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

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

(919) 800-0020

(Registrant’s telephone number, including area code)

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

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

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

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

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

The number of shares of the registrant’s common stock outstanding as of November 11, 2013 was 45,197,632 shares.

BAXANO SURGICAL, INC.

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 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 6.	Exhibits	31
SIGNATURES		32
EXHIBIT INDEX		33

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 September 30,				Nine months Ended September 30,
	2013		2012		2013		2012
Revenue	$	5,650	$	3,198	$	12,627	$	10,441
Cost of revenue		1,506		838		3,832		2,747
Gross profit		4,144		2,360		8,795		7,694
Operating expenses:
Research and development		1,904		1,361		4,698		3,937
Sales and marketing		6,764		4,453		17,722		15,124
General and administrative		2,769		1,739		6,181		4,661
Merger and integration expenses		530		-		3,426		-
Charges related to U.S. Government settlement		32		558		192		1,742
Total operating expenses		11,999		8,111		32,219		25,464
Operating loss		(7,855)		(5,751)		(23,424)		(17,770)
Other expense, net		(104)		(114)		(166)		(146)
Net loss	$	(7,959)	$	(5,865)	$	(23,590)	$	(17,916)
Other comprehensive loss:
Foreign currency translation adjustments		(1)		1		(2)		1
Comprehensive loss	$	(7,960)	$	(5,864)	$	(23,592)	$	(17,915)
Net loss per common share – basic and diluted	$	(0.18)	$	(0.22)	$	(0.67)	$	(0.66)
Weighted average common shares outstanding - basic and diluted		45,198		27,275		35,373		27,258

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

2

 

Baxano Surgical, Inc.

Consolidated Balance Sheets

(in thousands, except share amounts)

(Unaudited)

	September 30,			December 31,
	2013			2012
Assets
Current assets:
Cash and cash equivalents	$	11,599	$		21,541
Restricted cash		65			-
Accounts receivable, net		4,707			3,206
Inventory		7,154			5,017
Prepaid expenses and other assets		645			330
Total current assets		24,170			30,094
Property and equipment, net		3,142			2,166
Goodwill		16,043			-
Intangible assets, net		8,088			-
Other long-term assets		152			-
Total assets	$	51,595	$		32,260
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt	$	796	$		-
Accounts payable		2,951			2,603
Accrued liability related to U.S. Government settlement		2,748			6,792
Accrued expenses		3,302			1,648
Total current liabilities		9,797			11,043
Long-term debt		1,986			-
Other noncurrent liabilities		2,857			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 September 30, 2013 and December 31, 2012, respectively		4			3
Additional paid-in capital		199,333			159,929
Accumulated other comprehensive income		15			14
Accumulated deficit		(162,397)			(138,807)
Total stockholders' equity		36,955			21,139
Total liabilities and stockholders' equity	$	51,595	$		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)

	Nine months Ended September 30,
	2013		2012
Cash flows from operating activities:
Net loss	$	(23,590)	$	(17,916)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,477		794
Stock-based compensation		1,036		1,062
Provision (reversal of provision) for bad debts		650		(27)
Loss on disposal of fixed assets		-		261
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable		(584)		473
Increase in inventory		(191)		(638)
(Increase) decrease in prepaid expenses		(81)		294
Decrease in accounts payable		(1,140)		(1,134)
Increase (decrease) in accrued expenses related to U.S. Government settlement		(1,267)		452
Increase in accrued expenses		714		585
Net cash used in operating activities		(22,976)		(15,794)
Cash flows from investing activities:
Purchases of property and equipment		(1,376)		(1,793)
Acquisition, net of cash received		(2,685)		-
Sales and maturities of investments		-		6,027
Restricted cash classification change		13		-
Net cash provided by (used in) investing activities		(4,048)		4,234
Cash flows from financing activities:
Net proceeds from issuance of common stock		17,075		-
Proceeds from exercise of stock options		9		68
Net cash provided by financing activities		17,084		68
Effect of exchange rate changes on cash and cash   equivalents		(2)		1
Net decrease in cash and cash equivalents		(9,942)		(11,491)
Cash and cash equivalents, beginning of period		21,541		38,724
Cash and cash equivalents, end of period	$	11,599	$	27,233

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 designing, developing and marketing 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^® lateral access and interbody fusion system, the iO-Flex^® system, a proprietary set of flexible instruments used by surgeons during spinal decompression procedures, and the iO-Tome^® instrument, which rapidly and precisely removes bone, specifically the facet joints, which is commonly performed in spinal fusion 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 branded product was first commercially released in January 2005, the VEO lateral access and interbody fusion system was commercially launched in November 2011, the iO-Flex instrument was commercially launched in 2009, and the iO-Tome instrument was commercially launched in the fourth quarter of 2013. 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 concurrent private placement of 7,522,009 shares of the Company’s common stock at an offering price of $2.28 per share, with aggregate gross proceeds to the Company of approximately $17.2 million.

While the Company primarily markets its products in the United States, currently less than ten percent of revenues are derived from agent or distributor relationships in foreign countries. The Company has certain relationships in Europe and has expanded to Turkey, Mexico and Columbia. Product regulatory approval is also pending in China and Russia to support planned expansion.

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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 Company operates primarily in the United States in thirty-two states and certain foreign countries through distributor and agent relationships currently representing less than ten percent of revenues. As the Company’s products are focused on minimally invasive treatments for degenerative conditions of the spine affecting the lumbar region, the Company manages the business on the basis of one operating segment and, therefore, has only one reportable segment. 

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 the Company’s 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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. There have been no material changes in any of the Company’s 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.

6

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 September 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 (the “FASB”) 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.

7

In July 2013, the FASB issued guidance (ASU No. 2013-11) updating the financial statement presentation of an unrecognized tax benefit when a net loss carryforward, similar tax loss, or tax credit carryforward exists. The guidance requires an unrecognized tax benefit to be presented as a decrease in a deferred tax asset where a net operating loss, a similar tax loss, or a tax credit carryforward exists and certain criteria are met. The guidance is effective for annual reporting periods and interim periods within those years, beginning after December 15, 2013. Based on the Company’s cumulative net operating losses, the Company does not expect that adoption of ASU No. 2013-11 will have any impact on the Company’s consolidated financial statements. 

3.    Income Taxes

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

4.    Net Loss Per Common Share

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

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

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2013	2012	2013	2012
Weighted average stock options outstanding	4,219,918	3,409,083	3,648,463	3,224,660

8

 

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 September 30, 2013, the Company had $65,000 of restricted cash which is currently deposited in a bank account in Germany, but not readily accessible. Related unrealized gains and losses were not material as of September 30, 2013 and December 31, 2012. There have been no unrealized gains or losses reclassified to accumulated other comprehensive income. 

At September 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:

	September 30,		December 31,
	2013		2012
	(In thousands)
Cash and cash equivalents	$	8,899	$	21,116
Total cash and available for sale securities	$	8,899	$	21,116

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

6.    Accounts Receivable, Net

The following table presents the components of accounts receivable:

	September 30,		December 31,
	2013		2012
	(In thousands)
Gross accounts receivable	$	5,544	$	3,419
Allowance for uncollectible accounts		(837)		(213)
Total accounts receivable, net	$	4,707	$	3,206

7.    Inventories

The following table presents the components of inventories:

	September 30,		December 31,
	2013		2012
	(In thousands)
Finished goods	$	4,622	$	3,048
Raw materials		1,735		1,629
Work-in-process		797		340
Total inventories	$	7,154	$	5,017

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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:

	September 30,		December 31,
	2013		2012
	(In thousands)
Goodwill	$	16,043	$	-
Intangible assets:
Trademarks	$	1,265		-
Technology		6,598		-
Customer relationships		400		-
Less: Amortization of intangible assets		(175)		-
Total intangible assets	$	8,088	$	-

9.    Accrued Expenses

The following table presents the components of accrued expenses:

	September 30,		December 31,
	2013		2012
	(In thousands)
Bonus	$	656	$	630
Commissions		627		333
Vacation		613		160
Severance		451		5
Legal and professional fees		271		129
Other		684		391
Total accrued expenses	$	3,302	$	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:

10

	September 30,
	2013
	(in thousands)
Term Loan	$	2,815
Balloon payment on Term Loan		210
Debt discount		(243)
Total long-term debt		2,782
Less: Current portion of long-term debt		796
Total long-term debt, net of current portion	$	1,986

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.

Commencing December 2013, the Amended Loan Agreement provides for the amortization of principal (in the form of level $102,207 monthly payments of principal and interest for thirty months). 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 Amended Loan Agreement requires the Company to raise at least $10,000,000 in net cash proceeds from the sale of its equity securities before December 31, 2013.

11

 

11.   Commitments and Contingencies

In October 2011, the Company received a subpoena issued by the Department of Health and Human Services, Office of Inspector General (“OIG”) under the authority of the federal healthcare fraud and false claims statutes. The subpoena sought documents for the period January 1, 2008 through October 6, 2011. The Company 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, with the first installment paid in July 2013. The Company also signed the 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:

	September 30,		December 31,
	2013		2012
	(in thousands)
U.S. Government settlement	$	5,500	$	6,000
Less current portion		(2,723)		-
Long-term liability	$	2,777	$	6,000

In the nine months ended September 30, 2013 and 2012, the Company expensed legal fees of $192,000 and $1.7 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 $5.5 million at September 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 alleged 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 sought 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. On September 19, 2013, the Company’s motion was granted and the complaint was dismissed with prejudice. On October 17, 2013, the plaintiff filed a motion to alter or amend the order dismissing the complaint with prejudice.

12.   Closing of Merger and Financing Transaction

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.

12

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, the lenders party thereto 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. Upon the determination that no post-closing adjustment was required, 265,584 escrow shares were 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 were entitled to receive merger consideration in accordance with the Merger Agreement. Because the merger consideration was 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

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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		1,559
Inventory		1,946
Other current assets		234
Property and equipment		866
Other long-term assets		91
Intangible assets		8,263
Goodwill		16,043
Total assets acquired		29,281
Accounts payable and other liabilities		(2,429)
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 on January 1, 2012. The pro forma results for the nine months ended September 30, 2013 and 2012 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, 2012, or that the Company may achieve in the future.

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The following table presents the pro forma results for the nine months ended (in thousands, except per share data):

	September 30, 2013		September 30, 2012
Revenue	$	17,352	$	16,812
Operating loss	$	(31,369)	$	(32,708)
Net loss	$	(31,689)	$	(33,085)
Net loss per common share	$	(0.70)	$	(0.73)

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

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes to our consolidated financial statements included in this report. In addition to historical financial information, this report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, 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. These risks include, without limitation, the pace of adoption of the Company’s product technology by spine surgeons, limited clinical data about the efficacy of these products, the outcome of coverage and reimbursement decisions by the government and third party payors, the success of continuing product development efforts, the effect on the business of existing and new regulatory requirements, 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, the Company’s ability to raise additional capital, the ability to comply with the settlement agreement and Corporate Integrity Agreement (the “CIA”) with certain entities of the U.S. government, the reliance on a limited number of suppliers to provide the Company’s 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. 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.

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Overview

We are a medical device company focused on designing, developing and marketing 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^® lateral access and interbody fusion system, the iO-Flex® system, a proprietary set of flexible instruments used by surgeons during spinal decompression procedures, and the iO-Tome^® instrument, which rapidly and precisely removes bone, specifically the facet joints, which is commonly performed in spinal fusion 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.

We first commercially introduced our AxiaLIF branded products in 2005. Our VEO lateral access and interbody fusion system was commercially launched in November 2011, our iO-Flex System was commercially launched in 2009, and our iO-Tome instrument was commercially launched in the fourth quarter of 2013. We currently sell our products through a direct sales force, independent sales agents and international distributors.

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

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We rely on third parties to manufacture virtually all of our AxiaLIF, VEO and certain other 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 U.S. Food and Drug Administration, 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 Merger Sub, consummated our acquisition of Baxano, Inc., or 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. Upon the determination that no post-closing adjustment was required, 265,584 escrow shares were 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.

For the nine months ended September 30, 2013, we have incurred $2.2 million of merger related expenses and $1.2 million of integration expenses.

Since inception, we have been unprofitable. As of September 30, 2013 we had an accumulated deficit of $162.4 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.

Results of Operations

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

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	Three Months Ended September 30,									Nine Months Ended September 30,
	2013			2012			% change			2013			2012			% change
	(in millions, except percentages)
Revenue	$	5.7		$	3.2			76.7	%	$	12.6		$	10.4			20.9	%
Cost of revenue		1.5			0.8			79.7	%		3.8			2.7			39.5	%
Gross margin %		73.3	%		73.8	%		-0.7	%		69.7	%		73.7	%		-5.4	%
Total operating expenses		12.0			8.1			47.9	%		32.2			25.5			26.5	%
Net loss		(8.0)			(5.9)			-35.7	%		(23.6)			(17.9)			-31.7	%

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. The Company, and we believe our industry, tends to experience some revenue seasonality during the summer months as certain elective procedures may be deferred beyond the summer months.

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.

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.

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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, bad debt expense 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 September 30, 2012 and 2013

Revenue Revenue increased from $3.2 million in the three months ended September 30, 2012 to $5.7 million in the three months ended September 30, 2013.

Revenue by product line was:

	Three Months Ended September 30,
	2013		2012
	(in thousands)
Domestic revenue:
AxiaLIF	$	1,617	$	1,916
iO-Flex		2,654		-
VEO		523		484
Other		492		504
Total		5,286		2,904
International revenue		364		294
Total Revenue	$	5,650	$	3,198

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

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The $2.5 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 $1.2 million in the three months ended September 30, 2012 to $1.1 million in the three months ended September 30, 2013, and sales of our AxiaLIF Plus 2-Level products decreased from $0.7 million in the three months ended September 30, 2012 to $0.5 million in the three months ended September 30, 2013. In the three months ended September 30, 2013, average revenue per AxiaLIF case increased, primarily as a result of penetration into existing cases by our other products. In the three months ended September 30, 2012 and 2013, we recorded 164 and 140 domestic AxiaLIF cases, respectively, including 46 AxiaLIF Plus 2-Level cases in the three months ended September 30, 2012, and 37 AxiaLIF Plus 2-Level cases in the three months ended September 30, 2013. Sales of our iO-Flex products for the quarter were $2.7 million, which represented 701 cases. Sales of our VEO lateral access and interbody fusion system were $0.5 million in the three months ended September 30, 2012 and September 30, 2013, and the number of cases increased from 44 in the three months ended September 30, 2012, to 51 in the three months ended September 30, 2013. Other domestic revenues primarily includes revenue from our posterior fixation systems and our Bi-Ostetic bone void filler products and did not change materially over the comparative three month periods presented. Revenue generated outside the United States increased from $0.3 million in the three months ended September 30, 2012 to $0.4 million in the three months ended September 30, 2013. There were $0.1 million in initial stocking shipments to new distributors outside the United States in the three months ended September 30, 2012, compared to $0.2 million in the three months ended September 30, 2013. In the three months ended September 30, 2012, 91% of our revenues were generated in the United States compared to 94% in the three months ended September 30, 2013. Our revenue generated outside the United States included sales of AxiaLIF, VEO and iO-Flex products in 2013 and sales of AxiaLIF and VEO products in 2012.

Cost of Revenue Cost of revenue increased from $0.8 million for the three months ended September 30, 2012 to $1.5 million for the three months ended September 30, 2013. Gross margin decreased from 73.8% in the three months ended September 30, 2012 to 73.3% in the three months ended September 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 $1.4 million in the three months ended September 30, 2012 to $1.9 million in the three months ended September 30, 2013. Personnel-related expenses increased by $0.4 million from the three months ended September 30, 2012 compared to three months ended September 30, 2013 as we increased the headcount in our regulatory and clinical functions, including an increase in headcount related to the Merger

Sales and Marketing Sales and marketing expenses increased from $4.5 million in the three months ended September 30, 2012 to $6.8 million in the three months ended September 30, 2013. The increase in expenses from 2012 to 2013 of $2.3 million was primarily due to higher personnel-related costs of $0.9 million as we increased our direct sales personnel, including headcount related to the Merger, higher commissions of $0.8 million related to the increased revenue, as well as integrating the commission plans, increased promotional expense of $0.3 million and increased travel expenses related to the personnel increase of $0.1 million.

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General and Administrative General and administrative expenses increased from $1.7 million in the three months ended September 30, 2012 to $2.8 million in the three months ended September 30, 2013. The increase in expenses of $1.1 million was primarily due to an increase in personnel-related expense of $0.4 million, including headcount increases related to the Merger, increased bad debt expense of $0.6 million, and amortization of the intangible assets acquired in the merger.

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, with the first installment paid in July 2013. We also incurred legal fees related to the investigation of $0.6 million in the three months ended September 30, 2012 and $32,000 in the three months ended September 30, 2013.

Merger and Integration Expenses We have incurred $0.5 million of merger and integration related expenses for the three months ended September 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 decreased from $114,000 in the three months ended September 30, 2012 to $104,000 in the three months ended September 30, 2013. The expense in 2012 was primarily related to a loss on the disposal of fixed assets 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.

Comparison of the Nine Months Ended September 30, 2012 and 2013

Revenue Revenue increased from $10.4 million in the nine months ended September 30, 2012 to $12.6 million in the nine months ended September 30, 2013.

Revenue by product line was:

	Nine Months Ended September 30,
	2013		2012
	(in thousands)
Domestic revenue:
AxiaLIF	$	4,992	$	6,809
iO-Flex		3,452		-
VEO		1,750		1,232
Other		1,373		1,581
Total		11,567		9,622
International revenue		1,060		819
Total Revenue	$	12,627	$	10,441

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

The $2.2 million increase in revenue from 2012 to 2013 was due primarily to the addition of the iO-Flex family of products to our portfolio as of May 31, 2013, partially offset by the lower number of AxiaLIF cases performed by our current surgeon base. Domestically, sales of our AxiaLIF Plus 1-Level products decreased from $4.3 million in the nine months ended September 30, 2012 to $3.4 million in the nine months ended September 30, 2013, and sales of our AxiaLIF Plus 2-Level products decreased from $2.6 million in the nine months ended September 30, 2012 to $1.6 million in the nine months ended September 30, 2013. In the nine months ended September 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 nine months ended September 30, 2012 and 2013, we recorded 579 and 426 domestic AxiaLIF cases, respectively, including 174 AxiaLIF Plus 2-Level cases in the nine months ended September 30, 2012, and 113 AxiaLIF Plus 2-Level cases in the nine months ended September 30, 2013. Sales of our iO-Flex products for the nine months ended September 30, 2013 were $3.4 million, which represented 922 cases. Sales of our VEO lateral access and interbody fusion system increased from $1.2 million in the nine months ended September 30, 2012 to $1.8 million in the nine months ended September 30, 2013, as the number of cases increased from 122 in the nine months ended September 30, 2012, to 174 in the nine months ended September 30, 2013. Other domestic revenue primarily includes revenues from our posterior fixation systems and our Bi-Ostetic bone void filler products and did not change materially over the comparative nine month periods presented. Revenue generated outside the United States increased from $0.8 million in the nine months ended September 30, 2012 to $1.1 million in the nine months ended September 30, 2013. There was $0.1 million in initial stocking shipments to new distributors outside the United States in the nine months ended September 30, 2012 compared to $0.5 million in initial stocking shipments to new distributors in the nine months ended September 30, 2013. In the nine months ended September 30, 2012 and 2013, 92% of our revenues were generated in the United States.

Cost of Revenue Cost of revenue increased from $2.7 million for the nine months ended September 30, 2012 to $3.8 million for the nine months ended September 30, 2013. Gross margin decreased from 73.7% in the nine months ended September 30, 2012 to 69.7% in the nine months ended September 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 $3.9 million in the nine months ended September 30, 2012 to $4.7 million in the nine months ended September 30, 2013. Personnel-related expenses increased by $0.7 million from the nine months ended September 30, 2012 compared to nine months ended September 30, 2013 as we increased our headcount in our regulatory and clinical functions, primarily related to the Merger and R&D project spending, partially offset by a decrease of clinical trial spending and licensing agreements in the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012.

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Sales and Marketing Sales and marketing expenses increased from $15.1 million in the nine months ended September 30, 2012 to $17.7 million in the nine months ended September 30, 2013. The increase in expenses from 2012 to 2013 of $2.6 million was primarily due to higher commissions of $1.2 million related to integrating the commission plans, higher personnel-related costs of $1.1 million as we increased our direct sales personnel, including headcount related to the Merger, as well as increased training expense of $0.3 million as we educate our combined sales team on all products in our portfolio, increased promotional expense of $0.3 million and increased travel expenses related to the personnel increase of $0.2 million, 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 $4.7 million in the nine months ended September 30, 2012 to $6.2 million in the nine months ended September 30, 2013. The increase in expenses of $1.5 million was primarily due to an increase in personnel-related expense of $0.5 million, including headcount increases related to the Merger, increased bad debt expense of $0.6 million, increased legal and professional fees of $0.4 million and amortization of the intangible assets acquired in the merger.

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, with the first installment paid in July 2013. We also incurred legal fees related to the investigation of $1.7 million in the nine months ended September 30, 2012 and $0.2 million in the nine months ended September 30, 2013.

Merger and Integration Expenses We have incurred $3.4 million of merger and integration related expenses for the nine months ended September 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 $146,000 in the nine months ended September 30, 2012 to $166,000 in the nine months ended September 30, 2013. The expense in 2012 was primarily related to a loss on the disposal of fixed assets 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 September 30, 2013, we had an accumulated deficit of $162.4 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 $17.0 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 (File 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 September 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 $5.5 million related to our settlement agreement with the U.S. Government, payable quarterly over three years. We have working capital of $14.4 million at September 30, 2013 and our primary source of liquidity was $11.6 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 $11.6 million at September 30, 2013. The decrease of $9.9 million was primarily the result of net cash used in operating activities of $23.0 million, payments under the Baxano acquisition of $2.7 million and purchases of property and equipment of $1.4 million, partially offset by the net proceeds from our private placement transaction of $17.0 million.

Cash Flows

Net Cash Used in Operating Activities. Net cash used in operating activities was $23.0 million in the nine months ended September 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 nine months ended September 30, 2013, primarily an increase in accounts receivable and a decrease in accrued expenses related to a payment on the settlement with the U.S. Government. Net cash used in operating activities was $15.8 million in the nine months ended September 30, 2012. 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, and the loss on disposal of fixed assets, combined with changes in working capital requirements to support the market acceptance of our products.

Net Cash Used in Investing Activities. Net cash used in investing activities was $4.0 million in the nine months ended September 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 $1.4 million, primarily for reusable instrument kits used in the field and up-fitting our new headquarters in Raleigh, North Carolina.  Net cash provided by investing activities was $4.2 million in the nine months ended September 30, 2012. This amount reflected sales and maturities of short-term investments of $6.0 million, offset by the purchases of property and equipment of $1.8 million, primarily for reusable instrument kits used in the field and up-fitting our new training facility.

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Net Cash Provided by Financing Activities. Net cash provided by financing activities in the nine months ended September 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. Net cash provided by financing activities in the nine months ended September 30, 2012 was $68,000, which represented proceeds from the issuance of shares of common stock under our employee stock purchase program and 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 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, with the first installment paid 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.

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, the lender parties thereto and Baxano; and were senior in right of payment to the promissory notes of Baxano that were convertible into capital stock of Baxano. 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.

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) 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. Upon the determination that no post-closing adjustment was required, 265,584 escrow shares were 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.

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Concurrent with the closing of the Merger, and in accordance with the terms of 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 net proceeds to us of approximately $17.0 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.

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 our 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 our existing business. In addition, the Amended Loan Agreement requires us 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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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.

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.

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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

Business acquisitions are accounted for using the acquisition method of accounting in accordance with Accounting Standards Codification, or 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, or the FASB, 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.

In July 2013, the FASB issued guidance (ASU No. 2013-11) updating the financial statement presentation of an unrecognized tax benefit when a net loss carryforward, similar tax loss, or tax credit carryforward exists. The guidance requires an unrecognized tax benefit to be presented as a decrease in a deferred tax asset where a net operating loss, a similar tax loss, or a tax credit carryforward exists and certain criteria are met. The guidance is effective for annual reporting periods and interim periods within those years, beginning after December 15, 2013. Based on our cumulative net operating losses, we do not expect that adoption of ASU No. 2013-11 will have any impact on our consolidated financial statements.

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 September 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 September 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. Information regarding other material legal proceedings may be found in Part I, Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2012 and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2013 and June 30, 2013.

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 our securities between February 21, 2008 and October 17, 2011. The complaint alleged violations of the Exchange Act based upon purported omissions and/or false and misleading statements concerning our financial statements and reimbursement practices. The complaint sought 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. On September 19, 2013, our motion was granted and the complaint was dismissed with prejudice. On October 17, 2013, the plaintiff filed a motion to alter or amend the order dismissing the complaint with prejudice.

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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 Reports on Form 10-Q for the quarters ended March 31, 2013 and June 30, 2013. There have been no material changes to such risks, except (1) that the risk factor relating to the acquisition of Baxano being delayed or not consummated no longer applies because the acquisition of Baxano closed on May 31, 2013 and (2) as set forth below.

Our indebtedness could negatively impact our financial health.

In connection with the Merger, we assumed and became the borrower under Baxano’s outstanding credit facility, and we may incur additional indebtedness in the future. Our indebtedness could have important consequences to us, including the following:

· it may limit our ability to obtain additional debt or equity financing for working capital, capital expenditures, product development, debt service requirements, acquisitions or general corporate or other purposes;

· a portion of our cash flows from operations will be dedicated to the payment of principal and interest on our indebtedness and will not be available for other purposes, including our operations, capital expenditures and other business opportunities;

· if we seek to refinance our debt or require additional refinancing in the future, we may be unable to do so on attractive terms or at all;

· it may limit our flexibility in planning for, or our ability to adjust to, changes in our business or the industry in which we operate and place us at a competitive disadvantage compared to our competitors that have less debt; and

· we may be vulnerable to a downturn in general economic conditions or in our business, or we may be unable to carry out capital spending that is important to our growth.

One of our obligations under the Amended Loan Agreement is to raise at least $10,000,000 in net cash proceeds from the sale of our equity securities before December 31, 2013. If we are unable to meet this or our other debt obligations, we could be forced to restructure or refinance our obligations, seek additional equity financing or sell assets, which we may not be able to do on satisfactory terms or at all. As a result, we could default on those obligations.

In addition, the Amended Loan Agreement contains financial and other restrictive covenants that limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with these covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our indebtedness, which would adversely affect our financial health and could prevent us from fulfilling our obligations.

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:   November 12, 2013	By: /s/ Ken Reali
	Ken Reali
	President and Chief Executive Officer
Date:   November 12, 2013	By: /s/ Timothy M. Shannon
	Timothy M. Shannon
	Interim Chief Financial Officer

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Baxano Surgical, Inc.

Exhibit Index

Exhibit
No.	Description
10.1	2007 Stock Incentive Plan, as amended (incorporated by reference to Exhibit 99.1to Baxano Surgical’s Registration Statement on Form S-8 (File No. 333-191260) filed with the SEC on September 19, 2013).
10.2	Offer Letter, dated September 17, 2013, between Baxano Surgical, Inc. and Greg Slusser (incorporated by reference to Exhibit 10.1 to Baxano Surgical’s Current Report on Form 8-K filed with the SEC on September 20, 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

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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: November 12, 2013

/s/ Ken Reali

Ken Reali

President and Chief Executive Officer

 

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Timothy M. Shannon, 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: November 12, 2013

/s/ Timothy M. Shannon

Timothy M. Shannon

Interim 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 September 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: November 12, 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, Timothy M. Shannon, 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 September 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: November 12, 2013	/s/ Timothy M. Shannon
	Timothy M. Shannon
	Interim 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.

 

XML

Closing of Merger and Financing Transaction

9 Months Ended

Sep. 30, 2013

Business Combinations [Abstract]

Business Combination Disclosure [Text Block]

12.   Closing of Merger and Financing Transaction

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.

 

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, the lenders party thereto 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. Upon the determination that no post-closing adjustment was required, 265,584 escrow shares were 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 were entitled to receive merger consideration in accordance with the Merger Agreement. Because the merger consideration was 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		1,559
Inventory		1,946
Other current assets		234
Property and equipment		866
Other long-term assets		91
Intangible assets		8,263
Goodwill		16,043
Total assets acquired		29,281
Accounts payable and other liabilities		(2,429)
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 on January 1, 2012. The pro forma results for the nine months ended September 30, 2013 and 2012 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, 2012, or that the Company may achieve in the future.

 

The following table presents the pro forma results for the nine months ended (in thousands, except per share data):

	September 30, 2013		September 30, 2012
Revenue	$	17,352	$	16,812
Operating loss	$	(31,369)	$	(32,708)
Net loss	$	(31,689)	$	(33,085)
Net loss per common share	$	(0.70)	$	(0.73)

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Consolidated Balance Sheets [Parenthetical] (USD $)	Sep. 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

9 Months Ended

Sep. 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 September 30, 2013, the Company had $65,000 of restricted cash which is currently deposited in a bank account in Germany, but not readily accessible. Related unrealized gains and losses were not material as of September 30, 2013 and December 31, 2012. There have been no unrealized gains or losses reclassified to accumulated other comprehensive income. 

At September 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:

	September 30,		December 31,
	2013		2012
	(In thousands)
Cash and cash equivalents	$	8,899	$	21,116
Total cash and available for sale securities	$	8,899	$	21,116

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

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Accrued Expenses (Tables)

9 Months Ended

Sep. 30, 2013

Payables and Accruals [Abstract]

Schedule of Accrued Liabilities [Table Text Block]

The following table presents the components of accrued expenses:

	September 30,		December 31,
	2013		2012
	(In thousands)
Bonus	$	656	$	630
Commissions		627		333
Vacation		613		160
Severance		451		5
Legal and professional fees		271		129
Other		684		391
Total accrued expenses	$	3,302	$	1,648

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Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 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 Company operates primarily in the United States in thirty-two states and certain foreign countries through distributor and agent relationships currently representing less than ten percent of revenues. As the Company’s products are focused on minimally invasive treatments for degenerative conditions of the spine affecting the lumbar region, the Company manages the business on the basis of one operating segment and, therefore, has only one reportable segment. 

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 the Company’s 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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. There have been no material changes in any of the Company’s 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 September 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 (the “FASB”) 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.

In July 2013, the FASB issued guidance (ASU No. 2013-11) updating the financial statement presentation of an unrecognized tax benefit when a net loss carryforward, similar tax loss, or tax credit carryforward exists. The guidance requires an unrecognized tax benefit to be presented as a decrease in a deferred tax asset where a net operating loss, a similar tax loss, or a tax credit carryforward exists and certain criteria are met. The guidance is effective for annual reporting periods and interim periods within those years, beginning after December 15, 2013. Based on the Company’s cumulative net operating losses, the Company does not expect that adoption of ASU No. 2013-11 will have any impact on the Company’s consolidated financial statements. 

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Debt (Details Textual) (USD $)	9 Months Ended
	Sep. 30, 2013
Debt Instrument, Maturity Date	May 01, 2016
Term Loan Prepayment Description	Commencing December 2013, the Amended Loan Agreement provides for the amortization of principal (in the form of level $102,207 monthly payments of principal and interest for thirty months). 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 Agents and the Lenders expenses, and all other obligations that are due and payable to the Collateral Agent and the Lenders.
Subsequent Event [Member]
Long-term Debt, Percentage Bearing Fixed Interest, Percentage Rate	6.72%
Net Proceeds From Sale Of Equity Securities	$ 10,000,000
Debt Instrument, Periodic Payment	$ 102,207

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Closing of Merger and Financing Transaction (Tables)

9 Months Ended

Sep. 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		1,559
Inventory		1,946
Other current assets		234
Property and equipment		866
Other long-term assets		91
Intangible assets		8,263
Goodwill		16,043
Total assets acquired		29,281
Accounts payable and other liabilities		(2,429)
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 following table presents the pro forma results for the nine months ended (in thousands, except per share data):

	September 30, 2013		September 30, 2012
Revenue	$	17,352	$	16,812
Operating loss	$	(31,369)	$	(32,708)
Net loss	$	(31,689)	$	(33,085)
Net loss per common share	$	(0.70)	$	(0.73)

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Commitments and Contingencies (Tables)

9 Months Ended

Sep. 30, 2013

Commitments and Contingencies Disclosure [Abstract]

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

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

	September 30,		December 31,
	2013		2012
	(in thousands)
U.S. Government settlement	$	5,500	$	6,000
Less current portion		(2,723)		-
Long-term liability	$	2,777	$	6,000

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Inventories (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Finished goods	$ 4,622	$ 3,048
Raw materials	1,735	1,629
Work-in-process	797	340
Total inventories	$ 7,154	$ 5,017

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Commitments and Contingencies (Details Textual) (USD $)	3 Months Ended	9 Months Ended
	Dec. 31, 2012	Sep. 30, 2013	Sep. 30, 2012
Litigation Settlement Paid In Installments		$ 6,000,000
Debt Instrument, Interest Rate, Stated Percentage		2.00%
Legal Fees		192,000	1,700,000
Litigation Settlement, Expense	6,000,000
Accrued Settlement and Legal Fees	$ 6,800,000	$ 5,500,000

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Cash and Cash Equivalents (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Total cash and available for sale securities	$ 8,899	$ 21,116
Cash and Cash Equivalents [Member]
Total cash and available for sale securities	$ 8,899	$ 21,116

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Closing of Merger and Financing Transaction (Details 2) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 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)

9 Months Ended

Sep. 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:

 

	September 30,
	2013
	(in thousands)
Term Loan	$	2,815
Balloon payment on Term Loan		210
Debt discount		(243)
Total long-term debt		2,782
Less: Current portion of long-term debt		796
Total long-term debt, net of current portion	$	1,986

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Description of Business

9 Months Ended

Sep. 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 designing, developing and marketing 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^® lateral access and interbody fusion system, the iO-Flex^® system, a proprietary set of flexible instruments used by surgeons during spinal decompression procedures, and the iO-Tome^® instrument, which rapidly and precisely removes bone, specifically the facet joints, which is commonly performed in spinal fusion 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 branded product was first commercially released in January 2005, the VEO lateral access and interbody fusion system was commercially launched in November 2011, the iO-Flex instrument was commercially launched in 2009, and the iO-Tome instrument was commercially launched in the fourth quarter of 2013.  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 concurrent private placement of 7,522,009 shares of the Company’s common stock at an offering price of $2.28 per share, with aggregate gross proceeds to the Company of approximately $17.2 million.

While the Company primarily markets its products in the United States, currently less than ten percent of revenues are derived from agent or distributor relationships in foreign countries. The Company has certain relationships in Europe and has expanded to Turkey, Mexico and Columbia. Product regulatory approval is also pending in China and Russia to support planned expansion.

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Income Taxes

9 Months Ended

Sep. 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

9 Months Ended

Sep. 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:

	September 30,		December 31,
	2013		2012
	(In thousands)
Gross accounts receivable	$	5,544	$	3,419
Allowance for uncollectible accounts		(837)		(213)
Total accounts receivable, net	$	4,707	$	3,206

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Net Loss Per Common Share

9 Months Ended

Sep. 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		Nine Months Ended
	September 30,		September 30,
	2013	2012	2013	2012
Weighted average stock options outstanding	4,219,918	3,409,083	3,648,463	3,224,660

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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	9 Months Ended
	Sep. 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
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 $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Restricted cash	$ 65	$ 0

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Debt (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Term Loan	$ 2,815
Balloon payment on Term Loan	210
Debt discount	(243)
Total long-term debt	2,782
Less: Current portion of long-term debt	796	0
Total long-term debt, net of current portion	$ 1,986	$ 0

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Closing of Merger and Financing Transaction (Details Textual) (USD $)	1 Months Ended	9 Months Ended		2 Months Ended	9 Months Ended
	May 31, 2013	Sep. 30, 2013	Dec. 31, 2012	May 31, 2013 Bridge Loan [Member]	Sep. 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%
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%
Escrow Shares Distributed To Security Holders		265,584

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Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Assets
Cash and cash equivalents	$ 11,599	$ 21,541
Restricted cash	65	0
Accounts receivable, net	4,707	3,206
Inventory	7,154	5,017
Prepaid expenses and other assets	645	330
Total current assets	24,170	30,094
Property and equipment, net	3,142	2,166
Goodwill	16,043	0
Intangible assets, net	8,088	0
Other long-term assets	152	0
Total assets	51,595	32,260
Liabilities and Stockholders' Equity
Current portion of long-term debt	796	0
Accounts payable	2,951	2,603
Accrued liability	3,302	1,648
Total current liabilities	9,797	11,043
Long-term debt	1,986	0
Other noncurrent liabilities	2,857	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 September 30, 2013 and December 31, 2012, respectively	4	3
Additional paid-in capital	199,333	159,929
Accumulated other comprehensive income	15	14
Accumulated deficit	(162,397)	(138,807)
Total stockholders' equity	36,955	21,139
Total liabilities and stockholders' equity	51,595	32,260
US Treasury and Government [Member]
Liabilities and Stockholders' Equity
Accrued liability	$ 2,748	$ 6,792

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Accrued Expenses

9 Months Ended

Sep. 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:

	September 30,		December 31,
	2013		2012
	(In thousands)
Bonus	$	656	$	630
Commissions		627		333
Vacation		613		160
Severance		451		5
Legal and professional fees		271		129
Other		684		391
Total accrued expenses	$	3,302	$	1,648

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Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012
Cash flows from operating activities:
Net loss	$ (23,590)	$ (17,916)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	1,477	794
Stock-based compensation	1,036	1,062
Provision (reversal of provision) for bad debts	650	(27)
Loss on disposal of fixed assets	0	261
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable	(584)	473
Increase in inventory	(191)	(638)
(Increase) decrease in prepaid expenses	(81)	294
Decrease in accounts payable	(1,140)	(1,134)
Increase in accrued expenses	714	585
Net cash used in operating activities	(22,976)	(15,794)
Cash flows from investing activities:
Purchases of property and equipment	(1,376)	(1,793)
Acquisition, net of cash received	(2,685)	0
Sales and maturities of investments	0	6,027
Restricted cash classification change	13	0
Net cash provided by (used in) investing activities	(4,048)	4,234
Cash flows from financing activities:
Net proceeds from issuance of common stock	17,075	0
Proceeds from exercise of stock options	9	68
Net cash provided by financing activities	17,084	68
Effect of exchange rate changes on cash and cash equivalents	(2)	1
Net decrease in cash and cash equivalents	(9,942)	(11,491)
Cash and cash equivalents, beginning of period	21,541	38,724
Cash and cash equivalents, end of period	11,599	27,233
US Treasury and Government [Member]
Changes in operating assets and liabilities:
Increase in accrued expenses	$ (1,267)	$ 452

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Consolidated Statements of Operations and Comprehensive Loss (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Revenue	$ 5,650	$ 3,198	$ 12,627	$ 10,441
Cost of revenue	1,506	838	3,832	2,747
Gross profit	4,144	2,360	8,795	7,694
Operating expenses:
Research and development	1,904	1,361	4,698	3,937
Sales and marketing	6,764	4,453	17,722	15,124
General and administrative	2,769	1,739	6,181	4,661
Merger and integration expenses	530	0	3,426	0
Total operating expenses	11,999	8,111	32,219	25,464
Operating loss	(7,855)	(5,751)	(23,424)	(17,770)
Other expense, net	(104)	(114)	(166)	(146)
Net loss	(7,959)	(5,865)	(23,590)	(17,916)
Other comprehensive loss:
Foreign currency translation adjustments	(1)	1	(2)	1
Comprehensive loss	(7,960)	(5,864)	(23,592)	(17,915)
Net loss per common share - basic and diluted (in dollars Per Share)	$ (0.18)	$ (0.22)	$ (0.67)	$ (0.66)
Weighted average common shares outstanding - basic and diluted (in shares)	45,198	27,275	35,373	27,258
US Treasury and Government [Member]
Operating expenses:
Charges related to U.S. Government settlement	$ 32	$ 558	$ 192	$ 1,742

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Summary of Significant Accounting Policies (Details Textual)	9 Months Ended
	Sep. 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)

9 Months Ended

Sep. 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:

	September 30,		December 31,
	2013		2012
	(In thousands)
Goodwill	$	16,043	$	-
Intangible assets:
Trademarks	$	1,265		-
Technology		6,598		-
Customer relationships		400		-
Less: Amortization of intangible assets		(175)		-
Total intangible assets	$	8,088	$	-

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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		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Revenue	$ 5,650	$ 3,198	$ 12,627	$ 10,441
Operating Loss	(7,855)	(5,751)	(23,424)	(17,770)
Net Loss	(7,959)	(5,865)	(23,590)	(17,916)
Loss per common share (in dollars Per Share)	$ (0.18)	$ (0.22)	$ (0.67)	$ (0.66)
Pro Forma Results [Member]
Revenue			17,352	16,812
Operating Loss			(31,369)	(32,708)
Net Loss			$ (31,689)	$ (33,085)
Loss per common share (in dollars Per Share)			$ (0.70)	$ (0.73)

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Commitments and Contingencies (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
U.S. Government settlement	$ 5,500	$ 6,000
Less current portion	(2,723)	0
Long-term liability	$ 2,777	$ 6,000

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Goodwill and Intangible Assets (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Goodwill	$ 16,043	$ 0
Trademarks	1,265	0
Technology	6,598	0
Customer relationships	400	0
Less: Amortization of intangible assets	(175)	0
Total intangible assets	$ 8,088	$ 0

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Accrued Expenses (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Bonus	$ 656	$ 630
Commissions	627	333
Vacation	613	160
Severance	451	5
Legal and professional fees	271	129
Other	684	391
Total accrued expenses	$ 3,302	$ 1,648

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Goodwill and Intangible Assets

9 Months Ended

Sep. 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:

	September 30,		December 31,
	2013		2012
	(In thousands)
Goodwill	$	16,043	$	-
Intangible assets:
Trademarks	$	1,265		-
Technology		6,598		-
Customer relationships		400		-
Less: Amortization of intangible assets		(175)		-
Total intangible assets	$	8,088	$	-

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Net Loss Per Common Share (Details)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Weighted average stock options outstanding (in shares)	4,219,918	3,409,083	3,648,463	3,224,660

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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	1,559
Inventory	1,946
Other current assets	234
Property and equipment	866
Other long-term assets	91
Intangible assets	8,263
Goodwill	16,043
Total assets acquired	29,281
Accounts payable and other liabilities	(2,429)
Term debt assumed	(2,815)
Total purchase price	$ 24,037

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Commitments and Contingencies

9 Months Ended

Sep. 30, 2013

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies Disclosure [Text Block]

11.   Commitments and Contingencies

In October 2011, the Company received a subpoena issued by the Department of Health and Human Services, Office of Inspector General (“OIG”) under the authority of the federal healthcare fraud and false claims statutes. The subpoena sought documents for the period January 1, 2008 through October 6, 2011. The Company 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, with the first installment paid in July 2013. The Company also signed the 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:

	September 30,		December 31,
	2013		2012
	(in thousands)
U.S. Government settlement	$	5,500	$	6,000
Less current portion		(2,723)		-
Long-term liability	$	2,777	$	6,000

In the nine months ended September 30, 2013 and 2012, the Company expensed legal fees of $192,000 and $1.7 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 $5.5 million at September 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 alleged 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 sought 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. On September 19, 2013, the Company’s motion was granted and the complaint was dismissed with prejudice. On October 17, 2013, the plaintiff filed a motion to alter or amend the order dismissing the complaint with prejudice.

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Inventories

9 Months Ended

Sep. 30, 2013

Inventory Disclosure [Abstract]

Inventory Disclosure [Text Block]

7.     Inventories

The following table presents the components of inventories:

	September 30,		December 31,
	2013		2012
	(In thousands)
Finished goods	$	4,622	$	3,048
Raw materials		1,735		1,629
Work-in-process		797		340
Total inventories	$	7,154	$	5,017

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Summary of Significant Accounting Policies

9 Months Ended

Sep. 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 Company operates primarily in the United States in thirty-two states and certain foreign countries through distributor and agent relationships currently representing less than ten percent of revenues. As the Company’s products are focused on minimally invasive treatments for degenerative conditions of the spine affecting the lumbar region, the Company manages the business on the basis of one operating segment and, therefore, has only one reportable segment. 

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 the Company’s 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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. There have been no material changes in any of the Company’s 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 September 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 (the “FASB”) 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.

In July 2013, the FASB issued guidance (ASU No. 2013-11) updating the financial statement presentation of an unrecognized tax benefit when a net loss carryforward, similar tax loss, or tax credit carryforward exists. The guidance requires an unrecognized tax benefit to be presented as a decrease in a deferred tax asset where a net operating loss, a similar tax loss, or a tax credit carryforward exists and certain criteria are met. The guidance is effective for annual reporting periods and interim periods within those years, beginning after December 15, 2013. Based on the Company’s cumulative net operating losses, the Company does not expect that adoption of ASU No. 2013-11 will have any impact on the Company’s consolidated financial statements. 

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Accounts Receivable, Net (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Gross accounts receivable	$ 5,544	$ 3,419
Allowance for uncollectible accounts	(837)	(213)
Total accounts receivable, net	$ 4,707	$ 3,206

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Net Loss Per Common Share (Tables)

9 Months Ended

Sep. 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		Nine Months Ended
	September 30,		September 30,
	2013	2012	2013	2012
Weighted average stock options outstanding	4,219,918	3,409,083	3,648,463	3,224,660

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Debt

9 Months Ended

Sep. 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:

 

	September 30,
	2013
	(in thousands)
Term Loan	$	2,815
Balloon payment on Term Loan		210
Debt discount		(243)
Total long-term debt		2,782
Less: Current portion of long-term debt		796
Total long-term debt, net of current portion	$	1,986

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.

Commencing December 2013, the Amended Loan Agreement provides for the amortization of principal (in the form of level $102,207 monthly payments of principal and interest for thirty months). 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 Amended Loan Agreement requires the Company 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)

9 Months Ended

Sep. 30, 2013

Inventory Disclosure [Abstract]

Schedule of Inventory, Current [Table Text Block]

The following table presents the components of inventories:

	September 30,		December 31,
	2013		2012
	(In thousands)
Finished goods	$	4,622	$	3,048
Raw materials		1,735		1,629
Work-in-process		797		340
Total inventories	$	7,154	$	5,017

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Cash and Cash Equivalents (Tables)

9 Months Ended

Sep. 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:

	September 30,		December 31,
	2013		2012
	(In thousands)
Cash and cash equivalents	$	8,899	$	21,116
Total cash and available for sale securities	$	8,899	$	21,116

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Document And Entity Information	9 Months Ended
	Sep. 30, 2013	Nov. 11, 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	Sep. 30, 2013
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2013

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Accounts Receivable, Net (Tables)

9 Months Ended

Sep. 30, 2013

Receivables [Abstract]

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

The following table presents the components of accounts receivable:

	September 30,		December 31,
	2013		2012
	(In thousands)
Gross accounts receivable	$	5,544	$	3,419
Allowance for uncollectible accounts		(837)		(213)
Total accounts receivable, net	$	4,707	$	3,206