10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013

or

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

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission File Number 001-33744

BAXANO SURGICAL, 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.)

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

(919) 800-0020

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes    þ   No    ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes    þ     No    ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:

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

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

The number of shares of the registrant’s common stock outstanding as of August 8, 2013 was 45,197,632 shares.

BAXANO SURGICAL, INC.

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2013

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION	2
Item 1.	Financial Statements	2
	Consolidated Statements of Operations and Comprehensive Loss (unaudited)	2
	Consolidated Balance Sheets (unaudited)	3
	Consolidated Statements of Cash Flows (unaudited)	4
	Notes to Consolidated Financial Statements (unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4.	Controls and Procedures	30
PART II.	OTHER INFORMATION	30
Item 1.	Legal Proceedings	30
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 6.	Exhibits	32
SIGNATURES		33
EXHIBIT INDEX		34

1

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Baxano Surgical, Inc.

Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except per share amounts)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Revenue	$	3,877		$	3,460		$	6,977		$	7,243
Cost of revenue		1,295			912			2,327			1,909
Gross profit		2,582			2,548			4,650			5,334
Operating expenses:
Research and development		1,509			1,244			2,794			2,577
Sales and marketing		6,032			5,371			10,959			10,670
General and administrative		1,860			1,504			3,411			2,922
Merger and integration expenses		1,583			-			2,895			-
Charges related to U.S. Government settlement		69			720			160			1,184
Total operating expenses		11,053			8,839			20,219			17,353
Operating loss		(8,471	)		(6,291	)		(15,569	)		(12,019	)
Other expense, net		(60	)		(2	)		(62	)		(32	)
Net loss	$	(8,531	)	$	(6,293	)	$	(15,631	)	$	(12,051	)
Other comprehensive loss:
Foreign currency translation adjustments		1			-			-			-
Comprehensive loss	$	(8,530	)	$	(6,293	)	$	(15,631	)	$	(12,051	)
Net loss per common share – basic and diluted	$	(0.26	)	$	(0.23	)	$	(0.51	)	$	(0.44	)
Weighted average common shares outstanding - basic and diluted		33,408			27,255			30,379			27,250

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

2

Baxano Surgical, Inc.

Consolidated Balance Sheets

(in thousands, except share amounts)

(Unaudited)

	June 30,			December 31,
	2013			2012
Assets
Current assets:
Cash and cash equivalents	$	19,602		$	21,541
Restricted cash		138			-
Accounts receivable, net		4,290			3,206
Inventory		6,872			5,017
Prepaid expenses and other assets		834			330
Total current assets		31,736			30,094
Property and equipment, net		2,879			2,166
Goodwill		16,036			-
Intangible assets, net		8,219			-
Other long-term assets		158			-
Total assets	$	59,028		$	32,260
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt	$	526		$	-
Accounts payable		2,475			2,603
Accrued expenses related to U.S. Government settlement		2,702			6,792
Accrued expenses		3,048			1,648
Total current liabilities		8,751			11,043
Long-term debt		2,234			-
Noncurrent liabilities		3,553			78
Commitments and contingencies (Note 11)
Stockholders' equity:
Common stock, $0.0001 par value; 75,000,000 shares authorized, 45,197,632 and 27,313,997 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively		4			3
Additional paid-in capital		198,910			159,929
Accumulated other comprehensive income		14			14
Accumulated deficit		(154,438	)		(138,807	)
Total stockholders' equity		44,490			21,139
Total liabilities and stockholders' equity	$	59,028		$	32,260

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

3

Baxano Surgical, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

	Six Months Ended June 30,
	2013			2012
Cash flows from operating activities:
Net loss	$	(15,631	)	$	(12,051	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		817			474
Stock-based compensation		620			760
Allowance for excess and obsolete inventory		29			59
Provision (reversal of provision) for bad debts		32			(37	)
Loss on disposal of fixed assets		-			30
Changes in operating assets and liabilities:
Decrease in accounts receivable		451			506
(Increase) decrease in inventory		62			(677	)
(Increase) decrease in prepaid expenses		(270	)		149
Decrease in accounts payable		(1,616	)		(187	)
Increase (decrease) in accrued expenses related to U.S. Government settlement		(627	)		437
Increase in accrued expenses		470			482
Net cash used in operating activities		(15,663	)		(10,055	)
Cash flows from investing activities:
Purchases of property and equipment		(612	)		(1,357	)
Acquisition, net of cash received		(2,685	)		-
Sales and maturities of investments		-			6,027
Restricted cash classification change		(62	)		-
Net cash provided by (used in) investing activities		(3,359	)		4,670
Cash flows from financing activities:
Net proceeds from issuance of common stock		17,074			61
Proceeds from exercise of stock options		10			7
Net cash provided by financing activities		17,084			68
Effect of exchange rate changes on cash and cash equivalents		(1	)		-
Net decrease in cash and cash equivalents		(1,939	)		(5,317	)
Cash and cash equivalents, beginning of period		21,541			38,724
Cash and cash equivalents, end of period	$	19,602		$	33,407

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

4

Baxano Surgical, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

1. Description of Business

Baxano Surgical, Inc., a Delaware corporation (the “Company”), was incorporated in May 2000 and, effective March 1, 2013, is headquartered in Raleigh, North Carolina. The Company is a medical device company focused on marketing, designing and developing minimally invasive products to treat degenerative conditions of the spine affecting the lumbar region. The Company operates in one business segment. The Company currently markets the AxiaLIF^® family of products for single and two level lower lumbar fusion, the VEO^TM lateral access and interbody fusion system and the iO-Flex^® system, a proprietary set of flexible instruments used by surgeons during spinal decompression procedures. All of the Company’s AxiaLIF products are delivered using its pre-sacral approach. The Company also markets other products that complement these primary offerings, including pedicle screws, facet screws, bowel retractors, discectomy tools, bone void filler and a bone graft harvesting system that can be used to extract bone graft.

The AxiaLIF Legacy product was commercially released in January 2005. The AxiaLIF 2L™ product was commercially released in Europe in the fourth quarter of 2006 and in the United States in the second quarter of 2008. The AxiaLIF 2L product was discontinued in 2010 after the Company launched its AxiaLIF Plus 2-Level™ product in July 2010. The Company commercially launched the Vectre™ facet screw system in April 2010. In the first quarter of 2010, the Company completed product and regulatory training and began marketing Bi-Ostetic™ bone void filler, a biologics product for specific indications outside the interbody space of the spine. The Company commercially launched its AxiaLIF Plus 1-Level product in September 2011, which received FDA 510(k) clearance in March 2011. In 2010, the Company received 510(k) clearance for the VEO lateral access and interbody fusion system, which was commercially launched in November 2011, and in July 2012 the Company received a CE mark for the VEO lateral access and interbody fusion system and began commercialization in the European market. The iO-Flex System was commercialized in the United States in 2009 for decompression applications and received a CE Mark in February 2012. The Company also markets the iO-Tome™ instrument to rapidly and precisely remove facet joints, which is commonly performed in spinal fusion procedures, which received FDA clearance in July 2012 and is currently in a limited market release. The Company sells its products through a direct sales force, independent sales agents and international distributors.

On May 31, 2013, the Company changed its name from TranS1, Inc. to Baxano Surgical, Inc. and completed the acquisition of Baxano, Inc. (“Baxano”), a medical device company headquartered in San Jose, California. See Note 12 for a description of the Company’s merger (the “Merger”) with Baxano and the related transactions.

The Company has 77 U.S. issued patents, 41 pending patent applications or provisional patent applications in the United States, nine issued European patents with numerous national validations, 10 issued Japanese patents with another one allowed, five issued Australian patents, one Canadian patent and 17 pending foreign patent application families as counterparts of U.S. cases. The issued and pending patents cover, among other things, (i) the Company’s method for performing trans-sacral procedures in the spine, including diagnostic or therapeutic procedures, and minimally invasive trans-sacral introduction of instrumentation or implants; (ii) apparatus for conducting these procedures including access, disc preparation and implantation; (iii) implants for fusion and motion preservation in the spine, (iv) a lateral access and interbody fusion system; (v) posterior fixation systems; and, (vi) instrumentation individually and in kit form for accessing target spinal tissue, confirming the location of neural tissue, and modifying target tissue to achieve decompression.

5

The Company owns trademark registrations for 21 distinct marks in the United States, 14 trademark registrations in the European Union, 2 registered trademarks in Canada and 2 registered trademarks in China. The Company also owns 6 pending trademark applications in the United States and 2 pending trademark applications in China.

On May 31, 2013, the Company, through its wholly-owned subsidiary Racer X Acquisition Corp. (“Merger Sub”), consummated the Merger with Baxano pursuant to an Agreement and Plan of Merger (the “Merger Agreement”). Under the terms of the Merger Agreement, Merger Sub merged with and into Baxano, with Baxano remaining as the surviving corporation and as a wholly-owned subsidiary of the Company. Immediately following the closing of the Merger on May 31, 2013, the Company changed its name to Baxano Surgical, Inc. in connection with the merger of this wholly-owned subsidiary with and into the Company.

Concurrent with the closing of the Merger on May 31, 2013, the Company completed a private placement of 7,522,009 shares of its common stock at an offering price of $2.28 per share. The offering resulted in aggregate proceeds to the Company of approximately $17.2 million and has been included in stockholders' equity as common stock and additional paid-in capital. At June 30, 2013 and December 31, 2012, there were 45,197,632 and 27,313,997 shares of common stock issued and outstanding, respectively, and there were no shares of preferred stock issued and outstanding. See Note 12 for further information regarding the Merger and private placement.

The Company is subject to a number of risks similar to other similarly-sized companies in the medical device industry. These risks include, without limitation, acceptance and continued use of the Company’s products by surgeons, limited clinical data about the efficacy of these products, uncertainty of reimbursement from third-party payors, cost pressures in the healthcare industry, competitive pressures from substitute products and larger companies, the historical lack of profitability, the dependence on key employees, regulatory approval and market acceptance for new products, compliance with complex and evolving healthcare laws and regulations, our ability to raise additional capital, our ability to comply with our settlement agreement and Corporate Integrity Agreement (the “CIA”) with certain entities of the U.S. government, stockholder class action lawsuits, the reliance on a limited number of suppliers to provide these products and their components, changes in economic conditions, the ability to effectively manage a sales force to meet the Company’s objectives and the ability to conduct successful clinical studies.

6

2. Summary of Significant Accounting Policies

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, 2012. The accompanying unaudited interim consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) which are, in the opinion of the Company’s management, necessary for a fair statement of the Company’s consolidated financial position, results of operations and cash flows for the periods presented. These principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The principal estimates relate to accounts receivable reserves, inventory valuation, stock-based compensation, accrued expenses and income tax valuation. Actual results could differ from those estimates. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. All intercompany accounts and transactions have been eliminated in consolidation.

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

For a description of our critical accounting policies and estimates, please refer to the “Critical Accounting Policies and Estimates” section of the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section contained in our Annual Report on Form 10-K for the year ended December 31, 2012. There have been no material changes in any of our accounting policies since December 31, 2012, however the Company has adopted the following new accounting policies related to the Merger.

Identifiable Intangible Assets and Goodwill

Identifiable intangible assets are recorded at cost, or when acquired as part of a business acquisition, at estimated fair value. Certain intangible assets are amortized over periods ranging from 10 to 17 years. Similar to tangible personal property, plant and equipment, the Company periodically evaluates identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carry amount may not be recoverable.

Indefinite-lived intangible assets, such as goodwill and certain trademarks, are not amortized. The Company tests the carrying amounts of these assets for recoverability on an annual basis or when events or changes in circumstances indicate evidence of potential impairment exists, using a fair value based test.

7

Debt Issuance Costs

The Company capitalizes costs associated with the issuance of debt instruments and amortizes these costs to interest expense over the term of the related debt agreement using the effective yield amortization method. Unamortized debt issuance costs will be charged to operations when indebtedness under the related credit facility is repaid prior to maturity.

Business Acquisitions

Business acquisitions are accounted for using the acquisition method of accounting in accordance with Accounting Standards Codification (“ASC”) 805, “Business Combinations.” ASC 805 requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values, as determined in accordance with ASC 820, “Fair Value Measurements,” as of the acquisition date. For certain assets and liabilities, book value approximates fair value. In addition, ASC 805 establishes that consideration transferred be measured at the closing date of the acquisition at the then-current market price, which may be different than the amount of consideration assumed in the pro forma financial statements. Under ASC 805, acquisition related costs (i.e., advisory, legal, valuation and other professional fees) and certain acquisition-related restructuring charges impacting the target company are expensed in the period in which the costs are incurred. The application of the acquisition method of accounting requires the Company to make estimates and assumptions related to the estimated fair values of net assets acquired. Significant judgments are used during this process, particularly with respect to intangible assets. Generally, intangible assets are amortized over their estimated useful lives. Goodwill and other indefinite-lived intangibles are not amortized, but are annually assessed for impairment. Therefore, the purchase price allocation to intangible assets and goodwill has a significant impact on future operating results.

Reclassification

Certain balances in the prior year’s consolidated financial statements have been reclassified to conform to the June 30, 2013 presentation. These changes consisted of a reclassification on the consolidated statements of operations from general and administrative expense to a separate line item entitled charges related to U.S. Government settlement and a reclassification on the consolidated statements of cash flows from changes in accounts payable and accrued expenses to a separate line item entitled increase (decrease) in accrued expenses related to U.S. Government settlement.

Impact of Recently Issued Accounting Standards

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

8

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  June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
Weighted average stock options outstanding		4,093,296		3,371,301		3,702,905		3,185,326

5. Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents include money market treasury funds. Cash equivalents are carried at fair market value. At June 30, 2013, the Company had $138,000 of restricted cash; $63,000 is currently deposited in a bank account in Germany, but not readily accessible and $75,000 is in a certificate of deposit securing a line of credit. Related unrealized gains and losses were not material as of June 30, 2013 and December 31, 2012. There have been no unrealized gains or losses reclassified to accumulated other comprehensive income.

At June 30, 2013, the Company held certain assets that are required to be measured at fair value on a recurring basis. These assets include available for sale securities classified as cash equivalents. ASC 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.

9

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

	June 30,		December 31,
	2013		2012
	(In thousands)
Cash and cash equivalents	$	18,721	$	21,116
Total cash and available for sale securities	$	18,721	$	21,116

The Company had no Level 2 or Level 3 assets or liabilities at June 30, 2013 or December 31, 2012.

6. Accounts Receivable, Net

The following table presents the components of accounts receivable:

	June 30,			December 31,
	2013			2012
	(In thousands)
Gross accounts receivable	$	4,535		$	3,419
Allowance for uncollectible accounts		(245	)		(213	)
Total accounts receivable, net	$	4,290		$	3,206

7. Inventories

The following table presents the components of inventories:

	June 30,		December 31,
	2013		2012
	(In thousands)
Finished goods	$	4,351	$	3,048
Raw materials		1,871		1,629
Work-in-process		650		340
Total inventories	$	6,872	$	5,017

8. Goodwill and Intangible Assets

The following table presents the carrying value of the components of goodwill and intangible assets at the balance sheet dates:

	June 30,			December 31,
	2013			2012
	(In thousands)
Goodwill	$	16,036		$	-
Intangible assets:
Trademarks		1,265			-
Technology		6,598			-
Customer relationships		400			-
Amortization of intangible assets		(44	)		-
Total intangible assets	$	8,219		$	-

10

9. Accrued Expenses

The following table presents the components of accrued expenses:

	June 30,		December 31,
	2013		2012
	(In thousands)
Vacation	$	662	$	160
Commissions		581		333
Severance		531		5
Bonus		478		630
Legal and professional fees		263		129
Other		533		391
Total accrued expenses	$	3,048	$	1,648

10. Debt

In connection with the Merger, the Company assumed and became the borrower under Baxano’s outstanding credit facility pursuant to the terms of the First Amendment to Loan and Security Agreement, dated as of May 31, 2013 (the “First Amendment to Loan Agreement”), among the Company, Oxford Finance LLC, as collateral agent (the “Collateral Agent”), and Oxford Finance Funding I, LLC and Silicon Valley Bank, as lenders (the “Lenders”). The First Amendment to Loan Agreement amends the Loan and Security Agreement, dated as of March 15, 2012, among the Collateral Agent, the lenders party thereto, and Baxano (as so amended, the “Amended Loan Agreement”). The Amended Loan Agreement evidences a term loan, which will mature on May 1, 2016 (the “Term Loan”). The following table presents the components of long-term debt (in thousands):

	June 30,
	2013
	(in thousands)
Term Loan	$	2,815
Balloon payment on Term Loan		210
Debt discount		(265	)
Total long-term debt		2,760
Less: Current portion of long-term debt		526
Total long-term debt, net of current portion	$	2,234

The Term Loan bears interest at a fixed rate equal to 6.72% and the Company is required to make monthly interest-only payments through November 2013.

11

Commencing December 2013, the Amended Loan Agreement provides for the amortization of principal (in the form of level monthly payments of principal and interest). The Term Loan will be required to be prepaid if the Term Loan is accelerated following an event of default. In addition, the Company is permitted to prepay the Term Loan in full at any time upon 15 days’ written notice to the Lenders. Upon the earliest to occur of the maturity date, acceleration of the Term Loan, or prepayment of the Term Loan, the Company is required to make a final payment equal to the original principal amount of the Term Loan multiplied by 7.00% (the “Final Payment Fee”). Any prepayment, whether mandatory or voluntary, must include the Final Payment Fee, the prepayment fee (equal to 2% of the principal amount prepaid if prepayment is made on or before May 31, 2015, or 1% of the principal amount prepaid if payment is made thereafter), interest at the default rate (which is the rate otherwise applicable plus 5%) with respect to any amounts past due, the Collateral Agent’s and the Lenders’ expenses, and all other obligations that are due and payable to the Collateral Agent and the Lenders.

The Amended Loan Agreement is secured by a security interest in substantially all assets of the Company and any future subsidiaries, other than intellectual property. The Amended Loan Agreement contains customary representations (tested on a continual basis) and covenants that, subject to exceptions, restrict the Company’s ability to do the following things: declare dividends or redeem or repurchase equity interests; pay, redeem, or amend subordinated debt; incur additional liens; make loans and investments; incur additional indebtedness; engage in mergers, acquisitions, and asset sales; transact with affiliates; be party to material litigation; fail to appoint a chief executive officer or chief financial officer upon vacancy; undergo a change in control; add or change business locations; and engage in businesses that are not related to the Company’s existing business. In addition, the Company is required to raise at least $10,000,000 in net cash proceeds from the sale of its equity securities before December 31, 2013.

11. Legal Proceedings

In October 2011, the Company received a subpoena issued by the Department of Health and Human Services, Office of Inspector General (“OIG”) under the authority of the federal healthcare fraud and false claims statutes. The subpoena sought documents for the period January 1, 2008 through October 6, 2011. The Company has cooperated with the government’s request. On December 24, 2012 the Company reached a tentative agreement in principle with the U.S. Department of Justice related to the subpoena issued in October 2011. The Company and the staff of the Department of Justice agreed to settle its federal investigation for $6.0 million. The final agreement was executed in June 2013. The $6.0 million settlement, plus accrued interest of 2%, will be paid in nine quarterly installments beginning in July 2013. The Company also signed a CIA with the OIG in June 2013 and is in the process of implementing the requirements of the CIA.

The following table presents the components of the U.S. Government settlement liability:

	June 30,			Dec 31,
	2013			2012
	(in thousands)
U.S. Government settlement	$	6,000		$	6,000
Less current portion		(2,537	)		-
Long-term liability	$	3,463		$	6,000

12

In the three months ended June 30, 2013 and 2012, the Company expensed legal fees of $69,000 and $0.7 million, respectively, related to this investigation. In the fourth quarter of 2012, the Company expensed the $6.0 million related to the tentative settlement. The Company had accrued $6.2 million at June 30, 2013 and $6.8 million at December 31, 2012 for the settlement and related legal fees.

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

12. Closing of Merger and Financing Transaction

On May 31, 2013, the Company consummated the Merger with Baxano pursuant to the Merger Agreement. Under the terms of the Merger Agreement, Merger Sub merged with and into Baxano, with Baxano remaining as the surviving corporation and as a wholly-owned subsidiary of the Company. Immediately following the closing of the Merger on May 31, 2013, the Company changed its name to Baxano Surgical, Inc. in connection with the merger of this wholly-owned subsidiary with and into the Company.

During April and May 2013, Baxano issued promissory notes (the “Bridge Notes”) to the Company in the aggregate principal amount of $2.3 million, as contemplated by the Merger Agreement. The Bridge Notes bore interest at a rate of 6% per annum. The Bridge Notes were not secured by any collateral; were subordinated in right of payment to the loan evidenced by the Loan and Security Agreement dated as of March 15, 2012, among Oxford Finance LLC, Silicon Valley Bank and Baxano; and were senior in right of payment to the promissory notes of Baxano that were convertible into capital stock of Baxano (each a “Baxano Note”). The Bridge Notes were cancelled immediately prior to the effective time of the Merger without consideration, repayment, or any other right of ours repaid or otherwise compensated.

Upon the closing of the Merger, and in accordance with the terms of the Merger Agreement, the Company issued an aggregate of 10,329,035 shares of the Company’s common stock as merger consideration. In connection with the closing of the Merger, 796,772 shares of the Company’s common stock (equal to approximately 7.5% of the total merger consideration) were deposited in a third-party escrow account to secure certain indemnification obligations of the Baxano securityholders and to fund any post-closing adjustment payable to the Company based on excess indebtedness or unpaid transaction expenses of Baxano, or to the extent Baxano’s actual working capital at March 31, 2013 is less than target working capital of $2,121,000. Once the amount of any post-closing adjustment is determined and paid, remaining escrow shares, if any, in excess of 5% of the merger consideration will be distributed to the Baxano securityholders. The remainder of the escrow shares will be distributed to the Baxano securityholders promptly following the first anniversary of the closing date to the extent such escrow shares are not then subject to indemnification claims by the Company.

13

Concurrent with the closing of the Merger, and in accordance with the terms of a Securities Purchase Agreement, dated March 3, 2013, the Company issued and sold to certain investors 7,522,009 shares of the Company’s common stock, at a purchase price of $2.28 per share, resulting in gross proceeds to the Company of approximately $17.2 million.

At the closing of the Merger, each outstanding share of capital stock of Baxano was cancelled and extinguished and converted into the right to receive a portion of the merger consideration in accordance with the Merger Agreement. The Baxano Notes were terminated at closing of the Merger, and the holders of such Baxano Notes are entitled to receive merger consideration in accordance with the Merger Agreement. Because the merger consideration is being allocated first to holders of Baxano Notes and then to Baxano stockholders in accordance with Baxano’s certificate of incorporation , only holders of Baxano Notes and Baxano Series C Preferred Stock received merger consideration. All stock option plans or other stock or equity-related plans of Baxano, all employee stock purchase plans, each outstanding option to purchase common stock of Baxano, whether vested or unvested, and each warrant to acquire capital stock of Baxano were terminated prior to the closing of the Merger.

The following table summarizes the purchase price (in thousands):

Value of common shares issued	$	21,278
Cash paid at closing		250
Pre-acquisition amounts due from Baxano, net		2,509
	$	24,037

The purchase price was allocated to the net assets acquired utilizing the methodology prescribed in ASC 805. The Company recorded goodwill of $16.0 million after recording net assets acquired at fair value as presented in the following table.

The following table summarizes the allocation of the purchase price to the net assets acquired (in thousands):

Cash and cash equivalents	$	279
Accounts receivable		1,567
Inventory		1,946
Other current assets		234
Property and equipment		866
Other long-term asset		91
Intangible assets		8,263
Goodwill		16,036
Total assets acquired		29,282
Accounts payable and other liabilities		(2,430	)
Term debt assumed		(2,815	)
Total purchase price	$	24,037

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The Company allocated $8.3 million of the purchase price to identifiable intangible assets that met the separability and contractual legal criterion of ASC 805. The following summarizes the intangible assets that were acquired and the period over which the Company will recognize amortization cost using the straight-line method (in thousands):

			Amortization
			Period
	Amount		(Years)
Trademark	$	420	Indefinite
Product Trademarks		845	15-17
Technology		6,598	15-17
Customer Relationships		400	10
	$	8,263

The results of operations of Baxano have been included in our consolidated financial statements from the date of the acquisition. The following pro forma results of operations assume the acquisition of Baxano as of the beginning of 2012. The pro forma results for the six months ended June 30, 2013 presented below reflect our historical data and the historical data of the Baxano business adjusted for amortization of intangibles, interest costs associated with Baxano preferred stock and convertible debt, and elimination of intercompany G&A expenses. The pro forma results of operations presented below may not be indicative of the results the Company would have achieved had the Company completed the acquisition on January 1, 2013, or that the Company may achieve in the future.

							Historical
	Baxano Surgical			Baxano			Results of Baxano Surgical			Pro Forma Adjustments			Pro Forma Results
	(in thousands)
Revenue	$	6,977		$	4,725		$	11,702		$	-		$	11,702
Cost of revenue		2,327			1,662			3,989			25			4,014
Gross profit		4,650			3,063			7,713			(25	)		7,688
Operating expenses:
Research and development		2,794			1,318			4,112			4			4,116
Sales and marketing		10,959			5,437			16,396			4			16,400
General and administrative		3,411			939			4,350			227			4,577
Merger and integration expenses		2,895			3,054			5,949			-			5,949
Charges related to U.S. Government settlement		160			-			160			-			160
Operating expenses		(20,219	)		(10,748	)		(30,967	)		(235	)		(31,202	)
Operating loss		(15,569	)		(7,685	)		(23,254	)		(260	)		(23,514	)
Other expense, net		(62	)		(702	)		(764	)		548			(216	)
Net loss	$	(15,631	)	$	(8,387	)	$	(24,018	)	$	288		$	(23,730	)

Historical Baxano Surgical loss per common share - basic and diluted	$	(0.51	)
Pro forma loss per common share - basic and diluted:
Pro forma loss	$	(23,730	)
Pro forma weighted average common shares		45,173
Pro forma loss per common share	$	(0.53	)

15

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

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes to our consolidated financial statements included in this report. In addition to historical financial information, this report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, that concern matters that involve risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact contained in this report, including statements regarding future events, our future financial performance, our future business strategy and the plans and objectives of management for future operations, are forward-looking statements. We have attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should” or “will” or the negative of these terms or other comparable terminology. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Readers are urged to carefully review and consider the various disclosures made by us, which attempt to advise interested parties of the risks, uncertainties, and other factors that affect our business, operating results, financial condition and stock price, including without limitation the disclosures made under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Risk Factors”, “Financial Statements” and “Notes to Consolidated Financial Statements” in this report, as well as the disclosures made under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Risk Factors”, “Consolidated Financial Statements” and “Notes to Consolidated Financial Statements” included in our Annual Report on Form 10-K for the year ended December 31, 2012, and in other filings we make with the Securities and Exchange Commission, or the SEC. Furthermore, such forward-looking statements speak only as of the date of this report. We expressly disclaim any intent or obligation to update any forward-looking statements after the date hereof to conform such statements to actual results or to changes in our opinions or expectations except as required by applicable law or the rules of The NASDAQ Stock Market LLC. References in this report to “Baxano Surgical”, “we”, “our”, “us”, or the “Company” refer to Baxano Surgical, Inc.

Overview

We are a medical device company focused on marketing, designing and developing minimally invasive products to treat degenerative conditions of the spine affecting the lumbar region. We are committed to delivering minimally invasive surgical technologies that enhance patient clinical care while providing sustained value for our customers. We currently market the AxiaLIF^® family of products for single and two level lower lumbar fusion, the VEO^TM lateral access and interbody fusion system and the iO-Flex® system, a proprietary set of flexible instruments used by surgeons during spinal decompression procedures. Our AxiaLIF products use our pre-sacral approach, through which a surgeon can access discs in the lumbar region of the spine through an incision adjacent to the tailbone and perform an interbody fusion procedure through instrumentation that provides direct access to the intervertebral space. We developed our pre-sacral approach to allow spine surgeons to access and treat intervertebral spaces without compromising important surrounding soft tissue, nerves and bone structures. Our VEO lateral access and interbody fusion system provides for direct visualization of the psoas muscle and unrestricted lateral fluoroscopic views, which we believe has allowed us to increase our market share in the highly competitive lateral fusion segment. We believe that direct visualization allows a surgeon to have improved visibility of the psoas and the nerves running through this muscle that, when used in conjunction with neuromonitoring, can potentially reduce complications. We also market other products that complement these primary offerings, including pedicle screws, facet screws, bowel retractors, discectomy tools, bone void filler and a bone graft harvesting system that can be used to extract bone graft. Our philosophy of continuous improvement is driven by ongoing research and development investment in our core technologies. We support this investment by diligently expanding, maintaining, and protecting our significant patent portfolio.

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On May 31, 2013, we changed our name from TranS1 Inc. to Baxano Surgical, Inc. and completed the acquisition of Baxano, Inc. (“Baxano”), a medical device company headquartered in San Jose, California.

From our incorporation in 2000 through 2004, we devoted substantially all of our resources to research and development and start-up activities, consisting primarily of product design and development, clinical trials, manufacturing, recruiting qualified personnel and raising capital. We received 510(k) clearance from the U.S. Food and Drug Administration, or FDA, for our AxiaLIF Legacy product in the fourth quarter of 2004, and commercially introduced our AxiaLIF Legacy product in the United States in the first quarter of 2005. We received a CE mark to market our AxiaLIF Legacy product in the European market in the first quarter of 2005 and began commercialization in the first quarter of 2006. We received a CE mark for our AxiaLIF 2L product in the third quarter of 2006 and began commercialization in the European market in the fourth quarter of 2006. We received FDA 510(k) clearance for our AxiaLIF 2L product and began marketing this product in the United States in the second quarter of 2008. The AxiaLIF 2L product was discontinued in 2010 after we launched our AxiaLIF Plus 2-Level™ product in July 2010, for which we had received FDA 510(k) clearance in January 2010. We commercially launched the Vectre™ facet screw system in April 2010. In the first quarter of 2010, we completed product and regulatory training and began marketing Bi-Ostetic™ bone void filler, a biologics product for specific indications outside the interbody space of the spine. We commercially launched our AxiaLIF Plus 1-Level product in September 2011, for which we had received FDA 510(k) clearance in March 2011. In 2010, we received 510(k) clearance for our VEO lateral access and interbody fusion system, which was commercially launched in November 2011, and in July 2012 we received a CE mark for our VEO lateral access and interbody fusion system and began commercialization in the European market. The iO-Flex System was commercialized in the United States in 2009 for decompression applications and received a CE Mark in February 2012. The iO-Tome product received FDA clearance in July 2012 and is currently in a limited market release. We currently sell our products through a direct sales force, independent sales agents and international distributors.

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

We rely on third parties to manufacture virtually all of our AxiaLIF, VEO, Vectre and Bi-Ostetic products and their components. The majority of our iO-Flex and iO-Tome product manufacturing, including subassemblies, final assemblies, packaging, and product release, is performed at our San Jose facility. Our outsourcing partners are manufacturers that meet FDA, International Organization for Standardization or other internal quality standards, where applicable.

On May 31, 2013, we, through our wholly-owned subsidiary Racer X Acquisition Corp., or the Merger Sub, consummated our acquisition of Baxano pursuant to an Agreement and Plan of Merger, or the Merger Agreement. Under the terms of the Merger Agreement, Merger Sub merged with and into Baxano, with Baxano remaining as the surviving corporation and as a wholly-owned subsidiary of the Company, or the Merger. Immediately following the closing of the Merger on May 31, 2013, we changed our name to Baxano Surgical, Inc. in connection with the merger of this wholly-owned subsidiary with and into the Company.

Upon the closing of the Merger, and in accordance with the terms of the Merger Agreement, we issued an aggregate of 10,329,035 shares of our common stock as merger consideration. In connection with the closing of the Merger, 796,772 shares of our common stock (equal to approximately 7.5% of the total merger consideration) were deposited in a third-party escrow account to secure certain indemnification obligations of the Baxano securityholders and to fund any post-closing adjustment payable to us based on excess indebtedness or unpaid transaction expenses of Baxano, or to the extent Baxano’s actual working capital at March 31, 2013 is less than target working capital of $2,121,000. Once the amount of any post-closing adjustment is determined and paid, remaining escrow shares, if any, in excess of 5% of the merger consideration will be distributed to the Baxano securityholders. The remainder of the escrow shares will be distributed to the Baxano securityholders promptly following the first anniversary of the closing date to the extent such escrow shares are not then subject to indemnification claims by us.

Concurrent with the closing of the Merger, and in accordance with the terms of a Securities Purchase Agreement, dated March 3, 2013, or the Securities Purchase Agreement, we issued and sold to certain investors 7,522,009 shares of our common stock, at a purchase price of $2.28 per share, resulting in gross proceeds to us of approximately $17.2 million.

As of June 30, 2013, we have incurred $2.1 million of merger related expenses and $0.8 million of integration expenses.

Since inception, we have been unprofitable. As of June 30, 2013 we had an accumulated deficit of $154.4 million.

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

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Results of Operations

Our results of operations include the acquired Baxano operations from the Merger date, May 31, 2013, forward.

	Three Months Ended June 30,									Six Months Ended June 30,
	2013			2012			% change			2013			2012			% change
	(in thousands, except gross margin percentage)
Revenue	$	3,877		$	3,460			12.1	%	$	6,977		$	7,243			-3.7	%
Cost of revenue		1,295			912			42.0	%		2,327			1,909			21.9	%
Gross margin %		66.6	%		73.6	%		-9.5	%		66.6	%		73.6	%		-9.5	%
Total operating expenses		11,053			8,839			25.0	%		20,219			17,353			16.5	%
Net loss		(8,531	)		(6,293	)		-35.6	%		(15,631	)		(12,051	)		-29.7	%

Revenue

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

Cost of Revenue

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

Research and Development

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

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Sales and Marketing

Sales and marketing expenses consist primarily of personnel costs, sales commissions paid to our direct sales representatives, independent sales agents and independent distributors and costs associated with physician training programs, promotional activities and participation in medical and trade conferences. In future periods, we expect sales and marketing expenses to increase as we expand our sales and marketing efforts.

General and Administrative

General and administrative expenses consist of personnel costs related to the executive, finance and human resource functions, as well as professional service fees, legal fees, accounting fees, insurance costs and general corporate expenses. In future periods, we expect general and administrative expenses to increase to support our sales, marketing, research and development efforts.

Charges Related to U.S. Government Settlement

Charges related to U.S. Government settlement consist of settlement costs and legal fees related to the subpoena issued by the Department of Health and Human Services, Office of Inspector General, or the OIG, in October 2011 and the June 2013 settlement with the U.S. Department of Justice.

Merger and Integration Expenses

Merger expenses consist primarily of legal, accounting, consulting and other professional fees related to the Merger. Integration expenses consist of costs incurred in planning for and integrating our operations with Baxano.

Other Expense

Other expense is primarily composed of interest expense on the long-term debt and U.S. Government settlement, interest earned on our cash and cash equivalents and the gain or loss on disposal of fixed assets.

Comparison of the Three Months Ended June 30, 2012 and 2013

Revenue Revenue increased from $3.5 million in the three months ended June 30, 2012 to $3.9 million in the three months ended June 30, 2013.

Revenue by product line was:

	Three Months Ended June 30,
	2013		2012
	(in thousands)
Domestic revenue:
AxiaLIF	$	1,733	$	2,254
iO-Flex		798		-
VEO		664		447
Other		492		515
Total		3,687		3,216
International revenue		190		244
Total Revenue	$	3,877	$	3,460

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Note: iO-Flex revenue is included from the Merger date, May 31, 2013.

The $0.4 million increase in revenue from 2012 to 2013 was primarily due to the addition of the iO-Flex family of products to our portfolio as of May 31, 2013, offset by a lower number of AxiaLIF cases performed by our current surgeon base. Domestically, sales of our AxiaLIF Plus 1-Level products decreased from $1.5 million in the three months ended June 30, 2012 to $1.3 million in the three months ended June 30, 2013, and sales of our AxiaLIF Plus 2-Level products decreased from $0.8 million in the three months ended June 30, 2012 to $0.4 million in the three months ended June 30, 2013. In the three months ended June 30, 2013, average revenue per AxiaLIF case increased, primarily as a result penetration into existing cases by our other products. In the three months ended June 30, 2012 and 2013, we recorded 193 and 153 domestic AxiaLIF cases, respectively, including 52 AxiaLIF Plus 2-Level cases in the three months ended June 30, 2012, and 31 AxiaLIF Plus 2-Level cases in the three months ended June 30, 2013. Sales of our iO-Flex products for the quarter were $0.8 million, which represented 204 cases. Sales of our VEO lateral access and interbody fusion system increased from $0.4 million in the three months ended June 30, 2012 to $0.7 million in the three months ended June 30, 2013, as the number of cases increased from 32 in the three months ended June 30, 2012, to 65 in the three months ended June 30, 2013. During both the three months ended June 30, 2012 and 2013, we generated $0.2 million in revenues from sales of our posterior fixation systems. Sales of our Bi-Ostetic bone void filler decreased from $0.2 million for the three months ended June 30, 2012 to $0.1 million in the three months ended June 30, 2013. Revenue generated outside the United States was $0.2 million in both the three months ended June 30, 2012 and 2013. There were $25,000 in initial stocking shipments to new distributors outside the United States in the three months ended June 30, 2012, but there were no initial stocking shipments to new distributors in the three months ended June 30, 2013. In the three months ended June 30, 2012, 93% of our revenues were generated in the United States compared to 95% in the three months ended June 30, 2013.

Cost of Revenue Cost of revenue increased from $0.9 million for the three months ended June 30, 2012 to $1.3 million for the three months ended June 30, 2013. Gross margin decreased from 73.6% in the three months ended June 30, 2012 to 66.6% in the three months ended June 30, 2013. The decrease in gross margin was primarily due to increased depreciation expense on reusable kits, primarily due to upgrading reusable kits as we launched our next generation of AxiaLIF and VEO products, increased royalty expenses and the medical device tax that became effective on January 1, 2013.

Research and Development Research and development expenses increased from $1.2 million in the three months ended June 30, 2012 to $1.5 million in the three months ended June 30, 2013. Personnel-related expenses increased by $0.2 million from the three months ended June 30, 2012 compared to three months ended June 30, 2013 as we increased the headcount in our regulatory and clinical functions, including an increase in headcount related to the Merger. In addition, R&D project spending increased by $0.2 million, partially offset by a decrease of $0.1 million clinical trial spending in the three months ended June 30, 2013 compared to the three months ended June 30, 2012.

21

Sales and Marketing Sales and marketing expenses increased from $5.4 million in the three months ended June 30, 2012 to $6.0 million in the three months ended June 30, 2013. The increase in expenses from 2012 to 2013 of $0.6 million was primarily due to higher personnel-related costs of $0.3 million as we increased our direct sales personnel, including headcount related to the Merger, higher commissions of $0.5 million related to the increased revenue, as well as integrating the commission plans, partially offset by a decrease in consulting expenses of $0.3 million as we reduced our external reimbursement consultants and moved more of the efforts in-house.

General and Administrative General and administrative expenses increased from $1.5 million in the three months ended June 30, 2012 to $1.9 million in the three months ended June 30, 2013. The increase in expenses of $0.3 million was primarily due to an increase in personnel-related expense of $0.2 million, including headcount increases related to the Merger, increased insurance expenses related to the changes in the business and higher recruiting expenses.

U.S. Government Settlement Charges In December 2012, we reached a tentative agreement in principle with the U.S. Department of Justice related to the subpoena issued in October 2011. Baxano Surgical and the staff of the Department of Justice agreed to settle its federal investigation for $6.0 million. The final agreement was executed in June 2013. The $6.0 million settlement, plus accrued interest of 2%, will be paid in nine quarterly installments beginning in July 2013. We also incurred legal fees related to the investigation of $0.5 million in the three months ended June 30, 2012 and $0.1 million in the three months ended June 30, 2013.

Merger and Integration Expenses We have incurred $1.6 million of merger and integration related expenses for the three months ended June 30, 2013 related to the Merger with Baxano. These expenses consist primarily of legal expenses related to the Merger and employee severance and retention costs as we integrate the businesses.

Other Expense, net Other expense increased from $2,000 in the three months ended June 30, 2012 to $60,000 in the three months ended June 30, 2013. The increase of $58,000 was primarily related to interest on the term debt assumed in the Merger, including amortization of the debt discount, and interest on the U.S. Government settlement.

Comparison of the Six Months Ended June 30, 2012 and 2013

Revenue Revenue decreased from $7.2 million in the six months ended June 30, 2012 to $7.0 million in the six months ended June 30, 2013.

Revenue by product line was:

	Six Months Ended June 30,
	2013		2012
	(in thousands)
Domestic revenue:
AxiaLIF Plus 1-Level	$	3,383	$	4,902
iO-Flex		798		-
VEO		1,239		749
Other		861		1,067
Total		6,281		6,718
International revenue		696		525
Total Revenue	$	6,977	$	7,243

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Note: iO-Flex revenue is included from the Merger date, May 31, 2013.

The $0.2 million decrease in revenue from 2012 to 2013 was due primarily to the lower number of AxiaLIF cases performed by our current surgeon base, partially offset by the addition of the iO-Flex family of products to our portfolio as of May 31, 2013. Domestically, sales of our AxiaLIF Plus 1-Level products decreased from $3.0 million in the six months ended June 30, 2012 to $2.2 million in the six months ended June 30, 2013, and sales of our AxiaLIF Plus 2-Level products decreased from $1.9 million in the six months ended June 30, 2012 to $1.1 million in the six months ended June 30, 2013. In the six months ended June 30, 2013, average revenue per AxiaLIF case increased, primarily as a result of the release of new AxiaLIF products and penetration into existing cases by our other products. In the six months ended June 30, 2012 and 2013, we recorded 415 and 286 domestic AxiaLIF cases, respectively, including 128 AxiaLIF Plus 2-Level cases in the six months ended June 30, 2012, and 79 AxiaLIF Plus 2-Level cases in the six months ended June 30, 2013. Sales of our VEO lateral access and interbody fusion system increased from $0.7 million in the six months ended June 30, 2012 to $1.2 million in the six months ended June 30, 2013, as the number of cases increased from 61 in the six months ended June 30, 2012, to 113 in the six months ended June 30, 2013. Sales of our iO-Flex products for the six months ended June 30, 2013 were $0.8 million, which represented 204 cases. During the six months ended June 30, 2012 and 2013, we generated $0.4 million and $0.3 million, respectively, in revenues from sales of our posterior fixation systems. Sales of our Bi-Ostetic bone void filler decreased from $0.4 million for the six months ended June 30, 2012 to $0.3 million for the six months ended June 30, 2013. Revenue generated outside the United States increased from $0.5 million in the six months ended June 30, 2012 to $0.7 million in the six months ended June 30, 2013. There was $25,000 in initial stocking shipments to new distributors outside the United States in the six months ended June 30, 2012 compared to $0.3 million in initial stocking shipments to new distributors in the six months ended June 30, 2013. In the six months ended June 30, 2012, 93% of our revenues were generated in the United States compared to 90% in the six months ended June 30, 2013.

Cost of Revenue Cost of revenue increased from $1.9 million for the six months ended June 30, 2012 to $2.3 million for the six months ended June 30, 2013. Gross margin decreased from 73.6% in the six months ended June 30, 2012 to 66.6% in the six months ended June 30, 2013. The decrease in gross margin was primarily due to a higher percentage of international sales which carry a lower gross margin than domestic sales, increased depreciation expense on reusable kits, primarily due to upgrading reusable kits as we launched our next generation of AxiaLIF and VEO products, increased royalty expenses and the medical device tax that became effective on January 1, 2013.

Research and Development Research and development expenses increased from $2.6 million in the six months ended June 30, 2012 to $2.8 million in the six months ended June 30, 2013. Personnel-related expenses increased by $0.4 million from the six months ended June 30, 2012 compared to six months ended June 30, 2013 as we increased our headcount in our regulatory and clinical functions, including an increase in headcount related to the Merger, and R&D project spending increased by $0.2 million, partially offset by a decrease of $0.2 million clinical trial spending in the six months ended June 30, 2013, and a decrease of $0.2 million in licensing agreements incurred in the six months ended June 30, 2012.

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Sales and Marketing Sales and marketing expenses increased from $10.7 million in the six months ended June 30, 2012 to $11.0 million in the six months ended June 30, 2013. The increase in expenses from 2012 to 2013 of $0.3 million was primarily due to higher commissions of $0.5 million related to integrating the commission plans, as well as increased training expense of $0.3 million as we educate our combined sales team on all products in our portfolio, partially offset by a decrease in consulting expenses of $0.4 million as we reduced our external reimbursement consultants and moved more of the efforts in-house.

General and Administrative General and administrative expenses increased from $2.9 million in the six months ended June 30, 2012 to $3.4 million in the six months ended June 30, 2013. The increase in expenses of $0.5 million was primarily due to an increase in personnel-related expense of $0.2 million, including headcount increases related to the Merger, increased insurance expenses related to the changes in the business and higher recruiting expenses.

U.S. Government Settlement Charges In December 2012, we reached a tentative agreement in principle with the U.S. Department of Justice related to the subpoena issued in October 2011. Baxano Surgical and the staff of the Department of Justice agreed to settle its federal investigation for $6.0 million. The final agreement was executed in June 2013. The $6.0 million settlement, plus accrued interest of 2%, will be paid in nine quarterly installments beginning in July 2013. We also incurred legal fees related to the investigation of $0.7 million in the six months ended June 30, 2012 and $0.2 million in the six months ended June 30, 2013.

Merger and Integration Expenses We have incurred $2.9 million of merger and integration related expenses for the six months ended June 30, 2013 related to the Merger with Baxano. These expenses consist primarily of legal expenses related to the Merger and employee severance and retention costs as we integrate the businesses.

Other Expense, net Other expense increased from $32,000 in expense in the six months ended June 30, 2012 to $62,000 in expense in the six months ended June 30, 2013. The expense in 2012 was primarily related to a loss on the disposal of fixed assets in the six months ended June 30, 2012 from the disposal of obsolete components of certain reusable instrument kits and the expense in 2013 was primarily related to interest on the term debt assumed in the Merger, including amortization of the debt discount, and interest on the U.S. Government settlement.

Liquidity and Capital Resources

Sources of Liquidity

Since our inception in 2000, we have incurred significant losses and, as of June 30, 2013, we had an accumulated deficit of $154.4 million. We have not yet achieved profitability, and we cannot assure investors that we will achieve profitability with our existing capital resources. Our recurring losses raise substantial doubt about our ability to continue as a going concern. As a result, our independent registered public accounting firm included an explanatory paragraph in its report on our financial statements as of and for the year ended December 31, 2012 with respect to this uncertainty. We expect to continue to fund research and development, sales and marketing and general and administrative expenses at similar to current or higher levels 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, the net proceeds of our September 2011 stock offering of $18.2 million and the net proceeds of $17.1 million from our May 2013 private placement transaction have funded our operations since then.

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

As of June 30, 2013, our liabilities included an outstanding debt financing arrangement in the amount of $2.8 million, payable monthly over 36 months, and a payable of $6.0 million related to our settlement agreement with the U.S. Government, payable quarterly over three years. We have working capital of $23.0 million at June 30, 2013 and our primary source of liquidity was $19.6 million in cash and cash equivalents. We currently invest our cash and cash equivalents primarily in money market treasury funds.

Cash and cash equivalents decreased from $21.5 million at December 31, 2012 to $19.6 million at June 30, 2013. The decrease of $1.9 million was primarily the result of net cash used in operating activities of $15.7 million, payments under the Baxano acquisition of $2.7 million and purchases of property and equipment of $0.6 million, partially offset by the net proceeds from our private placement transaction of $17.1 million.

Cash Flows

Net Cash Used in Operating Activities. Net cash used in operating activities was $15.7 million in the six months ended June 30, 2013. This amount was attributable primarily to the net loss after adjustment for non-cash items, such as depreciation, stock-based compensation expense, inventory and bad debt reserves, plus the net change in operating assets and liabilities for the six months ended June 30, 2013, primarily decreases in accounts payable and accrued liabilities.

Net Cash Used in Investing Activities. Net cash used in investing activities was $3.4 million in the six months ended June 30, 2013. This amount reflected the net cash paid, net of cash acquired, of $2.7 million for the Baxano acquisition and purchases of property and equipment of $0.6 million, primarily for reusable instrument kits used in the field and up-fitting our new headquarters in Raleigh, North Carolina.

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Net Cash Provided by Financing Activities. Net cash provided by financing activities in the six months ended June 30, 2013 was $17.1 million, which represented the net proceeds from the sale of common stock under the Securities Purchase Agreement, purchases of common stock under our employee stock purchase plan and from the issuance of shares of common stock upon the exercise of stock options.

Operating Capital and Capital Expenditure Requirements

We believe that our existing cash and cash equivalents, together with cash received from sales of our products, will be sufficient to meet our anticipated cash needs through 2013, but will not be sufficient to meet our needs through 2014. We intend to spend substantial amounts on sales and marketing initiatives to support the ongoing commercialization of our products and on research and development activities, including product development, regulatory and compliance, clinical studies in support of our currently marketed products and future product offerings, and the enhancement and protection of our intellectual property. We will need to obtain additional financing to pursue our business strategy, to respond to new competitive pressures or to take advantage of opportunities that may arise. To meet our capital needs, we are considering multiple alternatives, including, but not limited to, additional equity financings, debt financings and other funding transactions. There can be no assurance that we will be able to complete any such transaction on acceptable terms or otherwise. If we are unable to obtain the necessary capital, we will need to pursue a plan to license or sell our assets, cease operations and/or seek bankruptcy protection.

In October 2011, we received a subpoena issued by the OIG under the authority of the federal healthcare fraud and false claims statutes. We have cooperated with the government’s request. On December 24, 2012 we reached a tentative agreement in principle with the U.S. Department of Justice related to the subpoena issued in October 2011. We agreed with the staff of the Department of Justice to settle its federal investigation for $6.0 million. The final agreement was executed in June 2013. The $6.0 million settlement, plus accrued interest of 2%, will be paid in nine quarterly installments beginning in July 2013. We also signed a Corporate Integrity Agreement, or CIA, with the OIG in June 2013 and are in the process of implementing the requirements of the CIA.

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

During April and May 2013, Baxano issued promissory notes, or the Bridge Notes, to us in the aggregate principal amount of $2.3 million, as contemplated by the Merger Agreement. The Bridge Notes bore interest at a rate of 6% per annum. The Bridge Notes were not secured by any collateral; were subordinated in right of payment to the loan evidenced by the Loan and Security Agreement dated as of March 15, 2012, among Oxford Finance LLC, Silicon Valley Bank and Baxano; and were senior in right of payment to the promissory notes of Baxano that were convertible into capital stock of Baxano, or the Baxano Notes. The Bridge Notes were cancelled immediately prior to the effective time of the Merger without consideration, repayment, or any other right of ours repaid or otherwise compensated.

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On May 31, 2013, we consummated our Merger with Baxano.

Upon the closing of the Merger, and in accordance with the terms of the Merger Agreement, we issued an aggregate of 10,329,035 shares of our common stock as merger consideration. In connection with the closing of the Merger, 796,772 shares of our common stock (equal to approximately 7.5% of the total merger consideration) was deposited in a third-party escrow account to secure certain indemnification obligations of the Baxano securityholders and to fund any post-closing adjustment payable to us based on excess indebtedness or unpaid transaction expenses of Baxano, or to the extent Baxano’s actual working capital at March 31, 2013 is less than target working capital of $2,121,000. Once the amount of any post-closing adjustment is determined and paid, remaining escrow shares, if any, in excess of 5% of the merger consideration will be distributed to the Baxano securityholders. The remainder of the escrow shares will be distributed to the Baxano securityholders promptly following the first anniversary of the closing date to the extent such escrow shares are not then subject to indemnification claims by us.

Concurrent with the closing of the Merger, and in accordance with the terms of the Securities Purchase Agreement, we issued and sold to the Investors 7,522,009 shares of our common stock, at a purchase price of $2.28 per share, resulting in net proceeds to us of approximately $17.1 million.

Pursuant to the Securities Purchase Agreement, we agreed to register the resale of the shares of our common stock to be issued pursuant to the Merger Agreement and the Securities Purchase Agreement under a registration statement on Form S-3 (or another appropriate form if Form S-3 is not then available to us). The Registration Statement on Form S-3 (File No. 333-189617) was declared effective by the SEC on July 11, 2013.

In connection with the Merger, we assumed and became the borrower under Baxano’s outstanding credit facility pursuant to the terms of the First Amendment to Loan and Security Agreement, dated as of May 31, 2013, or the First Amendment to Loan Agreement, among us, Oxford Finance LLC, as collateral agent, or the Collateral Agent, and Oxford Finance Funding I, LLC and Silicon Valley Bank, as lenders, or the Lenders. The First Amendment to Loan Agreement amends the Loan and Security Agreement, dated as of March 15, 2012, among the Collateral Agent, the lenders party thereto, and Baxano, or as so amended, the Amended Loan Agreement. The Amended Loan Agreement evidences a term loan, which will mature on May 1, 2016, or the Term Loan.

The Term Loan bears interest at a fixed rate equal to 6.72%, and we are required to make monthly interest-only payments through November 2013. Commencing December 2013, the Amended Loan Agreement provides for the amortization of principal (in the form of level monthly payments of principal and interest). The Term Loan will be required to be prepaid if the Term Loan is accelerated following an event of default. In addition, we are permitted to prepay the Term Loan in full at any time upon 15 days’ written notice to the Lenders. Upon the earliest to occur of the maturity date, acceleration of the Term Loan, or prepayment of the Term Loan, we are required to make a final payment equal to the original principal amount of the Term Loan multiplied by 7.00%, or the Final Payment Fee. Any prepayment, whether mandatory or voluntary, must include the Final Payment Fee, the prepayment fee (equal to 2% of the principal amount prepaid if prepayment is made on or before May 31, 2015, or 1% of the principal amount prepaid if payment is made thereafter), interest at the default rate (which is the rate otherwise applicable plus 5%) with respect to any amounts past due, the Collateral Agent’s and the Lenders’ expenses, and all other obligations that are due and payable to the Collateral Agent and the Lenders.

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The Amended Loan Agreement is secured by a security interest in substantially all of our assets and any future subsidiaries, other than intellectual property. The Amended Loan Agreement contains customary representations (tested on a continual basis) and covenants that, subject to exceptions, restrict the Company’s ability to do the following things: declare dividends or redeem or repurchase equity interests; pay, redeem, or amend subordinated debt; incur additional liens; make loans and investments; incur additional indebtedness; engage in mergers, acquisitions, and asset sales; transact with affiliates; be party to material litigation; fail to appoint a chief executive officer or chief financial officer upon vacancy; undergo a change in control; add or change business locations; and engage in businesses that are not related to the Company’s existing business. In addition, the Company is required to raise at least $10,000,000 in net cash proceeds from the sale of its equity securities before December 31, 2013.

The events of default under the Amended Loan Agreement include, without limitation, the following: payment default; other breach of the loan documents; breach of representations and warranties; insolvency; judgments and attachments; dissolutions; failure of security; loss of certain governmental approvals; cross default to intercreditor agreements and other debt; and the occurrence of a material adverse change. If an event of default occurs, the Lenders would be entitled to take various enforcement actions, including acceleration of amounts due under the Amended Loan Agreement and all other actions permitted under the Amended Loan Agreement and applicable law.

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, 2012. There have been no material changes in any of our accounting policies since December 31, 2012, however we have adopted the following new accounting policies related to the Merger.

Identifiable Intangible Assets and Goodwill

Identifiable intangible assets are recorded at cost, or when acquired as part of a business acquisition, at estimated fair value. Certain intangible assets are amortized over periods ranging from 10 to 17 years. Similar to tangible personal property, plant and equipment, we periodically evaluate identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carry amount may not be recoverable.

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Indefinite-lived intangible assets, such as goodwill and certain trademarks, are not amortized. We test the carrying amounts of these assets for recoverability on an annual basis or when events or changes in circumstances indicate evidence of potential impairment exists, using a fair value based test.

Debt Issuance Costs

We capitalize costs associated with the issuance of debt instruments and amortize these costs to interest expense over the term of the related debt agreement using the effective yield amortization method. Unamortized debt issuance costs will be charged to operations when indebtedness under the related credit facility is repaid prior to maturity.

Business Acquisitions and Goodwill

Business acquisitions are accounted for using the acquisition method of accounting in accordance with Accounting Standards Codification (“ASC”) 805, “Business Combinations.” ASC 805 requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values, as determined in accordance with ASC 820, “Fair Value Measurements,” as of the acquisition date. For certain assets and liabilities, book value approximates fair value. In addition, ASC 805 establishes that consideration transferred be measured at the closing date of the acquisition at the then-current market price, which may be different that the amount of consideration assumed in the pro forma financial statements. Under ASC 805, acquisition related costs (i.e., advisory, legal, valuation and other professional fees) and certain acquisition-related restructuring charges impacting the target company are expensed in the period in which the costs are incurred. The application of the acquisition method of accounting requires us to make estimates and assumptions related to the estimated fair values of net assets acquired. Significant judgments are used during this process, particularly with respect to intangible assets. Generally, intangible assets are amortized over their estimated useful lives. Goodwill and other indefinite-lived intangibles are not amortized, but are annually assessed for impairment. Therefore, the purchase price allocation to intangible assets and goodwill has a significant impact on future operating results.

New Accounting Standards

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

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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 Exchange Act) as of June 30, 2013. We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2013, our principal executive officer and principal financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

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

In October 2011, we received a subpoena issued by the OIG under the authority of the federal healthcare fraud and false claims statutes. The subpoena sought documents for the period January 1, 2008 through October 6, 2011. We have cooperated with the government’s request. On December 24, 2012 we reached a tentative agreement in principle with the U.S. Department of Justice related to the subpoena issued in October 2011. We agreed with the staff of the Department of Justice to settle its federal investigation for $6.0 million. The final agreement was executed in June 2013. The $6.0 million settlement, plus accrued interest of 2%, will be paid in nine quarterly installments beginning in July 2013. We also signed a Corporate Integrity Agreement, or CIA, with the OIG in June 2013 and are in the process of implementing the requirements of the CIA. The CIA requires us to hire an Independent Review Organization, or ISO, to assist us in evaluating our systems and processes related to healthcare compliance.

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

Item 1A. Risk Factors.

We discuss various risks that may materially affect our business in our Annual Report on Form 10-K for the year ended December 31, 2012 and our Quarterly Report on Form 10-Q for the Quarter ended March 31, 2013. There have been no material changes to such risks, except as set forth below.

We have entered into a Settlement Agreement and Corporate Integrity Agreement with certain U.S. government entities and may be subject to financial and other penalties, including exclusion from federal healthcare programs, if we fail to comply with these obligations.

On June 28, 2013, we entered into a settlement agreement with various U.S. government entities. Under the terms of this settlement agreement, we have agreed to pay an aggregate of $6 million (plus accrued interest) in installments from July 2013 through July 2015 in settlement of certain government investigatory matters related to our compliance with federal healthcare fraud and false claims statutes. In addition, we have agreed under the CIA, among other things, to maintain a compliance program designed to promote compliance with various federal health care and Food and Drug Administration, or FDA, requirements. We are required to maintain several elements of our existing compliance program during the term of the CIA, including maintaining a compliance officer, a compliance committee, and a code of conduct.  The CIA requires that we conduct certain additional compliance-related activities during the term of the CIA, including various training and monitoring procedures, and maintaining a disciplinary process for compliance obligations.  Pursuant to the CIA, we are required to notify the OIG in writing, among other things, of (i) any ongoing government investigation or legal proceeding involving an allegation that we have committed a crime or have engaged in fraudulent activities; (ii) any other matter that a reasonable person would consider a probable violation of applicable criminal, civil, or administrative laws related to compliance with Federal healthcare programs or FDA requirements; and (iii) any change in location, sale, closing, purchase, or establishment of a new business unit or location related to items or services that may be reimbursed by Federal health care programs.  We are also subject to periodic reporting and certification requirements attesting that the provisions of the CIA are being implemented and followed, as well as certain document and record retention mandates.

The CIA provides that in the event of an uncured material breach of the CIA, we could be excluded from participation in Federal healthcare programs and/or subject to prosecution and subject to other monetary penalties, each of which could have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, the settlement agreement provides that if we default on our obligation to make timely payment of the installment obligations thereunder, all remaining installments would accelerate and accrue further interest at a rate of 12% per annum, and the government would have the right to institute proceedings against us with respect to the settled matters. Such proceedings could subject us to penalties that could have a material adverse effect our business, financial condition, results of operations and cash flows. In addition, our failure to comply with our obligations under the CIA and/or settlement agreement could affect the willingness of surgeons to accept our products, our ability to hire or retain sales representatives and other employees, potential future reimbursement decisions by payors or other significant aspects of our business.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Other than those previously reported on Form 8-K, no unregistered securities were sold or issued during the three months ended June 30, 2013.

Item 6. Exhibits

The exhibits filed with this report are listed in the “Exhibit Index” immediately following the signature page to this report, which Exhibit Index is incorporated herein by reference.

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SIGNATURES

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

	Baxano Surgical, Inc.
Date: August 14, 2013	By:	/s/ Ken Reali
	Ken Reali
	President and Chief Executive Officer
Date: August 14, 2013	By:	/s/ Joseph P. Slattery
	Joseph P. Slattery
	Executive Vice President and Chief Financial Officer

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Baxano Surgical, Inc.

Exhibit Index

Exhibit
No.	Description
2.1	First Amendment to Agreement and Plan of Merger, dated April 10, 2013, among TranS1 Inc., RacerX Acquisition Corp., Baxano, Inc., and Sumeet Jain and David Schulte as Securityholder Representatives (including Form of Bridge Note in Attachment A) (incorporated by reference to Exhibit 2.1 to Baxano Surgical’s Current Report on Form 8-K filed with the SEC on April 10, 2013).
3.1	Certificate of Ownership and Merger, effective May 31, 2013 (incorporated by reference to Exhibit 3.1 to Baxano Surgical’s Current Report on Form 8-K filed with the SEC on June 3, 2013).
4.1	Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to Baxano Surgical’s Registration Statement on Form S-3 (File No. 333-189617) filed with the SEC on June 26, 2013).
10.1	Form of Stock Option Agreement under 2007 Stock Incentive Plan.
10.2	Amended and Restated Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.3 to Baxano Surgical’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013).
10.3	Employment Agreement, effective as of May 31, 2013, between TranS1 Inc. and Greg Welsh (incorporated by reference to Exhibit 10.3 to Baxano Surgical’s Current Report on Form 8-K filed with the SEC on June 3, 2013).
10.4	General Release and Severance Agreement, dated May 1, 2013, between TranS1 Inc. and Dwayne Montgomery.
10.5	First Amendment to Lease, dated June 30, 2013, between Baxano Surgical, Inc. and Sun Life Assurance Company of Canada.
10.6	Loan and Security Agreement, dated as of March 15, 2012, among Baxano, Inc., Oxford Finance LLC, and Silicon Valley Bank (incorporated by reference to Exhibit 10.1 to Baxano Surgical’s Current Report on Form 8-K filed with the SEC on June 3, 2013).
10.7	First Amendment to Loan and Security Agreement, dated May 31, 2013, among Baxano Surgical, Inc., Oxford Finance LLC, Oxford Finance Funding I, LLC, and Silicon Valley Bank (incorporated by reference to Exhibit 10.2 to Baxano Surgical’s Current Report on Form 8-K filed with the SEC on June 3, 2013).
10.8	Settlement Agreement, entered into on June 28, 2013, among the United States of America, acting through the United States Department of Justice and on behalf of the Office of Inspector General of the Department of Health and Human Services, the TRICARE Management Activity, the Office of Personnel Management, the United States Department of Veteran Affairs, Baxano Surgical, Inc. and relator Kevin J. Ryan (incorporated by reference to Exhibit 10.1 to Baxano Surgical’s Current Report on Form 8-K filed with the SEC on July 3, 2013).

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10.9	Corporate Integrity Agreement, entered into on June 24, 2013, among the Office of Inspector General of the Department of Health and Human Services and Baxano Surgical, Inc. (incorporated by reference to Exhibit 10.2 to Baxano Surgical’s Current Report on Form 8-K filed with the SEC on July 3, 2013).
31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934.
31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934.
32.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(b) / 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
32.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(b) / 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
101.INS	XBRL Instance Document*
101.SCH	XBRL Schema Document*
101.CAL	XBRL Calculation Linkbase Document*
101.DEF	XBRL Definition Linkbase Document*
101.LAB	XBRL Label Linkbase Document*
101.PRE	XBRL Presentation Linkbase Document*

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

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EX-10.1

Exhibit 10.1

Option No.     

BAXANO SURGICAL, INC.

STOCK OPTION AGREEMENT

Type of Option (check one): ¨ Incentive           ¨ Nonqualified

This Stock Option Agreement (the “Agreement”) is entered into as of                     , by and between Baxano Surgical, Inc., a Delaware corporation (the “Company”), and                      (the “Optionee”) pursuant to the Company’s 2007 Stock Incentive Plan (the “Plan”). Any capitalized term not defined herein shall have the same meaning ascribed to it in the Plan.

1.   Grant of Option. The Company hereby grants to Optionee an option (the “Option”) to purchase all or any portion of a total of                        (          ) shares (the “Shares”) of the Common Stock of the Company at a purchase price of                       ($         ) per share (the “Exercise Price”), subject to the terms and conditions set forth herein and the provisions of the Plan. If the box marked “Incentive” above is checked, then this Option is intended to qualify as an “incentive stock option” as defined in Section 422 of the Internal Revenue Code of l986, as amended (the “Code”). If this Option fails in whole or in part to qualify as an incentive stock option, or if the box marked “Nonqualified” is checked, then this Option shall to that extent constitute a nonqualified stock option. The effectiveness of this Option is expressly conditioned upon the approval of an amendment to the Plan by the Company’s stockholders at or before the Company’s 2013 Annual Meeting of Stockholders to increase the limit on the number of shares of Common Stock reserved for awards under the Plan to a number sufficient to allow for this Award. If approval for such additional shares under the Plan is not obtained from the stockholders, the Optionee shall cease to have any rights hereunder.

2.   Vesting of Option. The right to exercise this Option shall vest in installments, and this Option shall be exercisable from time to time in whole or in part as to any vested installment. This Option shall be vested     % on                      , following Optionee’s completion of                       months of Continuous Service, and thereafter commencing on                      , upon Optionee’s completion of each additional month of Continuous Service, the remaining                       shares shall vest in                        (      ) equal monthly installments.

No additional shares shall vest after the date of termination of Optionee’s Continuous Service, but this Option shall continue to be exercisable in accordance with Section 3 hereof with respect to that number of shares that have vested as of the date of termination of Optionee’s Continuous Service.

3.   Term of Option. The right of the Optionee to exercise this Option shall terminate upon the first to occur of the following:

(a)  the expiration of ten (10) years from the date of this Agreement;

(b)  the expiration of three (3) months from the date of termination of Optionee’s Continuous Service if such termination occurs for any reason other than permanent disability, death or voluntary resignation; provided, however, that if Optionee dies during such three-month period the provisions of Section 3(e) below shall apply;

(c)  the expiration of one (1) month from the date of termination of Optionee’s Continuous Service if such termination occurs due to voluntary resignation; provided, however, that if Optionee dies during such one-month period the provisions of Section 3(e) below shall apply;

(d)  the expiration of one (1) year from the date of termination of Optionee’s Continuous Service if such termination is due to permanent disability of the Optionee (as defined in Section 22(e)(3) of the Code);

(e)  the expiration of one (1) year from the date of termination of Optionee’s Continuous Service if such termination is due to Optionee’s death or if death occurs during either the three-month or one-month period following termination of Optionee’s Continuous Service pursuant to Section 3(b) or 3(c) above, as the case may be; or

(f)  upon the consummation of a Change in Control, unless such Option is otherwise assumed or replaced with a new option of comparable value or other New Incentives pursuant to Section 8 below.

4.   Exercise of Option. On or after the vesting of any portion of this Option in accordance with Sections 2 or 8 hereof, and until termination of the right to exercise this Option in accordance with Section 3 above, the portion of this Option which has vested may be exercised in whole or in part by the Optionee (or, after his or her death, by the person designated in Section 5 below) upon delivery of the following to the Company at its principal executive offices:

(a)  a written notice of exercise which identifies this Agreement and states the number of Shares then being purchased (but no fractional Shares may be purchased);

(b)  a check or cash in the amount of the Exercise Price (or payment of the Exercise Price in such other form of lawful consideration as the Administrator may approve from time to time under the provisions of Section 5.4 of the Plan);

(c)  a check or cash in the amount reasonably requested by the Company to satisfy the Company’s withholding obligations under federal, state or other applicable tax laws with respect to the taxable income, if any, recognized by the Optionee in connection with the exercise of this Option (unless the Company and Optionee shall have made other arrangements for deductions or withholding from Optionee’s wages, bonus or other compensation payable to Optionee, or by the withholding of Shares issuable upon exercise of this Option or the delivery of Shares owned by the Optionee in accordance with Section 12.1 of the Plan, provided such arrangements satisfy the requirements of applicable tax laws); and

(d)  a letter, if requested by the Company, in such form and substance as the Company may require, setting forth the investment intent of the Optionee, or person designated in Section 5 below, as the case may be.

5.   Death of Optionee; No Assignment. The rights of the Optionee under this Agreement may not be assigned or transferred except by will or by the laws of descent and distribution, and may be exercised during the lifetime of the Optionee only by such Optionee. Any attempt to sell, pledge, assign, hypothecate, transfer or dispose of this Option in contravention of this Agreement or the Plan shall be void and shall have no effect. If the Optionee’s Continuous Service terminates as a result of his or her death, and provided Optionee’s rights hereunder shall have vested pursuant to Section 2 hereof, Optionee’s legal representative, his or her legatee, or the person who acquired the right to exercise this Option by reason of the death of the Optionee (individually, a “Successor”) shall succeed to the Optionee’s rights and obligations under this Agreement. After the death of the Optionee, only a Successor may exercise this Option.

6.   Representation of Optionee. Optionee acknowledges receipt of a copy of the Plan and understands that all rights and obligations connected with this Option are set forth in this Agreement and the Plan.

7.   Adjustments Upon Changes in Capital Structure. In the event that the outstanding shares of Common Stock of the Company are hereafter increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company by reason of a recapitalization, stock split, reverse stock split, reclassification, stock dividend or other change in the capital structure of the Company, then appropriate adjustment shall be made by the Administrator to the aggregate number and kind of Shares subject to the unexercised portion of this Option and to the Exercise Price per share, in order to preserve, as nearly as practical, but not to increase, the benefits of the Optionee under this Option, in accordance with the provisions of Section 4.2 of the Plan.

8.   Change in Control. In the event of a Change in Control:

(a)  The vesting of this Option shall accelerate automatically effective as of immediately prior to the consummation of the Change in Control unless the Options are to be assumed by the acquiring or successor entity (or parent thereof) or new options under a new stock incentive program (“New Incentives”) are to be issued in exchange therefor, as provided in subsection (b) below. If vesting of outstanding Options will accelerate pursuant to this subsection (a), the Administrator in its discretion may provide, in connection with the Change in Control transaction, for the purchase or exchange of each Option for an amount of cash or other property having a value equal to the difference (or “spread”) between: (x) the value of the cash or other property that the Optionee would have received pursuant to the Change in Control transaction in exchange for the shares issuable upon exercise of the Option had the Option been exercised immediately prior to the Change in Control, and (y) the Exercise Price of the Option.

(b)  The vesting of this Option shall not accelerate if and to the extent that: (i) this Option (including the unvested portion thereof) is to be assumed by the acquiring or successor entity (or parent thereof) or a new option of comparable value is to be issued in exchange therefor pursuant to the terms of the Change in Control transaction, or (ii) in the event the consideration to be received by the stockholders of the Company in connection with the Change in Control does not consist of securities, this Option (including the unvested portion thereof) is to be replaced by the acquiring or successor entity (or parent thereof) with other incentives of comparable value containing such terms and provisions as the Administrator in its discretion may consider equitable. If this Option is assumed, or if a new option of comparable value is issued in exchange therefor, then this Option or the new option shall be appropriately adjusted, concurrently with the Change in Control, to apply to the number and class of securities or other property that the Optionee would have received pursuant to the Change in Control transaction in exchange for the Shares issuable upon exercise of this Option had this Option been exercised immediately prior to the Change in Control, and appropriate adjustment also shall be made to the Exercise Price such that the aggregate Exercise Price of this Option or the new option shall remain the same as nearly as practicable.

(c)  If this Option is assumed by an acquiring or successor entity (or parent thereof) or a New Incentive is issued in exchange therefor pursuant to the terms of a Change in Control transaction, the vesting of the Option or the New Incentive shall accelerate if and at such time as the Optionee’s service as an employee, director, officer, consultant or other service provider to the acquiring or successor entity (or a parent or subsidiary thereof) is Terminated Without Cause within twelve (12) months following consummation of the Change in Control.

9.   No Employment Contract Created. Neither the granting of this Option nor the exercise hereof shall be construed as granting to the Optionee any right with respect to continuance of employment by the Company or any of its subsidiaries. The right of the Company or any of its subsidiaries to terminate at will the Optionee’s employment at any time (whether by dismissal, discharge or otherwise), with or without cause, is specifically reserved.

10.   Rights as Stockholder. The Optionee shall have no rights as a stockholder with respect to any Shares covered by this Option until such person has duly exercised this Option, paid the Exercise Price and become a holder of record of the Shares purchased.

11.   “Market Stand-Off” Agreement. Optionee agrees that, if requested by the Company or the managing underwriter of any proposed public offering of the Company’s securities, Optionee will not sell or otherwise transfer or dispose of any Shares held by Optionee without the prior written consent of the Company or such underwriter, as the case may be, during such period of time, not to exceed 180 days following the effective date of the registration statement filed by the Company with respect to such offering, as the Company or the underwriter may specify, but only if all directors, officers and affiliates of the Company are similarly restricted.

12.   Interpretation. This Option is granted pursuant to the terms of the Plan, and shall in all respects be interpreted in accordance therewith. In the event of any conflict between a written employment agreement for the Optionee and this Agreement or the Plan, the provisions of the employment agreement shall control. The Administrator shall interpret and construe this Option and the Plan, and any action, decision, interpretation or determination made in good faith by the Administrator shall be final and binding on the Company and the Optionee.

13.   Limitation of Liability for Nonissuance. During the term of the Plan, the Company agrees at all times to reserve and keep available, and to use its reasonable best efforts to obtain from any regulatory body having jurisdiction any requisite authority in order to issue and sell, such number of shares of its Common Stock as shall be sufficient to satisfy its obligations hereunder and the requirements of the Plan. Inability of the Company to obtain, from any regulatory body having jurisdiction, authority deemed by the Company’s counsel to be necessary for the lawful issuance and sale of any shares of its Common Stock hereunder and under the Plan shall relieve the Company of any liability in respect of the nonissuance or sale of such shares as to which such requisite authority shall not have been obtained.

14.   Notices. Any notice, demand or request required or permitted to be given under this Agreement shall be in writing and shall be deemed given when delivered personally or three (3) days after being deposited in the United States mail, as certified or registered mail, with postage prepaid, (or by such other method as the Administrator may from time to time deem appropriate), and addressed, if to the Company, at its principal place of business, Attention: the Chief Financial Officer, and if to the Optionee, at his or her most recent address as shown in the employment or stock records of the Company.

15.   Governing Law. The validity, construction, interpretation, and effect of this Option shall be governed by and determined in accordance with the laws of the State of Delaware.

16.   Severability. Should any provision or portion of this Agreement be held to be unenforceable or invalid for any reason, the remaining provisions and portions of this Agreement shall be unaffected by such holding.

17.   Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall be deemed one instrument.

18.   Tax Consequences and Reporting Obligation Upon Sale of Shares. If this Option is an “incentive stock option,” the tax benefits afforded to incentive stock options will be obtained by the Optionee only if the Shares received upon exercise of this Option are held for at least one year after the date of exercise of this Option and two years after the date this Option was granted to the Optionee. If the Optionee sells or otherwise transfers the Shares before the expiration of either of these one- or two-year periods, the sale or transfer will be treated for tax purposes as a “disqualifying disposition,” resulting in the following tax consequences: (a) the Optionee will not obtain the tax benefits afforded to incentive stock options, (b) the “spread” as of the date of exercise will be taxed to the Optionee at ordinary income tax rates, and (c) the amount of ordinary income resulting from the disqualifying disposition will be included in the Optionee’s W-2. These tax consequences are described in more detail in the prospectus that relates to the Company’s 2007 Stock Incentive Plan, as amended, a copy of which was delivered to the Optionee with this Option. To assure that the Company has the information necessary to comply with its tax reporting obligations, Optionee agrees to promptly notify the Company if any Shares are sold or transferred less than one year after the date of exercise or less than two years after the date this Option was granted, and report information regarding the disqualifying disposition in accordance with procedures established by the Company for this purpose.

[The balance of this page intentionally left blank]

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

BAXANO SURGICAL, INC.,	OPTIONEE
a Delaware corporation
By:
	(Signature)
Name:
	(Type or print name)
Its:	Address:

EX-10.4

Execution Copy

Exhibit 10.4

GENERAL RELEASE AND SEVERANCE AGREEMENT

This GENERAL RELEASE AND SEVERANCE AGREEMENT (the “GENERAL RELEASE AGREEMENT”) is made and entered into between TranS1 Inc., a Delaware corporation having a principal place of business in North Carolina (the “Company”) and Dwayne Montgomery, a resident of the state of Tennessee, employed by the Company in North Carolina (the “Employee”). Throughout the remainder of this GENERAL RELEASE AGREEMENT, the Company and Employee may be collectively referred to as “the parties.”

Employee is currently employed by the Company as Vice President of Commercial Operations. The Company and Employee wish to terminate the employment relationship, effective May 1, 2013. The Company wishes to provide Employee with severance benefits that are greater than those to which he is entitled. The parties wish to agree upon mutually acceptable terms for Employee’s separation from employment and avoid all litigation relating to the employment relationship and its termination.

Employee represents that he or she has carefully read this entire GENERAL RELEASE AGREEMENT, understands its consequences, and voluntarily enters into it.

In consideration of the above and the mutual promises set forth below, Employee and the Company agree as follows:

1.          SEPARATION. Employee’s employment shall terminate effective May 1, 2013 (the “Separation Date”). Between the Notification Date (as defined in Section 11) and the Separation Date, Employee shall continue to perform his duties and shall continue to receive his full salary and benefits.

2.          Severance Benefits. In consideration of the release and other promises contained herein, the adequacy of which Employee hereby acknowledges, the Company shall pay Employee the sum of One Hundred and Seventy Thousand One Hundred Eighty-Six Dollars and 00/100 ($170,186.00) (less applicable withholdings), which shall be payable in seven (7) equal installment payments in accordance with the Company’s payroll schedule in existence on the Separation Date beginning on the first such payroll date following the tenth (10^th) day after this GENERAL RELEASE AGREEMENT becomes effective as set forth in Section 12 below.

As of the Separation Date, Employee shall not be entitled to medical, dental, vision, disability, accidental death and dismemberment insurance benefits, or any other employee benefits, and shall not be a participant in the Company’s 401(k) Plan (the “401(k) Plan”) or any other plan of any type. For the avoidance of doubt, Employee will not be eligible to contribute to his or her 401(k) plan from severance pay nor receive matching funds from the Company’s related policies. Nothing in this GENERAL RELEASE AGREEMENT, however, shall be deemed to limit Employee’s continuation coverage rights under COBRA or Employee’s vested rights, if any, under the 401(k) plan or other Company Plan, and the terms of those plans shall govern.

# Exhibit 10.4 - Montgomery Severance Agreement

3.          Adequacy of Consideration. Employee acknowledges that the benefits available to him or her under this GENERAL RELEASE AGREEMENT are significant, are of greater value than the benefits to which he or she would be entitled to receive if he or she did not sign this GENERAL RELEASE AGREEMENT, and constitute adequate consideration for the release of claims under Sections 9 and 10 of this GENERAL RELEASE AGREEMENT.

4.          ACKNOWLEDGEMENT OF PAY. Employee agrees and acknowledges that he or she has been paid all wages due and owing to him or her as of the Separation Date, except for the compensation and benefits described in Sections 2 and 5 of this GENERAL RELEASE AGREEMENT. Employee further acknowledges that he or she is not owed any further compensation, except as described in Section 2 of this GENERAL RELEASE AGREEMENT. Employee acknowledges and agrees that he or she is not entitled to severance benefits under any other agreement, including without limitation the Employment Severance Agreement, executed on or around November, 2011, or under any Company plan or policy.

5.          PAID TIME OFF/VACATION PAY. The Company will pay Employee for all accrued but untaken vacation in accordance with Company policy in his or her last regular paycheck following the Separation Date.

6.          OTHER AGREEMENTS. Nothing in this GENERAL RELEASE AGREEMENT shall terminate, revoke or diminish Employee’s obligations or the Company’s and/or its Affiliates’ rights and remedies under law or any agreements relating to trade secrets, confidential information, competitive activities or intellectual property, which Employee has executed in the past, including without limitation the TranS1, Inc. Employee Proprietary Information Agreement, dated February 23, 2010. Employee shall also be bound by and shall comply with all prior agreements or Company policies regarding confidentiality, nondisclosure, non-competition, non-solicitation, intellectual property, or related matters, which he or she has signed, acknowledged or has been subject to at any time during his or her employment with the Company (“Existing Obligations”), along with any other agreement that relate to confidentiality, proprietary information and intellectual property, and nothing herein shall diminish Employee’s obligations, or the Company’s rights thereunder.

7.          EMPLOYEE REPRESENTATIONS AND GOVERNMENT DISCLOSURES. Employee represents and acknowledges that he or she has fully disclosed to and cooperated with the Company in connection with all regulatory matters within his or her area or responsibility with the Company. Employee acknowledges and agrees that nothing in this GENERAL RELEASE AGREEMENT is intended to restrain and does not restrain the rights of Employee or the Company to report or provide information relating to any matters within the regulatory responsibilities of any government agency relating to the work of the Company.

8.          COMPANY PROPERTY. Employee agrees that before receiving any payments or benefits under this GENERAL RELEASE AGREEMENT, he or she shall have returned all Company property (including but not limited to computer and electronic equipment, cell phones, credit cards, keys, etc.), Company documents (whether in hard or electronic form), material, data, information and related matters to the Company.

# Exhibit 10.4 - Montgomery Severance Agreement 2

9.          RElease. In consideration of the pay and benefits conferred by this GENERAL RELEASE AGREEMENT, EMPLOYEE (ON BEHALF OF HERSELF/HIMSELF, HIS/HER FAMILY MEMBERS, HEIRS, ASSIGNS, EXECUTORS AND OTHER REPRESENTATIVES) RELEASES THE COMPANY AND ITS PAST, PRESENT AND FUTURE PARENTS, SUBSIDIARIES, AFFILIATES, AND ITS AND/OR THEIR PREDECESSORS, SUCCESSORS, ASSIGNS, AND ITS AND/OR THEIR PAST, PRESENT AND FUTURE OFFICERS, DIRECTORS, EMPLOYEES, OWNERS, INVESTORS, SHAREHOLDERS, ADMINISTRATORS, BUSINESS UNITS, EMPLOYEE BENEFIT PLANS (TOGETHER WITH ALL PLAN ADMINISTRATORS, TRUSTEES, FIDUCIARIES AND INSURERS) AND AGENTS (“RELEASEES”) FROM ALL CLAIMS AND WAIVES ALL RIGHTS KNOWN OR UNKNOWN, HE/SHE MAY HAVE OR CLAIM TO HAVE RELATING TO HIS/HER EMPLOYMENT WITH THE COMPANY, OR HIS/HER SEPARATION THEREFROM, OR RELATING TO ANY OTHER MATTER WHATSOEVER arising before the execution of this GENERAL RELEASE AGREEMENT, including but not limited to claims for: (i) discrimination, harassment or retaliation arising under any federal, state or local laws prohibiting age (including but not limited to claims under the Age Discrimination in Employment Act of 1967 (ADEA), as amended, and the Older Worker Benefit Protection Act of 1990 (OWBPA)), sex, national origin, race, religion, disability, veteran status or other protected class discrimination, the Family and Medical Leave Act, as amended (FMLA), harassment or retaliation for protected activity; (ii) for compensation, commission payments, bonus payments, stock, options and/or benefits under any plan, program or policy, including but not limited to claims under the Fair Labor Standards Act of 1938 (FLSA), as amended, the Employee Retirement Income Security Act of 1974, as amended, (ERISA), the Family and Medical Leave Act, as amended (FMLA), and similar federal, state, and local laws; (iii) under federal, state or local law of any nature whatsoever, including but not limited to constitutional, statutory, tort, express or implied contract, wrongful discharge, or other common law; and (iv) attorneys’ fees. Provided, however, that this release does not apply to claims for workers’ compensation benefits or unemployment benefits filed with the applicable state agencies, or to any claim for a breach of this GENERAL RELEASE AGREEMENT. For the purpose of implementing a full and complete release and discharge, Employee expressly acknowledges that this GENERAL RELEASE AGREEMENT is intended to include in its effect, without limitation, all claims which he or she does not know or suspect to exist in his or her favor at the time of execution hereof, and that this GENERAL RELEASE AGREEMENT contemplated the extinguishment of any such claim or claims.

CALIFORNIA EMPLOYEES. Employee expressly waives and relinquishes all rights and benefits afforded by Section 1542 of the Civil Code of the State of California, and does so understanding and acknowledging the significance of such specific waiver of Section 1542. Section 1542 states as follows: “A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release, which, if known by him/her must have materially affected his or her settlement with the debtor.” Thus, notwithstanding the provisions of Section 1542, and for the purpose of implementing a full and complete release and discharge, Employee expressly acknowledges that this GENERAL RELEASE AGREEMENT is intended to include in its effect, without limitation, all claims which Employee does not know or suspect to exist in his/her favor at the time of execution hereof, and that this GENERAL RELEASE AGREEMENT contemplates the extinguishment of any such claim or claims.

# Exhibit 10.4 - Montgomery Severance Agreement 3

10.         Covenant Not To Sue. In consideration of the pay and benefits offered to Employee under this GENERAL RELEASE AGREEMENT, Employee will not sue Releasees on any of the released claims, on any matters relating to his or her employment, or relating to any other matter, arising before the execution of this GENERAL RELEASE AGREEMENT, including but not limited to claims under the ADEA, or join as a party with others who may sue Releasees on any such claims; provided, however, this paragraph will not bar a challenge under the OWBPA to the enforceability of the waiver and release of ADEA claims set forth in this GENERAL RELEASE AGREEMENT or bar claims for workers’ compensation or unemployment benefits above, or where otherwise prohibited by law. To the maximum extent permitted by law, Employee agrees that Employee will not seek and waives any right to accept any relief or award from any charge or action against Releasees before any federal, state, or local administrative agency or federal, state or local court whether filed by Employee or on Employee’s behalf with respect to any claim or right covered by paragraph 10. Employee does not abide by this paragraph, then (i) he or she will return all monies received under this GENERAL RELEASE AGREEMENT and indemnify Releasees for all expenses incurred in defending the action, and (ii) Releasees will be relieved of their obligations hereunder.

11.         RIGHT TO REVIEW. The Company delivered, via hand delivery, the original GENERAL RELEASE AGREEMENT, containing the release language set forth in Sections 9 and 10 to Employee on April 2, 2013 (the “Initial Notification Date”) and desired that he or she have adequate time and opportunity to review and understand the consequences of entering into it. Accordingly, the Company advised Employee as follows:

· to consult with his or her attorney prior to executing it; and

· that he or she has twenty one (21) days from the Initial Notification Date to review and consider whether he or she wishes to execute this GENERAL RELEASE AGREEMENT.

Since receiving this GENERAL RELEASE AGREEMENT, Employee asked that the reference in the opening paragraph to his state of residency be changed to Tennessee from North Carolina, and the Company has made this modification. The revised GENERAL RELEASE AGREEMENT was delivered to Employee, via email, on April 8, 2013 (the “Supplemental Notification Date”). Employee acknowledges and agrees that such modification is not material, and does not restart the running of the 21-day review period. Accordingly, Employee acknowledges and agrees that he has been given at least 21-days to review this GENERAL RELEASE AGREEMENT from the Initial Notification Date. Since the Separation Date is more than 21-days after the Initial Notification Date, Employee has until five (5) calendar days after the Separation Date to execute and return this GENERAL RELEASE AGREEMENT. Employee may not execute or return the GENERAL RELEASE AGREEMENT before the Separation Date. If Employee does not return an executed copy of this GENERAL RELEASE AGREEMENT to the Company by no later than the fifth (5^th) calendar day after the Separation Date, it and the obligations of the Company herein shall become null and void. The executed GENERAL RELEASE AGREEMENT should be returned to: Tod McDonald, Sr. HR Director, TranS1, Inc., 301 Government Center Drive, Wilmington, North Carolina 28403.

# Exhibit 10.4 - Montgomery Severance Agreement 4

12.         REVOCATION. Employee may revoke the GENERAL RELEASE AGREEMENT during the seven (7) day period immediately following his or her execution of it. This GENERAL RELEASE AGREEMENT will not become effective or enforceable until the revocation period has expired. To revoke this GENERAL RELEASE AGREEMENT, a written notice of revocation must be delivered to: Tod McDonald, Sr. HR Director, TranS1, Inc., 301 Government Center Drive, Wilmington, North Carolina 28403.

13.         AGENCY CHARGES/INVESTIGATIONS. Nothing in this GENERAL RELEASE AGREEMENT shall prohibit Employee from filing a charge or participating in an investigation or proceeding conducted by the U.S. Equal Employment Opportunity Commission or other governmental agency with jurisdiction concerning the terms, conditions and privileges of his or her employment; provided, however, that by signing this GENERAL RELEASE AGREEMENT, Employee waives his or her right to, and shall not seek or accept, any monetary or other relief of any nature whatsoever in connection with any such charges, investigations or proceedings.

14.         CONFIDENTIALITY AND GOOD WILL. The terms and provisions of the GENERAL RELEASE AGREEMENT are confidential and will not be disclosed to third parties, except as required by law. Notwithstanding the above, Employee may reveal the terms and provisions of the GENERAL RELEASE AGREEMENT to a lawyer he or she consults for legal advice, members of his or her immediate family, or a financial advisor, provided that such persons agree to maintain the confidentiality of the Agreement. Employee will not denigrate, disparage, defame or cast aspersions on the Company or upon the Company’s owners, stockholders, affiliates, officers, directors, employees or agents.

15.         References. Employee agrees that he or she will direct all written inquiries from prospective employers to the Company’s Human Resources department. Employee acknowledges and agrees that, consistent with its usual practices, the Company will provide only information about Employee’s positions, dates of employment and salary.

16.         Disclaimer of Liability. Nothing in this GENERAL RELEASE AGREEMENT is to be construed as either an admission of liability or admission of wrongdoing on the part of either party, each of which denies any liabilities or wrongdoing on its part.

17.         Governing Law. This GENERAL RELEASE AGREEMENT shall be governed by the laws of North Carolina, without regard to its conflict of laws provisions and the applicable provisions of federal law.

18.         Entire Agreement. Except as expressly provided herein, this GENERAL RELEASE AGREEMENT: (i) supersedes and cancels all other understandings and agreements, oral or written, with respect to Employee’s employment with the Company; (ii) supersedes all other understandings and agreements, oral or written, between the parties with respect to the subject matter of this GENERAL RELEASE AGREEMENT; and (iii) constitutes the sole agreement between the parties with respect to this subject matter. Each party acknowledges that: (i) no representations, inducements, promises or agreements, oral or written, have been made by any party or by anyone acting on behalf of any party, which are not embodied in this GENERAL RELEASE AGREEMENT; and (ii) no agreement, statement or promise not contained in this GENERAL RELEASE AGREEMENT shall be valid. No change or modification of this GENERAL RELEASE AGREEMENT shall be valid or binding upon the parties unless such change or modification is in writing and is signed by the parties.

# Exhibit 10.4 - Montgomery Severance Agreement 5

19.         Severability. If any portion, provision, or part of this GENERAL RELEASE AGREEMENT is held, determined, or adjudicated by any court of competent jurisdiction to be invalid, unenforceable, void, or voidable for any reason whatsoever, each such portion, provision, or part shall be severed from the remaining portions, provisions, or parts of this GENERAL RELEASE AGREEMENT, and such determination or adjudication shall not affect the validity or enforceability of such remaining portions, provisions, or parts.

20.         Counterparts. This GENERAL RELEASE AGREEMENT may be executed in any number of counterparts, each of which shall be deemed an original, and all of which taken together shall constitute one and the same instrument. Any party hereto may execute this GENERAL RELEASE AGREEMENT by signing any such counterpart.

21.         Waiver of Breach. A waiver of any breach of this GENERAL RELEASE AGREEMENT shall not constitute a waiver of any other provision of this GENERAL RELEASE AGREEMENT or any subsequent breach of this GENERAL RELEASE AGREEMENT.

22.         SECTION 409A OF THE INTERNAL REVENUE CODE.

22.1         Notwithstanding anything to the contrary in this Agreement, if   the Employee is a “specified employee” within the meaning of Section 409A as of the Separation Date (other than due to death), then the severance payable to the Employee together with any other severance payments or separation benefits that are considered deferred compensation under Section 409A (together, the “Deferred Compensation Separation Benefits”), that are payable within the first six (6) months following the Employee’s termination of employment will become payable on the first payroll date that occurs on or after the date six (6) months and one (1) day following the date of the Employee’s termination of employment. All subsequent Deferred Compensation Separation Benefits, if any, will be payable in accordance with the payment schedule applicable to each payment or benefit. Notwithstanding anything herein to the contrary, if the Employee dies following the Separation Date but prior to the six (6) month anniversary of the Employee’s termination, then any payments delayed in accordance with this paragraph will be payable in a lump sum as soon as administratively practicable after the date of the Employee’s death and all other Deferred Compensation Separation Benefits will be payable in accordance with the payment schedule applicable to each payment or benefit. Each payment and benefit payable under this Agreement is intended to constitute separate payments for purposes of Section 1.409A-2(b)(2) of the Treasury Regulations.

22.2         Any amount paid under this Agreement that satisfies the requirements of the “short-term deferral” rule set forth in Section 1.409A-1(b)(4) of the Treasury Regulations shall not constitute Deferred Compensation Separation Benefits for purposes of clause (i) above.

# Exhibit 10.4 - Montgomery Severance Agreement 6

22.3         Any amount paid under this Agreement that qualifies as a payment made as a result of an involuntary separation from service pursuant to Section 1.409A-1(b)(9)(iii) of the Treasury Regulations that do not exceed the Section 409A Limit shall not constitute Deferred Compensation Separation Benefits for purposes of clause (i) above. For purposes of this Agreement, “Section 409A Limit” shall mean the lesser of two (2) times: (i) the Employee’s annualized compensation based upon the annual rate of pay paid to the Employee during the Company’s taxable year preceding the Company’s taxable year of the Employee’s termination of employment as determined under Treasury Regulation 1.409A-1(b)(9)(iii)(A)(1) and any Internal Revenue Service guidance issued with respect thereto; or (ii) the maximum amount that may be taken into account under a qualified plan pursuant to Section 401(a)(17) of the Code for the year in which the Employee’s employment is terminated.

22.4         The foregoing provisions are intended to comply with the requirements of Section 409A so that none of the severance payments and benefits to be provided hereunder will be subject to the additional tax imposed under Section 409A, and any ambiguities herein will be interpreted to so comply. The Company and the Employee agree to work together in good faith to consider amendments to this Agreement and to take such reasonable actions which are necessary, appropriate or desirable to avoid imposition of any additional tax or income recognition prior to actual payment to the Employee under Section 409A. The parties intend that the provisions of this Agreement comply with Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), and the regulations thereunder (collectively, “Section 409A”) and all provisions of this Agreement shall be construed in a manner consistent with the requirements for avoiding taxes or penalties under Section 409A. If any provision of this Agreement (or of any award of compensation, including equity compensation or benefits) would cause Executive to incur any additional tax or interest under Section 409A, the Company shall, upon the specific request of Executive, use its reasonable business efforts to in good faith reform such provision to comply with Code Section 409A; provided, that to the maximum extent practicable, the original intent and economic benefit to Executive and the Company of the applicable provision shall be maintained, and the Company shall have no obligation to make any changes that could create any additional economic cost or loss of benefit to the Company. The Company shall timely use its reasonable business efforts to amend any plans and programs in which Executive participates to bring it in compliance with Section 409A. Notwithstanding the foregoing, the Company shall have no liability with regard to any failure to comply with Section 409A so long as it has acted in good faith with regard to compliance therewith.

[Signatures on the following page]

# Exhibit 10.4 - Montgomery Severance Agreement 7

IN WITNESS WHEREOF, the parties have entered into this GENERAL RELEASE AGREEMENT as of the day and year written below.

TRANS1 INC.
By:	/s/ Ken Reali
Date:	5/1/2013
DWAYNE MONTGOMERY
/s/Dwayne Montgomery
Date:	5/1/2013

# Exhibit 10.4 - Montgomery Severance Agreement 8

EX-10.5

Exhibit 10.5

FIRST AMENDMENT TO LEASE

This First Amendment to Lease (this “Amendment”) is made as of the __ day of June, 2013, by and between SUN LIFE ASSURANCE COMPANY OF CANADA, a Canadian corporation (“Landlord”), and BAXANO SURGICAL, INC., a Delaware corporation (“Tenant”) (NASDAQ symbol BAXS).

Landlord and Tenant, as successor in in interest to TranS1, Inc., are parties to that certain Office Lease dated October _, 2012 (the “Lease”), pursuant to which Landlord leases to Tenant approximately 4,358 rentable square feet known as Suite 230 (the “Original Premises”) in the building owned by Landlord known as Horizon IV, with a street address of 110 Horizon Drive, Raleigh, North Carolina. Landlord and Tenant now wish to amend the Lease.

NOW THEREFORE, in consideration of the mutual covenants contained herein, and other good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the Lease is hereby amended and the parties hereto do hereby agree as follows:

1.             Recitals; Definitions. The foregoing recitals are true, correct and complete and are hereby incorporated in this Amendment by this reference. Capitalized terms used herein and not otherwise defined herein shall have the meanings given them in the Lease.

2.             Expansion Premises. Effective as of the Expansion Commencement Date (as defined below), Landlord leases to Tenant and Tenant leases from Landlord the additional areas known as Suite 210, consisting of 6,745 rentable square feet, and Suite 130, consisting of 1,759 square feet, which space is shown on Exhibit A attached hereto and incorporated herein by this reference (collectively, the “Expansion Premises”). As of the Expansion Commencement Date and except as expressly set forth herein, all references to the “Premises” in the Lease shall be deemed to refer to the Original Premises and the Expansion Premises and shall consist of an aggregate of 12,862 rentable square feet.

3.             Expansion Commencement Date. The “Expansion Commencement Date” shall mean the earlier of (i) October 1, 2013 or (ii) the first business day after Landlord delivers the Expansion Premises with the Tenant Improvements (as defined below) substantially completed (net of any Tenant delays).

4.             Extension Term. The term of the Lease for the Premises (Original Premises and Expansion Premises) is hereby extended (the “Extension Term”) until the date which is seventy four (74) months after the Expansion Commencement Date.

5.             Rent.

(a)          Base Rent: Expansion Premises. The Base Rent payable during the Extension Term for the Expansion Premises only shall be as follows:

Months		Monthly Rent		Annual Rent		Rent PRSF
	1- 2	$	0.00	$	0.00	$	0.00
	3-12	$	14,279.63	$	171,355.60	$	20.15
	13-24	$	14,708.02	$	176,496.27	$	20.75
	25-36	$	15,149.26	$	181,791.16	$	21.38
	37-48	$	15,603.74	$	187,244.89	$	22.02
	49-60	$	16,071.85	$	192,862.24	$	22.68
	61-72	$	16,554.01	$	198,648.10	$	23.36
	73-74	$	17,050.63	$	204,607.55	$	24.06

(b)          Base Rent: Existing Premises. The Base Rent for the Existing Premises shall be as currently set forth in the Lease through June 10, 2018, and thereafter shall increase by three percent (3%) per annum.

(c)          Operating Expenses. Effective as of the Expansion Commencement Date, Tenant’s Percentage shall be adjusted to 27.52%.

6.             Condition.

(a)          Prior to delivering the Premises to Tenant, Landlord shall install the tenant improvements to the Premises as depicted on the space plan and specifications (if any) (collectively, the “Plan”) prepared by _______________________ dated ______________, 2013 (the “Tenant Improvements”). Landlord shall cause the Tenant Improvements to be installed in accordance with the Plan and all applicable permits, approvals, codes, ordinances and regulations, in a good and workmanlike manner, using Building-standard materials unless otherwise specified in the Plan, free of all liens, by a licensed contractor. Once installed, the Tenant Improvements shall be a part of the Premises and the sole property of Landlord. Landlord shall obtain bids from three (3) reputable general contractors and select the lowest bid. In selecting the general contractor, Landlord agrees to cooperate with any project manager retained by Tenant, at Tenant’s expense, and to work with Tenant to adjust the scope of work to Tenant’s construction budget.

(b)          Landlord shall provide Tenant a tenant allowance of up to Fifteen Dollars ($15.00) per rentable square foot (the “Tenant Allowance”) for design, permitting, construction and supervision of the Tenant Improvements to the Premises. Any costs of the Tenant Improvements in excess of the Tenant Allowance shall be paid by Tenant to Landlord, as additional rent, within thirty (30) days after substantial completion of the Tenant Improvements (as “substantial completion” is defined in Exhibit C to the Lease). Any amount not used by Landlord for the Tenant Improvements shall be retained by Landlord. The costs of the Tenant Improvements shall include the actual costs of construction (including the overhead and profit of Landlord’s contractor), all construction management fees of Landlord’s property manager, the costs of all permits and approvals, and all design costs and other charges by Landlord’s architects and engineers. The parties acknowledge that the construction management fees of Landlord’s property manager equal three percent (3%) of the total project costs. The early access provisions of Section 4.4 of the Lease shall apply to the Expansion Premises.

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(c)          Landlord shall notify Tenant in writing of the substantial completion of the Tenant Improvements. Within three (3) days after receipt of such notice, Tenant shall inspect the Expansion Premises and provide Landlord with a punch list of uncompleted items; delivery of the punch list shall not, however, delay the Expansion Commencement Date (which may occur prior to completion of the Tenant Improvements). Tenant shall be deemed to have approved all work not listed in the punch list (other than latent defects). The punch list items shall be completed by Landlord within thirty (30) days, subject to availability of labor and materials.

(d)          Tenant shall purchase (not using the Tenant Allowance) and thereafter maintain, repair and replace the supplemental HVAC unit for Tenant’s server room, which shall be installed by Landlord’s general contractor during installation of the Tenant Improvements.

7.             Use. The Expansion Premises shall be used by Tenant only for offices, storage and sterilization of instruments, which shall be delivered and sent in a decontaminated (no blood) form using sealed boxes.

8.             Security Deposit. Upon full execution hereof, as a condition to the effectiveness of this Amendment (in addition to the existing Security Deposit under the Lease), Tenant shall deliver to Landlord an irrevocable letter of credit issued by a major banking institution reasonably acceptable to Landlord (the "Bank") in the amount of $150,000 having an expiration date three (3) months after the expiration of the Lease term (or a self-renewal provision which extends the final expiration date to three (3) months after the expiration of the Lease term), and otherwise in form and content acceptable to landlord in its discretion. The letter of credit shall provide that Landlord may draw from time to time upon such letter to the extent that Landlord certifies to the Bank as to any one or more of the following: (a) that Landlord is owed Base Rent or additional rent, or both, or other amounts which Tenant is obligated to pay under the Lease which remain unpaid beyond applicable grace periods, (b) that the letter of credit has not been renewed or replaced as required below, or (c) that a default beyond applicable grace periods has occurred under the Lease. Such letter of credit shall be replaced or renewed, and such replacement or renewal letter of credit shall be delivered to Landlord, not later than thirty (30) days prior to expiration thereof. If Landlord draws upon the letter of credit to satisfy any obligation of Tenant hereunder, Tenant shall immediately upon request by Landlord deliver a replacement letter of credit to Landlord or otherwise restore the Security Deposit to its original amount. In the event the letter of credit is drawn upon by Landlord because such letter of credit is about to expire and has not been replaced or renewed by Tenant in accordance with the provisions of this Section, the proceeds of such letter of credit and all interest accrued thereon shall be held in escrow by Landlord or its agent as security for Tenant's obligations hereunder until such time as Tenant shall have delivered Landlord a replacement letter of credit. Upon thirty (30) days prior notice from Landlord, Tenant shall cooperate with Landlord in transferring the letter of credit to a grantee or transferee and, if necessary, shall deliver a replacement letter of credit if such letter of credit is not otherwise transferable.

9.             Brokers. Landlord and Tenant acknowledge that Avison Young is acting as broker for Landlord and shall be paid a commission pursuant to a separate agreement with Landlord, and Jones Lang LaSalle is acting as broker for Tenant and shall be paid a commission pursuant to a separate agreement. Tenant hereby indemnifies and holds harmless Landlord from any claim from any third party claiming to be Tenant’s agent and therein demanding a fee for the transaction contemplated by this Amendment, and Landlord hereby indemnifies and holds harmless Tenant from any claim from any third party claiming to be Landlord’s agent and therein demanding a fee for the transaction contemplated by this Amendment.

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10.          Entire Agreement. This Amendment and the Lease represent the entire agreement between the parties hereto. Landlord and Tenant agree that there are no collateral or oral agreements or understandings between them with respect to the Premises. This Amendment supersedes all prior negotiations, agreements, letters or other statements with respect to the Premises.

11.          No Further Modifications. Except as expressly amended and modified hereby, the Lease shall otherwise remain in full force and effect, the parties hereto hereby ratifying and confirming the same. To the extent of any inconsistency between the Lease and this Amendment, the terms of this Amendment shall control. Landlord and Tenant hereby confirm that there are no defaults under the Lease.

12.          OFAC. Neither Tenant nor, to Tenant's actual knowledge without inquiry (i) its direct parent or any of its subsidiaries, (ii) any of their respective partners, or members, shareholders or other equity owners, or (iii)any of their respective employees, officers, directors, representatives or agents, is a person or entity with whom U.S. persons or entities are restricted from doing business under regulations of the Office of Foreign Asset Control ("OFAC") of the Department of the Treasury (including those named on OFAC's Specially Designated and Blocked Persons List) or under any statute, executive order (including the September 24, 2001, Executive Order Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit, or Support Terrorism), or other governmental action.

13.          Counterpart Execution. This Amendment may be executed in any number of counterparts, each of which shall be an original, but all of which when attached together shall constitute one and the same instrument.

IN WITNESS WHEREOF, the duly authorized representatives of the parties herein have hereunto set their hands and seals, the day and year first above written.

TENANT:	LANDLORD:
Baxano Surgical, Inc.	Sun Life Assurance Company of Canada
By:	By:
Name:	Name:
Title:	Title:
	By:
	Name:
	Title:

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EXHIBIT A

DRAWING OF EXPANSION PREMISES

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EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, Ken Reali, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Baxano Surgical, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  August 14, 2013

/s/ Ken Reali

Ken Reali

President and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Joseph P. Slattery, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Baxano Surgical, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting

Date:  August 14, 2013

/s/ Joseph P. Slattery

Joseph P. Slattery

Executive Vice President and Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION

I, Ken Reali, hereby certify pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and 18 U.S.C. Section 1350, that the Quarterly Report on Form 10-Q of Baxano Surgical, Inc. (the “Company”) for the quarterly period ended June 30, 2013 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 14, 2013	/s/  Ken Reali
	Ken Reali
	President and Chief Executive Officer

This certification accompanies the Report pursuant to Rule 13a-14(b) or Rule 15d-14(b) under the Exchange Act and 18 U.S.C. Section 1350 and shall not be deemed filed by the Company for purposes of Section 18 of the Exchange Act, and shall not be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or after the date of this Report, irrespective of any general incorporation language contained in such filing.

A signed original of this certification has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

EXHIBIT 32.2

CERTIFICATION

I, Joseph P. Slattery, hereby certify pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and 18 U.S.C. Section 1350, that the Quarterly Report on Form 10-Q of Baxano Surgical, Inc. (the “Company”) for the quarterly period ended June 30, 2013 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 14, 2013	/s/ Joseph P. Slattery
	Joseph P. Slattery
	Executive Vice President and Chief Financial Officer

This certification accompanies the Report pursuant to Rule 13a-14(b) or Rule 15d-14(b) under the Exchange Act and 18 U.S.C. Section 1350 and shall not be deemed filed by the Company for purposes of Section 18 of the Exchange Act, and shall not be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or after the date of this Report, irrespective of any general incorporation language contained in such filing.

A signed original of this certification has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

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Closing of Merger and Financing Transaction

6 Months Ended

Jun. 30, 2013

Business Combinations [Abstract]

Business Combination Disclosure [Text Block]

12. Closing of Merger and Financing Transaction

On May 31, 2013, the Company consummated the Merger with Baxano pursuant to the Merger Agreement. Under the terms of the Merger Agreement, Merger Sub merged with and into Baxano, with Baxano remaining as the surviving corporation and as a wholly-owned subsidiary of the Company. Immediately following the closing of the Merger on May 31, 2013, the Company changed its name to Baxano Surgical, Inc. in connection with the merger of this wholly-owned subsidiary with and into the Company. 

During April and May 2013, Baxano issued promissory notes (the “Bridge Notes”) to the Company in the aggregate principal amount of $2.3 million, as contemplated by the Merger Agreement. The Bridge Notes bore interest at a rate of 6% per annum. The Bridge Notes were not secured by any collateral; were subordinated in right of payment to the loan evidenced by the Loan and Security Agreement dated as of March 15, 2012, among Oxford Finance LLC, Silicon Valley Bank and Baxano; and were senior in right of payment to the promissory notes of Baxano that were convertible into capital stock of Baxano (each a “Baxano Note”). The Bridge Notes were cancelled immediately prior to the effective time of the Merger without consideration, repayment, or any other right of ours repaid or otherwise compensated. 

Upon the closing of the Merger, and in accordance with the terms of the Merger Agreement, the Company issued an aggregate of 10,329,035 shares of the Company’s common stock as merger consideration. In connection with the closing of the Merger, 796,772 shares of the Company’s common stock (equal to approximately 7.5% of the total merger consideration) were deposited in a third-party escrow account to secure certain indemnification obligations of the Baxano securityholders and to fund any post-closing adjustment payable to the Company based on excess indebtedness or unpaid transaction expenses of Baxano, or to the extent Baxano’s actual working capital at March 31, 2013 is less than target working capital of $2,121,000. Once the amount of any post-closing adjustment is determined and paid, remaining escrow shares, if any, in excess of 5% of the merger consideration will be distributed to the Baxano securityholders. The remainder of the escrow shares will be distributed to the Baxano securityholders promptly following the first anniversary of the closing date to the extent such escrow shares are not then subject to indemnification claims by the Company.

Concurrent with the closing of the Merger, and in accordance with the terms of a Securities Purchase Agreement, dated March 3, 2013, the Company issued and sold to certain investors 7,522,009 shares of the Company’s common stock, at a purchase price of $2.28 per share, resulting in gross proceeds to the Company of approximately $17.2 million.

At the closing of the Merger, each outstanding share of capital stock of Baxano was cancelled and extinguished and converted into the right to receive a portion of the merger consideration in accordance with the Merger Agreement. The Baxano Notes were terminated at closing of the Merger, and the holders of such Baxano Notes are entitled to receive merger consideration in accordance with the Merger Agreement. Because the merger consideration is being allocated first to holders of Baxano Notes and then to Baxano stockholders in accordance with Baxano’s certificate of incorporation, only holders of Baxano Notes and Baxano Series C Preferred Stock received merger consideration. All stock option plans or other stock or equity-related plans of Baxano, all employee stock purchase plans, each outstanding option to purchase common stock of Baxano, whether vested or unvested, and each warrant to acquire capital stock of Baxano were terminated prior to the closing of the Merger.

The following table summarizes the purchase price (in thousands):

Value of common shares issued	$	21,278
Cash paid at closing		250
Pre-acquisition amounts due from Baxano, net		2,509
	$	24,037

The purchase price was allocated to the net assets acquired utilizing the methodology prescribed in ASC 805. The Company recorded goodwill of $16.0 million after recording net assets acquired at fair value as presented in the following table.

The following table summarizes the allocation of the purchase price to the net assets acquired (in thousands):

Cash and cash equivalents	$	279
Accounts receivable		1,567
Inventory		1,946
Other current assets		234
Property and equipment		866
Other long-term asset		91
Intangible assets		8,263
Goodwill		16,036
Total assets acquired		29,282
Accounts payable and other liabilities		(2,430)
Term debt assumed		(2,815)
Total purchase price	$	24,037

The Company allocated $8.3 million of the purchase price to identifiable intangible assets that met the separability and contractual legal criterion of ASC 805. The following summarizes the intangible assets that were acquired and the period over which the Company will recognize amortization cost using the straight-line method (in thousands):

			Amortization
			Period
	Amount		(Years)
Trademark	$	420	Indefinite
Product Trademarks		845	15-17
Technology		6,598	15-17
Customer Relationships		400	10
	$	8,263

The results of operations of Baxano have been included in our consolidated financial statements from the date of the acquisition. The following pro-forma results of operations assume the acquisition of Baxano as of the beginning of 2012. The pro-forma results for the six months ended June 30, 2013 presented below reflect our historical data and the historical data of the Baxano business adjusted for amortization of intangibles, interest costs associated with Baxano preferred stock and convertible debt, and elimination of intercompany G&A expenses. The pro-forma results of operations presented below may not be indicative of the results the Company would have achieved had the Company completed the acquisition on January 1, 2013, or that the Company may achieve in the future.

					Historical
					Results of
	Baxano				Baxano		Pro Forma		Pro Forma
	Surgical		Baxano		Surgical		Adjustments		Results
	(in thousands)
Revenue	$	6,977	$	4,725	$	11,702	$	-	$	11,702
Cost of revenue		2,327		1,662		3,989		25		4,014
Gross profit		4,650		3,063		7,713		(25)		7,688
Operating expenses:
Research and development		2,794		1,318		4,112		4		4,116
Sales and marketing		10,959		5,437		16,396		4		16,400
General and administrative		3,411		939		4,350		227		4,577
Merger and integration expenses		2,895		3,054		5,949		-		5,949
Charges related to U.S. Government settlement		160		-		160		-		160
Operating expenses		(20,219)		(10,748)		(30,967)		(235)		(31,202)
Operating loss		(15,569)		(7,685)		(23,254)		(260)		(23,514)
Other expense, net		(62)		(702)		(764)		548		(216)
Net loss	$	(15,631)	$	(8,387)	$	(24,018)	$	288	$	(23,730)
Historical Baxano Surgical loss per common share - basic and diluted							$	(0.51)
Pro forma loss per common share - basic and diluted:
Pro forma loss							$	(23,730)
Pro forma weighted average common shares								45,173
Pro forma loss per common share							$	(0.53)

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Consolidated Balance Sheets [Parenthetical] (USD $)	Jun. 30, 2013	Dec. 31, 2012
Common stock, par value (in dollars per share)	$ 0.0001	$ 0.0001
Common stock, shares authorized	75,000,000	75,000,000
Common stock, shares issued	45,197,632	27,313,997
Common stock, shares outstanding	45,197,632	27,313,997

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Cash and Cash Equivalents

6 Months Ended

Jun. 30, 2013

Cash and Cash Equivalents [Abstract]

Cash and Cash Equivalents Disclosure [Text Block]

5. Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents include money market treasury funds. Cash equivalents are carried at fair market value. At June 30, 2013, the Company had $138,000 of restricted cash; $63,000 is currently deposited in a bank account in Germany, but not readily accessible and $75,000 is in a certificate of deposit securing a line of credit. Related unrealized gains and losses were not material as of June 30, 2013 and December 31, 2012. There have been no unrealized gains or losses reclassified to accumulated other comprehensive income.

At June 30, 2013, the Company held certain assets that are required to be measured at fair value on a recurring basis. These assets include available for sale securities classified as cash equivalents. ASC 820-10 requires the valuation of investments using a three-tiered approach, which requires that fair value measurements be classified and disclosed in one of three tiers. These tiers are: Level 1, defined as quoted prices in active markets for identical assets or liabilities; Level 2, defined as valuations based on observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets, or other inputs that are observable or can be corroborated by observable input data; and Level 3, defined as valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants.

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

	June 30,		December 31,
	2013		2012
	(In thousands)
Cash and cash equivalents	$	18,721	$	21,116
Total cash and available for sale securities	$	18,721	$	21,116

The Company had no Level 2 or Level 3 assets or liabilities at June 30, 2013 or December 31, 2012.

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Accrued Expenses (Tables)

6 Months Ended

Jun. 30, 2013

Payables and Accruals [Abstract]

Schedule of Accrued Liabilities [Table Text Block]

The following table presents the components of accrued expenses:

	June 30,		December 31,
	2013		2012
	(In thousands)
Vacation	$	662	$	160
Commissions		581		333
Severance		531		5
Bonus		478		630
Legal and professional fees		263		129
Other		533		391
Total accrued expenses	$	3,048	$	1,648

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Summary of Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2013

Accounting Policies [Abstract]

Basis of Accounting, Policy [Policy Text Block]

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, 2012. The accompanying unaudited interim consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) which are, in the opinion of the Company’s management, necessary for a fair statement of the Company’s consolidated financial position, results of operations and cash flows for the periods presented. These principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The principal estimates relate to accounts receivable reserves, inventory valuation, stock-based compensation, accrued expenses and income tax valuation. Actual results could differ from those estimates. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. All intercompany accounts and transactions have been eliminated in consolidation.

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

For a description of our critical accounting policies and estimates, please refer to the “Critical Accounting Policies and Estimates” section of the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section contained in our Annual Report on Form 10-K for the year ended December 31, 2012. There have been no material changes in any of our accounting policies since December 31, 2012, however the Company has adopted the following new accounting policies related to the Merger.

Goodwill and Intangible Assets, Policy [Policy Text Block]

Identifiable Intangible Assets and Goodwill

Identifiable intangible assets are recorded at cost, or when acquired as part of a business acquisition, at estimated fair value. Certain intangible assets are amortized over periods ranging from 10 to 17 years. Similar to tangible personal property, plant and equipment, the Company periodically evaluates identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carry amount may not be recoverable.

Indefinite-lived intangible assets, such as goodwill and certain trademarks, are not amortized. The Company tests the carrying amounts of these assets for recoverability on an annual basis or when events or changes in circumstances indicate evidence of potential impairment exists, using a fair value based test.

Debt, Policy [Policy Text Block]

Debt Issuance Costs

The Company capitalizes costs associated with the issuance of debt instruments and amortizes these costs to interest expense over the term of the related debt agreement using the effective yield amortization method. Unamortized debt issuance costs will be charged to operations when indebtedness under the related credit facility is repaid prior to maturity.

Business Combinations Policy [Policy Text Block]

Business Acquisitions

Business acquisitions are accounted for using the acquisition method of accounting in accordance with Accounting Standards Codification (“ASC”) 805, “Business Combinations.” ASC 805 requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values, as determined in accordance with ASC 820, “Fair Value Measurements,” as of the acquisition date. For certain assets and liabilities, book value approximates fair value. In addition, ASC 805 establishes that consideration transferred be measured at the closing date of the acquisition at the then-current market price, which may be different than the amount of consideration assumed in the pro forma financial statements. Under ASC 805, acquisition related costs (i.e., advisory, legal, valuation and other professional fees) and certain acquisition-related restructuring charges impacting the target company are expensed in the period in which the costs are incurred. The application of the acquisition method of accounting requires the Company to make estimates and assumptions related to the estimated fair values of net assets acquired. Significant judgments are used during this process, particularly with respect to intangible assets. Generally, intangible assets are amortized over their estimated useful lives. Goodwill and other indefinite-lived intangibles are not amortized, but are annually assessed for impairment. Therefore, the purchase price allocation to intangible assets and goodwill has a significant impact on future operating results.

Reclassification, Policy [Policy Text Block]

Reclassification

Certain balances in the prior year’s consolidated financial statements have been reclassified to conform to the June 30, 2013 presentation. These changes consisted of a reclassification on the consolidated statements of operations from general and administrative expense to a separate line item entitled charges related to U.S. Government settlement and a reclassification on the consolidated statements of cash flows from changes in accounts payable and accrued expenses to a separate line item entitled increase (decrease) in accrued expenses related to U.S. Government settlement.

New Accounting Pronouncements, Policy [Policy Text Block]

Impact of Recently Issued Accounting Standards

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

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Debt (Details Textual) (USD $)	6 Months Ended	18 Months Ended
	Jun. 30, 2013	Jun. 30, 2013
Long-term Debt, Percentage Bearing Fixed Interest, Percentage Rate	6.72%	6.72%
Long-term Debt, Maturities, Repayment Terms	36 months
Term Loan Prepayment Description	the Company is required to make a final payment equal to the original principal amount of the Term Loan multiplied by 7.00% (the Final Payment Fee). Any prepayment, whether mandatory or voluntary, must include the Final Payment Fee, the prepayment fee (equal to 2% of the principal amount prepaid if prepayment is made on or before May 31, 2015, or 1% of the principal amount prepaid if payment is made thereafter), interest at the default rate (which is the rate otherwise applicable plus 5%) with respect to any amounts past due, the Collateral Agents and the Lenders expenses, and all other obligations that are due and payable to the Collateral Agent and the Lenders.
Net Proceeds From Sale Of Equity Securities		$ 10,000,000

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Closing of Merger and Financing Transaction (Tables)

6 Months Ended

Jun. 30, 2013

Business Combinations [Abstract]

Schedule Of Preliminary Purchase Price [Table Text Block]

The following table summarizes the purchase price (in thousands):

Value of common shares issued	$	21,278
Cash paid at closing		250
Pre-acquisition amounts due from Baxano, net		2,509
	$	24,037

Schedule Of Preliminary Purchase Price Allocation [Table Text Block]

The following table summarizes the allocation of the purchase price to the net assets acquired (in thousands):

Cash and cash equivalents	$	279
Accounts receivable		1,567
Inventory		1,946
Other current assets		234
Property and equipment		866
Other long-term asset		91
Intangible assets		8,263
Goodwill		16,036
Total assets acquired		29,282
Accounts payable and other liabilities		(2,430)
Term debt assumed		(2,815)
Total purchase price	$	24,037

Schedule Of Preliminary Purchase Price Allocation Identifiable Intangible Assets [Table Text Block]

The following summarizes the intangible assets that were acquired and the period over which the Company will recognize amortization cost using the straight-line method (in thousands):

			Amortization
			Period
	Amount		(Years)
Trademark	$	420	Indefinite
Product Trademarks		845	15-17
Technology		6,598	15-17
Customer Relationships		400	10
	$	8,263

Business Acquisition, Pro Forma Information [Table Text Block]

The pro-forma results of operations presented below may not be indicative of the results the Company would have achieved had the Company completed the acquisition on January 1, 2013, or that the Company may achieve in the future.

					Historical
					Results of
	Baxano				Baxano		Pro Forma		Pro Forma
	Surgical		Baxano		Surgical		Adjustments		Results
	(in thousands)
Revenue	$	6,977	$	4,725	$	11,702	$	-	$	11,702
Cost of revenue		2,327		1,662		3,989		25		4,014
Gross profit		4,650		3,063		7,713		(25)		7,688
Operating expenses:
Research and development		2,794		1,318		4,112		4		4,116
Sales and marketing		10,959		5,437		16,396		4		16,400
General and administrative		3,411		939		4,350		227		4,577
Merger and integration expenses		2,895		3,054		5,949		-		5,949
Charges related to U.S. Government settlement		160		-		160		-		160
Operating expenses		(20,219)		(10,748)		(30,967)		(235)		(31,202)
Operating loss		(15,569)		(7,685)		(23,254)		(260)		(23,514)
Other expense, net		(62)		(702)		(764)		548		(216)
Net loss	$	(15,631)	$	(8,387)	$	(24,018)	$	288	$	(23,730)
Historical Baxano Surgical loss per common share - basic and diluted							$	(0.51)
Pro forma loss per common share - basic and diluted:
Pro forma loss							$	(23,730)
Pro forma weighted average common shares								45,173
Pro forma loss per common share							$	(0.53)

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Legal Proceedings (Tables)

6 Months Ended

Jun. 30, 2013

Legal Proceedings [Abstract]

Schedule Of Legal Matters And Contigencies Government Settlement [Table Text Block]

The following table presents the components of the U.S. Government settlement liability:

	June 30,		Dec 31,
	2013		2012
	(in thousands)
U.S. Government settlement	$	6,000	$	6,000
Less current portion		(2,537)		-
Long-term liability	$	3,463	$	6,000

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Inventories (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Finished goods	$ 4,351	$ 3,048
Raw materials	1,871	1,629
Work-in-process	650	340
Total inventories	$ 6,872	$ 5,017

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Legal Proceedings (Details Textual) (USD $)	3 Months Ended
	Jun. 30, 2013	Dec. 31, 2012	Jun. 30, 2012
Litigation Settlement Paid In Installments	$ 6,000,000
Debt Instrument, Interest Rate, Stated Percentage	2.00%
Legal Fees	69,000		700,000
Litigation Settlement, Expense		6,000,000
Accrued Settlement and Legal Fees	$ 6,200,000	$ 6,800,000

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Cash and Cash Equivalents (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Total cash and available for sale securities	$ 18,721	$ 21,116
Cash and Cash Equivalents [Member]
Total cash and available for sale securities	$ 18,721	$ 21,116

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Closing of Merger and Financing Transaction (Details 2) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2013	May 31, 2013
Business Acquisition Purchase Price Allocation Intangible Assets		$ 8,263
Customer Relationships [Member]
Business Acquisition Purchase Price Allocation Intangible Assets		400
Finite-Lived Intangible Assets, Remaining Amortization Period	10 years
Technology [Member]
Business Acquisition Purchase Price Allocation Intangible Assets		6,598
Technology [Member] | Maximum [Member]
Finite-Lived Intangible Assets, Remaining Amortization Period	17 years
Technology [Member] | Minimum [Member]
Finite-Lived Intangible Assets, Remaining Amortization Period	15 years
Trademarks [Member]
Business Acquisition Purchase Price Allocation Intangible Assets		420
Finite Lived Intangible Assets Remaining Amortization Period Description	Indefinite
Product Trademarks [Member]
Business Acquisition Purchase Price Allocation Intangible Assets		$ 845
Product Trademarks [Member] | Maximum [Member]
Finite-Lived Intangible Assets, Remaining Amortization Period	17 years
Product Trademarks [Member] | Minimum [Member]
Finite-Lived Intangible Assets, Remaining Amortization Period	15 years

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Debt (Tables)

6 Months Ended

Jun. 30, 2013

Debt Disclosure [Abstract]

Schedule of Maturities of Long-term Debt [Table Text Block]

The following table presents the components of long-term debt (in thousands): 

	June 30,
	2013
	(in thousands)
Term Loan	$	2,815
Balloon payment on Term Loan		210
Debt discount		(265)
Total long-term debt		2,760
Less: Current portion of long-term debt		526
Total long-term debt, net of current portion	$	2,234

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Description of Business

6 Months Ended

Jun. 30, 2013

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block]

1. Description of Business

Baxano Surgical, Inc., a Delaware corporation (the “Company”), was incorporated in May 2000 and, effective March 1, 2013, is headquartered in Raleigh, North Carolina. The Company is a medical device company focused on marketing, designing and developing minimally invasive products to treat degenerative conditions of the spine affecting the lumbar region. The Company operates in one business segment. The Company currently markets the AxiaLIF^® family of products for single and two level lower lumbar fusion, the VEO^TM lateral access and interbody fusion system and the iO-Flex^® system, a proprietary set of flexible instruments used by surgeons during spinal decompression procedures. All of the Company’s AxiaLIF products are delivered using its pre-sacral approach. The Company also markets other products that complement these primary offerings, including pedicle screws, facet screws, bowel retractors, discectomy tools, bone void filler and a bone graft harvesting system that can be used to extract bone graft.

The AxiaLIF Legacy product was commercially released in January 2005. The AxiaLIF 2L™ product was commercially released in Europe in the fourth quarter of 2006 and in the United States in the second quarter of 2008. The AxiaLIF 2L product was discontinued in 2010 after the Company launched its AxiaLIF Plus 2-Level™ product in July 2010. The Company commercially launched the Vectre™ facet screw system in April 2010. In the first quarter of 2010, the Company completed product and regulatory training and began marketing Bi-Ostetic™ bone void filler, a biologics product for specific indications outside the interbody space of the spine. The Company commercially launched its AxiaLIF Plus 1-Level product in September 2011, which received FDA 510(k) clearance in March 2011. In 2010, the Company received 510(k) clearance for the VEO lateral access and interbody fusion system, which was commercially launched in November 2011, and in July 2012 the Company received a CE mark for the VEO lateral access and interbody fusion system and began commercialization in the European market. The iO-Flex System was commercialized in the United States in 2009 for decompression applications and received a CE Mark in February 2012. The Company also markets the iO-Tome™ instrument to rapidly and precisely remove facet joints, which is commonly performed in spinal fusion procedures, which received FDA clearance in July 2012 and is currently in a limited market release. The Company sells its products through a direct sales force, independent sales agents and international distributors.

On May 31, 2013, the Company changed its name from TranS1, Inc. to Baxano Surgical, Inc. and completed the acquisition of Baxano, Inc. (“Baxano”), a medical device company headquartered in San Jose, California. See Note 12 for a description of the Company’s merger (the “Merger”) with Baxano and the related transactions.

The Company has 77 U.S. issued patents, 41 pending patent applications or provisional patent applications in the United States, nine issued European patents with numerous national validations, 10 issued Japanese patents with another one allowed, five issued Australian patents, one Canadian patent and 17 pending foreign patent application families as counterparts of U.S. cases. The issued and pending patents cover, among other things, (i) the Company’s method for performing trans-sacral procedures in the spine, including diagnostic or therapeutic procedures, and minimally invasive trans-sacral introduction of instrumentation or implants; (ii) apparatus for conducting these procedures including access, disc preparation and implantation; (iii) implants for fusion and motion preservation in the spine, (iv) a lateral access and interbody fusion system; (v) posterior fixation systems; and, (vi) instrumentation individually and in kit form for accessing target spinal tissue, confirming the location of neural tissue, and modifying target tissue to achieve decompression.

The Company owns trademark registrations for 21 distinct marks in the United States, 14 trademark registrations in the European Union, 2 registered trademarks in Canada and 2 registered trademarks in China. The Company also owns 6 pending trademark applications in the United States and 2 pending trademark applications in China.

On May 31, 2013, the Company, through its wholly-owned subsidiary Racer X Acquisition Corp. (“Merger Sub”), consummated the Merger with Baxano pursuant to an Agreement and Plan of Merger (the “Merger Agreement”). Under the terms of the Merger Agreement, Merger Sub merged with and into Baxano, with Baxano remaining as the surviving corporation and as a wholly-owned subsidiary of the Company. Immediately following the closing of the Merger on May 31, 2013, the Company changed its name to Baxano Surgical, Inc. in connection with the merger of this wholly-owned subsidiary with and into the Company.

Concurrent with the closing of the Merger on May 31, 2013, the Company completed a private placement of 7,522,009 shares of its common stock at an offering price of $2.28 per share. The offering resulted in aggregate proceeds to the Company of approximately $17.2 million and has been included in stockholders' equity as common stock and additional paid-in capital. At June 30, 2013 and December 31, 2012, there were 45,197,632 and 27,313,997 shares of common stock issued and outstanding, respectively, and there were no shares of preferred stock issued and outstanding. See Note 12 for further information regarding the Merger and private placement.

The Company is subject to a number of risks similar to other similarly-sized companies in the medical device industry. These risks include, without limitation, acceptance and continued use of the Company’s products by surgeons, limited clinical data about the efficacy of these products, uncertainty of reimbursement from third-party payors, cost pressures in the healthcare industry, competitive pressures from substitute products and larger companies, the historical lack of profitability, the dependence on key employees, regulatory approval and market acceptance for new products, compliance with complex and evolving healthcare laws and regulations, our ability to raise additional capital, our ability to comply with our settlement agreement and Corporate Integrity Agreement (the “CIA”) with certain entities of the U.S. government, stockholder class action lawsuits, the reliance on a limited number of suppliers to provide these products and their components, changes in economic conditions, the ability to effectively manage a sales force to meet the Company’s objectives and the ability to conduct successful clinical studies.

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Income Taxes

6 Months Ended

Jun. 30, 2013

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

3. Income Taxes

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

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Accounts Receivable, Net

6 Months Ended

Jun. 30, 2013

Receivables [Abstract]

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

6. Accounts Receivable, Net

The following table presents the components of accounts receivable:

	June 30,		December 31,
	2013		2012
	(In thousands)
Gross accounts receivable	$	4,535	$	3,419
Allowance for uncollectible accounts		(245)		(213)
Total accounts receivable, net	$	4,290	$	3,206

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Net Loss Per Common Share

6 Months Ended

Jun. 30, 2013

Earnings Per Share [Abstract]

Earnings Per Share [Text Block]

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 June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
Weighted average stock options outstanding		4,093,296		3,371,301		3,702,905		3,185,326

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Closing of Merger and Financing Transaction (Details) (USD $) In Thousands, unless otherwise specified	May 31, 2013
Value of common shares issued	$ 21,278
Cash paid at closing	250
Pre-acquisition amounts due from Baxano, net	2,509
Total purchase price	$ 24,037

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Description of Business (Details Textual) (USD $) In Millions, except Share data, unless otherwise specified	6 Months Ended
	Jun. 30, 2013	May 31, 2013	Dec. 31, 2012
Common Stock, Shares, Issued	45,197,632	7,522,009	27,313,997
Common Stock Offer Price		$ 2.28
Proceeds from Issuance of Private Placement	$ 17.2
Common Stock, Shares, Outstanding	45,197,632		27,313,997
Preferred Stock, Shares Issued	0		0
Preferred Stock, Shares Outstanding	0		0
Private Placement [Member]
Common Stock, Shares, Issued		7,522,009
Common Stock Offer Price		$ 2.28

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Cash and Cash Equivalents (Details Textual) (USD $)	Jun. 30, 2013	Dec. 31, 2012
Restricted cash	$ 138,000	$ 0
Restricted Cash Deposited In Bank	63,000
Certificates of Deposit, at Carrying Value	$ 75,000

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Debt (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Term Loan	$ 2,815
Balloon payment on Term Loan	210
Debt discount	(265)
Total long-term debt	2,760
Less: Current portion of long-term debt	(526)	0
Total long-term debt, net of current portion	$ 2,234	$ 0

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Closing of Merger and Financing Transaction (Details Textual) (USD $)	1 Months Ended	6 Months Ended				2 Months Ended	6 Months Ended
	May 31, 2013	Jun. 30, 2013	May 13, 2013	Mar. 31, 2013	Dec. 31, 2012	May 31, 2013 Bridge Loan [Member]	Jun. 30, 2013 Bridge Loan [Member]
Business Acquisition, Equity Interest Issued or Issuable, Number of Shares	10,329,035
Common Stock Deposited In Escrow Account	$ 796,772
Percentage Of Merger Consideration In Terms Of Stock	7.50%
Estimated Working Capital				2,121,000
Proceeds from Issuance of Private Placement		17,200,000
Business Acquisition, Goodwill, Expected Tax Deductible Amount			16,000,000
Common Stock, Shares, Issued	7,522,009	45,197,632			27,313,997
Common Stock Offer Price	$ 2.28
Business Acquisition Purchase Price Allocation Intangible Assets	8,263,000
Proceeds From Issuance Of Bridge Notes						$ 2,300,000
Debt Instrument, Interest Rate During Period							6.00%

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Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Assets
Cash and cash equivalents	$ 19,602	$ 21,541
Restricted cash	138	0
Accounts receivable, net	4,290	3,206
Inventory	6,872	5,017
Prepaid expenses and other assets	834	330
Total current assets	31,736	30,094
Property and equipment, net	2,879	2,166
Goodwill	16,036	0
Intangible assets, net	8,219	0
Other long-term assets	158	0
Total assets	59,028	32,260
Liabilities and Stockholders' Equity
Current portion of long-term debt	526	0
Accounts payable	2,475	2,603
Accrued expenses	3,048	1,648
Total current liabilities	8,751	11,043
Long-term debt	2,234	0
Noncurrent liabilities	3,553	78
Commitments and contingencies (Note 11)
Stockholders' equity:
Common stock, $0.0001 par value; 75,000,000 shares authorized, 45,197,632 and 27,313,997 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively	4	3
Additional paid-in capital	198,910	159,929
Accumulated other comprehensive income	14	14
Accumulated deficit	(154,438)	(138,807)
Total stockholders' equity	44,490	21,139
Total liabilities and stockholders' equity	59,028	32,260
US Treasury and Government [Member]
Liabilities and Stockholders' Equity
Accrued expenses	$ 2,702	$ 6,792

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Accrued Expenses

6 Months Ended

Jun. 30, 2013

Payables and Accruals [Abstract]

Accounts Payable and Accrued Liabilities Disclosure [Text Block]

9. Accrued Expenses

The following table presents the components of accrued expenses:

	June 30,		December 31,
	2013		2012
	(In thousands)
Vacation	$	662	$	160
Commissions		581		333
Severance		531		5
Bonus		478		630
Legal and professional fees		263		129
Other		533		391
Total accrued expenses	$	3,048	$	1,648

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Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Cash flows from operating activities:
Net loss	$ (15,631)	$ (12,051)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	817	474
Stock-based compensation	620	760
Allowance for excess and obsolete inventory	29	59
Provision (reversal of provision) for bad debts	32	(37)
Loss on disposal of fixed assets	0	30
Changes in operating assets and liabilities:
Decrease in accounts receivable	451	506
(Increase) decrease in inventory	62	(677)
(Increase) decrease in prepaid expenses	(270)	149
Decrease in accounts payable	(1,616)	(187)
Increase in accrued expenses	470	482
Net cash used in operating activities	(15,663)	(10,055)
Cash flows from investing activities:
Purchases of property and equipment	(612)	(1,357)
Acquisition, net of cash received	(2,685)	0
Sales and maturities of investments	0	6,027
Restricted cash classification change	(62)	0
Net cash provided by (used in) investing activities	(3,359)	4,670
Cash flows from financing activities:
Net proceeds from issuance of common stock	17,074	61
Proceeds from exercise of stock options	10	7
Net cash provided by financing activities	17,084	68
Effect of exchange rate changes on cash and cash equivalents	(1)	0
Net decrease in cash and cash equivalents	(1,939)	(5,317)
Cash and cash equivalents, beginning of period	21,541	38,724
Cash and cash equivalents, end of period	19,602	33,407
US Treasury and Government [Member]
Changes in operating assets and liabilities:
Increase in accrued expenses	$ (627)	$ 437

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Consolidated Statements of Operations and Comprehensive Loss (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Revenue	$ 3,877	$ 3,460	$ 6,977	$ 7,243
Cost of revenue	1,295	912	2,327	1,909
Gross profit	2,582	2,548	4,650	5,334
Operating expenses:
Research and development	1,509	1,244	2,794	2,577
Sales and marketing	6,032	5,371	10,959	10,670
General and administrative	1,860	1,504	3,411	2,922
Merger and integration expenses	1,583	0	2,895	0
Total operating expenses	11,053	8,839	20,219	17,353
Operating loss	(8,471)	(6,291)	(15,569)	(12,019)
Other expense, net	(60)	(2)	(62)	(32)
Net loss	(8,531)	(6,293)	(15,631)	(12,051)
Other comprehensive loss:
Foreign currency translation adjustments	1	0	0	0
Comprehensive loss	(8,530)	(6,293)	(15,631)	(12,051)
Net loss per common share - basic and diluted (in dollars Per Share)	$ (0.26)	$ (0.23)	$ (0.51)	$ (0.44)
Weighted average common shares outstanding - basic and diluted (in shares)	33,408	27,255	30,379	27,250
US Treasury and Government [Member]
Operating expenses:
Charges related to U.S. Government settlement	$ 69	$ 720	$ 160	$ 1,184

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Summary of Significant Accounting Policies (Details Textual)	6 Months Ended
	Jun. 30, 2013
Maximum [Member]
Finite-Lived Intangible Asset, Useful Life	17 years
Minimum [Member]
Finite-Lived Intangible Asset, Useful Life	10 years

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Goodwill and Intangible Assets (Tables)

6 Months Ended

Jun. 30, 2013

Goodwill and Intangible Assets Disclosure [Abstract]

Schedule of Intangible Assets and Goodwill [Table Text Block]

The following table presents the carrying value of the components of goodwill and intangible assets at the balance sheet dates:

	June 30,		December 31,
	2013		2012
	(In thousands)
Goodwill	$	16,036	$	-
Intangible assets:
Trademarks		1,265		-
Technology		6,598		-
Customer relationships		400		-
Amortization of intangible assets		(44)		-
Total intangible assets	$	8,219	$	-

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Closing of Merger and Financing Transaction (Details 3) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Revenue	$ 3,877	$ 3,460	$ 6,977	$ 7,243
Cost of revenue	1,295	912	2,327	1,909
Gross Profit	2,582	2,548	4,650	5,334
Operating expenses:
Research and development	1,509	1,244	2,794	2,577
Sales and marketing	6,032	5,371	10,959	10,670
General and administrative	1,860	1,504	3,411	2,922
Merger and integration expenses	1,583	0	2,895	0
Operating expenses	11,053	8,839	20,219	17,353
Operating loss	(8,471)	(6,291)	(15,569)	(12,019)
Other expense, net	(60)	(2)	(62)	(32)
Net loss	(8,531)	(6,293)	(15,631)	(12,051)
Historical Baxano Surgical loss per common share - basic and diluted (in dollars Per Share)	$ (0.26)	$ (0.23)	$ (0.51)	$ (0.44)
Historical Results of Baxano Surgical [Member]
Revenue			11,702
Cost of revenue			3,989
Gross Profit			7,713
Operating expenses:
Research and development			4,112
Sales and marketing			16,396
General and administrative			4,350
Merger and integration expenses			5,949
Charges related to U.S. Government settlement			160
Operating expenses			(30,967)
Operating loss			(23,254)
Other expense, net			(764)
Net loss			(24,018)
Pro Forma Adjustments [Member]
Revenue			0
Cost of revenue			25
Gross Profit			(25)
Operating expenses:
Research and development			4
Sales and marketing			4
General and administrative			227
Merger and integration expenses			0
Charges related to U.S. Government settlement			0
Operating expenses			(235)
Operating loss			(260)
Other expense, net			548
Net loss			288
Historical Baxano Surgical loss per common share - basic and diluted (in dollars Per Share)			$ (0.51)
Pro forma loss per common share - basic and diluted:
Pro forma loss			(23,730)
Pro forma weight average common shares			45,173
Pro forma loss per common share			$ (0.53)
Pro Forma Results [Member]
Revenue			11,702
Cost of revenue			4,014
Gross Profit			7,688
Operating expenses:
Research and development			4,116
Sales and marketing			16,400
General and administrative			4,577
Merger and integration expenses			5,949
Charges related to U.S. Government settlement			160
Operating expenses			(31,202)
Operating loss			(23,514)
Other expense, net			(216)
Net loss			(23,730)
Baxano Surgical [Member]
Revenue			6,977
Cost of revenue			2,327
Gross Profit			4,650
Operating expenses:
Research and development			2,794
Sales and marketing			10,959
General and administrative			3,411
Merger and integration expenses			2,895
Charges related to U.S. Government settlement			160
Operating expenses			(20,219)
Operating loss			(15,569)
Other expense, net			(62)
Net loss			(15,631)
Baxano [Member]
Revenue			4,725
Cost of revenue			1,662
Gross Profit			3,063
Operating expenses:
Research and development			1,318
Sales and marketing			5,437
General and administrative			939
Merger and integration expenses			3,054
Charges related to U.S. Government settlement			0
Operating expenses			(10,748)
Operating loss			(7,685)
Other expense, net			(702)
Net loss			$ (8,387)

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Legal Proceedings (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
U.S. Government settlement	$ 6,000	$ 6,000
Less current portion	(2,537)	0
Long-term liability	$ 3,463	$ 6,000

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Goodwill and Intangible Assets (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Goodwill	$ 16,036	$ 0
Trademarks	1,265	0
Technology	6,598	0
Customer relationships	400	0
Amortization of intangible assets	(44)	0
Total intangible assets	$ 8,219	$ 0

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Accrued Expenses (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Vacation	$ 662	$ 160
Commissions	581	333
Severance	531	5
Bonus	478	630
Legal and professional fees	263	129
Other	533	391
Total accrued expenses	$ 3,048	$ 1,648

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Goodwill and Intangible Assets

6 Months Ended

Jun. 30, 2013

Goodwill and Intangible Assets Disclosure [Abstract]

Goodwill and Intangible Assets Disclosure [Text Block]

8. Goodwill and Intangible Assets

The following table presents the carrying value of the components of goodwill and intangible assets at the balance sheet dates:

	June 30,		December 31,
	2013		2012
	(In thousands)
Goodwill	$	16,036	$	-
Intangible assets:
Trademarks		1,265		-
Technology		6,598		-
Customer relationships		400		-
Amortization of intangible assets		(44)		-
Total intangible assets	$	8,219	$	-

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Net Loss Per Common Share (Details)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Weighted average stock options outstanding (in shares)	4,093,296	3,371,301	3,702,905	3,185,326

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Closing of Merger and Financing Transaction (Details 1) (USD $) In Thousands, unless otherwise specified	May 31, 2013
Cash and cash equivalents	$ 279
Accounts receivable	1,567
Inventory	1,946
Other current assets	234
Property and equipment	866
Other long-term asset	91
Intangible assets	8,263
Goodwill	16,036
Total assets acquired	29,282
Accounts payable and other liabilities	(2,430)
Term debt assumed	(2,815)
Total purchase price	$ 24,037

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Legal Proceedings

6 Months Ended

Jun. 30, 2013

Legal Proceedings [Abstract]

Legal Matters and Contingencies [Text Block]

11. Legal Proceedings

In October 2011, the Company received a subpoena issued by the Department of Health and Human Services, Office of Inspector General (“OIG”) under the authority of the federal healthcare fraud and false claims statutes. The subpoena sought documents for the period January 1, 2008 through October 6, 2011. The Company has cooperated with the government’s request. On December 24, 2012 the Company reached a tentative agreement in principle with the U.S. Department of Justice related to the subpoena issued in October 2011. The Company and the staff of the Department of Justice agreed to settle its federal investigation for $6.0 million. The final agreement was executed in June 2013. The $6.0 million settlement, plus accrued interest of 2%, will be paid in nine quarterly installments beginning in July 2013. The Company also signed a CIA with the OIG in June 2013 and is in the process of implementing the requirements of the CIA.

The following table presents the components of the U.S. Government settlement liability:

	June 30,		Dec 31,
	2013		2012
	(in thousands)
U.S. Government settlement	$	6,000	$	6,000
Less current portion		(2,537)		-
Long-term liability	$	3,463	$	6,000

In the three months ended June 30, 2013 and 2012, the Company expensed legal fees of $69,000 and $0.7 million, respectively, related to this investigation. In the fourth quarter of 2012, the Company expensed the $6.0 million related to the tentative settlement. The Company had accrued $6.2 million at June 30, 2013 and $6.8 million at December 31, 2012 for the settlement and related legal fees.

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

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Inventories

6 Months Ended

Jun. 30, 2013

Inventory Disclosure [Abstract]

Inventory Disclosure [Text Block]

7. Inventories

The following table presents the components of inventories:

	June 30,		December 31,
	2013		2012
	(In thousands)
Finished goods	$	4,351	$	3,048
Raw materials		1,871		1,629
Work-in-process		650		340
Total inventories	$	6,872	$	5,017

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Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2013

Accounting Policies [Abstract]

Significant Accounting Policies [Text Block]

2. Summary of Significant Accounting Policies 

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, 2012. The accompanying unaudited interim consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) which are, in the opinion of the Company’s management, necessary for a fair statement of the Company’s consolidated financial position, results of operations and cash flows for the periods presented. These principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The principal estimates relate to accounts receivable reserves, inventory valuation, stock-based compensation, accrued expenses and income tax valuation. Actual results could differ from those estimates. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. All intercompany accounts and transactions have been eliminated in consolidation.

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

For a description of our critical accounting policies and estimates, please refer to the “Critical Accounting Policies and Estimates” section of the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section contained in our Annual Report on Form 10-K for the year ended December 31, 2012. There have been no material changes in any of our accounting policies since December 31, 2012, however the Company has adopted the following new accounting policies related to the Merger.

Identifiable Intangible Assets and Goodwill

Identifiable intangible assets are recorded at cost, or when acquired as part of a business acquisition, at estimated fair value. Certain intangible assets are amortized over periods ranging from 10 to 17 years. Similar to tangible personal property, plant and equipment, the Company periodically evaluates identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carry amount may not be recoverable.

Indefinite-lived intangible assets, such as goodwill and certain trademarks, are not amortized. The Company tests the carrying amounts of these assets for recoverability on an annual basis or when events or changes in circumstances indicate evidence of potential impairment exists, using a fair value based test.

Debt Issuance Costs

The Company capitalizes costs associated with the issuance of debt instruments and amortizes these costs to interest expense over the term of the related debt agreement using the effective yield amortization method. Unamortized debt issuance costs will be charged to operations when indebtedness under the related credit facility is repaid prior to maturity.

Business Acquisitions

Business acquisitions are accounted for using the acquisition method of accounting in accordance with Accounting Standards Codification (“ASC”) 805, “Business Combinations.” ASC 805 requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values, as determined in accordance with ASC 820, “Fair Value Measurements,” as of the acquisition date. For certain assets and liabilities, book value approximates fair value. In addition, ASC 805 establishes that consideration transferred be measured at the closing date of the acquisition at the then-current market price, which may be different than the amount of consideration assumed in the pro forma financial statements. Under ASC 805, acquisition related costs (i.e., advisory, legal, valuation and other professional fees) and certain acquisition-related restructuring charges impacting the target company are expensed in the period in which the costs are incurred. The application of the acquisition method of accounting requires the Company to make estimates and assumptions related to the estimated fair values of net assets acquired. Significant judgments are used during this process, particularly with respect to intangible assets. Generally, intangible assets are amortized over their estimated useful lives. Goodwill and other indefinite-lived intangibles are not amortized, but are annually assessed for impairment. Therefore, the purchase price allocation to intangible assets and goodwill has a significant impact on future operating results.

Reclassification

Certain balances in the prior year’s consolidated financial statements have been reclassified to conform to the June 30, 2013 presentation. These changes consisted of a reclassification on the consolidated statements of operations from general and administrative expense to a separate line item entitled charges related to U.S. Government settlement and a reclassification on the consolidated statements of cash flows from changes in accounts payable and accrued expenses to a separate line item entitled increase (decrease) in accrued expenses related to U.S. Government settlement.

Impact of Recently Issued Accounting Standards

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

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Accounts Receivable, Net (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Gross accounts receivable	$ 4,535	$ 3,419
Allowance for uncollectible accounts	(245)	(213)
Total accounts receivable, net	$ 4,290	$ 3,206

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Net Loss Per Common Share (Tables)

6 Months Ended

Jun. 30, 2013

Earnings Per Share [Abstract]

Schedule Of Antidilutive Securities Excluded From Computation Of Earnings Per Share [Table Text Block]

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,
	2013		2012		2013		2012
Weighted average stock options outstanding		4,093,296		3,371,301		3,702,905		3,185,326

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Debt

6 Months Ended

Jun. 30, 2013

Debt Disclosure [Abstract]

Long-term Debt [Text Block]

10.   Debt

In connection with the Merger, the Company assumed and became the borrower under Baxano’s outstanding credit facility pursuant to the terms of the First Amendment to Loan and Security Agreement, dated as of May 31, 2013 (the “First Amendment to Loan Agreement”), among the Company, Oxford Finance LLC, as collateral agent (the “Collateral Agent”), and Oxford Finance Funding I, LLC and Silicon Valley Bank, as lenders (the “Lenders”). The First Amendment to Loan Agreement amends the Loan and Security Agreement, dated as of March 15, 2012, among the Collateral Agent, the lenders party thereto, and Baxano (as so amended, the “Amended Loan Agreement”). The Amended Loan Agreement evidences a term loan, which will mature on May 1, 2016 (the “Term Loan”). The following table presents the components of long-term debt (in thousands): 

	June 30,
	2013
	(in thousands)
Term Loan	$	2,815
Balloon payment on Term Loan		210
Debt discount		(265)
Total long-term debt		2,760
Less: Current portion of long-term debt		526
Total long-term debt, net of current portion	$	2,234

The Term Loan bears interest at a fixed rate equal to6.72% and the Company is required to make monthly interest-only payments through November 2013.

Commencing December 2013, the Amended Loan Agreement provides for the amortization of principal (in the form of level monthly payments of principal and interest). The Term Loan will be required to be prepaid if the Term Loan is accelerated following an event of default. In addition, the Company is permitted to prepay the Term Loan in full at any time upon 15 days’ written notice to the Lenders. Upon the earliest to occur of the maturity date, acceleration of the Term Loan, or prepayment of the Term Loan, the Company is required to make a final payment equal to the original principal amount of the Term Loan multiplied by 7.00% (the “Final Payment Fee”). Any prepayment, whether mandatory or voluntary, must include the Final Payment Fee, the prepayment fee (equal to 2% of the principal amount prepaid if prepayment is made on or before May 31, 2015, or 1% of the principal amount prepaid if payment is made thereafter), interest at the default rate (which is the rate otherwise applicable plus 5%) with respect to any amounts past due, the Collateral Agent’s and the Lenders’ expenses, and all other obligations that are due and payable to the Collateral Agent and the Lenders.

The Amended Loan Agreement is secured by a security interest in substantially all assets of the Company and any future subsidiaries, other than intellectual property. The Amended Loan Agreement contains customary representations (tested on a continual basis) and covenants that, subject to exceptions, restrict the Company’s ability to do the following things: declare dividends or redeem or repurchase equity interests; pay, redeem, or amend subordinated debt; incur additional liens; make loans and investments; incur additional indebtedness; engage in mergers, acquisitions, and asset sales; transact with affiliates; be party to material litigation; fail to appoint a chief executive officer or chief financial officer upon vacancy; undergo a change in control; add or change business locations; and engage in businesses that are not related to the Company’s existing business. In addition, the Company is required to raise at least $10,000,000 in net cash proceeds from the sale of its equity securities before December 31, 2013.

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Inventories (Tables)

6 Months Ended

Jun. 30, 2013

Inventory Disclosure [Abstract]

Schedule of Inventory, Current [Table Text Block]

The following table presents the components of inventories:

	June 30,		December 31,
	2013		2012
	(In thousands)
Finished goods	$	4,351	$	3,048
Raw materials		1,871		1,629
Work-in-process		650		340
Total inventories	$	6,872	$	5,017

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Cash and Cash Equivalents (Tables)

6 Months Ended

Jun. 30, 2013

Cash and Cash Equivalents [Abstract]

Available-for-sale Securities [Table Text Block]

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

	June 30,		December 31,
	2013		2012
	(In thousands)
Cash and cash equivalents	$	18,721	$	21,116
Total cash and available for sale securities	$	18,721	$	21,116

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Document And Entity Information	6 Months Ended
	Jun. 30, 2013	Aug. 08, 2013
Document Information [Line Items]
Entity Registrant Name	BAXANO SURGICAL, INC.
Entity Central Index Key	0001230355
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Trading Symbol	BAXS
Entity Common Stock, Shares Outstanding		45,197,632
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Jun. 30, 2013
Document Fiscal Period Focus	Q2
Document Fiscal Year Focus	2013

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Accounts Receivable, Net (Tables)

6 Months Ended

Jun. 30, 2013

Receivables [Abstract]

Schedule of Accounts, Notes, Loans and Financing Receivable [Table Text Block]

The following table presents the components of accounts receivable:

	June 30,		December 31,
	2013		2012
	(In thousands)
Gross accounts receivable	$	4,535	$	3,419
Allowance for uncollectible accounts		(245)		(213)
Total accounts receivable, net	$	4,290	$	3,206