Baxano Surgical 10-Q 2011 Q1 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 March 31, 2011

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                    

Commission File Number 001-33744

TRANS1 INC.

(Exact name of Registrant as specified in its charter)

DELAWARE
(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
		(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 May 4, 2011 was 20,902,994 shares.

TRANS1 INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2011
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	14
Item 4. Controls and Procedures	14
PART II. OTHER INFORMATION
Item 6. Exhibits	14
SIGNATURES	15
EXHIBIT INDEX	16
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements.

TranS1 Inc.

Consolidated Statements of Operations

(in thousands, except per share amounts)

(Unaudited)

	Three Months Ended March 31,
	2011			2010
Revenue	$	5,130		$	6,713
Cost of revenue		1,296			1,429
Gross profit		3,834			5,284
Operating expenses:
Research and development		1,582			1,255
Sales and marketing		6,383			7,697
General and administrative		1,613			2,639
Total operating expenses		9,578			11,591
Operating loss		(5,744	)		(6,307	)
Other income (expense), net		18			(49	)
Net loss	$	(5,726	)	$	(6,356	)
Net loss per common share — basic and diluted	$	(0.27	)	$	(0.31	)
Weighted average common shares outstanding — basic and diluted		20,886			20,655

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)

	March 31,			December 31,
	2011			2010
Assets
Current assets:
Cash and cash equivalents	$	6,341		$	24,461
Short-term investments		30,168			18,075
Accounts receivable, net		3,573			3,654
Inventory		4,160			3,878
Prepaid expenses and other assets		478			389
Total current assets		44,720			50,457
Property and equipment, net		1,483			1,562
Total assets	$	46,203		$	52,019
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	2,204		$	2,214
Accrued expenses		1,598			2,077
Total current liabilities		3,802			4,291
Stockholders’ equity:
Common stock, $0.0001 par value; 75,000,000 shares authorized, 20,887,594 and 20,877,171 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively		2			2
Additional paid-in capital		138,792			138,401
Accumulated other comprehensive loss		(21	)		(29	)
Accumulated deficit		(96,372	)		(90,646	)
Total stockholders’ equity		42,401			47,728
Total liabilities and stockholders’ equity	$	46,203		$	52,019

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

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TranS1 Inc.

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

	Three Months Ended March 31,
	2011			2010
Cash flows from operating activities:
Net loss	$	(5,726	)	$	(6,356	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		148			231
Stock-based compensation		379			530
Allowance for excess and obsolete inventory		240			276
Provision for bad debts		25			18
Loss on sale of fixed assets		—			71
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable		56			(669	)
(Increase) decrease in inventory		(522	)		193
(Increase) decrease in prepaid expenses		(89	)		18
Decrease in accounts payable		(10	)		(301	)
Increase (decrease) in accrued expenses		(479	)		711
Net cash used in operating activities		(5,978	)		(5,278	)
Cash flows from investing activities:
Purchases of property and equipment		(69	)		(265	)
Purchases of investments		(16,102	)		(3,986	)
Sales and maturities of investments		4,009			8,979
Net cash provided by (used in) investing activities		(12,162	)		4,728
Cash flows from financing activities:
Proceeds from issuance of common stock		12			11
Net cash provided by financing activities		12			11
Effect of exchange rate changes on cash and cash equivalents		8			(8	)
Net decrease in cash and cash equivalents		(18,120	)		(547	)
Cash and cash equivalents, beginning of period		24,461			29,298
Cash and cash equivalents, end of period	$	6,341		$	28,751

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 minimally invasive surgical 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, the Vectre™ and Avatar™ lumbar posterior fixation systems and Bi-Ostetic^TM bone void filler, a biologics product. All of the Company’s AxiaLIF products are delivered using its pre-sacral approach. The AxiaLIF 1L product was commercially released in January 2005. The AxiaLIF 2L™ product was commercially released in Europe in the fourth quarter of 2006 and in the United States in the second quarter of 2008. The AxiaLIF 2L product was discontinued in 2010 after the Company launched its AxiaLIF 2L+™ product in July 2010. The Company commercially launched its next generation Vectre facet screw system in April 2010. In the first quarter of 2010, the Company entered into agreements to distribute Avatar, a pedicle screw system, and Bi-Ostetic bone void filler, a biologics product. In March 2011, the Company received 510(k) clearance for its next generation AxiaLIF 1L+ product and made it commercially available in a limited market release. 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 two pending trademark applications in the United States and two 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, acceptance and continued use of our products by surgeons, the lack of clinical data about the efficacy of our products, uncertainty of reimbursement from third-party payors, cost pressures in the healthcare industry, competitive pressures from substitute products and larger companies, our historical lack of profitability, our dependence on key employees, regulatory approval and market acceptance for new products, our reliance on a limited number of suppliers to provide our products, changes in economic conditions, our ability to effectively manage a sales force to meet our objectives and our ability to conduct successful clinical studies.

2. Basis of presentation

The Company has prepared the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. The consolidated financial statements are unaudited and should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. The accompanying unaudited interim consolidated

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financial statements reflect all adjustments (consisting of normal recurring adjustments) which are, in the opinion of the Company’s management, necessary for a fair statement of the Company’s consolidated financial position, results of operations and cash flows for the periods presented. These principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The principal estimates relate to accounts receivable reserves, inventory reserves, stock-based compensation, accrued expenses and income tax valuations. Actual results could differ from those estimates. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. All intercompany accounts and transactions have been eliminated in consolidation.

Impact of Recently Issued Accounting Standards

There have been no recently issued accounting standards that have an impact on the Company’s consolidated 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 is computed by dividing net loss by the weighted average number of common shares outstanding. Diluted net loss available to common stockholders per common share is computed by dividing net loss by the weighted average number of common shares and dilutive potential common share equivalents then outstanding. The Company’s potential dilutive common shares, which consist of shares issuable upon the exercise of stock options, have not been included in the computation of diluted net loss per share for all periods as the result would be anti-dilutive.

The following table sets forth the potential shares of common stock that are not included in the calculation of diluted net loss per share as the result would be anti-dilutive as of the end of each period presented:

	Three Months Ended
	March 31,
	2011		2010
Weighted average stock options outstanding		2,592,507		2,308,038

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5. Cash, Cash Equivalents and Investments

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

At March 31, 2011, the Company held certain assets that are required to be measured at fair value on a recurring basis. These assets include available for sale securities classified as cash equivalents and short-term investments. Accounting Standards Codification 820-10 requires the valuation of investments using a three-tiered approach, which requires that fair value measurements be classified and disclosed in one of three tiers. These tiers are: Level 1, defined as quoted prices in active markets for identical assets or liabilities; Level 2, defined as valuations based on observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets, or other inputs that are observable or can be corroborated by observable input data; and Level 3, defined as valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants.

At March 31, 2011, all available for sale securities were classified as Level 1 assets with a fair value of $36.5 million, which included money market funds of $6.3 million and short-term investments of $30.2 million. At December 31, 2010, all available for sale securities were classified as Level 1 assets with a fair value of $42.1 million, which included money market funds of $24.0 million and short-term investments of $18.1 million. The Company had no Level 2 or Level 3 assets or liabilities at March 31, 2011 or December 31, 2010.

6. Accounts Receivable, Net

The following table presents the components of accounts receivable:

	March 31,			December 31,
	2011			2010
	(In thousands)
Gross accounts receivable	$	3,935		$	4,001
Allowance for uncollectible accounts		(362	)		(347	)
Total accounts receivable, net	$	3,573		$	3,654

7. Inventories

The following table presents the components of inventories:

	March 31,		December 31,
	2011		2010
	(In thousands)
Work-in-process	$	2,055	$	2,005
Finished goods		1,854		1,727
Raw materials		251		146
Total inventories	$	4,160	$	3,878

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8. Accrued Expenses

The following table presents the components of accrued expenses:

	March 31,		December 31,
	2011		2010
	(In thousands)
Commissions	$	614	$	589
Legal and professional fees		266		300
Vacation		262		175
Salaries and fringe		145		52
Travel and entertainment		125		53
Franchise Tax		80		116
Bonus		69		770
Other		37		22
Total accrued expenses	$	1,598	$	2,077

9. Comprehensive Loss

The following table presents the components of other comprehensive loss:

	Three Months Ended
	March 31,
	2011			2010
	(In thousands)
Net loss	$	(5,726	)	$	(6,356	)
Other comprehensive income (loss):
Translation adjustments		8			(8	)
Total comprehensive loss	$	(5,718	)	$	(6,364	)

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

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes to our consolidated financial statements included in this report. In addition to historical financial information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that concern matters that involve risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact contained in this report, including statements regarding 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. Actual results could differ materially from those projected in forward-looking statements as a result of the following factors, among others: acceptance and continued use of our products by surgeons, the lack of clinical data about the efficacy of our products, uncertainty of reimbursement from third-party payors, our historical lack of profitability, cost pressures in the healthcare industry, competitive pressures from substitute products and larger companies, our dependence on key employees, regulatory approval and market acceptance for new products, our reliance on a limited number of suppliers to provide our products, our ability to effectively manage a sales force to meet our objectives and our ability to conduct successful clinical studies. 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, 2010, and in other filings we make with the Securities and Exchange Commission, or the SEC. Furthermore, such forward-looking statements speak only as of the date of this report. We expressly disclaim any intent or obligation to update any forward-looking statements after the date hereof to conform such statements to actual results or to changes in our opinions or expectations except as required by applicable law or the rules of the NASDAQ Stock Market. 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

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lumbar region. Using our pre-sacral approach, a surgeon can access discs in the lower lumbar region of the spine through a small incision adjacent to the tailbone and can perform an entire interbody 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, the Vectre™ and Avatar™ lumbar posterior fixation systems and Bi-Ostetic^TM bone void filler, a biologics product.

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 1L product in the fourth quarter of 2004, and commercially introduced our AxiaLIF 1L product in the United States in the first quarter of 2005. We received a CE mark to market our AxiaLIF 1L product in the European market in the first quarter of 2005 and began commercialization in the first quarter of 2006. We received a CE mark for our AxiaLIF 2L product in the third quarter of 2006 and began commercialization in the European market in the fourth quarter of 2006. We received FDA 510(k) clearance for our AxiaLIF 2L product and began marketing this product in the United States in the second quarter of 2008. The AxiaLIF 2L product was discontinued in 2010 after we launched our AxiaLIF 2L+™ product in July 2010, for which we had received FDA 510(k) clearance in January 2010. We commercially launched our next generation Vectre facet screw system in April 2010. In the first quarter of 2010, we entered into agreements to distribute Avatar, a pedicle screw system, and Bi-Ostetic bone void filler, a biologics product. In March 2011, we received FDA 510(k) clearance for our next generation AxiaLIF 1L+ product and made it commercially available in a limited market release. We currently sell our products through a direct sales force, independent sales agents and international distributors.

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

Since inception, we have been unprofitable. As of March 31, 2011, we had an accumulated deficit of $96.4 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.

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Financial Operations

	Three Months Ended March 31,
	2011			2010			% change
	(in thousands except gross margin percentage)
Revenue	$	5,130		$	6,713			-23.6	%
Cost of revenue		1,296			1,429			-9.3	%
Gross margin %		74.7	%		78.7	%		-5.1	%
Total operating expenses		9,578			11,591			-17.4	%
Net loss		(5,726	)		(6,356	)		9.9	%

Revenue

We generate revenue from the sales of our implants and disposable surgical instruments. We have two distinct sales methods. The first method is when implants and/or disposable surgical instruments are sold directly to hospitals or surgical centers for the purpose of conducting a scheduled surgery. Our sales representatives or independent sales agents hand deliver the products to the customer on or before the day of the surgery. The sales representative or independent agent is then responsible for reporting the delivery of the products and the date of the operation to the corporate office for proper revenue recognition. We recognize revenue upon the confirmation that the products have been used in a surgical procedure. The other sales method is for sales to hospitals for consumption during future surgeries or to distributors outside the United States. These transactions require the customer to send in a purchase order before shipment will be made and the customer only has the right of return for defective products. We 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

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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), Net

Other income (expense), net is primarily composed of interest earned on our cash, cash equivalents and available-for-sale securities and the loss on disposal of fixed assets.

Results of Operations

Comparison of the Three Months Ended March 31, 2010 and 2011

Revenue.  Revenue decreased from $6.7 million in the three months ended March 31, 2010 to $5.1 million in the three months ended March 31, 2011. The $1.6 million decrease in revenue from 2010 to 2011 was primarily a result of a lower number of AxiaLIF cases performed in 2011, which was due primarily to physician reimbursement limitations and insurance denials for lumbar fusion surgery due to medical necessity. Domestically, sales of our AxiaLIF 1L products decreased from $3.5 million in the three months ended March 31, 2010 to $2.5 million in the three months ended March 31, 2011, and sales of our AxiaLIF 2L products decreased from $1.9 million in the three months ended March 31, 2010 to $1.5 million in the three months ended March 31, 2011. Sales of our pedicle screw system, which was introduced in January 2010, were $0.1 million for the three months ended March 31, 2010 and 2011 and sales of our Bi-Ostetic bone void filler, which we introduced in February 2010, increased from $17,000 in the three months ended March 31, 2010 to $0.2 million in the three months ended March 31, 2011. In the three months ended March 31, 2011, average revenue per AxiaLIF case continued to increase, helped by a price increase effective April 1, 2010, the release of our AxiaLIF 2L+ product in July 2010, and penetration into existing cases by our new products. In the three months ended March 31, 2010 and 2011, we recorded 537 and 369 domestic AxiaLIF cases, respectively, including 141 AxiaLIF 2L cases in the three months ended March 31, 2010, and 102 AxiaLIF 2L and 2L+ cases in the three months ended March 31, 2011. Additionally, during the three months ended March 31, 2010 and 2011, we generated $0.5 million and $0.3 million, respectively, in revenues from sales of our facet and Vectre screw systems. Revenue generated outside the United States decreased from $0.7 million in the three months ended March 31, 2010 to $0.6 million in the three months ended March 31, 2011. There were no initial stocking shipments to new distributors outside the United States in the three months ended March 31, 2010 or March 31, 2011. In the three months ended March 31, 2010 and 2011, 90% and 89%, respectively, of our revenues were generated in the United States.

Cost of Revenue.  Cost of revenue decreased from $1.4 million in the three months ended March 31, 2010 to $1.3 million in the three months ended March 31, 2011. Gross margin decreased from 78.7% in the three months ended March 31, 2010 to 74.7% in the three months ended March 31, 2011. The decrease in gross margin was primarily due to a higher percentage of sales being derived from distributed products in 2011 as compared to 2010, which have a lower gross margin than our AxiaLIF products.

Research and Development.  Research and development expenses increased from $1.3 million in the three months ended March 31, 2010 to $1.6 million in the three months ended March 31, 2011. The $0.3 million increase in expenses from 2010 to 2011 was primarily related to an increase in clinical trials and project spending of $0.2 million and an expense of $0.3 million to acquire the exclusive license to a new technology under development offset by a decrease in salaries and benefits of $0.1 million.

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Sales and Marketing.  Sales and marketing expenses decreased from $7.7 million in the three months ended March 31, 2010 to $6.4 million in the three months ended March 31, 2011. The decrease in expenses from 2010 to 2011 of $1.3 million was primarily due to lower personnel-related costs of $0.7 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 $0.2 million, decreased surgeon training expenses of $0.2 million and decreased promotional expenses of $0.2 million.

General and Administrative.  General and administrative expenses decreased from $2.6 million in the three months ended March 31, 2010 to $1.6 million in the three months ended March 31, 2011. The decrease in expenses from 2010 to 2011 of $1.0 million was primarily due to a decrease in personnel-related expenses, including management transition costs that occurred in the first quarter of 2010.

Other Income (Expense), Net.  Other income (expense), net, increased from a loss of $49,000 in the three months ended March 31, 2010 to income of $18,000 in the three months ended March 31, 2011. The increase of $67,000 from 2010 to 2011 was primarily related to a loss on disposal of fixed assets of $71,000 in the three months ended March 31, 2010.

Liquidity and Capital Resources

Sources of Liquidity

Since our inception in 2000, we have incurred significant losses and, as of March 31, 2011, we had an accumulated deficit of $96.4 million. We have not yet achieved profitability, and anticipate that we will continue to incur losses in the near term. We expect to continue to fund research and development, sales and marketing and general and administrative expenses at similar to current levels or higher and, as a result, we will need to generate significant revenues to achieve profitability. Prior to our October 2007 initial public offering, our operations were funded primarily with the gross proceeds from the sale of preferred stock of $40.5 million. The net proceeds from our October 2007 initial public offering of $86.7 million have funded our operations since then.

As of March 31, 2011, we did not have any outstanding debt financing arrangements, we had working capital of $40.9 million and our primary source of liquidity was $36.5 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 $42.5 million at December 31, 2010 to $36.5 million at March 31, 2011. The decrease of $6.0 million was primarily the result of net cash used in operating activities of $6.0 million and purchases of property and equipment of $69,000 offset by net cash provided from issuance of our common stock upon the exercise of stock options of $12,000.

Cash Flows

Net Cash Used in Operating Activities.  Net cash used in operating activities was $6.0 million in the three months ended March 31, 2011. This amount was attributable primarily to the net loss after adjustment for non-cash items, such as depreciation, stock-based compensation expense, inventory and bad debt reserves, combined with changes in working capital requirements to support the market acceptance of our AxiaLIF products.

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Net Cash Provided by Investing Activities,  Net cash used by investing activities was $12.2 million in the three months ended March 31, 2011. This amount reflected net purchases or sales and maturities of short-term investments of $12.1 million, offset by purchases of property and equipment of $0.1 million, primarily for reusable instrument kits used in the field and information technology needs.

Net Cash Provided by Financing Activities.  Net cash provided by financing activities in the three months ended March 31, 2011 was $12,000, 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 and cash equivalents, together with cash received from sales of our products, will be sufficient to meet our cash needs for at least the next two years. We intend to spend substantial sums on sales and marketing initiatives to support the ongoing commercialization of our products and on research and development activities, including product development, regulatory and compliance, clinical studies in support of our currently marketed products and future product offerings, and the enhancement and protection of our intellectual property. We may need to obtain additional financing to pursue our business strategy, to respond to new competitive pressures or to take advantage of opportunities that may arise. The sale of additional equity or convertible debt securities could result in dilution to our stockholders. If additional funds are raised through the issuance of debt securities, these securities could have rights senior to those associated with our common stock and could contain covenants that would restrict our operations. Any additional financing may not be available in amounts or on terms acceptable to us, if at all. If we are unable to obtain this additional financing, we may be required to reduce the scope of our planned product development and marketing efforts.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenue and expenses, and disclosures of contingent assets and liabilities at the date of the financial statements. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, accounts receivable reserves, inventory reserves, accrued expenses, income tax valuations and stock-based compensation. We base our estimates on historical experience and various other assumptions that we believe to be reasonable, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Actual results could differ from those estimates under different assumptions or conditions.

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, 2010. There have been no material changes in any of our accounting policies since December 31, 2010.

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New Accounting Standards

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not required.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of March 31, 2011. We maintain disclosure controls and procedures that are designed to provide a reasonable assurance level that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2011, our principal executive officer and principal financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

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

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 aggregate market value of our voting stock held by non-affiliates as of June 30, 2010.

PART II. OTHER INFORMATION

Item 6. Exhibits

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

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SIGNATURES

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

	TranS1 Inc.
Date: May 16, 2011	By:	/s/ Ken Reali
		Ken Reali
		President and Chief Executive Officer
Date: May 16, 2011	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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