sale of fixed assets
    71        
Changes in operating assets and liabilities:
               
Increase in accounts receivable
    (669 )     (659 )
(Increase) decrease in inventory
    193       (191 )
Decrease in prepaid expenses
    18       30  
Increase (decrease) in accounts payable
    (301 )     48  
Increase in accrued expenses
    711       50  
 
           
Net cash used in operating activities
    (5,278 )     (4,955 )
 
           
 
Cash flows from investing activities:
               
Purchases of property and equipment
    (265 )     (277 )
Purchases of investments
    (3,986 )     (2,973 )
Sales and maturities of investments
    8,979       18,919  
 
           
Net cash provided by investing activities
    4,728       15,669  
 
           
 
Cash flows from financing activities:
               
Proceeds from issuance of common stock
    3       21  
 
           
Net cash provided by financing activities
    3       21  
 
           
Net increase (decrease) in cash and cash equivalents
    (547 )     10,735  
Cash and cash equivalents, beginning of period
    29,298       42,051  
 
           
Cash and cash equivalents, end of period
  $ 28,751     $ 52,786  
 
           
The accompanying notes are an integral part of these financial statements.

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TranS1 Inc.
Notes to Consolidated 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 the AxiaLIF® family of products for single and multilevel lumbar fusion and the Vectre and Avatar™ posterior fixation systems for lumbar fixation supplemental to AxiaLIF fusion. 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. In November 2009, the Company commenced the limited market release of its next generation Vectre facet screw system. The Company began marketing its AxiaLIF 2L+ product, in January 2010. In January 2010, the Company entered into a partnership agreement with Life Spine, Inc. to distribute Avatar, a minimally invasive pedicle screw system. 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 seven trademark registrations in the United States and seven trademark registrations in the European Union. The Company also owns five pending trademark applications in the United States, two pending trademark applications in the European Union and eight 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 consolidated 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 consolidated 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 consolidated financial position, results of operations and cash flows. These principles require management to make estimates and assumptions

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that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated 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 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. All intercompany accounts and transactions have been eliminated in consolidation.
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 amount for the three month period ended March 31, 2009 was $208,000. 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
There have been no recently issued accounting standards that have an impact on the Company’s financial statements.
3. Income Taxes
No provisions for federal or state income taxes have been recorded as the Company has incurred net operating losses since inception.
4. Net Loss Per Common Share
Basic net loss per common share (“Basic EPS”) is computed by dividing the net loss available to common stockholders by the weighted average number of common shares outstanding. Diluted net loss per common share (“Diluted EPS”) is computed by dividing the net loss available to common shareholders 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.

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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  
    March 31,  
    2010     2009  
Weighted average stock options outstanding
    2,308,038       2,264,005  
 
           
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 treasury funds. Short-term investments consist of U.S. agency backed debt instruments.
At March 31, 2010, 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 March 31, 2010, all available for sale securities are classified as Level 1 assets with a fair value of $49.7 million, which included money market funds of $28.7 million and short-term investments of $21.0 million. At December 31, 2009, all available for sale securities were classified as Level 1 assets with a fair value of $54.9 million, which included money market funds of $28.9 million and short-term investments of $26.0 million. The Company had no Level 2 or Level 3 assets or liabilities at March 31, 2010 or December 31, 2009.
6. Accounts Receivable, Net
The following table presents the components of accounts receivable:
                 
    March 31,     December 31,  
    2010     2009  
    (In thousands)  
Gross accounts receivable
  $ 4,757     $ 4,119  
Allowance for uncollectible accounts
    (180 )     (193 )
 
           
Total accounts receivable, net
  $ 4,577     $ 3,926  
 
           
7. Inventories
The following table presents the components of inventories:

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    March 31,     December 31,  
    2010     2009  
    (In thousands)  
Work-in-process
  $ 3,828     $ 3,993  
Finished goods
    2,823       3,112  
Raw materials
    205       220  
 
           
Total inventories
  $ 6,856     $ 7,325  
 
           
8. Accrued Expenses
The following table presents the components of accrued expenses:
                 
    March 31,     December 31,  
    2010     2009  
    (In thousands)  
Commissions
  $ 665     $ 597  
Salaries and severance
    375       47  
Vacation
    279       186  
Bonus
    233       10  
Legal and professional fees
    107       90  
Franchise tax
    95       122  
Consulting
    93       120  
Other
    133       97  
 
           
Total accrued expenses
  $ 1,980     $ 1,269  
 
           
9. Comprehensive Loss
The following table presents the components of other comprehensive loss:
                 
    Three Months Ended  
    March 31,  
    2010     2009  
    (In thousands)  
Net loss
  $ (6,356 )   $ (5,164 )
Other comprehensive income (loss):
               
Translation adjustments
    (8 )      
 
           
 
               
Total comprehensive loss
  $ (6,364 )   $ (5,164 )
 
           

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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 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 consolidated 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”, “Consolidated Financial Statements” and “Notes to Consolidated Financial Statements” included in our Annual Report on Form 10-K for the year ended December 31, 2009. Furthermore, such forward-looking statements speak only as of the date of this report. We expressly disclaim any intent or obligation to update any forward-looking statements after the date hereof to conform such statements to actual results or to changes in our opinions or expectations. References in this report to “TranS1”, “we”, “our”, “us”, or the “Company” refer to TranS1 Inc.
Overview
We are a medical device company focused on designing, developing and marketing products that implement our proprietary minimally invasive surgical approach to treat degenerative disc disease and instability affecting the lower lumbar region of the spine. Using our 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 intervertebral space. We developed our pre-sacral approach to allow spine surgeons to access and treat intervertebral spaces without compromising important surrounding soft tissue. We believe this approach enables fusion procedures to be performed with low complication rates, low blood loss, short hospital stays, fast recovery times and reduced pain. We have developed and currently market our single-level fusion products, the AxiaLIF® and the AxiaLIF 360°™ and our two-level fusion products, the AxiaLIF 2L™ and the AxiaLIF 2L+, which include the Vectre and Avatar™ posterior fixation systems for lumbar fixation supplemental to AxiaLIF fusion.

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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. In November 2009, we commenced the limited market release of our next generation Vectre facet screw system. Our AxiaLIF 2L+ product received FDA 510(k) clearance, and we began marketing the product, in January 2010. In January 2010, we entered into a partnership agreement with Life Spine, Inc. to distribute Avatar, a minimally invasive pedicle screw system. We currently sell our products through a direct sales force, independent sales agents and international distributors.
We rely on third parties to manufacture most of our products and their components. We believe these manufacturing relationships allow us to work with suppliers who have the best specific competencies while we minimize our capital investment, control costs and shorten cycle times, all of which allows us to compete with larger volume manufacturers of spine surgery products.
Since inception, we have been unprofitable. As of March 31, 2010, we had an accumulated deficit of $77.5 million.
We expect to continue to invest in creating a sales and marketing infrastructure for our AxiaLIF, AxiaLIF 360°, AxiaLIF 2L and AxiaLIF 2L+ products in order to gain wider acceptance for these products. We also expect to continue to invest in research and development and related clinical trials, and increase general and administrative expenses as we grow. As a result, we will need to generate significant revenue in order to achieve profitability.
Financial Operations
Revenue
We generate revenue from the sales of our procedure kits and implants used in our AxiaLIF fusion procedure for the treatment of degenerative disc disease and instability. Our revenue is generated by our direct sales force, independent sales agents and independent distributors. Our sales representatives or independent sales agents hand deliver the procedure kit to the customer on the day of the surgery or several days prior to the surgery. The sales representative or independent agent is then responsible for reporting the delivery of the procedure kit, and the date of the operation to the corporate office for proper revenue recognition. We recognize revenue upon the confirmation that the procedure kit has been used in a surgical procedure. The other sales method is for 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

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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 products. 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. 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, 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.
Interest and Other Income (Loss)
Interest and other income (loss) 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 March 31, 2009 and 2010
Revenue. Revenue decreased from $8.7 million in the three months ended March 31, 2009 to $6.7 million in the three months ended March 31, 2010. The $2.0 million decrease in revenue from 2009 to 2010 was related to lower than expected case volume as a result of concerns and uncertainty in the marketplace surrounding physician reimbursement for our AxiaLIF procedure. We are addressing these issues with increased education and support resources for our current and prospective surgeon users. Domestically, sales of our AxiaLIF 2L product decreased from $2.3 million in the three months ended March 31, 2009 to $1.9 million in the three months ended March 31, 2010 and sales of our AxiaLIF 360° product decreased from $2.6 million in the three months ended March 31, 2009 to $1.4 million in

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the three months ended March 31, 2010. New products accounted for revenue of $132,000 in the first quarter of 2010. Average selling prices in the United States increased from approximately $10,600 in the three months ended March 31, 2009 to approximately $10,700 in the three months ended March 31, 2010. In the three months ended March 31, 2009 and 2010, we recorded 751 and 537 domestic AxiaLIF cases, respectively, including 261 AxiaLIF 360° cases and 168 AxiaLIF 2L cases in the first quarter of 2009, and 134 AxiaLIF 360° cases and 141 AxiaLIF 2L cases in the first quarter of 2010. Additionally, during the three months ended March 31, 2009 and 2010, we generated $297,000 and $125,000, respectively, in revenues from stand alone sales of our percutaneous facet and Vectre screw systems.
Revenue generated outside the United States increased from $452,000 in the three months ended March 31, 2009 to $684,000 in the three months ended March 31, 2010. In February 2009, we began to sell directly to hospitals in Germany through our own sales force, which previously had been done through a distributor. In the three months ended March 31, 2009, there was $87,000 in initial stocking shipments to new distributors outside the United States compared to no initial stocking shipments in the three months ended March 31, 2010. In the three months ended March 31, 2009 and 2010, 95% and 90%, respectively, of our revenues were generated in the United States.
Cost of Revenue. Cost of revenue decreased from $1.5 million in the three months ended March 31, 2009 to $1.4 million in the three months ended March 31, 2010. The $113,000 decrease in cost of revenue resulted primarily from lower material and overhead costs associated with decreased sales volume for our products, partially offset by an inventory obsolescence reserve of $266,000 related to excess inventory for our AxiaLIF 2L product, as we introduce our AxiaLIF 2L+ product. As a percentage of revenue, cost of revenue increased from 17.8% in the three months ended March 31, 2009 to 21.3% in the three months ended March 31, 2010. The increase in cost of revenue as a percent of revenue from 2009 to 2010 was primarily attributable to the inventory obsolescence reserve recorded in 2010.
Research and Development. Research and development expenses remained consistent at $1.3 million in the three months ended March 31, 2009 and 2010. Expenses in the three months ended March 31, 2009 included $0.2 million for the exclusive rights to negotiate for a potential product acquisition. Expenses in the three months ended March 31, 2010 included management transition costs of $0.1 million.
Sales and Marketing. Sales and marketing expenses decreased from $9.2 million in the three months ended March 31, 2009 to $7.7 million in the three months ended March 31, 2010. The decrease in expenses from 2009 to 2010 of $1.5 million was primarily due to lower commissions of $0.8 million, related to the lower revenue, and decreased personnel-related costs of $0.8 million, as we reduced our U.S. sales force to focus our investment. These lower expenses were partially offset by severance costs of $0.4 million for employees affected by the sales force reduction.
General and Administrative. General and administrative expenses increased from $2.0 million in the three months ended March 31, 2009 to $2.6 million in the three months ended March 31, 2010. The increase in expenses from 2009 to 2010 of $0.6 million was primarily due to an increase in personnel- related costs related to management transition that occurred in the first quarter of 2010. These costs included compensation, recruiting and severance related expenses.

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Interest and Other Income (Loss). Interest and other income (loss) decreased from income of $217,000 in the three months ended March 31, 2009 to a loss of $49,000 in the three months ended March 31, 2010. The decrease of $266,000 from 2009 to 2010 was primarily related to lower interest income of $195,000 due to lower interest rates and our lower average cash and investment balance and a loss on disposal of fixed assets of $71,000.
Liquidity and Capital Resources
Sources of Liquidity
Since our inception in 2000, we have incurred significant losses and, as of March 31 2010, we had an accumulated deficit of $77.5 million. We have not yet achieved profitability, and anticipate that we will continue to incur losses in the near term. We expect that research and development, sales and marketing and general and administrative expenses will grow and, as a result, we will need to generate significant revenues to achieve profitability. To date, our operations have been funded primarily with proceeds from the sale of preferred stock and the net proceeds from our October 2007 initial public offering. Gross proceeds from our preferred stock sales totaled $40.5 million to date, and the net proceeds from our initial public offering were approximately $86.7 million.
As of March 31 2010, we did not have any outstanding debt financing arrangements, we had working capital of $57.7 million and our primary source of liquidity was $49.7 million in cash, cash equivalents and short-term investments. We currently invest our cash and cash equivalents primarily in money market treasury funds and our short-term investments primarily in U.S. agency backed debt instruments.
Cash, cash equivalents and short-term investments decreased from $55.3 million at December 31, 2009 to $49.7 million at March 31, 2010. The decrease of $5.6 million was primarily the result of net cash used in operating activities of $5.3 million and purchases of property and equipment of $265,000.
Cash Flows
Net Cash Used in Operating Activities. Net cash used in operating activities was $5.3 million in the three months ended March 31, 2010. This amount was attributable primarily to the net loss after adjustment for non-cash items, such as depreciation, stock-based compensation expense, inventory and receivable reserves, and the loss on sale of fixed assets, combined with an increase in accrued expenses, primarily personnel related, partially offset by an increase in accounts receivable related to the increase in revenue in the first quarter of 2010 compared to the fourth quarter of 2009, and changes in accounts payable due to the timing of activity.
Net Cash Provided by Investing Activities. Net cash provided by investing activities was $4.7 million in the three months ended March 31, 2010. This amount reflected net purchases or sales and maturities of short-term investments of $5.0 million, offset by purchases of property and equipment of $265,000, primarily for capital improvements to our facility.
Net Cash Provided by Financing Activities. Net cash provided by financing activities in the three months ended March 31, 2010 was $3,000 which primarily represented proceeds from the issuance of shares of our common stock upon the exercise of stock options.

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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 consolidated 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, 2009. There have been no material changes in any of our accounting policies since December 31, 2009.
New Accounting Standards
There have been no recently issued accounting standards that have an impact on our financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to interest rate risk at March 31, 2010 is related to our investment portfolio. We invest our excess cash primarily in money market funds and 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, while increases in interest rates over time will increase our interest expense. Historically, and as of March 31, 2010, we have not used derivative instruments or engaged in hedging activities.

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Although most of our sales and purchases are denominated in U.S. dollars, future fluctuations in the value of the U.S. dollar may affect the competitiveness of our products outside the United States. We do not believe, however, that we currently have significant direct foreign currency exchange rate risk and have not hedged exposures denominated in foreign currencies.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of March 31, 2010. We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31 2010, 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 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: May 10, 2010  By:   /s/ Richard Randall    
    Richard Randall   
    Chief Executive Officer   
 
     
Date: May 10, 2010  By:   /s/ Joseph Slattery    
    Joseph Slattery   
    Executive Vice-President and
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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