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EX-10.2 - EXHIBIT 10.2 - BAXANO SURGICAL, INC.v342565_ex10-2.htm
EX-32.2 - EXHIBIT 32.2 - BAXANO SURGICAL, INC.v342565_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - BAXANO SURGICAL, INC.v342565_ex32-1.htm
EX-10.3 - EXHIBIT 10.3 - BAXANO SURGICAL, INC.v342565_ex10-3.htm
EX-31.2 - EXHIBIT 31.2 - BAXANO SURGICAL, INC.v342565_ex31-2.htm
EXCEL - IDEA: XBRL DOCUMENT - BAXANO SURGICAL, INC.Financial_Report.xls
EX-31.1 - EXHIBIT 31.1 - BAXANO SURGICAL, INC.v342565_ex31-1.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2013

or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

 

Commission File Number 001-33744

 

TRANS1 INC.

(Exact name of Registrant as specified in its charter)

 

DELAWARE 33-0909022
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

 

110 HORIZON DRIVE, SUITE 230, RALEIGH, NC 27615
(Address of principal executive office) (Zip code)

 

(919) 800-0020

(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 ¨

 

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 þ No ¨

 

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 ¨ Accelerated filer ¨
  Non-accelerated filer ¨ Smaller reporting company þ

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

 

The number of shares of the registrant’s common stock outstanding as of May 13, 2013 was 27,318,785 shares.

 

 
 

 

TRANS1 INC.

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2013

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION  
     
Item 1. Financial Statements 2
  Consolidated Statements of Operations and Comprehensive Loss (unaudited) 2
  Consolidated Balance Sheets (unaudited) 3
  Consolidated Statements of Cash Flows (unaudited) 4
  Notes to Consolidated Financial Statements (unaudited) 5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Item 4. Controls and Procedures 23
     
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 24
Item 1A. Risk Factors 24
Item 6. Exhibits 25
     
SIGNATURES 26
     
EXHIBIT INDEX 27

 

1
 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

 

TranS1 Inc.

Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except per share amounts)

(Unaudited)

 

   Three Months Ended March 31, 
   2013   2012 
         
Revenue  $3,099   $3,782 
Cost of revenue   1,031    997 
Gross profit   2,068    2,785 
           
Operating expenses:          
Research and development   1,285    1,333 
Sales and marketing   4,927    5,299 
General and administrative   1,550    1,417 
Merger and integration expenses   1,313    - 
Charges related to U.S. Government settlement   91    464 
Total operating expenses   9,166    8,513 
Operating loss   (7,098)   (5,728)
Other expense, net   (2)   (30)
Net loss  $(7,100)  $(5,758)
           
Other comprehensive loss:          
Foreign currency translation adjustments   (1)   - 
Comprehensive loss  $(7,101)  $(5,758)
Net loss per common share – basic and diluted  $(0.26)  $(0.21)
           
Weighted average common shares outstanding - basic and diluted   27,317    27,245 

 

The accompanying notes are an integral part of these financial statements.

 

2
 

 

TranS1 Inc.

Consolidated Balance Sheets

(in thousands, except share amounts)

(Unaudited)

 

   March 31,   December 31, 
   2013   2012 
Assets          
Current assets:          
Cash and cash equivalents  $14,686   $21,541 
Restricted cash   62    - 
Accounts receivable, net   2,936    3,206 
Inventory   5,053    5,017 
Prepaid expenses and other assets   593    330 
Total current assets   23,330    30,094 
Property and equipment, net   2,203    2,166 
Total assets  $25,533   $32,260 
           
Liabilities and Stockholders' Equity          
Current liabilities:          
Accounts payable  $3,002   $2,603 
Accrued expenses related to U.S. Government settlement   6,359    6,792 
Accrued expenses   1,731    1,648 
Total current liabilities   11,092    11,043 
Noncurrent liabilities   77    78 
Commitments and contingencies (Note 9)          
           
Stockholders' equity:          
Common stock, $0.0001 par value; 75,000,000  shares authorized, 27,318,785 and 27,313,997   shares issued and outstanding at March 31,  2013 and December 31, 2012, respectively   3    3 
Additional paid-in capital   160,255    159,929 
Accumulated other comprehensive income   13    14 
Accumulated deficit   (145,907)   (138,807)
Total stockholders' equity   14,364    21,139 
Total liabilities and stockholders' equity  $25,533   $32,260 

 

The accompanying notes are an integral part of these financial statements.

 

3
 

 

TranS1 Inc.

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

   Three Months Ended March 31, 
   2013   2012 
Cash flows from operating activities:          
Net loss  $(7,100)  $(5,758)
Adjustments to reconcile net loss to net cash used in
operating activities:
          
Depreciation   359    207 
Stock-based compensation   317    331 
Allowance for excess and obsolete inventory   20    12 
Provision (reversal of provision) for bad debts   11    (41)
Loss on disposal of fixed assets   -    30 
Changes in operating assets and liabilities:          
Decrease in accounts receivable   259    173 
Increase in inventory   (56)   (162)
(Increase) decrease in prepaid expenses   (263)   195 
Increase (decrease) in accounts payable   398    (943)
Increase (decrease) in accrued expenses related  to U.S. Government settlement   (433)   250 
Increase in accrued expenses   83    113 
Net cash used in operating activities   (6,405)   (5,593)
           
Cash flows from investing activities:          
Purchases of property and equipment   (396)   (697)
Sales and maturities of investments   -    6,027 
Restricted cash classification change   (62)   - 
Net cash provided by (used in) investing activities   (458)   5,330 
           
Cash flows from financing activities:          
Proceeds from exercise of stock options   9    6 
Net cash provided by financing activities   9    6 
Effect of exchange rate changes on cash and cash  equivalents   (1)   - 
Net decrease in cash and cash equivalents   (6,855)   (257)
Cash and cash equivalents, beginning of period   21,541    38,724 
Cash and cash equivalents, end of period  $14,686   $38,467 

 

The accompanying notes are an integral part of these financial statements.

 

4
 

 

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, effective March 1, 2013, is headquartered in Raleigh, North Carolina. The Company is a medical device company focused on designing, developing and marketing products to treat degenerative conditions of the spine affecting the lumbar region. The Company operates in one business segment. The Company currently markets the AxiaLIF® family of products for single and two level lumbar fusion, the VEOTM lateral access and interbody fusion system, the Vectrelumbar posterior fixation system and Bi-OsteticTM bone void filler, a biologics product. All of the Company’s AxiaLIF products are delivered using its pre-sacral approach. The Company also markets products that may be used with its surgical approach, including bowel retractors and additional discectomy tools, as well as a bone graft harvesting system that can be used to extract bone graft in any procedure for which the use of bone graft is appropriate. The AxiaLIF Legacy product was commercially released in January 2005. 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 AxiaLIF 2L product was discontinued in 2010 after the Company launched its AxiaLIF Plus 2-Level™ product in July 2010. The Company commercially launched its next generation Vectre facet screw system in April 2010. In the first quarter of 2010, the Company completed product and regulatory training and began marketing Bi-Ostetic bone void filler, a biologics product for specific indications outside the interbody space of the spine. The Company commercially launched its AxiaLIF Plus 1-Level product in September 2011, which received FDA 510(k) clearance in March 2011. In 2010, the Company received 510(k) clearance for the VEO lateral access and interbody fusion system, which was commercially launched in November 2011, and in July 2012 the Company received a CE mark for the VEO lateral access and interbody fusion system and began commercialization in the European market. The Company sells its products through a direct sales force, independent sales agents and international distributors.

 

The Company has fifty issued United States patents, twelve pending patent applications or provisional patent applications in the United States, eight issued European patents, seven issued Japanese patents, and eleven foreign patent application families as counterparts of U.S. cases. The issued and pending patents cover, among other things, (i) the Company’s method for performing trans-sacral procedures in the spine, including diagnostic or therapeutic procedures, and trans-sacral introduction of instrumentation or implants, (ii) apparatus for conducting these procedures including access, disc preparation and implantation including the current TranS1 instruments individually and in kit form, (iii) implants for fusion and motion preservation in the spine, (iv) a lateral access and interbody fusion system, and (v) posterior fixation systems.

 

The Company owns nine trademark registrations in the United States, nine trademark registrations in the European Union, two registered trademarks in Canada and one registered trademark in China. The Company also owns two pending trademark applications in the United States and three pending trademark applications in China.

 

5
 

 

See Note 10 for a description of the Company’s proposed merger with Baxano, Inc. (“Baxano”) and the related transactions.

 

The Company is subject to a number of risks similar to other similarly-sized companies in the medical device industry. These risks include, without limitation, acceptance and continued use of the Company’s products by surgeons, the lack of clinical data about the efficacy of these products, uncertainty of reimbursement from third-party payors, cost pressures in the healthcare industry, competitive pressures from substitute products and larger companies, the historical lack of profitability, the dependence on key employees, regulatory approval and market acceptance for new products, compliance with complex and evolving healthcare laws and regulations, uncertainty surrounding the outcome of the matters relating to the subpoena issued to the Company by the Department of Health and Human Services, Office of Inspector General (the “OIG”), stockholder class action lawsuits, the reliance on a limited number of suppliers to provide these products and their components, changes in economic conditions, the ability to effectively manage a sales force to meet the Company’s objectives and the ability to conduct successful clinical studies.

 

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 should be read in conjunction with the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2012. The accompanying unaudited interim consolidated financial statements 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 for the periods presented. 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The principal estimates relate to accounts receivable reserves, inventory valuation, stock-based compensation, accrued expenses and income tax valuation. Actual results could differ from those estimates. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. All intercompany accounts and transactions have been eliminated in consolidation.

 

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company has incurred operating losses and negative cash flows from operations, which raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts of liabilities that might result from the outcome of this uncertainty. To meet its capital needs, the Company is considering multiple alternatives, including, but not limited to, additional equity financings, debt financings and other funding transactions. There can be no assurance that the Company will be able to complete any such transaction on acceptable terms or otherwise. If the Company is unable to obtain the necessary capital, it will need to pursue a plan to license or sell its assets, seek to be acquired by another entity, cease operations and/or seek bankruptcy protection.

 

6
 

 

Reclassification

 

Certain balances in the prior years’ consolidated financial statements have been reclassified to conform to the March 31, 2013 presentation. These changes consisted of a reclassification on the consolidated statements of operations from general and administrative expense to a separate line item entitled charges related to U.S. Government settlement and a reclassification on the consolidated statements of cash flows from changes in accounts payable and accrued expenses to a separate line item entitled increase (decrease) in accrued expenses related to U.S. Government settlement.

 

Impact of Recently Issued Accounting Standards

 

In February 2013, the Financial Accounting Standards Board issued guidance (ASU No. 2013-02) finalizing the reporting of amounts reclassified out of accumulated other comprehensive income. The new standard requires either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. The guidance is effective for annual reporting periods and interim periods within those years, beginning after December 15, 2012. In the first quarter of 2013, the Company adopted the guidance and determined that there were no amounts reclassified in the period that would require enhanced disclosure.

 

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 is computed by dividing net loss by the weighted average number of common shares outstanding. Diluted net loss available to common stockholders per common share is computed by dividing net loss by the weighted average number of common shares and dilutive potential 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
March 31,
 
   2013   2012 
           
Weighted average stock options outstanding   3,579,814    3,051,991 

 

7
 

 

5.Cash and Cash Equivalents

 

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. Cash equivalents are carried at fair market value. At March 31, 2013, the Company had $62,000 of restricted cash which is currently deposited in a bank account in Germany, but not readily accessible. Related unrealized gains and losses were not material as of March 31, 2013 and 2012. There have been no unrealized gains or losses reclassified to accumulated other comprehensive income.

 

At March 31, 2013, the Company held 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. Accounting Standards Codification 820-10 requires the valuation of investments using a three-tiered approach, which 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.

 

Cash and available for sale securities classified as Level 1 assets were:

   March 31,   December 31, 
   2013   2012 
   (In thousands) 
Cash and cash equivalents  $14,515   $21,116 
Total cash and available for sale securities  $14,515   $21,116 

 

The Company had no Level 2 or Level 3 assets or liabilities at March 31, 2013 or December 31, 2012.

 

6.Accounts Receivable, Net

 

The following table presents the components of accounts receivable:

   March 31,   December 31, 
   2013   2012 
   (In thousands) 
Gross accounts receivable  $3,115   $3,419 
Allowance for uncollectible accounts   (179)   (213)
Total accounts receivable, net  $2,936   $3,206 

 

8
 

 

7.Inventories

 

The following table presents the components of inventories:

 

   March 31,   December 31, 
   2013   2012 
   (In thousands) 
Finished goods  $2,998   $2,491 
Work-in-process   1,819    2,272 
Raw materials   236    254 
Total inventories  $5,053   $5,017 

 

8.Accrued Expenses

 

The following table presents the components of accrued expenses:

   March 31,   December 31, 
   2013   2012 
   (In thousands) 
Legal and professional fees  $602   $129 
Commissions   274    333 
Vacation   257    160 
Bonus   159    630 
Salaries and benefits   129    168 
Travel and entertainment   93    43 
Other   217    185 
Total accrued expenses  $1,731   $1,648 

 

9.Contingencies

 

In October 2011, the Company received a subpoena issued by the Department of Health and Human Services, Office of Inspector General (“OIG”) under the authority of the federal healthcare fraud and false claims statutes. The subpoena sought documents for the period January 1, 2008 through October 6, 2011. The Company has cooperated with the government’s request. On December 24, 2012 the Company reached a tentative agreement in principle with the U.S. Department of Justice related to the subpoena issued in October 2011. The Company and the staff of the Department of Justice tentatively agreed to settle its federal investigation for $6.0 million, subject to completion and approval of written settlement agreements with the Department of Justice and the OIG, which are expected to be finalized in the second quarter of 2013. The Company admits no wrongdoing as part of the settlement. In the three months ended March 31, 2013 and 2012, the Company expensed legal fees of $0.1 million and $0.5 million, respectively, related to this investigation. In the fourth quarter of 2012, the Company expensed the $6.0 million related to the tentative settlement. The Company had accrued $6.4 million at March 31, 2013 and $6.8 million at December 31, 2012 for the settlement and related legal fees.

 

9
 

 

On January 24, 2012, the Company received notice that a putative class action lawsuit had been filed in the U.S. District Court Eastern District, North Carolina, on behalf of all persons, other than defendants, who purchased the Company’s securities between February 21, 2008 and October 17, 2011.  The complaint alleges violations of the Securities Exchange Act of 1934, as amended, based upon purported omissions and/or false and misleading statements concerning the Company’s financial statements and reimbursement practices.  The complaint seeks damages sustained by the putative class, pre- and post-judgment interest, and attorneys’ fees and other costs.  On September 7, 2012, the Company filed a motion to dismiss the complaint for failure to meet the heightened pleading requirements of the Private Securities Litigation Reform Act of 1995, among other grounds; the motion is pending.  The Company is unable to predict what impact, if any, the outcome of this matter might have on the Company’s consolidated financial position, results of operations, or cash flows.

 

10.Merger and Private Placement Transaction

 

Agreement and Plan of Merger

 

On March 3, 2013, the Company entered into an Agreement and Plan of Merger with RacerX Acquisition Corp., a wholly-owned subsidiary of the Company (“Merger Sub”), Baxano, and Sumeet Jain and David Schulte solely as Securityholder Representatives (the “Securityholder Representatives”), as amended on April 10, 2013 by the First Amendment to Agreement and Plan of Merger by and among the parties (such agreement, as amended, the “Merger Agreement”). Under the terms of the Merger Agreement, the Company will acquire Baxano through a merger of Merger Sub with and into Baxano (the “Merger”). At the effective time of the Merger (the “Effective Time”), Merger Sub will cease to exist and Baxano will continue as the surviving corporation and as a wholly-owned subsidiary of the Company.

 

As of March 31, 2013, the Company had incurred $1.2 million of merger related expenses and $0.1 million of integration expenses.

 

Pursuant to the terms of the Merger Agreement, the merger consideration will consist of approximately 10.4 million shares of the Company’s common stock. The number of shares comprising the merger consideration will be reduced by a number of shares with a value equal to the following (using for the per share value an average closing price on the NASDAQ Global Market during the 10 days preceding the Effective Time): (1) Baxano’s indebtedness in excess of (a) amounts under promissory notes of Baxano that are convertible into capital stock of Baxano (each a “Baxano Note”), outstanding at the Effective Time, and (b) up to $3,000,000 of principal as well as interest outstanding under certain long-term indebtedness; (2) $300,000 in cash, which will be used to fund a compensation plan to be adopted by Baxano prior to the closing of the Merger providing for bonuses to Baxano’s employees and certain non-employee directors; and (3) $250,000 in cash, which the Company has agreed to deposit into an account specified for the purpose of funding the expenses of the Securityholder Representatives under the Merger Agreement.

 

At the Effective Time, each Baxano Note will be terminated, and the holders of such notes will be entitled to receive merger consideration in accordance with the Merger Agreement. Any and all stock option plans or other stock or equity-related plans of Baxano, together with any employee stock purchase plans, will be terminated prior to the Effective Time. Prior to the Effective Time, Baxano must use commercially reasonable efforts to terminate each outstanding option to purchase common stock of Baxano, whether vested or unvested, and each warrant to acquire capital stock of Baxano.

 

10
 

 

The Merger Agreement contains customary representations, warranties, and covenants, including covenants related to obtaining the requisite stockholder approvals, appointing two Baxano designees to the Company’s Board of Directors, restricting the solicitation of competing acquisition proposals, the lock-up and registration of the shares of the Company’s common stock issued in connection with the Merger pursuant to the Securities Purchase Agreement described below, and the Company’s and Baxano’s conduct of their businesses between the date of signing the Merger Agreement and the closing of the Merger.

 

The stockholders of Baxano approved the Merger and the Merger Agreement pursuant to a written consent in lieu of a stockholders’ meeting on March 3, 2013 following execution of the Merger Agreement. Consummation of the Merger is also subject to approval by the Company’s stockholders of the issuance of shares of the Company’s common stock in connection with the Merger and the satisfaction or waiver of the closing conditions set forth in the Securities Purchase Agreement and other customary closing conditions set forth in the Merger Agreement. The Company’s directors, officers, and certain affiliates of the Company, who together hold approximately 24.2% of the issued and outstanding common stock of the Company, have agreed to vote their shares in favor of the issuance of the Company’s common stock in connection with the Merger Agreement and the Securities Purchase Agreement.

 

The Merger Agreement grants certain termination rights to the Company and Baxano. In addition, the Merger Agreement provides that the Company will be required to pay Baxano a termination fee equal to $2,000,000 and to reimburse Baxano for its expenses incurred relating to the transactions contemplated by the Merger Agreement, up to a cap of $750,000, if Baxano or the Company terminates the Merger Agreement under certain conditions. The Merger Agreement also provides that Baxano will be required to pay the Company a termination fee equal to $1,000,000 and to reimburse the Company for its expenses incurred relating to the transactions contemplated by the Merger Agreement, up to a cap of $750,000, if the Company terminates the Merger Agreement under certain conditions.

 

Securities Purchase Agreement

 

Concurrent with entering into the Merger Agreement, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”), dated March 3, 2013, with certain investors (the “Investors”), pursuant to which the Company will sell to the Investors, and the Investors will purchase from the Company, an aggregate of 7,522,009 shares of the Company’s common stock, at a purchase price of $2.28 per share, resulting in gross proceeds to the Company of $17.2 million (the “Private Placement Transaction”).

 

Pursuant to the Securities Purchase Agreement, the Company agreed to register the resale of the shares of the Company’s common stock to be issued pursuant to the Merger Agreement and the Securities Purchase Agreement under a registration statement (the “Registration Statement”) on Form S-3 (or another appropriate form if Form S-3 is not then available to the Company). In addition, the Investors and all other holders of shares received pursuant to the Merger Agreement agreed not to sell, transfer, or otherwise dispose of the shares of the Company’s common stock issued at the closing of the Merger and the Private Placement Transaction from the period commencing on the closing of the Private Placement Transaction and expiring on the effective date of the Registration Statement, subject to certain exceptions.

 

11
 

 

If the Registration Statement is not declared effective by the SEC by a certain date, the Company must pay each Investor and other holder of shares issued pursuant to the Merger Agreement liquidated damages equal to 1% of the value of their shares (calculated at the closing price of such shares) per month, up to a maximum of 12%.

 

The Securities Purchase Agreement contains customary representations and warranties of the Company and the Investors. Consummation of the Private Placement Transaction is subject to approval by the Company’s stockholders of the issuance of shares of the Company’s common stock in connection with the Merger Agreement and the Securities Purchase Agreement, the closing of the Merger, and other customary closing conditions set forth in the Securities Purchase Agreement.

 

11.Subsequent Event

 

On April 16, 2013 and April 25, 2013, Baxano issued promissory notes (the “Bridge Notes”) to the Company in the principal amount of $800,000 and $1.3 million, respectively, as contemplated by the Merger Agreement. The Bridge Notes bear interest at a rate of 6% per annum. The Bridge Notes are not secured by any collateral; are subordinated in right of payment to the loan evidenced by the Loan and Security Agreement dated as of March 15, 2012, among Oxford Finance LLC, Silicon Valley Bank and Baxano; and are senior in right of payment to the Baxano Notes.

 

The Bridge Notes will be cancelled immediately prior to the Effective Time without consideration, repayment, or any other right of the Company to be repaid or otherwise compensated. All outstanding principal and interest under the Bridge Notes will be due and payable on demand by the Company any time on or after September 7, 2013 if the Effective Time has not occurred by such date. Additionally, all principal and accrued interest under the Bridge Notes will be due and payable upon the consummation of any sale by Baxano of its equity securities to venture capital, institutional, or private investors, including at least one investor that is not an existing noteholder or stockholder of Baxano, resulting in aggregate cash proceeds to Baxano of at least $15,000,000 (excluding any amount invested by cancellation or conversion of the indebtedness represented by the Baxano Notes).

 

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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” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, that concern matters that involve risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact contained in this report, including statements regarding the expected timing, completion, and benefits of the Merger (as defined below) and Private Placement Transaction (as defined below), other future events, our future financial performance, our future business strategy and the plans and objectives of management for future operations, are forward-looking statements. We have attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should” or “will” or the negative of these terms or other comparable terminology. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Readers are urged to carefully review and consider the various disclosures made by us, which attempt to advise interested parties of the risks, uncertainties, and other factors that affect our business, operating results, financial condition and stock price, including without limitation the disclosures made under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Risk Factors”, “Financial Statements” and “Notes to Consolidated Financial Statements” in this report, as well as the disclosures made under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Risk Factors”, “Consolidated Financial Statements” and “Notes to Consolidated Financial Statements” included in our Annual Report on Form 10-K for the year ended December 31, 2012, and in other filings we make with the Securities and Exchange Commission, or the SEC. Furthermore, such forward-looking statements speak only as of the date of this report. We expressly disclaim any intent or obligation to update any forward-looking statements after the date hereof to conform such statements to actual results or to changes in our opinions or expectations except as required by applicable law or the rules of The NASDAQ Stock Market LLC. 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 to treat degenerative conditions of the spine affecting the lumbar region. We are committed to delivering minimally invasive surgical technologies that enhance patient clinical care while providing sustained value for our customers. We currently market the AxiaLIF® family of products for single and two level lumbar fusion, the VEOTM lateral access and interbody fusion system, the Vectrelumbar posterior fixation system and Bi-OsteticTM bone void filler, a biologics product. Our AxiaLIF products use our pre-sacral approach, through which a surgeon can access discs in the lumbar region of the spine through an incision adjacent to the tailbone and perform an interbody fusion procedure through instrumentation that provides direct access to the intervertebral space. We developed our pre-sacral approach to allow spine surgeons to access and treat intervertebral spaces without compromising important surrounding soft tissue, nerves and bone structures. Our VEO lateral access and interbody fusion system provides for direct visualization of the psoas muscle and unrestricted lateral fluoroscopic views, which we believe has allowed us to increase our market share in the highly competitive lateral fusion segment. We believe that direct visualization allows a surgeon to have improved visibility of the psoas and the nerves running through this muscle that, when used in conjunction with neuromonitoring, can potentially reduce complications. We also market products that may be used with our AxiaLIF surgical approach, including bowel retractors and additional discectomy tools, as well as a bone graft harvesting system that can be used to extract bone graft in any procedure for which the use of bone graft is appropriate. Our philosophy of continuous improvement is driven by ongoing research and development investment in our core technologies. We support this investment by diligently expanding, maintaining, and protecting our significant patent portfolio.

 

From our incorporation in 2000 through 2004, we devoted substantially all of our resources to research and development and start-up activities, consisting primarily of product design and development, clinical trials, manufacturing, recruiting qualified personnel and raising capital. We received 510(k) clearance from the U.S. Food and Drug Administration, or FDA, for our AxiaLIF Legacy product in the fourth quarter of 2004, and commercially introduced our AxiaLIF Legacy product in the United States in the first quarter of 2005. We received a CE mark to market our AxiaLIF Legacy product in the European market in the first quarter of 2005 and began commercialization in the first quarter of 2006. We received a CE mark for our AxiaLIF 2L product in the third quarter of 2006 and began commercialization in the European market in the fourth quarter of 2006. We received FDA 510(k) clearance for our AxiaLIF 2L product and began marketing this product in the United States in the second quarter of 2008. The AxiaLIF 2L product was discontinued in 2010 after we launched our AxiaLIF Plus 2-Level ™ product in July 2010, for which we had received FDA 510(k) clearance in January 2010. We commercially launched our next generation Vectre facet screw system in April 2010. In the first quarter of 2010, we completed product and regulatory training and began marketing Bi-Ostetic bone void filler, a biologics product for specific indications outside the interbody space of the spine. We commercially launched our AxiaLIF Plus 1-Level product in September 2011, for which we had received FDA 510(k) clearance in March 2011. In 2010, we received 510(k) clearance for our VEO lateral access and interbody fusion system, which was commercially launched in November 2011, and in July 2012 we received a CE mark for our VEO lateral access and interbody fusion system and began commercialization in the European market. We currently sell our products through a direct sales force, independent sales agents and international distributors.

 

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

 

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We rely on third parties to manufacture all of our products and their components, except for our nitinol nucleus cutter blades, which we manufacture at our facility in Wilmington, North Carolina. Our outsourcing partners are manufacturers that meet FDA, International Organization for Standardization or other internal quality standards, where applicable. We believe these manufacturing relationships allow us to work with suppliers who have the best specific competencies while we minimize our capital investment, control costs and shorten cycle times.

 

On March 3, 2013, we entered into an Agreement and Plan of Merger with RacerX Acquisition Corp., a wholly-owned subsidiary of the Company, or Merger Sub, Baxano, Inc., or Baxano, and Sumeet Jain and David Schulte solely as Securityholder Representatives, or the Securityholder Representatives, as amended on April 10, 2013 by the First Amendment to Agreement and Plan of Merger by and among the parties. We refer to this agreement, as amended, as the Merger Agreement. Under the terms of the Merger Agreement, we will acquire Baxano through a merger of Merger Sub with and into Baxano, or the Merger. At the effective time of the Merger, Merger Sub will cease to exist and Baxano will continue as the surviving corporation and as a wholly-owned subsidiary of the Company. The dollar value of the shares of our common stock to be issued in connection with the Merger is expected to be approximately $23.1 million, subject to fluctuations in the price of our common stock on the NASDAQ Global Market and certain adjustments.

 

As of March 31, 2013, we have incurred $1.2 million of merger related expenses and $0.1 million of integration expenses.

 

Baxano is a medical instrument company focused on designing, developing and marketing innovative tools that restore spine function, preserve healthy tissue, and enable a better quality of life for the patients it serves.  Baxano currently markets the patented iO-Flex® system, a proprietary minimally invasive set of flexible instruments allowing surgeons to target lumbar spinal stenosis in all three regions of the spine: central canal, lateral recess, and neural foramen, and has developed the patented iO-TomeTM instrument to rapidly and precisely remove bone, including the facet joints, which is commonly performed in spinal fusion procedures. Baxano was founded in 2005 and is headquartered in San Jose, California. The Merger is expected to close in the second quarter of 2013 and is subject to TranS1 stockholder approval and customary conditions to closing.

 

Concurrent with entering into the Merger Agreement, we entered into a Securities Purchase Agreement, or the Securities Purchase Agreement, dated March 3, 2013, with certain investors, or the Investors, pursuant to which we will sell to the Investors, and the Investors will purchase from us, an aggregate of 7,522,009 shares of our common stock, at a purchase price of $2.28 per share, resulting in gross proceeds to us of $17.2 million, or the Private Placement Transaction. Consummation of the Private Placement Transaction is subject to approval by our stockholders of the issuance of shares of our common stock in connection with the Merger Agreement and the Securities Purchase Agreement, the closing of the Merger, and other customary closing conditions set forth in the Securities Purchase Agreement.

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Since inception, we have been unprofitable. As of March 31, 2013 we had an accumulated deficit of $145.9 million.

 

We expect to continue to invest in sales and marketing infrastructure for our products in order to gain wider acceptance for them. We also expect to continue to invest in research and development and related clinical trials, and increase general and administrative expenses as we grow. As a result, we will need to generate significant revenue in order to achieve profitability.

 

Results of Operations

 

   Three Months Ended March 31, 
   2013   2012   %
change
 
   (in thousands, except gross margin percentage) 
Revenue  $3,099   $3,782    -18.1%
Cost of revenue   1,031    997    3.4%
Gross margin %   66.7%   73.6%   -9.4%
Total operating expenses   9,166    8,513    7.7%
Net loss   (7,100)   (5,758)   -23.3%

 

Revenue

Revenue is recognized based on the following criteria: (i) persuasive evidence that an arrangement exists with the customer; (ii) delivery of the products and/or services has occurred; (iii) the selling price has been fixed for the products or services delivered; and (iv) collection is reasonably assured. We generate revenue from the sales of our implants and disposable surgical instruments. We have two distinct sales methods. The first method is when implants and/or disposable surgical instruments are sold directly to hospitals or surgical centers for the purpose of conducting a scheduled surgery. Our sales representatives or independent sales agents hand deliver the products to the customer on or before the day of the surgery. The sales representative or independent agent is then responsible for reporting the delivery of the products and the date of the operation to the corporate office for proper revenue recognition. We recognize revenue upon the confirmation that the products have been used in a surgical procedure. The other sales method is for sales to distributors outside the United States. These transactions require the customer to send in a purchase order before shipment will be made and the customer only has the right of return for defective products. We primarily recognize revenue upon the shipment of the product to distributors outside the United States, when risk of loss and title has transferred to the distributor, provided we have no material performance obligations. We expect that a substantial portion of our revenues will continue to be generated in the United States in future periods.

 

Cost of Revenue

Cost of revenue consists primarily of material and overhead costs related to our products, including reusable kit depreciation, product royalties and medical device taxes. Overhead costs include facilities-related costs, such as rent and utilities.

 

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Research and Development

Research and development expenses consist primarily of personnel costs within our product development, regulatory and clinical functions and the costs of clinical studies, product development projects and technology licensing costs. In future periods, we expect research and development expenses to grow as we continue to invest in basic research, clinical trials, product development and intellectual property. Research and development expenses are expensed as incurred.

 

Sales and Marketing

Sales and marketing expenses consist primarily of personnel costs, sales commissions paid to our direct sales representatives, independent sales agents and independent distributors and costs associated with physician training programs, promotional activities and participation in medical and trade 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 related to the executive, finance and human resource functions, as well as professional service fees, legal fees, accounting fees, insurance costs and general corporate expenses. In future periods, we expect general and administrative expenses to increase to support our sales, marketing, research and development efforts.

 

Charges Related to U.S. Government Settlement

Charges related to U.S. government settlement consist of legal fees related to a federal investigation by the U.S. Department of Justice related to their subpoena issued in October 2011. We expect to incur additional expenses until this investigation is settled.

 

Merger and Integration Expenses

Merger expenses consist primarily of legal, accounting, consulting and other professional fees related to the pending merger with Baxano. Integration expenses consist of costs incurred in planning for the integration of our operations with Baxano. We expect the merger costs to continue through the completion of the merger and the integration costs to continue through the remainder of 2013.

 

Other Expense

Other expense 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.

 

Comparison of the Three Months Ended March 31, 2012 and 2013

Revenue Revenue decreased from $3.8 million in the three months ended March 31, 2012 to $3.1 million in the three months ended March 31, 2013. The $0.7 million decrease in revenue from 2012 to 2013 was due primarily to the lower number of AxiaLIF cases performed by our current surgeon base. Domestically, sales of our AxiaLIF Plus 1-Level products decreased from $1.5 million in the three months ended March 31, 2012 to $1.0 million in the three months ended March 31, 2013, and sales of our AxiaLIF Plus 2-Level products decreased from $1.1 million in the three months ended March 31, 2012 to $0.7 million in the three months ended March 31, 2013. In the three months ended March 31, 2013, average revenue per AxiaLIF case increased, primarily as a result of a price increase effective April 1, 2012, the release of new AxiaLIF products and penetration into existing cases by our other products. In the three months ended March 31, 2012 and 2013, we recorded 222 and 133 domestic AxiaLIF cases, respectively, including 76 AxiaLIF Plus 2-Level cases in the three months ended March 31, 2012, and 48 AxiaLIF Plus 2-Level cases in the three months ended March 31, 2013. Sales of our VEO lateral access and interbody fusion system increased from $0.3 million in the three months ended March 31, 2012 to $0.6 million in the three months ended March 31, 2013. During the three months ended March 31, 2012 and 2013, we generated $0.2 million and $0.1 million, respectively, in revenues from sales of our posterior fixation systems. Sales of our Bi-Ostetic bone void filler remained the same at $0.2 million for both the three months ended March 31, 2012 and 2013. Revenue generated outside the United States increased from $0.3 million in the three months ended March 31, 2012 to $0.5 million in the three months ended March 31, 2013. There were no initial stocking shipments to new distributors outside the United States in the three months ended March 31, 2012 compared to $0.3 million in initial stocking shipments to new distributors in the three months ended March 31, 2013. In the three months ended March 31, 2012, 93% of our revenues were generated in the United States compared to 84% in the three months ended March 31, 2013.

 

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Cost of Revenue Cost of revenue remained the same at $1.0 million for both the three months ended March 31, 2012 and March 31, 2013. Gross margin decreased from 73.6% in the three months ended March 31, 2012 to 66.7% in the three months ended March 31, 2013. The decrease in gross margin was primarily due to a higher percentage of international sales which carry a lower gross margin than domestic sales, increased depreciation expense on reusable kits, primarily due to upgrading reusable kits as we launched our next generation of AxiaLIF and VEO products, increased royalty expenses and the new medical device tax.

 

Research and Development Research and development expenses remained the same at $1.3 million in both the three months ended March 31, 2012 and March 31, 2013. Personnel-related expenses increased by $0.2 million from the three months ended March 31, 2012 compared to three months ended March 31, 2013 as we increased our headcount in our regulatory and clinical functions, offset by a decrease of $0.2 million in licensing agreements incurred in the three months ended March 31, 2012.

 

Sales and Marketing Sales and marketing expenses decreased from $5.3 million in the three months ended March 31, 2012 to $4.9 million in the three months ended March 31, 2013. The decrease in expenses from 2012 to 2013 of $0.4 million was primarily due to lower personnel-related costs of $0.3 million and lower promotional costs of $0.3 million, partially offset by an increase in training expenses of $0.2 million to train surgeons on our new products.

 

General and Administrative General and administrative expenses increased from $1.4 million in the three months ended March 31, 2012 to $1.6 million in the three months ended March 31, 2013. The increase in expenses of $0.2 million was primarily due to an increase in legal fees related to our intellectual property of $0.1 million and an increase in personnel-related expense of $0.1 million.

 

U.S. Government Settlement Charges. In December 2012, we reached a tentative agreement in principle with the U.S. Department of Justice related to the subpoena issued in October 2011. TranS1 and the staff of the Department of Justice tentatively agreed to settle its federal investigation for $6.0 million, subject to completion and approval of written settlement agreements with the Department of Justice and the OIG. We also incurred legal fees related to the investigation of $0.5 million in the three months ended March 31, 2012 and $0.1 million in the three months ended March 31, 2013.

 

Merger and Integration Expenses. We have incurred $1.2 million of merger related expenses and $0.1 million of integration expenses for the three months ended March 31, 2013 related to the Merger Agreement with Baxano.

 

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Other Expense Other expense decreased from $30,000 in expense in the three months ended March 31, 2012 to $2,000 in expense in the three months ended March 31, 2013. The decrease of $28,000 was primarily related to a loss on the disposal of fixed assets in the three months ended March 31, 2012 from the disposal of obsolete components of certain reusable instrument kits.

 

Liquidity and Capital Resources

 

Sources of Liquidity

Since our inception in 2000, we have incurred significant losses and, as of March 31, 2013, we had an accumulated deficit of $145.9 million. We have not yet achieved profitability, and we cannot assure investors that we will achieve profitability with our existing capital resources. Our recurring losses raise substantial doubt about our ability to continue as a going concern. As a result, our independent registered public accounting firm included an explanatory paragraph in its report on our financial statements as of and for the year ended December 31, 2012 with respect to this uncertainty. We expect to continue to fund research and development, sales and marketing and general and administrative expenses at similar to current levels or higher and, as a result, we will need to generate significant revenues to achieve profitability. Prior to our October 2007 initial public offering, our operations were funded primarily with the gross proceeds from the sale of preferred stock of $40.5 million. The net proceeds from our October 2007 initial public offering of $86.7 million and the net proceeds of our September 2011 stock offering of $18.2 million have funded our operations since then.

 

In May 2011, we filed a “universal shelf” Registration Statement on Form S-3 (Filing No. 333-174255), or the Shelf Registration Statement, with the SEC, which became effective on August 1, 2011 and which we used for our September 2011 stock offering. Depending on our non-affiliated public equity float during the time period prior to consummating a financing transaction, the Shelf Registration Statement allows us to raise up to an additional $29.85 million through the sale of debt securities, common stock, preferred stock, or warrants, or any combination thereof. The timing and terms of any additional financing transactions pursuant to the Shelf Registration Statement, or otherwise, have not yet been determined. Any additional financing may not be available in amounts or on terms acceptable to us, if at all.

 

As of March 31, 2013, we did not have any outstanding debt financing arrangements, other than capital lease obligations, we had working capital of $12.2 million and our primary source of liquidity was $14.7 million in cash and cash equivalents. We currently invest our cash and cash equivalents primarily in money market treasury funds.

 

Cash and cash equivalents decreased from $21.5 million at December 31, 2012 to $14.7 million at March 31, 2013. The decrease of $6.8 million was primarily the result of net cash used in operating activities of $6.5 million and purchases of property and equipment of $0.4 million.

 

Cash Flows

Net Cash Used in Operating Activities. Net cash used in operating activities was $6.4 million in the three months ended March 31, 2013. This amount was attributable primarily to the net loss after adjustment for non-cash items, such as depreciation, stock-based compensation expense, inventory and bad debt reserves. There were no significant changes in working capital requirements in the three months ended March 31, 2013. The three months ended March 31, 2013 included a decrease in accrued legal expenses of $0.4 million related to the U.S. Government settlement.

 

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Net Cash Used in Investing Activities. Net cash used in investing activities was $0.5 million in the three months ended March 31, 2013. This amount reflected purchases of property and equipment of $0.4 million, primarily for reusable instrument kits used in the field and up-fitting our new headquarters in Raleigh, North Carolina.

 

Net Cash Provided by Financing Activities. Net cash provided by financing activities in the three months ended March 31, 2013 was $9,000, which represented proceeds from the issuance of shares of common stock upon the exercise of stock options.

 

Operating Capital and Capital Expenditure Requirements

We believe that our existing cash and cash equivalents, together with cash received from sales of our products, will be insufficient to meet our anticipated cash needs through 2013. We intend to spend substantial amounts on sales and marketing initiatives to support the ongoing commercialization of our products and on research and development activities, including product development, regulatory and compliance, clinical studies in support of our currently marketed products and future product offerings, and the enhancement and protection of our intellectual property. We will 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. To meet our capital needs, we are considering multiple alternatives, including, but not limited to, additional equity financings, debt financings and other funding transactions. There can be no assurance that we will be able to complete any such transaction on acceptable terms or otherwise. If we are unable to obtain the necessary capital, we will need to pursue a plan to license or sell our assets, cease operations and/or seek bankruptcy protection.

 

Under the Shelf Registration Statement, we have the ability to issue debt securities, common stock, preferred stock, or warrants, or any combination thereof. Depending on our non-affiliated public equity float during the time period prior to consummating another financing transaction, the Shelf Registration Statement will allow us to raise up to an additional $29.85 million. The timing and terms of any additional financing transactions, whether pursuant to the Shelf Registration Statement or otherwise, have not yet been determined. Any additional financing may not be available in amounts or on terms acceptable to us, if at all. 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.

 

In October 2011, we received a subpoena issued by the Department of Health and Human Services, Office of Inspector General, or the OIG, under the authority of the federal healthcare fraud and false claims statutes. We have cooperated with the government’s request. On December 24, 2012 we reached a tentative agreement in principle with the U.S. Department of Justice related to the subpoena issued in October 2011. We tentatively agreed with the staff of the Department of Justice to settle its federal investigation for $6.0 million, subject to completion and approval of written settlement agreements with the Department of Justice and the OIG, which are expected to be finalized in the second quarter of 2013. We admit no wrongdoing as part of the settlement.

 

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On January 24, 2012, we received notice that a putative class action lawsuit had been filed in the U.S. District Court Eastern District, North Carolina, on behalf of all persons, other than defendants, who purchased TranS1 securities between February 21, 2008 and October 17, 2011.   The complaint alleges violations of the Exchange Act, based upon purported omissions and/or false and misleading statements concerning our financial statements and reimbursement practices.  The complaint seeks damages sustained by the putative class, pre- and post-judgment interest, and attorneys’ fees and other costs.  On September 7, 2012, we filed a motion to dismiss the complaint for failure to meet the heightened pleading requirements of the Private Securities Litigation Reform Act of 1995, among other grounds; the motion is pending.  We are unable to predict what impact, if any, the outcome of this matter might have on our consolidated financial position, results of operations, or cash flows.

 

On March 3, 2013, we entered into the Merger Agreement with Merger Sub, Baxano and the Securityholder Representatives. Under the terms of the Merger Agreement, we will acquire Baxano through a merger of Merger Sub with and into Baxano. At the effective time of the Merger, or the Effective Time, Merger Sub will cease to exist and Baxano will continue as the surviving corporation and as a wholly-owned subsidiary of the Company.

 

Pursuant to the terms of the Merger Agreement, the merger consideration will consist of approximately 10.4 million shares of our common stock. The number of shares comprising the merger consideration will be reduced by a number of shares with a value equal to the following (using for the per share value an average closing price on the NASDAQ Global Market during the 10 days preceding the Effective Time): (1) Baxano’s indebtedness in excess of (a) amounts under promissory notes of Baxano that are convertible into capital stock of Baxano, each a Baxano Note, outstanding at the Effective Time, and (b) up to $3,000,000 of principal as well as interest outstanding under certain long-term indebtedness; (2) $300,000 in cash, which will be used to fund a compensation plan to be adopted by Baxano prior to the closing of the Merger providing for bonuses to Baxano’s employees and certain non-employee directors; and (3) $250,000 in cash, which we have agreed to deposit into an account specified for the purpose of funding the expenses of the Securityholder Representatives under the Merger Agreement.

 

The Merger Agreement contains customary representations, warranties, and covenants, including covenants related to obtaining the requisite stockholder approvals, appointing two Baxano designees to our Board of Directors, restricting the solicitation of competing acquisition proposals, the lock-up and registration of the shares of our common stock issued in connection with the Merger pursuant to the Securities Purchase Agreement described below, and the Company’s and Baxano’s conduct of their businesses between the date of signing the Merger Agreement and the closing of the Merger.

 

The Merger Agreement grants certain termination rights to us and Baxano. In addition, the Merger Agreement provides that we will be required to pay Baxano a termination fee equal to $2,000,000 and to reimburse Baxano for its expenses incurred relating to the transactions contemplated by the Merger Agreement, up to a cap of $750,000, if Baxano or we terminate the Merger Agreement under certain conditions. The Merger Agreement also provides that Baxano will be required to pay us a termination fee equal to $1,000,000 and to reimburse us for our expenses incurred relating to the transactions contemplated by the Merger Agreement, up to a cap of $750,000, if we terminate the Merger Agreement under certain conditions.

 

Concurrent with entering into the Merger Agreement, we entered into the Securities Purchase Agreement with the Investors, pursuant to which we will sell to the Investors, and the Investors will purchase from us, an aggregate of 7,522,009 shares of our common stock, at a purchase price of $2.28 per share, resulting in gross proceeds to us of $17.2 million.

 

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Pursuant to the Securities Purchase Agreement, we agreed to register the resale of the shares of our common stock to be issued pursuant to the Merger Agreement and the Securities Purchase Agreement under a registration statement (the “Registration Statement”) on Form S-3 (or another appropriate form if Form S-3 is not then available to us). If the Registration Statement is not declared effective by the SEC by a certain date, we must pay each Investor and other holder of shares issued pursuant to the Merger Agreement liquidated damages equal to 1% of the value of their shares (calculated at the closing price of such shares) per month, up to a maximum of 12%.

 

The Securities Purchase Agreement contains customary representations and warranties of us and the Investors. Consummation of the Private Placement Transaction is subject to approval by our stockholders of the issuance of shares of our common stock in connection with the Merger Agreement and the Securities Purchase Agreement, the closing of the Merger, and other customary closing conditions set forth in the Securities Purchase Agreement.

 

Recent Developments

On April 16, 2013 and April 25, 2013, Baxano issued promissory notes, or the Bridge Notes, to us in the principal amount of $800,000 and $1.3 million, respectively, as contemplated by the Merger Agreement. The Bridge Notes bear interest at a rate of 6% per annum. The Bridge Notes are not secured by any collateral; are subordinated in right of payment to the loan evidenced by the Loan and Security Agreement dated as of March 15, 2012, among Oxford Finance LLC, Silicon Valley Bank and Baxano; and are senior in right of payment to the Baxano Notes.

 

The Bridge Notes will be cancelled immediately prior to the effective time of the Merger without consideration, repayment, or any other right of ours to be repaid or otherwise compensated. All outstanding principal and interest under the Bridge Notes will be due and payable on demand by us any time on or after September 7, 2013 if the Effective Time has not occurred by such date. Additionally, all principal and accrued interest under the Bridge Notes will be due and payable upon the consummation of any sale by Baxano of its equity securities to venture capital, institutional, or private investors, including at least one investor that is not an existing noteholder or stockholder of Baxano, resulting in aggregate cash proceeds to Baxano of at least $15,000,000 (excluding any amount invested by cancellation or conversion of the indebtedness represented by the Baxano Notes).

 

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 reserves, inventory reserves, accrued expenses, income tax valuations and stock-based compensation. We base our estimates on historical experience and various other assumptions that we believe to be reasonable, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Actual results could differ from those estimates under different assumptions or conditions.

 

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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, 2012. There have been no material changes in any of our accounting policies since December 31, 2012.

 

New Accounting Standards

 

In February 2013, the Financial Accounting Standards Board issued guidance (ASU No. 2013-02) finalizing the reporting of amounts reclassified out of accumulated other comprehensive income. The new standard requires either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. The guidance is effective for annual reporting periods and interim periods within those years, beginning after December 15, 2012. In the first quarter of 2013, we adopted the guidance and determined that there were no amounts reclassified in the period that would require enhanced disclosure.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable.

 

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 Exchange Act) as of March 31, 2013. 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, 2013, our principal executive officer and principal financial officer concluded that, as of such date, our disclosure controls and procedures were effective 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.

 

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PART II.OTHER INFORMATION

 

Item 1.Legal Proceedings.

 

We are subject to legal proceedings and claims in the ordinary course of our business. These claims potentially cover a variety of allegations spanning our entire business. The following is a brief discussion of the material pending legal proceedings to which we are a party or to which any of our property is subject.

 

In October 2011, we received a subpoena issued by the Department of Health and Human Services, Office of Inspector General, under the authority of the federal healthcare fraud and false claims statutes. The subpoena sought documents for the period January 1, 2008 through October 6, 2011. We have cooperated with the government’s request. On December 24, 2012 we reached a tentative agreement in principle with the U.S. Department of Justice related to the subpoena issued in October 2011. We tentatively agreed with the staff of the Department of Justice to settle its federal investigation for $6 million, subject to completion and approval of written settlement agreements with the Department of Justice and the OIG, which are expected to be finalized in the second quarter of 2013. We admit no wrongdoing as part of the settlement.

 

On January 24, 2012, we received notice that a putative class action lawsuit had been filed in the U.S. District Court for the Eastern District of North Carolina, on behalf of all persons , other than defendants, who purchased TranS1 securities between February 21, 2008 and October 17, 2011. The complaint alleges violations of the Exchange Act based upon purported omissions and/or false and misleading statements concerning TranS1’s financial statements and reimbursement practices.  The complaint seeks damages sustained by the putative class, pre- and post-judgment interest, and attorneys’ fees and other costs.  On September 7, 2012, we filed a motion to dismiss the complaint for failure to meet the heightened pleading requirements of the Private Securities Litigation Reform Act of 1995, among other grounds; the motion is pending.  We are unable to predict what impact, if any, the outcome of this matter might have on our consolidated financial position, results of operations, or cash flows.

 

Item 1A.Risk Factors.

 

We discuss in our Annual Report on Form 10-K for the year ended December 31, 2012 various risks that may materially affect our business. There have been no material changes to such risks, except as set forth below.

 

Baxano has incurred losses since inception and expects to continue to incur losses for the foreseeable future. It will need to raise additional capital in order to pursue its business strategy.

 

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Baxano has incurred significant losses since its inception in 2005 and, as of December 31, 2012, had an accumulated deficit of $70.4 million. As a result of Baxano’s operating losses and negative cash flows, the report of its independent registered public accounting firm on the financial statements as of and for the year ended December 31, 2012, included an explanatory paragraph indicating that there is substantial doubt about Baxano’s ability to continue as a going concern. To date, Baxano’s operations have been funded primarily with proceeds from the sale of preferred stock and, most recently, from issuance of convertible promissory notes and term loans. Gross proceeds from preferred stock sales totaled $58.6 million to date, and gross proceeds from Baxano’s March 2012 and October 2012 convertible promissory note issuances were approximately $14.8 million. If the Merger is consummated, we intend to spend substantial sums on sales and marketing initiatives to support the ongoing commercialization of Baxano’s products and on research and development activities, including product development, regulatory and compliance, clinical studies in support of its currently marketed products and future product offerings, and the enhancement and protection of its intellectual property. As a result, we expect to continue to incur operating losses as we support these initiatives. These losses will continue to have an adverse effect on our stockholders’ equity, and the product lines we acquire from Baxano may never achieve or sustain profitability.

 

At December 31, 2012, Baxano believed that its existing cash and cash equivalents, taken together with cash received from sales of its products, would be sufficient only to meet its cash needs through the first quarter of 2013. On March 25, 2013, our Board of Directors authorized Company management to provide up to $2,500,000 of bridge financing to Baxano for its working capital needs through the effective time of the Merger. To date, Baxano has issued $2,100,000 aggregate principal amount of Bridge Notes to us. If the Merger and Private Placement Transaction are consummated, we will need to obtain additional financing to pursue our combined business strategy, to respond to new competitive pressures, or to take advantage of opportunities that may arise. Any additional financing may not be available in amounts or on terms acceptable to us. 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 for Baxano’s product lines.

 

Item 6.Exhibits

 

The exhibits filed with this report are listed in the “Exhibit Index” immediately following the signature page to this report, which Exhibit Index 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 15, 2013 By: /s/ Ken Reali
                Ken Reali
                President and Chief Executive Officer
     
Date: May 15, 2013 By: /s/ Joseph P. Slattery
                Joseph P. Slattery
                Executive Vice President and Chief Financial Officer

 

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TranS1 Inc.

Exhibit Index

 

Exhibit  
No. Description
   
2.1 Agreement and Plan of Merger, among TranS1 Inc., RacerX Acquisition Corp., Baxano, Inc., and Sumeet Jain and David Schulte as Securityholder Representatives, dated March 3, 2013 (incorporated by reference to Exhibit 2.1 to TranS1’s Current Report on Form 8-K filed with the SEC on March 5, 2013).
   
2.2 List of Schedules Omitted from Agreement and Plan of Merger included as Exhibit 2.1 above (incorporated by reference to Exhibit 2.2 to TranS1’s Current Report on Form 8-K filed with the SEC on March 5, 2013).
   
10.1 Form of Securities Purchase Agreement, between TranS1 Inc. and the investors identified on the signature pages thereto, dated March 3, 2013 (incorporated by reference to Exhibit 10.1 to TranS1’s Current Report on Form 8-K filed with the SEC on March 5, 2013).
   
10.2 Summary of 2013 Incentive Bonus Plan.
   
10.3 Amended and Restated Employee Stock Purchase Plan.
   
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.
   
101.INS XBRL Instance Document*
   
101.SCH XBRL Schema Document*
   
101.CAL XBRL Calculation Linkbase Document*
   
101.DEF XBRL Definition Linkbase Document*
   
101.LAB XBRL Label Linkbase Document*
   
101.PRE XBRL Presentation Linkbase Document*

 

* Pursuant to Rule 406T of Regulation S-T, this XBRL information will not be deemed “filed” for the purposes of Section 18 of the Securities and Exchange Act of 1934 or otherwise subject to the liability of that section, nor will it be deemed filed or made a part of a registration statement or prospectus for purposes of Sections 11 and 12 of the Securities Act of 1933, or otherwise subject to liability under those sections.

 

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