UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
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| þ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2009
or
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| 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)
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| DELAWARE | | 33-0909022 |
| (State or other jurisdiction of | | (I.R.S. employer |
| incorporation or organization) | | identification no.) |
411 LANDMARK DRIVE, WILMINGTON, NC 28412-6303
(Address of principal executive office) (Zip code)
(910) 332-1700
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo
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 Noo
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. (Check one):
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| Large accelerated filero | | Accelerated filerþ | | Non-accelerated filero | | Smaller reporting companyo |
| | | | | (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). Yeso Noþ
The number of shares of the registrant’s common stock outstanding as of August 3, 2009 was 20,631,144 shares.
TRANS1 INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2009
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
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| Item 1. | | Financial Statements. |
TranS1 Inc.
Statements of Operations
(in thousands, except per share amounts)
(Unaudited)
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| | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | | 2009 | | | 2008 | | | 2009 | | | 2008 | |
| Revenue | | $ | 7,938 | | | $ | 5,951 | | | $ | 16,616 | | | $ | 11,929 | |
| Cost of revenue | | | 1,515 | | | | 1,137 | | | | 3,057 | | | | 2,175 | |
| | | | | | | | | | | | | |
| Gross profit | | | 6,423 | | | | 4,814 | | | | 13,559 | | | | 9,754 | |
| | | | | | | | | | | | | |
| |
| Operating expenses: | | | | | | | | | | | | | | | | |
| Research and development | | | 2,359 | | | | 1,211 | | | | 3,685 | | | | 2,331 | |
| Sales and marketing | | | 8,943 | | | | 7,200 | | | | 18,093 | | | | 12,898 | |
| General and administrative | | | 1,991 | | | | 2,390 | | | | 4,031 | | | | 3,891 | |
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| |
| Total operating expenses | | | 13,293 | | | | 10,801 | | | | 25,809 | | | | 19,120 | |
| | | | | | | | | | | | | |
| Operating loss | | | (6,870 | ) | | | (5,987 | ) | | | (12,250 | ) | | | (9,366 | ) |
| Interest income | | | 111 | | | | 688 | | | | 328 | | | | 1,628 | |
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| Net loss | | $ | (6,759 | ) | | $ | (5,299 | ) | | $ | (11,922 | ) | | $ | (7,738 | ) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Net loss per common share — basic and diluted | | $ | (0.33 | ) | | $ | (0.26 | ) | | $ | (0.58 | ) | | $ | (0.39 | ) |
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| | | | | | | | | | | | | | | | | |
| Weighted average common shares outstanding — basic and diluted | | | 20,590 | | | | 20,212 | | | | 20,571 | | | | 20,071 | |
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The accompanying notes are an integral part of these financial statements.
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TranS1 Inc.
Balance Sheets
(in thousands)
(Unaudited)
| | | | | | | | | |
| | | June 30, | | | December 31, | |
| | | 2009 | | | 2008 | |
Assets | | | | | | | | |
| Current assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 29,207 | | | $ | 42,051 | |
| Short-term investments | | | 37,275 | | | | 35,215 | |
| Accounts receivable, net | | | 4,707 | | | | 4,812 | |
| Inventory | | | 7,346 | | | | 6,369 | |
| Prepaid expenses and other assets | | | 547 | | | | 632 | |
| | | | | | | |
| Total current assets | | | 79,082 | | | | 89,079 | |
| Property and equipment, net | | | 1,374 | | | | 1,412 | |
| | | | | | | |
| Total assets | | $ | 80,456 | | | $ | 90,491 | |
| | | | | | | |
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Liabilities and Stockholders’ Equity | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Accounts payable | | $ | 3,099 | | | $ | 2,896 | |
| Accrued expenses | | | 2,021 | | | | 2,009 | |
| | | | | | | |
| Total current liabilities | | | 5,120 | | | | 4,905 | |
| | | | | | | |
| | | | | | | | | |
| Stockholders’ equity | | | | | | | | |
| Common stock | | | 2 | | | | 2 | |
| Additional paid-in capital | | | 135,175 | | | | 133,507 | |
| Accumulated other comprehensive income | | | 4 | | | | — | |
| Accumulated deficit | | | (59,845 | ) | | | (47,923 | ) |
| | | | | | | |
| Total stockholders’ equity | | | 75,336 | | | | 85,586 | |
| | | | | | | |
| Total liabilities and stockholders’ equity | | $ | 80,456 | | | $ | 90,491 | |
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The accompanying notes are an integral part of these financial statements.
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TranS1 Inc.
Statements of Cash Flows
(in thousands)
(Unaudited)
| | | | | | | | | |
| | | Six Months Ended June 30, | |
| | | 2009 | | | 2008 | |
Cash flows from operating activities: | | | | | | | | |
| Net loss | | $ | (11,922 | ) | | $ | (7,738 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities | | | | | | | | |
| Depreciation | | | 448 | | | | 369 | |
| Stock-based compensation | | | 1,587 | | | | 1,854 | |
| Allowance for excess and obsolete inventory | | | 383 | | | | 34 | |
| Provision for bad debts | | | 45 | | | | 66 | |
| Changes in operating assets and liabilities: | | | | | | | | |
| (Increase) decrease in accounts receivable | | | 60 | | | | (615 | ) |
| (Increase) decrease in inventory | | | (1,360 | ) | | | 27 | |
| (Increase) decrease in prepaid expenses | | | 85 | | | | 235 | |
| Increase (decrease) in accounts payable | | | 203 | | | | 386 | |
| Increase (decrease) in accrued expenses | | | 12 | | | | (251 | ) |
| | | | | | | |
| Net cash used in operating activities | | | (10,459 | ) | | | (5,633 | ) |
| | | | | | | |
| | | | | | | | | |
Cash flows from investing activities: | | | | | | | | |
| Purchases of property and equipment | | | (410 | ) | | | (618 | ) |
| Purchases of investments | | | (33,922 | ) | | | (41,288 | ) |
| Sales and maturities of investments | | | 31,862 | | | | 34,791 | |
| | | | | | | |
| Net cash used in investing activities | | | (2,470 | ) | | | (7,115 | ) |
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Cash flows from financing activities: | | | | | | | | |
| Proceeds from issuance of common stock | | | 85 | | | | 121 | |
| | | | | | | |
| Net cash provided by financing activities | | | 85 | | | | 121 | |
| | | | | | | |
| Net decrease in cash and cash equivalents | | | (12,844 | ) | | | (12,627 | ) |
| Cash and cash equivalents, beginning of period | | | 42,051 | | | | 64,676 | |
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| Cash and cash equivalents, end of period | | $ | 29,207 | | | $ | 52,049 | |
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The accompanying notes are an integral part of these financial statements.
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TranS1 Inc.
Notes to Financial Statements
(Unaudited)
1. Description of Business
TranS1 Inc., a Delaware corporation (the “Company”), was incorporated in May 2000 and is headquartered in Wilmington, North Carolina. The Company is a medical device company focused on designing, developing and marketing products that implement its proprietary minimally invasive surgical approach to treat degenerative disc disease and instability affecting the lower lumbar region of the spine. The Company operates in one business segment. The Company has developed and currently markets two single-level fusion products, AxiaLIF® and AxiaLIF 360°™, and a two-level fusion product, the AxiaLIF 2L™. All of the Company’s products are delivered using its pre-sacral approach. The AxiaLIF product was commercially released in January 2005 and the AxiaLIF 360° product was commercially released in July 2006. The AxiaLIF 2L™ product was commercially released in Europe in the fourth quarter of 2006 and in the United States in the second quarter of 2008. The Company generates revenue from the sale of implants and procedure kits. The Company sells its products directly to hospitals and surgical centers in the United States and certain European countries, and to independent distributors elsewhere.
The Company owns three trademark registrations in the United States and six trademark registrations in the European Union. The Company also owns nine pending trademark applications in the United States, one pending trademark applications in the European Union and six pending trademark applications in Canada.
The Company is subject to a number of risks similar to other companies in the medical device industry. These risks include, without limitation, rapid technological change, uncertainty of market acceptance of our products, uncertainty of regulatory clearance or approval, uncertainty of reimbursement from third-party payors, competition from substitute products and larger companies, the need to obtain additional financing, compliance with government regulation, protection of proprietary technology, product liability, and the dependence on key individuals.
2. Basis of presentation
The Company has prepared the accompanying financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The financial statements are unaudited and reflect all adjustments (consisting of normal recurring adjustments) which are, in the opinion of the Company’s management, necessary for a fair statement of the Company’s financial position, results of operations and cash flows. These principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The principal estimates relate specifically to accounts receivable reserves, inventory reserves, stock-based compensation, accrued expenses and income tax valuations. Actual results could differ from those estimates. Operating results
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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.
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 Statement of Financial Accounting Standards No. 2, “Accounting for Research and Development Costs”. Amounts related to prior periods are not considered material to the financial statements taken as a whole, but were revised for purposes of comparability. Such amounts for the three and six month periods ended June 30, 2008 were $351,000 and $446,000, respectively. The revision did not affect previously reported total operating expenses, net loss, loss per share, assets, liabilities, stockholders’ equity or cash flows.
Impact of Recently Issued Accounting Standards
In February 2008, the Financial Accounting Standards Board (“FASB”) issued Staff Position No. FAS 157-2, which delayed the effective date of Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements”, for non-financial assets and liabilities to fiscal years beginning after November 15, 2008. The Company adopted SFAS No. 157 for its non-financial assets and non-financial liabilities on January 1, 2009, and it did not have a material impact on the Company’s financial statements.
In May 2009, the FASB issued SFAS No. 165, “Subsequent Events,” which establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. SFAS No. 165 provides guidance on the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The Company adopted SFAS No. 165 during the second quarter of 2009, and its application did not have a material impact on the Company’s financial statements. The Company has performed this evaluation through August 6, 2009, the date the financial statements were issued.
In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles”. SFAS No. 168 establishes the FASB Accounting Standards Codification (the “Codification”) as the single source of authoritative nongovernmental U.S. GAAP. The Codification is effective for interim and annual periods ending after September 15, 2009. The adoption of this standard did not have a material impact on the Company’s financial statements.
No other recently issued, but not yet effective, accounting standards are believed to have a material impact on the Company.
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3. Income taxes
No provision for federal or state income taxes has been recorded as the Company has incurred net operating losses since inception.
4. Loss per share
Basic net loss per common share (“Basic EPS”) is computed by dividing the net loss by the weighted average number of common shares outstanding. Diluted net loss per common share (“Diluted EPS”) is computed by dividing the net loss by the weighted average number of common shares and potential dilutive common share equivalents then outstanding. The Company’s potential dilutive common shares, which consist of shares issuable upon the exercise of stock options, have not been included in the computation of diluted net loss per share for all periods as the result would be anti-dilutive.
The following table sets forth the potential shares of common stock that are not included in the calculation of diluted net loss per share as the result would be anti-dilutive as of the end of each period presented:
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2009 | | 2008 | | 2009 | | 2008 |
| Weighted average stock options outstanding | | | 2,350,270 | | | | 2,316,641 | | | | 2,247,111 | | | | 2,094,691 | |
| | | | | | | | | | | | | | | | | |
5. Cash, Cash Equivalents and Investments
The Company considers all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents include money market funds. Short-term investments consist of corporate notes and U.S. government securities.
At June 30, 2009, the Company holds certain assets that are required to be measured at fair value on a recurring basis. These assets include available for sale securities classified as cash equivalents and short-term investments. SFAS 157 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.
At June 30, 2009, all available for sale securities are classified as Level 1 assets with a fair value of $66.1 million, which included money market funds of $28.8 million and short-term investments of $37.3 million. At December 31, 2008, all available for sale securities were classified as Level 1 assets with a fair value of $76.8 million, which included money market funds of $41.6 million and short-term investments of $35.2 million. The Company had no Level 2 or Level 3 assets or liabilities at June 30, 2009 or December 31, 2008.
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6. Accounts receivable, net
The following table presents the components of accounts receivable:
| | | | | | | | | |
| | | June 30, | | | December 31, | |
| | | 2009 | | | 2008 | |
| | | (In thousands) | |
| Gross accounts receivable | | $ | 4,914 | | | $ | 5,005 | |
| Allowance for uncollectible accounts | | | (207 | ) | | | (193 | ) |
| | | | | | | |
| Total accounts receivable, net | | $ | 4,707 | | | $ | 4,812 | |
| | | | | | | |
7. Inventories
The following table presents the components of inventories:
| | | | | | | | | |
| | | June 30, | | | December 31, | |
| | | 2009 | | | 2008 | |
| | | (In thousands) | |
| Finished goods | | $ | 4,181 | | | $ | 2,598 | |
| Work-in-process | | | 2,700 | | | | 3,334 | |
| Raw materials | | | 465 | | | | 437 | |
| | | | | | | |
| Total inventories | | $ | 7,346 | | | $ | 6,369 | |
| | | | | | | |
8. Accrued Expenses
The following table presents the components of accrued expenses:
| | | | | | | | | |
| | | June 30, | | | December 31, | |
| | | 2009 | | | 2008 | |
| | | (In thousands) | |
| Commissions | | $ | 800 | | | $ | 1,178 | |
| Bonus | | | 526 | | | | 270 | |
| Vacation | | | 323 | | | | 163 | |
| Legal and professional fees | | | 134 | | | | 69 | |
| Other | | | 238 | | | | 329 | |
| | | | | | | |
| Total accrued expenses | | $ | 2,021 | | | $ | 2,009 | |
| | | | | | | |
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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 financial statements and the related notes to our financial statements included in this report. In addition to historical financial information, this report contains forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995 and concern matters that involve risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. All statements other than statements of historical fact contained in this report, including statements regarding future events, our future financial performance, business strategy and plans and objectives of management for future operations, are forward-looking statements. We have attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should” or “will” or the negative of these terms or other comparable terminology. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Readers are urged to carefully review and consider the various disclosures made by us, which attempt to advise interested parties of the risks, uncertainties, and other factors that affect our business, operating results, financial condition and stock price, including without limitation the disclosures made under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report and in the financial statements and notes thereto included elsewhere in this report, as well as the disclosures made under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Risk Factors”, “Financial Statements” and “Notes to Financial Statements” included in our Annual Report on Form 10-K for the year ended December 31, 2008. Furthermore, such forward-looking statements speak only as of the date of this report. We expressly disclaim any intent or obligation to update any forward-looking statements after the date hereof to conform such statements to actual results or to changes in our opinions or expectations. References in this report to “TranS1”, “we”, “our”, “us”, or the “Company” refer to TranS1 Inc.
Overview
We are a medical device company focused on designing, developing and marketing products that implement our proprietary minimally invasive surgical approach to treat degenerative disc disease and instability affecting the lower lumbar region of the spine. Using this pre-sacral approach, a surgeon can access discs in the lower lumbar region of the spine through a 1.5 cm incision adjacent to the tailbone and can perform an entire fusion procedure through a small tube that provides direct access to the degenerative disc. We developed our pre-sacral approach to allow spine surgeons to access and treat degenerative lumbar discs without compromising important surrounding soft tissue. We believe this approach enables fusion procedures to be performed with low complication rates, short procedure times, low blood loss, short hospital stays, fast recovery times and reduced pain. We have developed and currently market in the United States and Europe two single-level fusion products, AxiaLIF and AxiaLIF 360°, and a two-level fusion product, the AxiaLIF 2L. All of our products are delivered using our pre-sacral approach.
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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. 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 June 30, 2009, we had an accumulated deficit of $59.8 million.
We expect to continue to invest in creating a sales and marketing infrastructure for our AxiaLIF, AxiaLIF 360° and AxiaLIF 2L products in order to gain wider acceptance for these products. We also expect to continue to invest in research and development and related clinical trials, and increase general and administrative expenses as we grow. As a result, we will need to generate significant revenue in order to achieve profitability.
Financial Operations
Revenue
We generate revenue from the sales of our procedure kits and implants used in our AxiaLIF fusion procedure for the treatment of degenerative disc disease and instability. Our revenue is generated by our direct sales force, independent sales agents and independent distributors. Our sales representatives or independent sales agents hand deliver the procedure kit to the customer on the day of the surgery or several days prior to the surgery. The sales representative or independent agent is then responsible for reporting the delivery of the procedure kit, and the date of the operation to the corporate office for proper revenue recognition. We recognize revenue upon the confirmation that the procedure kit has been used in a surgical procedure. We also generate revenue through sales to distributors outside the United States. These distributors order multiple procedure kits at one time to have on hand. These transactions require the customer to send in a purchase order before shipment will be made to the customer. We determine revenue recognition on a case-by-case basis dependent upon the terms and conditions of each individual distributor agreement. Under the distributor agreements currently in place, a distributor only has the right of return for defective products and, accordingly, revenue is recognized upon shipment of
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our products to our independent distributors. Although we intend to continue to expand our international sales and marketing efforts, we expect that a substantial amount of our revenues will be generated in the United States in future periods.
Cost of Revenue
Cost of revenue consists primarily of material and overhead costs related to our AxiaLIF, AxiaLIF 360° and AxiaLIF 2L instruments and implants. Cost of revenue also includes facilities-related costs, such as rent, utilities and depreciation.
Research and Development
Research and development expenses consist primarily of personnel costs, including stock-based compensation expense, within our product development, regulatory and clinical functions and the costs of clinical studies and product development projects. Research and development expenses also include facilities-related costs. In future periods, we expect research and development expenses to grow as we continue to invest in basic research, clinical trials, product development and in our intellectual property.
Sales and Marketing
Sales and marketing expenses consist of personnel costs, including stock-based compensation expense, sales commissions paid to our direct sales representatives and independent sales agents, and costs associated with physician training programs, promotional activities, and participation in medical conferences. In future periods, we expect sales and marketing expenses to increase as we expand our sales and marketing efforts.
General and Administrative
General and administrative expenses consist of personnel costs, including stock-based compensation, related to the executive, finance, business development, information technology and human resource functions, as well as professional service fees, legal fees, accounting fees, insurance costs and general corporate expenses. We expect general and administrative expenses to increase as we grow our business and as we incur additional professional fees, increased insurance costs and other general corporate expenses related to operating as a public company.
Interest Income
Interest income is primarily composed of interest earned on our cash, cash equivalents and available-for-sale securities.
Results of Operations
Comparison of the Three Months Ended June 30, 2008 and 2009
Revenue. Revenue increased from $6.0 million in the three months ended June 30, 2008 to $7.9 million in the three months ended June 30, 2009. The $1.9 million increase in revenue from 2009 to 2008 was
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primarily attributable to an increase in the number of AxiaLIF products sold, which we believe resulted from continued market acceptance of our AxiaLIF and AxiaLIF 360° products, and the commercialization of our AxiaLIF 2L product in the United States, which had its limited market release in May 2008. None of this increase was attributable to price increases. Domestically, sales of our AxiaLIF 2L product, increased from $356,000 in the three months ended June 30, 2008 to $2.3 million in the three months ended June 30, 2009 and sales of our AxiaLIF 360° product decreased from $2.2 million in the three months ended June 30, 2008 to $2.0 million in the three months ended June 30, 2009. As a result of the launch of the AxiaLIF 2L, which has a higher selling price than our other products, average selling prices in the United States increased from approximately $9,500 in the three months ended June 30, 2008 to approximately $10,700 in the three months ended June 30, 2009. In the three months ended June 30, 2008 and 2009, we recorded 541 and 671 domestic AxiaLIF cases, respectively, including 213 AxiaLIF 360° cases and 24 AxiaLIF 2L cases in the second quarter of 2008, and 199 AxiaLIF 360° cases and 175 AxiaLIF 2L cases in the second quarter of 2009. Additionally, during the three months ended June 30, 2008 and 2009, we generated $175,000 and $211,000, respectively, in revenues from stand alone sales of our percutaneous facet screw system. Revenue generated outside the United States decreased from $649,000 in the three months ended June 30, 2008 to $565,000 in the three months ended June 30, 2009. In the second quarter of 2008, initial stocking shipments to new distributors outside the United States were $73,000. There were no initial stocking shipments to our international distributors in the second quarter of 2009. In the three months ended June 30, 2008 and 2009, 89% and 93%, respectively, of our revenues were generated in the United States.
Cost of Revenue. Cost of revenue increased from $1.1 million in the three months ended June 30, 2008 to $1.5 million in the three months ended June 30, 2009. The $378,000 increase in cost of revenue resulted primarily from higher material and overhead costs associated with increased sales volume for our products. As a percentage of revenue, cost of revenue remained consistent at 19% in the three months ended June 30, 2008 and 2009.
Research and Development. Research and development expenses increased from $1.2 million in the three months ended June 30, 2008 to $2.4 million in the three months ended June 30, 2009. The $1.2 million increase in expense in 2009 compared to 2008 was primarily the result of an expenditure of $1.0 million to acquire the rights to develop a technology for future use, along with increased research and development and clinical project-related spending of $316,000, partially offset by a decrease in stock compensation expense of $147,000.
Sales and Marketing. Sales and marketing expenses increased from $7.2 million in the three months ended June 30, 2008 to $8.9 million in the three months ended June 30, 2009. The increase in expenses from 2008 to 2009 of $1.7 million was primarily the result of increased personnel related costs, including commissions, of $1.3 million, as we continued to build out our sales and marketing organization in order to continue to drive global market acceptance of our AxiaLIF products and increased tradeshow and promotional expenses of $0.2 million.
General and Administrative. General and administrative expenses decreased from $2.4 million in the three months ended June 30, 2008 to $2.0 million in the three months ended June 30, 2009. The decrease in expenses from 2008 to 2009 of $0.4 million was primarily due to decreased professional fees of $0.3 million.
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Interest Income. Interest income decreased from $688,000 in the three months ended June 30, 2008 to $111,000 in the three months ended June 30, 2009. The decrease of $577,000 in interest income from 2008 to 2009 was primarily due to significantly lower interest rates and our lower average cash and investment balances.
Comparison of the Six Months Ended June 30, 2008 and 2009
Revenue. Revenue increased from $11.9 million in the six months ended June 30, 2008 to $16.6 million in the six months ended June 30, 2009. The $4.7 million increase in revenue from 2008 to 2009 was primarily attributable to an increase in the number of AxiaLIF products sold. None of this increase was attributable to price increases. Sales of our AxiaLIF 360° product increased from $4.3 million in the six months ended June 30, 2008 to $4.7 million in the six months ended June 30, 2009. Sales of our AxiaLIF 2L product, which began commercialization in the United States in the second quarter of 2008, increased from $356,000 in the six months ended June 30, 2008 to $4.6 million in the six months ended June 30, 2009. As a result of the launch of the AxiaLIF 2L, which has a higher selling price than our other products, average selling prices in the United States increased from approximately $9,400 in the six months ended June 30, 2008 to approximately $10,600 in the six months ended June 30, 2009. In the six months ended June 30, 2008 and 2009 we recorded 1,074 and 1,422 domestic AxiaLIF cases, respectively, including 426 AxiaLIF 360° cases and 24 AxiaLIF 2L cases in 2008, and 460 AxiaLIF 360° cases and 343 AxiaLIF 2L cases in 2009. Additionally, during the six months ended June 30, 2008 and 2009 we generated $440,000 and $508,000, respectively, in revenues from stand alone sales of our percutaneous facet screw system. Revenue generated outside the United States decreased from $1.4 million in the six months ended June 30, 2008 to $1.0 million in the six months ended June 30, 2009. $295,000 of this decrease was attributable to initial stocking shipments to new distributors in 2008. In the six months ended June 30, 2008 and 2009, 88% and 94%, respectively, of our revenues were generated in the United States.
Cost of Revenue. Cost of revenue increased from $2.2 million in the six months ended June 30, 2008 to $3.1 million in the six months ended June 30, 2009. The $0.9 million increase in cost of revenue resulted primarily from higher material and overhead costs associated with increased sales volume for our AxiaLIF products. As a percentage of revenue, cost of revenue remained consistent at 18% in the six months ended June 30, 2008 and 2009.
Research and Development. Research and development expenses increased from $2.3 million in the six months ended June 30, 2008 to $3.7 million in the six months ended June 30, 2009. The $1.4 million increase in expense in 2009 compared to 2008 was primarily the result of an expenditure of $1.0 million to acquire the rights to develop a technology for future use, along with increases in project related research and development and clinical trial costs of $256,000.
Sales and Marketing. Sales and marketing expenses increased from $12.9 million in the six months ended June 30, 2008 to $18.1 million in the six months ended June 30, 2009. The increase in expenses from 2008 to 2009 of $5.2 million was primarily the result of increased personnel related costs, including commissions, of $3.2 million, increased travel and entertainment expenses of $0.5 million related to the larger sales force, increased training of $0.5 million and increased tradeshow and promotional expenses of $0.7 million.
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General and Administrative. General and administrative expenses increased from $3.9 million in the six months ended June 30, 2008 to $4.0 million in the six months ended June 30, 2009. The increase in expenses from 2008 to 2009 of $0.1 million was primarily due to increased personnel related costs, including stock-based compensation expense, of $415,000, partially offset by a decrease in professional fees of $212,000.
Interest Income. Interest income decreased from $1.6 million in the six months ended June 30, 2008 to $328,000 in the six months ended June 30, 2009. The decrease of $1.3 million in interest income from 2008 to 2009 was primarily due to significantly lower interest rates and our lower average cash and investment balances.
Liquidity and Capital Resources
Sources of Liquidity
Since our inception in 2000, we have incurred significant losses and, as of June 30, 2009, we had an accumulated deficit of $59.8 million. We have not yet achieved profitability, and anticipate that we will continue to incur losses in the near term. As we continue to develop new products, drive global market acceptance of our current AxiaLIF products and expand our sales and marketing efforts, we expect that research and development, sales and marketing and general and administrative expenses will continue to increase. As a result, we will need to generate significant revenues to achieve profitability. To date, our operations have been funded primarily with proceeds from the sale of preferred stock and the net proceeds from our October 2007 initial public offering. Gross proceeds from our preferred stock sales totaled $40.5 million to date, and the net proceeds from our initial public offering were approximately $86.7 million.
As of June 30, 2009, we did not have any outstanding debt financing arrangements, we had working capital of $74.0 million and our primary source of liquidity was $66.5 million in cash, cash equivalents and short-term investments. We currently invest our cash and cash equivalents primarily in money market treasury funds. We currently place our short-term investments primarily in U.S. agency backed debt instruments and high grade corporate bonds.
Cash, cash equivalents and short-term investments decreased from $77.3 million at December 31, 2008 to $66.5 million at June 30, 2009. The decrease of $10.8 million was primarily the result of net cash used in operating activities of $10.5 million and purchases of property and equipment of $410,000.
Cash Flows
Net Cash Used in Operating Activities. Net cash used in operating activities was $10.5 million in the six months ended June 30, 2009. This amount was attributable primarily to the net loss after adjustment for non-cash items, such as depreciation and stock-based compensation expense, and an increase in inventory as we prepare for continued growth, partially offset by small changes in accounts receivable, prepaid assets, accounts payable and accrued expense due to the timing of activity in those accounts.
Net Cash Used in Investing Activities. Net cash used in investing activities was $2.5 million in the six months ended June 30, 2009. This amount reflected net purchases or sales and maturities of short-term
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investments of $2.1 million and purchases of property and equipment of $410,000, primarily for research and development, surgical instrument kits and information technology needs.
Net Cash Provided by Financing Activities. Net cash provided by financing activities in the six months ended June 30, 2009 was $85,000, which primarily represented proceeds from the issuance of shares of our common stock upon the exercise of stock options.
Operating Capital and Capital Expenditure Requirements
We believe that our existing cash, cash equivalents and short-term investments, together with cash received from sales of our products, will be sufficient to meet our cash needs for at least the next two years. We intend to spend substantial sums on sales and marketing initiatives to support the ongoing commercialization of our products and on research and development activities, including product development, regulatory and compliance, clinical studies in support of our currently marketed products and future product offerings, and the enhancement and protection of our intellectual property. We may need to obtain additional financing to pursue our business strategy, to respond to new competitive pressures or to take advantage of opportunities that may arise. The sale of additional equity or convertible debt securities could result in dilution to our stockholders. If additional funds are raised through the issuance of debt securities, these securities could have rights senior to those associated with our common stock and could contain covenants that would restrict our operations. Any additional financing may not be available in amounts or on terms acceptable to us, if at all. If we are unable to obtain this additional financing, we may be required to reduce the scope of our planned product development and marketing efforts.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenue and expenses, and disclosures of contingent assets and liabilities at the date of the financial statements. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, accounts receivable, inventories, accrued expenses, income taxes and stock-based compensation. We use authoritative pronouncements, historical experience and other assumptions as the basis for making estimates. Actual results could differ from those estimates under different assumptions or conditions.
For a description of our critical accounting policies and estimates, please refer to the “Critical Accounting Policies and Estimates” section of the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section contained in our Annual Report on Form 10-K for the year ended December 31, 2008. There have been no material changes in any of our accounting policies since December 31, 2008.
New Accounting Standards
In February 2008, the Financial Accounting Standards Board, or FASB, issued Staff Position No. FAS 157-2, which delayed the effective date of Statement of Financial Accounting Standards, or
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SFAS, No. 157, “Fair Value Measurements”, for non-financial assets and liabilities to fiscal years beginning after November 15, 2008. We adopted SFAS No. 157 for our non-financial assets and non-financial liabilities on January 1, 2009 and it did not have a material impact on our financial statements.
In May 2009, the FASB issued SFAS No. 165, “Subsequent Events,”, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. SFAS No. 165 provides guidance on the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. We adopted SFAS No. 165 during the second quarter of 2009, and its application did not have a material impact on our financial statements. We performed this evaluation through August 6, 2009, the date the financial statements were issued.
In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles”. SFAS No. 168 establishes the FASB Accounting Standards Codification, or the Codification, as the single source of authoritative nongovernmental U.S. GAAP. The Codification is effective for interim and annual periods ending after September 15, 2009. The adoption of this standard did not have a material impact on our financial statements.
No other recently issued, but not yet effective, accounting standards are believed to have a material impact on us.
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| Item 3. | | Quantitative and Qualitative Disclosures About Market Risk |
Our exposure to interest rate risk at June 30, 2009 is related to our investment portfolio. We invest our excess cash primarily in money market funds, debt instruments of the U.S. government and its agencies and in high quality corporate bonds. Due to the short-term nature of these investments, we have assessed that there is no material exposure to interest rate risk arising from our investments. Thus, a hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would not materially affect the fair market value of our interest-sensitive financial investments. Declines in interest rates over time will, however, reduce our investment income. Historically, and as of June 30, 2009, we have not used derivative instruments or engaged in hedging activities.
Although substantially all of our sales and purchases are denominated in U.S. dollars, future fluctuations in the value of the U.S. dollar may affect the competitiveness of our products outside the United States. We do not believe, however, that we currently have significant direct foreign currency exchange rate risk and have not hedged exposures denominated in foreign currencies.
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| Item 4. | | Controls and Procedures. |
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of June 30, 2009. We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2009, our principal executive officer and principal financial officer concluded that, as of such date, our disclosure controls and procedures were effective and operating at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
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| Item 2. | | Unregistered Sales of Equity Securities and Use of Proceeds |
(b) Uses of Proceeds from Sale of Registered Securities
On October 22, 2007, we completed our initial public offering of 6,325,000 shares of common stock at the offering price of $15.00 per share. We effected the offering through a Registration Statement on Form S-1 (Registration No. 333-144802), which was declared effective by the SEC on October 16, 2007, and through a Registration Statement on Form S-1 filed pursuant to Rule 462(b) under the Securities Act (Registration No. 333-146753), which became effective upon filing on October 17, 2007 pursuant to Rule 462(b). The offering resulted in aggregate proceeds to us of approximately $86.7 million, net of underwriting discounts and commissions.
As of June 30, 2009, we had used approximately $64.0 million of the net proceeds for sales, marketing and general administrative activities and $8.7 million for research and development activities.
We intend to use the remaining net proceeds of our initial public offering to support the commercialization of our existing and future products and to support our research and development
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activities, clinical trials, regulatory clearances or approvals and for capital expenditures, working capital and other general corporate purposes. We have invested the net proceeds from our initial public offering in money-market funds and short-term investment-grade interest-bearing securities. There has been no material change in the planned use of proceeds from our initial public offering as described in the final prospectus filed with the SEC on October 17, 2007 pursuant to Rule 424(b) under the Securities Act. As of the date of this report, we cannot specify with certainty all of the particular uses for the net proceeds received in connection with our initial public offering. The amounts and timing of our actual expenditures will depend on numerous factors, including the status of our product development efforts, sales and marketing activities, technological advances, amount of cash generated or used by our operations and competition. Accordingly, our management will have broad discretion in the application of the net proceeds and investors will be relying on the judgment of our management regarding the application of the proceeds of the offering.
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| Item 4. | | Submission of Matters to a Vote of Security Holders |
We held an annual meeting on June 3, 2009 at our corporate headquarters in Wilmington, North Carolina. The first item of business was the election of two class II directors. The nominees elected were Michael Carusi and Jonathan Osgood. Both nominees were elected by a majority of votes present at the meeting as follows:
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| Name | | Votes For | | Votes Withheld |
| Michael Carusi | | | 17,188,315 | | | | 150,448 | |
| Jonathan Osgood | | | 17,304,345 | | | | 34,458 | |
Directors Richard Randall, Mitchell Dann, James Shapiro, Joseph Slattery and Paul LaViolette continued in office after the meeting.
The appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the year ending December 31, 2009 was ratified with 17,321,156 in favor and 17,647 abstentions.
An amendment to our 2007 Stock Incentive Plan to increase the number of shares reserved for issuance from 1,400,000 to 2,000,000 was ratified with 13,056,492 in favor, 1,716,865 against and 10,050 abstentions.
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.
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| | TranS1 Inc.
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| Date: August 6, 2009 | By: | /s/ Richard Randall | |
| | | Richard Randall | |
| | | President and Chief Executive Officer | |
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| Date: August 6, 2009 | By: | /s/ Michael Luetkemeyer | |
| | | Michael Luetkemeyer | |
| | | Chief Financial Officer | |
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TranS1 Inc.
Exhibit Index
| | | |
| Exhibit | | |
| No. | | Description |
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| 31.1 | | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934. |
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| 31.2 | | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934. |
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| 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. |
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| 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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