Baxano Surgical 10-Q 2010 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2010
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period _______ to _______

Commission File Number 001-33744

TRANS1 INC.

(Exact name of Registrant as specified in its charter)

DELAWARE
(State or other jurisdiction of
incorporation or organization) 33-0909022
(I.R.S. employer
identification no.)

301 GOVERNMENT CENTER DRIVE, WILMINGTON, NC 28403
(Address of principal executive office)                                     (Zip code)

(910) 332-1700
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 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.:

Large accelerated filero	Accelerated filero
Non-accelerated filero	Smaller reporting companyþ

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 November 5, 2010 was 20,870,594 shares.

TRANS1 INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2010
TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements(unaudited)
	Consolidated Statements of Operations	1
	Consolidated Balance Sheets	2
	Consolidated Statements of Cash Flows	3
	Notes to Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	8
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	15
Item 4.	Controls and Procedures	15
PART II.	OTHER INFORMATION
Item 6.	Exhibits	16
SIGNATURES		17
EXHIBIT INDEX		18
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements.

TranS1 Inc.

Consolidated Statements of Operations
(in thousands, except per share amounts)
(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Revenue	$	6,339		$	6,912		$	20,296		$	23,528
Cost of revenue		1,205			1,366			3,998			4,423
Gross profit		5,134			5,546			16,298			19,105
Operating expenses:
Research and development		1,026			1,362			3,307			5,047
Sales and marketing		5,908			8,126			20,053			26,219
General and administrative		2,011			1,683			6,716			5,714
Total operating expenses		8,945			11,171			30,076			36,980
Operating loss		(3,811	)		(5,625	)		(13,778	)		(17,875	)
Other income (expense)		20			54			(15	)		382
Net loss	$	(3,791	)	$	(5,571	)	$	(13,793	)	$	(17,493	)
Net loss per common share – basic and diluted	$	(0.18	)	$	(0.27	)	$	(0.67	)	$	(0.85	)
Weighted average common shares outstanding — basic and diluted		20,741			20,630			20,694			20,591

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

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TranS1 Inc.

Consolidated Balance Sheets
(in thousands, except share amounts)
(Unaudited)

	September 30,			December 31,
	2010			2009
Assets
Current assets:
Cash and cash equivalents	$	25,089		$	29,298
Short-term investments		18,980			25,953
Accounts receivable, net		4,428			3,926
Inventory		6,164			7,325
Prepaid expenses and other assets		338			676
Total current assets		54,999			67,178
Property and equipment, net		1,569			1,813
Total assets	$	56,568		$	68,991
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	1,294		$	2,442
Accrued expenses		2,249			1,269
Total current liabilities		3,543			3,711
Stockholders’ equity:
Common stock, $0.0001 par value; 75,000,000 shares authorized, 20,857,717 and 20,648,447 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively		2			2
Additional paid-in capital		137,951			136,402
Accumulated other comprehensive income (loss)		(16	)		(5	)
Accumulated deficit		(84,912	)		(71,119	)
Total stockholders’ equity		53,025			65,280
Total liabilities and stockholders’ equity	$	56,568		$	68,991

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

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TranS1 Inc.

Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)

	Nine Months Ended September 30,
	2010			2009
Cash flows from operating activities:
Net loss	$	(13,793	)	$	(17,493	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		592			684
Stock-based compensation		1,421			2,200
Allowance for excess and obsolete inventory		341			541
Provision for bad debts		54			63
Loss on sale of fixed assets		70			—
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable		(556	)		581
(Increase) decrease in inventory		820			(1,843	)
Decrease in prepaid expenses		338			199
Decrease in accounts payable		(1,148	)		(241	)
Increase (decrease) in accrued expenses		980			(229	)
Net cash used in operating activities		(10,881	)		(15,538	)
Cash flows from investing activities:
Purchases of property and equipment		(418	)		(553	)
Purchases of investments		(7,969	)		(39,911	)
Sales and maturities of investments		14,942			44,157
Net cash provided by (used in) investing activities		6,555			3,693
Cash flows from financing activities:
Proceeds from issuance of common stock		128			89
Net cash provided by financing activities		128			89
Effect of exchange rate changes on cash and cash equivalents		(11	)		3
Net decrease in cash and cash equivalents		(4,209	)		(11,753	)
Cash and cash equivalents, beginning of period		29,298			42,051
Cash and cash equivalents, end of period	$	25,089		$	30,298

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

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TranS1 Inc.

Notes to Consolidated Financial Statements
(Unaudited)

1. Description of Business

TranS1 Inc., a Delaware corporation (the “Company”), was incorporated in May 2000 and is headquartered in Wilmington, North Carolina. The Company is a medical device company focused on designing, developing and marketing products that implement its proprietary approach to treat degenerative conditions of the spine affecting the lower lumbar region. The Company operates in one business segment. The Company currently markets the AxiaLIF® family of products for single and multilevel lumbar fusion and the Vectre and Avatar™ posterior fixation systems for lumbar fixation supplemental to AxiaLIF fusion. All of the Company’s AxiaLIF products are delivered using its pre-sacral approach. The AxiaLIF 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 Company commercially launched its next generation Vectre facet screw system in April 2010 and its AxiaLIF 2L+™ product in July 2010. In January 2010, the Company entered into an agreement to distribute Avatar, a pedicle screw system, and in February 2010, the Company entered into an agreement to distribute a biologics product. The Company sells its products directly to hospitals and surgical centers in the United States and certain European countries, and to independent distributors elsewhere.

The Company owns seven trademark registrations in the United States and eight trademark registrations in the European Union. The Company also owns four pending trademark applications in the United States, two pending trademark applications in the European Union and nine pending trademark applications in Canada.

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, our dependence on key employees, cost pressures in the healthcare industry, uncertainty of reimbursement from third-party payors, competitive pressures from substitute products and larger companies, our ability to recruit and retain qualified personnel, the possibility that key surgeons using our products may cease practicing or using our products in their practice, regulatory approval and market acceptance for new products, changes in economic conditions, our ability to effectively manage employees to meet our objectives and conducting 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 reflect all adjustments (consisting of normal recurring adjustments) which are, in the opinion of the Company’s management, necessary for a fair statement of the Company’s consolidated financial position, results of operations and cash flows. These principles require management to make estimates and assumptions

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that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The principal estimates relate specifically to accounts receivable reserves, inventory reserves, stock-based compensation, accrued expenses and income tax valuations. Actual results could differ from those estimates. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the full year. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. All intercompany accounts and transactions have been eliminated in consolidation.

Impact of Recently Issued Accounting Standards

There have been no recently issued accounting standards that have an impact on the Company’s financial statements.

3. Income Taxes

No provisions for federal or state income taxes have been recorded as the Company has incurred net operating losses since inception.

4. Net Loss Per Common Share

Basic net loss per common share (“Basic EPS”) is computed by dividing the net loss available to common stockholders by the weighted average number of common shares outstanding. Diluted net loss per common share (“Diluted EPS”) is computed by dividing the net loss available to common shareholders by the weighted average number of common shares and potential dilutive common share equivalents then outstanding. The Company’s potential dilutive common shares, which consist of shares issuable upon the exercise of stock options, have not been included in the computation of diluted net loss per share for all periods as the result would be anti-dilutive.

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 September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Weighted average stock options outstanding		2,137,880		2,441,139		1,791,803		2,274,259

5. Cash, Cash Equivalents and Investments

The Company considers all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents include money market treasury funds. Short-term investments consist of U.S. agency backed debt instruments.

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At September 30, 2010, the Company holds certain assets that are required to be measured at fair value on a recurring basis. These assets include available for sale securities classified as cash equivalents and short-term investments. ASC 820 requires that fair value measurements be classified and disclosed in one of three tiers. These tiers are: Level 1, defined as quoted prices in active markets for identical assets or liabilities; Level 2, defined as valuations based on observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets, or other inputs that are observable or can be corroborated by observable input data; and Level 3, defined as valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants.

At September 30, 2010, all available for sale securities are classified as Level 1 assets with a fair value of $43.9 million, which included money market funds of $24.9 million and short-term investments of $19.0 million. At December 31, 2009, all available for sale securities were classified as Level 1 assets with a fair value of $54.9 million, which included money market funds of $28.9 million and short-term investments of $26.0 million. The Company had no Level 2 or Level 3 assets or liabilities at September 30, 2010 or December 31, 2009.

6. Accounts Receivable, Net

The following table presents the components of accounts receivable:

	September 30,			December 31,
	2010			2009
	(In thousands)
Gross accounts receivable	$	4,629		$	4,119
Allowance for uncollectible accounts		(201	)		(193	)
Total accounts receivable, net	$	4,428		$	3,926

7. Inventories

The following table presents the components of inventories:

	September 30,		December 31,
	2010		2009
	(In thousands)
Work-in-process	$	3,332	$	3,993
Finished goods		2,618		3,112
Raw materials		214		220
Total inventories	$	6,164	$	7,325

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8. Accrued Expenses

The following table presents the components of accrued expenses:

	September 30,		December 31,
	2010		2009
	(In thousands)
Bonus	$	702	$	10
Commissions		577		597
Vacation		320		186
Legal and professional fees		206		90
Salaries and severance		139		47
Travel and entertainment		101		50
Franchise Tax		96		122
Consulting		83		120
Other		25		47
Total accrued expenses	$	2,249	$	1,269

9. Comprehensive Loss

The following table presents the components of other comprehensive loss:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
	(In thousands)						(In thousands)
Net loss	$	(3,791	)	$	(5,571	)	$	(13,793	)	$	(17,493	)
Other comprehensive income (loss):
Translation adjustments		—			(1	)		(11	)		3
Total comprehensive loss	$	(3,791	)	$	(5,572	)	$	(13,804	)	$	(17,490	)

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes to our consolidated financial statements included in this report. In addition to historical financial information, this report contains forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995 and concern matters that involve risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. All statements other than statements of historical fact contained in this report, including statements regarding future events, our future financial performance, our business strategy and plans and objectives of management for future operations, are forward-looking statements. We have attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should” or “will” or the negative of these terms or other comparable terminology. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Readers are urged to carefully review and consider the various disclosures made by us, which attempt to advise interested parties of the risks, uncertainties, and other factors that affect our business, operating results, financial condition and stock price, including without limitation the disclosures made under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report and in the consolidated financial statements and notes thereto included elsewhere in this report, as well as the disclosures made under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Risk Factors”, “Consolidated Financial Statements” and “Notes to Consolidated Financial Statements” included in our Annual Report on Form 10-K for the year ended December 31, 2009. Furthermore, such forward-looking statements speak only as of the date of this report. We expressly disclaim any intent or obligation to update any forward-looking statements after the date hereof to conform such statements to actual results or to changes in our opinions or expectations. References in this report to “TranS1”, “we”, “our”, “us”, or the “Company” refer to TranS1 Inc.

Overview

We are a medical device company focused on designing, developing and marketing products that implement our proprietary approach to treat degenerative conditions of the spine affecting the lower lumbar region. Using our pre-sacral approach, a surgeon can access discs in the lower lumbar region of the spine through a 1.5 cm incision adjacent to the tailbone and can perform an entire fusion procedure through a small tube that provides direct access to the intervertebral space. We developed our pre-sacral approach to allow spine surgeons to access and treat intervertebral spaces without compromising important surrounding soft tissue. We believe this approach enables fusion procedures to be performed with low complication rates, low blood loss, short hospital stays, fast recovery times and reduced pain. We currently market our AxiaLIF® family of products for single and multilevel lumbar fusion and the Vectre and Avatar™ posterior fixation systems for lumbar fixation supplemental to AxiaLIF fusion.

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,

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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 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. 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 commercially launched our next generation Vectre facet screw system in April 2010. Our AxiaLIF 2L+ product received FDA 510(k) clearance in January 2010, and we commercially launched this product in July 2010. In January 2010, we entered into an agreement to distribute Avatar, a pedicle screw system, and in February 2010, we entered into an agreement to distribute a biologics product. 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 allow us to compete with larger volume manufacturers of spine surgery products.

Since inception, we have been unprofitable. As of September 30, 2010, we had an accumulated deficit of $84.9 million.

We expect to continue to invest in creating a sales and marketing infrastructure for our AxiaLIF family of 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.

Financial Operations

	Three Months Ended September 30,									Nine Months Ended September 30,
							%									%
	2010			2009			change			2010			2009			change
				(in thousands, except gross margin)
Revenue	$	6,339		$	6,912			-8.3	%	$	20,296		$	23,528			-13.7	%
Cost of revenue		1,205			1,366			-11.8	%		3,998			4,423			-9.6	%
Gross margin		81.0	%		80.2	%		1.0	%		80.3	%		81.2	%		-1.1	%

Revenue

We generate revenue from the sales of our procedure kits and implants used in our AxiaLIF fusion procedure for the treatment of degenerative conditions of the spine affecting the lower lumbar region. 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

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confirmation that the procedure kit has been used in a surgical procedure. The other sales method is for sales to distributors outside the United States. These distributors order multiple procedure kits at one time to have on hand. These transactions require the customer to send in a purchase order before shipment will be made to the customer. We determine revenue recognition on a case by case basis dependent upon the terms and conditions of each individual distributor agreement. Under the distributor agreements currently in place, a distributor only has the right of return for defective products and, accordingly, revenue is recognized upon shipment of our products to our independent distributors.We expect that a substantial amount 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. 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 within our product development, regulatory and clinical functions and the costs of clinical studies and product development projects. In future periods, we expect research and development expenses to grow as we continue to invest in basic research, clinical trials, product development and intellectual property.

Sales and Marketing

Sales and marketing expenses consist of personnel costs, 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 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.

Other Income (Expense)

Other income (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.

Results of Operations

Comparison of the Three Months Ended September 30, 2009 and 2010

RevenueRevenue decreased from $6.9 million in the three months ended September 30, 2009 to $6.3 million in the three months ended September 30, 2010. The $0.6 million decrease in revenue from 2009 to 2010 was related to lower case volume as a result of concerns and uncertainty in the marketplace surrounding physician reimbursement for our AxiaLIF procedure. Domestically, sales of our AxiaLIF single level products decreased from $4.1 million in the three months ended September 30, 2009 to $3.2 million in the three months ended September 30, 2010, and sales of our AxiaLIF 2L products increased from $1.8 million in the three months ended September 30, 2009 to $1.9 million in the three months

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ended September 30, 2010. New products accounted for revenue of $0.3 million in the three months ended September 30, 2010. In the three months ended September 30, 2010, average revenue per AxiaLIF case continued to increase, helped by a price increase effective April 1, 2010, the release of our AxiaLIF 2L+ product, and penetration into existing cases by our new products. In the three months ended September 30, 2009 and 2010, we recorded 606 and 490 domestic AxiaLIF cases, respectively, including 138 AxiaLIF 2L cases in the three months ended September 30, 2009, and 136 AxiaLIF 2L and 2L+ cases in the three months ended September 30, 2010. Additionally, during the three months ended September 30, 2009 and 2010, we generated $0.6 million and $0.5 million, respectively, in revenues from sales of our facet and Vectre screw systems. Revenue generated outside the United States was $0.4 million in both the three months ended September 30, 2009 and 2010. There was $35,000 in initial stocking shipments to new distributors outside the United States in the three months ended September 30, 2009, compared to no initial stocking shipments to new distributors in the three months ended September 30, 2010. In the three months ended September 30, 2009 and 2010, 94% and 93%, respectively, of our revenues were generated in the United States.

Cost of RevenueCost of revenue decreased from $1.4 million in the three months ended September 30, 2009 to $1.2 million in the three months ended September 30, 2010. Gross margin increased from 80.2% in the three months ended September 30, 2009 to 81.0% in the three months ended September 30, 2010. The increase in gross margin was primarily due to better product mix and lower inventory reserves, partially offset by the introduction of new products in 2010 which have a lower gross margin than our existing AxiaLIF products. Excluding these new products, gross margin for the three months ended September 30, 2010 was 82.1%.

Research and DevelopmentResearch and development expenses decreased from $1.4 million in the three months ended September 30, 2009 to $1.0 million in the three months ended September 30, 2010. The $0.4 million decrease in expenses from 2009 to 2010 was primarily related to a decrease in project spending.

Sales and MarketingSales and marketing expenses decreased from $8.1 million in the three months ended September 30, 2009 to $5.9 million in the three months ended September 30, 2010. The decrease in expenses from 2009 to 2010 of $2.2 million was primarily due to lower personnel-related costs of $1.2 million, including lower commissions of $0.3 million, as we reduced our U.S. sales force to focus our resources, decreased travel and entertainment expenses of $0.6 million, and decreased surgeon training expenses of $0.5 million.

General and AdministrativeGeneral and administrative expenses increased from $1.7 million in the three months ended September 30, 2009 to $2.0 million in the three months ended September 30, 2010. The increase in expenses from 2009 to 2010 of $0.3 million was primarily due to an increase in personnel expenses.

Other Income (Expense)Other income (expense) decreased from $54,000 in the three months ended September 30, 2009 to $20,000 in the three months ended September 30, 2010. The decrease of $34,000 from 2009 to 2010 was primarily related to lower interest income due to lower interest rates and our lower average cash and investment balances.

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Comparison of the Nine Months Ended September 30, 2009 and 2010

RevenueRevenue decreased from $23.5 million in the nine months ended September 30, 2009 to $20.3 million in the nine months ended September 30, 2010. The $3.2 million decrease in revenue from 2009 to 2010 was related to lower case volume as a result of concerns and uncertainty in the marketplace surrounding physician reimbursement for our AxiaLIF procedure. Domestically, sales of our AxiaLIF single level products decreased from $13.1 million in the nine months ended September 30, 2009 to $10.2 million in the nine months ended September 30, 2010 and sales of our AxiaLIF 2L products decreased from $6.2 million in the nine months ended September 30, 2009 to $6.0 million in the nine months ended September 30, 2010. New products accounted for revenue of $0.8 million in the nine months ended September 30, 2010. In the nine months ended September 30, 2010, average revenue per AxiaLIF case continued to increase, helped by a price increase effective April 1, 2010, the full market release of our AxiaLIF 2L+ product, and penetration into existing cases by our new products. In the nine months ended September 30, 2009 and 2010, we recorded 2,028 and 1,568 domestic AxiaLIF cases, respectively, including 481 AxiaLIF 2L cases in 2009 and 425 AxiaLIF 2L and 2L+ cases in 2010. Additionally, during the nine months ended September 30, 2009 and 2010, we generated $2.4 million and $1.6 million, respectively, in revenues from sales of our facet and Vectre screw systems. Revenue generated outside the United States increased from $1.4 million in the nine months ended September 30, 2009 to $1.7 million in the nine months ended September 30, 2010. In February 2009, we began to sell directly to hospitals in Germany through our own sales force, which previously had been done through a distributor.In the nine months ended September 30, 2009 and 2010, there were $122,000 and $51,000, respectively, in initial stocking shipments to new distributors outside the United States. In the nine months ended September 30, 2009 and 2010, 94% and 92%, respectively, of our revenues were generated in the United States.

Cost of RevenueCost of revenue decreased from $4.4 million in the nine months ended September 30, 2009 to $4.0 million in the nine months ended September 30, 2010. The $0.4 million decrease in cost of revenue resulted primarily from lower material and overhead costs associated with decreased sales volume for our products. Gross margin decreased from 81.2% in the nine months ended September 30, 2009 to 80.3% in the nine months ended September 30, 2010. The decrease in gross margin was the result of decreased production demand resulting in increased manufacturing overhead costs as a percentage of revenue and the introduction of new products in 2010, which have a lower gross margin than our existing AxiaLIF products. Excluding these new products, gross margin for the nine months ended September 30, 2010 was 81.3%.

Research and DevelopmentResearch and development expenses decreased from $5.0 million in the nine months ended September 30, 2009 to $3.3 million in the nine months ended September 30, 2010. The $1.7 million decrease in expenses from 2009 to 2010 was primarily related to a $1.0 million expense in 2009 to acquire the rights to develop a technology for future use, a $0.2 million expense in 2009 for the exclusivity rights to negotiate for a potential product acquisition, and a decrease in project spending of $0.8 million in 2010.

Sales and MarketingSales and marketing expenses decreased from $26.2 million in the nine months ended September 30, 2009 to $20.1 million in the nine months ended September 30, 2010. The decrease in expenses from 2009 to 2010 of $6.1 million was primarily due to lower commissions of $1.5 million, related to the lower revenue, decreased personnel-related costs of $1.5 million as we reduced our U.S. sales force to focus our resources, decreased travel and entertainment expenses of $1.6 million,

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decreased surgeon training costs of $1.3 million and a decrease in promotional costs of $0.2 million. These lower expenses were partially offset by severance costs of $0.5 million for employees affected by the sales force reduction.

General and AdministrativeGeneral and administrative expenses increased from $5.7 million in the nine months ended September 30, 2009 to $6.7 million in the nine months ended September 30, 2010. The increase in expenses from 2009 to 2010 of $1.0 million was primarily due to an increase in personnel-related costs related to the management transition that occurred in the first quarter of 2010. These costs included compensation, recruiting and severance related expenses of $0.7 million.

Other Income (Expense)Other income (expense) decreased from income of $382,000 in the nine months ended September 30, 2009 to a loss of $15,000 in the nine months ended September 30, 2010. The decrease of $397,000 from 2009 to 2010 was primarily related to lower interest income of $327,000 due to lower interest rates and our lower average cash and investment balances and a loss on disposal of fixed assets of $70,000.

Liquidity and Capital Resources

Sources of Liquidity

Since our inception in 2000, we have incurred significant losses and, as of September 30 2010, we had an accumulated deficit of $84.9 million. We have not yet achieved profitability, and anticipate that we will continue to incur losses in the near term. We expect that research and development, sales and marketing and general and administrative expenses will grow and, as a result, we will need to generate significant revenues to achieve profitability. To date, our operations have been funded primarily with proceeds from the sale of preferred stock and the net proceeds from our October 2007 initial public offering. Gross proceeds from our preferred stock sales totaled $40.5 million to date, and the net proceeds from our initial public offering were approximately $86.7 million.

As of September 30 2010, we did not have any outstanding debt financing arrangements, we had working capital of $51.5 million and our primary source of liquidity was $44.1 million in cash, cash equivalents and short-term investments. We currently invest our cash and cash equivalents primarily in money market treasury funds and our short-term investments primarily in U.S. agency backed debt instruments.

Cash, cash equivalents and short-term investments decreased from $55.3 million at December 31, 2009 to $44.1 million at September 30, 2010. The decrease of $11.2 million was primarily the result of net cash used in operating activities of $10.9 million and purchases of property and equipment of $0.4 million.

Cash Flows

Net Cash Used in Operating ActivitiesNet cash used in operating activities was $10.9 million in the nine months ended September 30, 2010. This amount was attributable primarily to the net loss after adjustment for non-cash items, such as depreciation, stock-based compensation expense, inventory and receivable reserves, and the loss on sale of fixed assets, combined with changes in net working capital due to the timing of activity.

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Net Cash Provided by Investing ActivitiesNet cash provided by investing activities was $6.6 million in the nine months ended September 30, 2010. This amount reflected net purchases or sales and maturities of short-term investments of $7.0 million, offset by purchases of property and equipment of $0.4 million, primarily for capital improvements to our facility.

Net Cash Provided by Financing ActivitiesNet cash provided by financing activities in the nine months ended September 30, 2010 was $128,000, which 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 further the scope of our planned product development and marketing efforts.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenue and expenses, and disclosures of contingent assets and liabilities at the date of the financial statements. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, accounts receivable, inventories, accrued expenses, income taxes and stock-based compensation. We use authoritative pronouncements, historical experience and other assumptions as the basis for making estimates. Actual results could differ from those estimates under different assumptions or conditions.

For a description of our critical accounting policies and estimates, please refer to the “Critical Accounting Policies and Estimates” section of the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section contained in our Annual Report on Form 10-K for the year ended December 31, 2009. There have been no material changes in any of our accounting policies since December 31, 2009.

New Accounting Standards

There have been no recently issued accounting standards that have an impact on our financial statements.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our exposure to interest rate risk at September 30, 2010 is related to our investment portfolio. We invest our excess cash primarily in money market funds and debt instruments of the U.S. government and its agencies. Due to the short-term nature of these investments, we have assessed that there is no material exposure to interest rate risk arising from our investments. Thus, a hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would not materially affect the fair market value of our interest-sensitive financial investments. Declines in interest rates over time will, however, reduce our investment income. Historically, and as of September 30, 2010, we have not used derivative instruments or engaged in hedging activities.

Although most of our sales and purchases are denominated in U.S. dollars, future fluctuations in the value of the U.S. dollar may affect the competitiveness of our products outside the United States. We do not believe, however, that we currently have significant direct foreign currency exchange rate risk and have not hedged exposures denominated in foreign currencies.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of September 30, 2010. We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2010 our principal executive officer and principal financial officer concluded that, as of such date, our disclosure controls and procedures were effective and operating at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Effective July 1, 2010, we became a “Smaller Reporting Company” under Rule 12b-2 of the Exchange Act. Previously we were an “Accelerated Filer”. This classification is based on the public float of the Company held by non-affiliates as of June 30, 2010.

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PART II. OTHER INFORMATION

Item 6. Exhibits

A list of the exhibits required to be filed as part of this report is set forth in the “Exhibit Index,” which immediately precedes such exhibits, and is incorporated herein by reference.

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	TranS1 Inc.
Date: November 10, 2010	By:	/s/ Richard Randall
	Richard Randall
	Chief Executive Officer
Date: November 10, 2010	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
31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934.
31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934.
32.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(b) / 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
32.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(b) / 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

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