UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~June 30, ~~2013~~ 2014

¨ 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~~August 1113, ~~2013~~2014 was 4549,~~197~~725,~~632~~413 shares.

BAXANO SURGICAL, INC.

FORM 10-Q FOR THE QUARTER ENDED ~~SEPTEMBER~~JUNE 30, ~~2013~~ 2014

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION	23
Item 1.	Condensed Consolidated Financial Statements	23
	Consolidated Statements of Operations and Comprehensive Loss (unaudited)	2
	Condensed Consolidated Statements of Operations and Comprehensive Loss (unaudited)	3
	Consolidated Balance Sheets (unaudited)	3
	Condensed Consolidated Balance Sheets (unaudited)	4
	Consolidated Statements of Cash Flows (unaudited)	4
	Condensed Consolidated Statements of Cash Flows (unaudited)	5
	Notes to Consolidated Financial Statements (unaudited)	5
	Notes to Condensed Consolidated Financial Statements (unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1615
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2923
Item 4.	Controls and Procedures	3023
PART II.	OTHER INFORMATION	3023
Item 1.	Legal Proceedings	3023
Item 1A.	Risk Factors	3124
Item 6.	Exhibits	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
SIGNATURES		32
Item 5.	Other Information	26
EXHIBIT INDEX		33
Item 6.	Exhibits	26
SIGNATURES		27
EXHIBIT INDEX		28

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.

~~Baxano~~PART ~~Surgical, Inc~~I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated ~~Balance~~Financial ~~Sheets~~Statements.

~~(in~~Baxano ~~thousands~~Surgical, ~~except share amounts)~~Inc.

Condensed ~~(Unaudited)~~Consolidated Statements of Operations and Comprehensive Loss

	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

(in thousands, except per share amounts)

~~The accompanying notes are an integral part of these financial statements.~~(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013

Revenue	$	4,656		$	3,877		$	9,068		$	6,977
Cost of revenue		1,417			1,295			2,680			2,327
Gross profit		3,239			2,582			6,388			4,650

Operating expenses:
Research and development		2,465			1,509			4,452			2,794
Sales and marketing		6,001			6,032			13,275			10,959
General and administrative		2,567			1,860			5,115			3,411
Merger and integration expenses		-			1,583			19			2,895
Charges related to U.S. Government settlement		-			69			-			160
Total operating expenses		11,033			11,053			22,861			20,219
Operating loss		(7,794	)		(8,471	)		(16,473	)		(15,569	)

Non-operating items:
Interest expense		(759	)		(73	)		(1,135	)		(73	)
Change in fair value of derivative and warrant liabilities		2,676			-			2,624			-
Other income, net		10			13			8			11
Net loss	$	(5,867	)	$	(8,531	)	$	(14,976	)	$	(15,631	)

Other comprehensive income (loss):
Foreign currency translation adjustments		(1	)		1			(2	)		-
Comprehensive loss	$	(5,868	)	$	(8,530	)	$	(14,978	)	$	(15,631	)
Net loss per common share – basic and diluted	$	(0.12	)	$	(0.26	)	$	(0.31	)	$	(0.51	)

Weighted average common shares outstanding - basic and diluted		48,520			33,408			47,793			30,379

~~Baxano~~The ~~Surgical,~~accompanying ~~Inc~~notes are an integral part of these condensed consolidated financial statements.

~~Consolidated Statements of Cash Flows~~3

~~(in~~Baxano ~~thousands)~~Surgical, Inc.

Condensed ~~(Unaudited)~~Consolidated Balance Sheets

	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

(in thousands, except share amounts)

~~The accompanying notes are an integral part of these financial statements.~~(Unaudited)

	June 30,			December 31,
	2014			2013
Assets

Current assets:
Cash and cash equivalents	$	2,326		$	8,540
Restricted cash		569			610
Accounts receivable, net of allowances of $747 and $832, respectively		3,754			4,699
Inventory		7,181			7,037
Prepaid expenses and other assets		720			475
Total current assets		14,550			21,361
Property and equipment, net		2,574			3,047
Goodwill		8,463			8,463
Intangible assets, net		14,765			15,530
Other long-term assets		1,851			577
Total assets	$	42,203		$	48,978

Liabilities and Stockholders' Equity

Current liabilities:
Accounts payable	$	2,858		$	3,693
Accrued expenses related to U.S. Government settlement		2,764			2,736
Accrued expenses		3,108			3,593
Current portion of long-term debt		1,940			563
Common stock warrant liability associated with convertible notes		1,454			-
Derivative liabilities associated with convertible notes		938			-
Total current liabilities		13,062			10,585
Credit facility, net of current portion and discount		5,043			6,268
Convertible notes, net of discount		5,470			-
Common stock warrant liability associated with credit facility		226			528
Other noncurrent liabilities		751			2,150

Commitments and contingencies (Note 6)

Stockholders' equity:
Preferred stock, $0.0001 par value; 5,000,000 shares authorized, none issued and outstanding at June 30, 2014 and December 31, 2013		-			-
Common stock, $0.0001 par value; 150,000,000 shares authorized, 48,659,826 shares issued and outstanding at June 30, 2014; 75,000,000 shares authorized, 46,156,921 shares issued and outstanding at December 31, 2013		5			5
Additional paid-in capital		203,442			200,260
Accumulated other comprehensive income		13			15
Accumulated deficit		(185,809	)		(170,833	)
Total stockholders' equity		17,651			29,447
Total liabilities and stockholders' equity	$	42,203		$	48,978

~~Baxano~~The ~~Surgical,~~accompanying ~~Inc~~notes are an integral part of these condensed consolidated financial statements.

~~Notes to Consolidated Financial Statements~~4

Baxano ~~(Unaudited)~~Surgical, Inc.

~~1. Description~~Condensed Consolidated Statements of Cash ~~Business~~Flows

~~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. thousands)

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.(Unaudited)

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.

	Six Months Ended June 30,
	2014			2013
Cash flows from operating activities:
Net loss	$	(14,976	)	$	(15,631	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization		1,745			817
Stock-based compensation		669			620
Provision for bad debts		19			32
Change in fair value of derivative and warrant liabilities		(2,624	)		-
Amortization of debt discount and deferred financing fees		485			-
Loss on sale of fixed assets		2			-
Changes in operating assets and liabilities:
Decrease in accounts receivable		926			451
(Increase) decrease in inventory		(144	)		91
Increase in prepaid expenses		(245	)		(270	)
Decrease in accounts payable and accrued expenses		(1,372	)		(1,146	)
Decrease in accrued expenses related to U.S. Government settlement		(1,371	)		(627	)
Net cash used in operating activities		(16,886	)		(15,663	)

Cash flows from investing activities:
Purchases of property and equipment		(508	)		(612	)
Acquisition, net of cash received		-			(2,685	)
Restricted cash classification		41			(62	)
Net cash used in investing activities		(467	)		(3,359	)

Cash flows from financing activities:
Proceeds from convertible notes		9,994			-
Payment of convertible notes issue costs		(1,407	)		-
Net proceeds from issuance of common stock		2,506			17,074
Proceeds from employee stock plans		48			10
Net cash provided by financing activities		11,141			17,084

Effect of exchange rate changes on cash and cash equivalents		(2	)		(1	)

Net decrease in cash and cash equivalents		(6,214	)		(1,939	)
Cash and cash equivalents, beginning of period		8,540			21,541
Cash and cash equivalents, end of period	$	2,326		$	19,602

The ~~While~~accompanying ~~the~~notes ~~Company~~are ~~primarily~~an ~~markets~~integral ~~its products in the United States, currently less than ten percent~~ part of ~~revenues~~these ~~are~~condensed ~~derived~~consolidated ~~from~~financial ~~agent or distributor relationships in foreign countries~~statements. ~~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.~~

~~2. Summary~~Baxano ofSurgical, ~~Significant Accounting Policies~~ Inc.

Notes ~~Basis~~to ofCondensed ~~presentation~~Consolidated Financial Statements

~~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”~~Unaudited) 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 revenues1. 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. Organization

~~The~~Baxano ~~accompanying~~Surgical, ~~financial~~Inc. ~~statements~~(“we” or ~~have~~the ~~been~~“Company”) ~~prepared~~is on a ~~going~~medical ~~concern~~device ~~basis~~company focused on designing, ~~which~~developing ~~contemplates~~and ~~the~~marketing ~~realization~~minimally ofinvasive ~~assets~~products to ~~and~~treat ~~the~~degenerative ~~satisfaction~~conditions of ~~liabilities~~the ~~and~~spine ~~commitments~~affecting in the ~~normal~~lumbar ~~course~~region. ofWe ~~business.~~are ~~The~~passionately ~~Company~~committed ~~has~~to ~~incurred~~delivering ~~operating~~innovative technologies ~~losses~~to ~~and~~our ~~negative~~surgeon ~~cash~~customers ~~flows~~that ~~from~~benefit ~~operations,~~their ~~which~~patients. ~~raise~~On ~~substantial~~May ~~doubt~~31, ~~about~~2013, ~~its~~we, ~~ability~~through toour ~~continue~~wholly-owned assubsidiary aRacer X ~~going~~Acquisition ~~concern~~Corp. ~~The~~(“Merger ~~financial~~Sub”), ~~statements~~consummated doour ~~not~~acquisition ~~include~~of ~~any~~Baxano, ~~adjustments~~Inc. ~~relating~~(“Baxano”) pursuant to an ~~the~~Agreement ~~recoverability~~ and ~~classification~~Plan of ~~recorded~~Merger ~~asset~~(the ~~amounts~~“Merger orAgreement”). ~~amounts~~Under ~~of liabilities that might result from~~ the ~~outcome~~terms of ~~this~~the ~~uncertainty.~~Merger ~~To meet its capital needs~~Agreement, ~~the~~Merger ~~Company~~Sub ismerged with ~~considering~~and ~~multiple~~into ~~alternatives~~Baxano, ~~including,~~with ~~but~~Baxano ~~not~~remaining ~~limited~~as ~~to,~~the ~~additional~~surviving ~~equity~~corporation ~~financings,~~and ~~debt~~as ~~financings~~a ~~and~~wholly-owned ~~other~~subsidiary ~~funding~~of ~~transactions.~~the ~~There~~Company ~~can~~(the be“Merger”). Immediately nofollowing ~~assurance~~the ~~that~~closing of the ~~Company~~Merger ~~will~~on beMay ~~able~~31, to2013, ~~complete~~we ~~any~~changed ~~such~~our ~~transaction~~name onto ~~acceptable~~Baxano ~~terms~~Surgical, ~~or otherwise~~Inc. Ifin connection with the ~~Company~~merger isof ~~unable~~this towholly-owned ~~obtain~~subsidiary ~~the~~with ~~necessary~~and ~~capital,~~into itthe ~~will~~Company. ~~need~~Our tocondensed ~~pursue~~consolidated astatements ~~plan~~of tooperations ~~license~~reflect the orBaxano ~~sell its assets~~results, ~~seek~~including tothe beiO-Flex ~~acquired~~® byand ~~another~~iO-Tome ~~entity~~® products, ~~cease~~from ~~operations~~the ~~and/or~~Merger ~~seek~~date, ~~bankruptcy~~May ~~protection~~31, 2013.

~~For~~We acurrently ~~description~~market of the ~~Company’s~~AxiaLIF® ~~critical~~family of ~~accounting~~products ~~policies~~for single and ~~estimates,~~two ~~please~~level ~~refer~~lower tolumbar fusion, the ~~“Critical~~VEO® ~~Accounting~~lateral ~~Policies~~access and ~~Estimates”~~interbody ~~section~~fusion system, iO-Flex, a proprietary set of ~~the~~flexible ~~“Management’s~~instruments ~~Discussion~~used by surgeons during spinal decompression procedures, iO-Tome instrument, which rapidly and ~~Analysis~~precisely removes ofbone, ~~Financial~~specifically ~~Condition~~the facet joints, which is commonly performed in spinal fusion procedures and ~~Results~~Avance™, ofan ~~Operations”~~MIS pedicle ~~section~~screw ~~contained~~system used in ~~the~~lumbar ~~Company’s~~spinal ~~Annual~~fusion ~~Report~~procedures. onWe ~~Form~~also 10market other products that complement these primary offerings, including our Vectre™ facet screw system, Bi-KOstetic™ ~~for~~bone ~~the~~void ~~year~~filler, ~~ended~~bowel ~~December~~retractors, 31discectomy tools, ~~2012.~~and ~~There~~a ~~have~~bone graft ~~been~~harvesting nosystem ~~material~~that ~~changes~~can inbe ~~any~~used ofto extract bone graft from the ~~Company~~patient’s ~~accounting~~hip ~~policies~~for ~~since~~use ~~December~~in ~~31,~~fusion ~~2012;~~procedures. ~~however~~We ~~the~~currently sell ~~Company~~our ~~has~~products ~~adopted~~through ~~the~~a ~~following~~direct ~~new~~sales ~~accounting~~force, ~~policies~~independent ~~related~~sales toagents ~~the~~and ~~Merger~~distributors.

~~Identifiable~~2. ~~Intangible~~Summary ~~Assets~~of ~~and~~Significant ~~Goodwill~~Accounting Policies

Basis ~~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.Presentation

6We have prepared the accompanying unaudited interim condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X issued by the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such SEC rules and regulations. The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on March 10, 2014 (“2013 Form 10-K”). The Company’s historical results are not necessarily indicative of future operating results, and the results for the three and six months ended June 30, 2014 are not necessarily indicative of results to be expected for the full year or for any other period.

In ~~Indefinite-lived~~our ~~intangible assets~~opinion, ~~such~~the accompanying unaudited interim condensed consolidated financial statements have been prepared on the same basis as ~~goodwill~~our annual audited consolidated financial statements and ~~certain~~contain ~~trademarks,~~all material adjustments (consisting of normal recurring accruals and adjustments) which are, ~~not~~in ~~amortized. The~~the opinion of Company’s ~~tests~~management necessary to present fairly our financial condition, results of operations, and cash flows for the periods ~~carrying~~presented. These principles require management to make estimates and assumptions that affect the reported amounts of ~~these~~assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed 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, valuation of stock-based compensation, accrued expenses, deferred tax asset valuation reserves, and the valuation of embedded derivatives and warrants for ~~recoverability~~common onstock. anActual ~~annual~~results ~~basis~~could ordiffer ~~when~~from ~~events~~those orestimates. ~~changes~~The condensed inconsolidated ~~circumstances~~balance ~~indicate~~sheet ~~evidence~~that we have presented as of ~~potential~~December 31, ~~impairment~~2013 ~~exists~~has been derived from the audited consolidated financial statements on that date, ~~using~~but adoes ~~fair~~not ~~value~~include ~~based~~all ~~test~~of the information and footnotes required by U.S. GAAP for complete financial statements.

~~Debt~~Our financial ~~Issuance~~statements ~~Costs~~are prepared on the basis that our business will continue as a going concern in accordance with U.S. GAAP. This basis of presentation assumes that we will continue in operation for the foreseeable future and will be able to realize our assets and discharge our liabilities and commitments in the normal course of business. However, our independent registered public accounting firm has indicated in its audit report on our fiscal 2013 financial statements, included in our 2013 Form 10-K, that our recurring losses and negative cash flows from operations raise substantial doubt about our 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.

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.6

~~Business~~At ~~Acquisitions~~June 30, 2014, our principal sources of liquidity consisted of cash and cash equivalents of $2.3 million and accounts receivable, net of $3.8 million. Our ability to fund our cash and future liquidity requirements is dependent on our ability to raise additional capital, increase revenues, maintain our relationships with certain vendors, successfully avoid an event of default under our debt agreements, maintain tight controls over spending and attain our other business objectives on a timely basis. To meet our capital needs, we are actively pursuing multiple alternatives to raise additional funds, including additional debt or equity financings and other sources of funding. If we are unable to obtain the necessary capital from cash flows from operations and the infusion of additional capital to fund our operations in the near term, we will need to implement further expense reduction measures, including workforce reductions, the consolidation of operations and/or the delay or cancellation of certain operational programs, pursue a plan to license or sell our assets, or to cease operations. Please refer to “—Liquidity and Capital Resources” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this Form 10-Q for a discussion of our cash requirements and efforts to obtain additional capital.

~~Business~~Significant ~~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.Policies

A ~~Reclassification~~detailed description of our significant accounting policies is presented in the footnotes to our annual audited consolidated financial statements included in our 2013 Form 10-K. Our significant accounting policies, estimates, and assumptions have not changed materially since December 31, 2013, except for those related to our 2014 convertible notes. Additional information regarding the convertible notes can be found in Note 5, “Credit Facility, Convertible Notes and Common Stock Warrants.”

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.Inventory

~~Impact~~The offollowing ~~Recently~~table ~~Issued~~presents ~~Accounting~~the ~~Standards~~components of inventory (in thousands):

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.

	June 30,		December 31,
	2014		2013
Finished goods	$	4,887	$	4,607
Raw materials		1,600		1,584
Work-in-process		694		846
Total inventories, net	$	7,181	$	7,037

7Segment and Geographic Reporting

InWe ~~July~~apply ~~2013,~~ the ~~FASB~~relevant ~~issued~~ guidance ~~(ASU~~which ~~No.~~establishes standards ~~2013-11)~~for ~~updating~~ the ~~financial~~reporting ~~statement~~by ~~presentation~~business enterprises of aninformation ~~unrecognized~~about ~~tax~~operating ~~benefit when a net loss carryforward~~segments, ~~similar~~products ~~tax~~and ~~loss~~services, ~~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~~geographic areas, ~~a similar tax loss, or a tax credit carryforward exists~~ and ~~certain~~major ~~criteria are met~~customers. ~~The~~We ~~guidance~~have isdetermined ~~effective~~that ~~for~~we ~~annual~~did ~~reporting~~not ~~periods~~have ~~and~~any ~~interim~~separately ~~periods~~reportable ~~within those years, beginning after December 15, 2013~~segments. ~~Based~~ onAll ~~the~~our ~~Company’s~~products ~~cumulative~~provide surgical ~~net~~treatment ~~operating~~for ~~losses,~~ the ~~Company~~lumbar ~~does~~region ~~not expect that adoption~~ of ~~ASU~~the Nospine. ~~2013~~Long-11lived ~~will~~assets ~~have~~are ~~any~~primarily ~~impact~~located onin the ~~Company’s~~United ~~consolidated financial statements~~States.

~~3. Income~~The ~~Taxes~~following table summarizes revenue by geographic area (in thousands):

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
United States	$	4,482	$	3,687	$	8,745	$	6,281
Europe		151		176		244		659
Asia		23		14		79		37
	$	4,656	$	3,877	$	9,068	$	6,977

4. Net Loss ~~Per~~per Common Share

We ~~Basic~~calculate ~~net~~basic ~~loss~~earnings per ~~common~~ share isbased upon ~~computed by dividing net loss by~~ the weighted average number of common shares outstanding. ~~Diluted~~We ~~net~~calculate ~~loss~~diluted ~~available~~earnings ~~to common stockholders~~ per ~~common~~ share isbased ~~computed~~upon ~~by dividing net loss by~~ the weighted average number of common shares ~~and~~outstanding plus the dilutive ~~potential~~effect of common share equivalents ~~then~~calculated ~~outstanding.~~using ~~The~~the ~~Company’s~~treasury stock method. Our potential dilutive common shares, which consist of shares issuable upon the exercise of stock options, restricted stock units, warrants and conversion of notes, have not been included in the computation of diluted net loss per common 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:

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Weighted average stock options and restricted stock units outstanding		6,089,502		4,093,296		5,773,266		3,702,905
Common stock warrants related to credit facility		882,353		-		882,353		-
Common stock warrants related to convertible notes		7,252,308		-		3,646,188		-

	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

Recently Issued Accounting Standards

8 In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). The FASB issued ASU 2014-09 to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes the most current revenue recognition guidance. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2016. We are currently evaluating the impact that the implementation of this standard will have on our consolidated financial statements.

~~5. Cash and Cash Equivalents~~7

~~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~~3. 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. Merger

On AtMay ~~September 30~~31, 2013, ~~the~~we, ~~Company~~through ~~held~~our ~~certain~~wholly-owned subsidiary ~~assets~~Merger ~~that~~Sub, ~~are~~consummated ~~required~~our toacquisition beof ~~measured~~Baxano at(the ~~fair~~“Merger”) ~~value~~pursuant onto athe ~~recurring~~Merger ~~basis~~Agreement. ~~These~~ ~~assets~~Additional information ~~include~~regarding ~~available for sale securities classified as cash equivalents. ASC 820-10 requires~~ the ~~valuation~~Merger ofcan ~~investments using a three-tiered approach, which requires that fair value measurements~~ be ~~classified~~found ~~and disclosed~~ in ~~one~~Note ~~of three tiers. These tiers are: Level 1~~3, ~~defined~~“Merger asand ~~quoted~~Financing ~~prices in active markets for identical assets or liabilities; Level 2~~Transaction,” ~~defined~~of asthe ~~valuations~~footnotes ~~based~~to onour annual ~~observable~~audited ~~inputs~~consolidated ~~other~~financial ~~than~~statements ~~those~~ included in ~~Level~~our 1,2013 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 participantsForm 10-K.

The ~~Cash~~results of operations of Baxano have been included in our condensed consolidated financial statements from the date of the acquisition. The following pro forma results of operations assume the acquisition of Baxano occurred on January 1, 2013. The pro forma results for the three and ~~available~~six months ended June 30, 2013 presented below reflect our historical data and the historical data of the Baxano business adjusted for ~~sale~~amortization of ~~securities~~intangibles, ~~classified~~interest ascosts ~~Level~~associated with Baxano preferred stock and convertible debt, and elimination of intercompany general and administrative expenses. The pro forma results of operations presented below may not be indicative of the results we would have achieved had we completed the acquisition on January 1, ~~assets~~2013, ~~were:~~or that we may achieve in the future.

	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 following table presents the pro forma results (in thousands, except per share data):

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

	June 30, 2013
	Three Months Ended			Six Months Ended
Revenue	$	5,650		$	11,702
Operating loss	$	(12,099	)	$	(23,514	)
Net loss	$	(12,230	)	$	(23,730	)
Net loss per common share	$	(0.27	)	$	(0.53	)

64. ~~Accounts~~ ~~Receivable,~~Goodwill ~~Net~~and Intangible Assets

The ~~following~~goodwill ~~table~~and ~~presents~~intangible assets amounts as of June 30, 2014 and December 31, 2013, were recorded as part of the ~~components~~purchase price allocation for the Merger. The carrying amount of ~~accounts~~goodwill ~~receivable:~~as of December 31, 2013 was $8.5 million and unchanged during the three and six months ended June 30, 2014. Amortization expense for finite-lived intangible assets for the three and six months ended June 30, 2014 was $0.5 million and $0.8 million, respectively.

	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

Intangible assets as of June 30, 2014 consisted of the following (in thousands):

7. Inventories

				Amortization
				Period (Years)
Trademark	$	830		Indefinite
Product trademarks		1,530		15-17
Technology		13,001		15-17
Customer relationships		475		10
		15,836
Less: accumulated amortization		(1,071	)
	$	14,765

Goodwill ~~The~~and ~~following~~trademarks ~~table~~are ~~presents~~tested annually for impairment and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair ~~components~~value of ~~inventories:~~our outstanding common stock below our net equity carrying amount. All other intangible assets are assessed for reviewed for impairment whenever events or circumstances indicate the carrying amount of an asset may not be fully recoverable. Should our stock price continue to decline, or other impairment indicators occur, we may have to perform an impairment assessment of our intangible assets at an interim date and prior to our required assessment at year-end for goodwill and trademark.

	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

5.	Credit Facility, Convertible Notes and Common Stock Warrants

9Credit Facility with Hercules Technology Growth Capital, Inc.

8On December 3, 2013 (the “Credit Facility Closing Date”), we obtained a credit facility of up to $15. ~~Goodwill~~0 million (the “Credit Facility”) from Hercules Technology Growth Capital, Inc., a Maryland corporation (“Hercules”). The Credit Facility is governed by a loan and security ~~Intangible~~agreement, ~~Assets~~dated December 3, 2013 (the “Loan Agreement”), which provides for up to three separate advances, with the first advance of $7.5 million available at closing. The availability of the second advance of $2.5 million was dependent upon our achieving $6.0 million in gross commercial revenue for the fourth quarter of our 2013 fiscal year. The availability of the third advance of $5.0 million was dependent upon our achieving $7.0 million in gross commercial revenue for the first quarter of our 2014 fiscal year and net proceeds of at least $15.0 million from sales of our equity securities on or before June 15, 2014. We did not achieve the requirements to draw the second or third advances.

~~The following table presents the carrying value of the components of goodwill and intangible assets at the balance sheet dates:~~8

	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	$	-

The following table presents the components of the Credit Facility (in thousands):

9. Accrued Expenses

	June 30, 2014			December 31, 2013
Advance	$	7,500		$	7,500
Final payment		263			263
Debt discounts, including common stock warrant		(780	)		(932	)
Total long-term debt		6,983			6,831
Less: Current portion of long-term debt		(1,940	)		(563	)
Total long-term debt, net of current portion	$	5,043		$	6,268

The ~~following~~Credit ~~table~~Facility ~~presents~~has a term of 39 months and accrues interest at a rate equal to the ~~components~~prime rate plus 7.75% (with the prime rate subject to a floor of ~~accrued~~4.75%), ~~expenses:~~calculated on an actual/360 basis and payable monthly in arrears. Amounts outstanding during an event of default accrue interest at a rate of 3% in excess of the above rate, and past due amounts are subject to a 5% late charge. Outstanding principal will amortize in the 30-month period preceding maturity, payable in equal installments of principal and interest (subject to recalculation upon a change in prime rates). Any advance may be prepaid in whole or in part at any time, subject to a prepayment fee of 1-2% if prepaid more than one year after closing. In addition, a fee equal to 3.50% of all advances made under the Credit Facility will be payable upon the final principal payment or prepayment in full of the advances. The Credit Facility is secured by a lien on substantially all of our assets.

	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

The Loan Agreement contains customary covenants and representations, including a financial reporting covenant and limitations on cash dividends, distributions, debt, contingent obligations, liens, loans, investments, mergers, acquisitions, divestitures, subsidiaries, and changes in control. We are not allowed to declare or pay any cash dividends or make cash distributions on any class of stock or other equity interest, except that our subsidiary may pay dividends or make distributions up to Baxano Surgical. There are no financial covenants. Prior to the maturity of the Credit Facility, Hercules will also have the right to participate on the same terms as other participants in certain types of our broadly marketed equity financings.

10The events of default under the Loan Agreement include, without limitation, (1) a material adverse change in our ability to perform our obligations under the Loan Agreement, or in the value of our collateral, and (2) an event of default under any other of our indebtedness in excess of $150,000. ~~Debt~~ If an event of default occurs, Hercules is entitled to take enforcement action, including acceleration of amounts due under the Loan Agreement. The Loan Agreement also contains other customary provisions, such as expense reimbursement and confidentiality. Hercules has indemnification rights and the right to assign the Credit Facility.

InThe ~~connection~~estimated ~~with~~fair ~~the~~value ~~Merger, the Company assumed and became the borrower under Baxano’s outstanding credit facility pursuant to the terms~~ of the ~~First~~debt ~~Amendment to Loan and Security Agreement, dated~~ (categorized as ofa ~~May~~Level 2 ~~31,~~liability ~~2013~~for ~~(the~~fair ~~“First~~value ~~Amendment~~measurement ~~to Loan Agreement”~~purposes), ~~among~~is ~~the~~determined ~~Company,~~using ~~Oxford~~current ~~Finance~~market ~~LLC,~~factors ~~as collateral agent (the “Collateral Agent”),~~ and ~~Oxford~~our ~~Finance~~ability ~~Funding~~to obtain I,debt ~~LLC~~at ~~and~~comparable ~~Silicon~~terms ~~Valley Bank, as lenders (the “Lenders”). The First Amendment~~ to ~~Loan~~those ~~Agreement~~that ~~amends~~are ~~the~~currently ~~Loan~~in ~~and~~place. ~~Security~~We ~~Agreement,~~believe ~~dated as of March 15, 2012, among~~ the ~~Collateral~~estimated ~~Agent,~~fair ~~the~~value ~~lenders~~at ~~party~~June ~~thereto~~30, ~~and~~2014 ~~Baxano (as so amended~~and December 31, ~~the~~2013 ~~“Amended~~approximates ~~Loan Agreement”). The Amended Loan Agreement evidences a term loan, which will mature on May 1, 2016 (~~the ~~“Term~~carrying ~~Loan”)~~amount. ~~The following table presents the components of long-term debt:~~

10In connection with the Credit Facility, we issued to Hercules a warrant to purchase shares of our common stock (the “Warrant”). The Warrant consists of two tranches, the first tranche issued at closing and the second tranche to be issued if and when Hercules makes a second advance under the Loan Agreement. The first tranche is exercisable for a number of shares of our common stock equal to $900,000 divided by the exercise price. The second tranche is exercisable for a number of shares of our common stock equal to $300,000 divided by the exercise price. We did not achieve the requirements to draw the second or third advances under the Loan Agreement and, therefore, the second tranche of the Warrant has not been issued. The exercise price is $1.02 per share initially, but is subject to downward adjustment upon our consummation of a financing at a lower effective price per share during the one-year period following the Credit Facility Closing Date. The aggregate number of shares issuable upon exercise is limited to 1,176,471. The Warrant is exercisable by Hercules in whole or in part, at any time, or from time to time, prior to the fifth anniversary of the Credit Facility Closing Date. The Warrant will be exercised automatically on a net issuance basis if not exercised prior to the expiration date.

	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 Warrant is considered a mark-to-market liability which is re-measured to fair value at each reporting period due to a provision whereby the exercise price of the Warrant could be decreased if we had a subsequent issue of equity instruments at a price less than $1.02 per share. We will be required to mark-to-market the fair value of the warrant liability each reporting period over the warrants term. At December 3, 2013, we recorded as a liability the initial Warrant tranche for 882,353 shares of our common stock at an estimated fair value of approximately $0.7 million with an offset to debt discount. The debt discount associated with the initial value of the Warrant is being amortized to interest expense over the term of the Credit Facility.

~~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.~~9

~~Commencing~~Convertible 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.Notes

~~The~~On ~~Amended~~March ~~Loan~~11, ~~Agreement~~2014, iswe ~~secured~~entered byinto a ~~security~~securities purchase ~~interest~~agreement in(the ~~substantially~~“Securities ~~all~~Purchase ~~assets~~Agreement”) ofwith ~~the~~certain ~~Company~~institutional ~~and~~investors ~~any~~(the ~~future~~“Purchasers”) whereby ~~subsidiaries,~~we ~~other~~agreed ~~than~~to ~~intellectual~~sell ~~property~~approximately $10.0 ~~The~~million ~~Amended~~in ~~Loan~~aggregate ~~Agreement~~principal ~~contains~~amount ~~customary~~of ~~representations~~subordinated ~~(tested~~convertible ondebentures a(the “Convertible ~~continual basis~~Notes”) ~~and covenants that~~, ~~subject~~together towith ~~exceptions,~~warrants ~~restrict~~ (the ~~Company’s~~“Convertible ~~ability~~Warrants”) to dopurchase ~~the following things: declare dividends or redeem or repurchase equity interests; pay~~9, ~~redeem~~428,000 orshares of ~~amend~~our ~~subordinated~~Common ~~debt;~~Stock ~~incur additional liens; make loans and investments; incur additional indebtedness; engage~~ in ~~mergers,~~a ~~acquisitions,~~private ~~and~~placement ~~asset~~transaction ~~sales;~~(the ~~transact~~“Private ~~with~~Placement ~~affiliates;~~Transaction”). beThe ~~party~~closing toof ~~material~~the ~~litigation;~~full amount ~~fail~~of tosecurities ~~appoint a chief executive officer or chief financial officer upon vacancy; undergo a change~~ in ~~control;~~the ~~add~~Private orPlacement ~~change~~Transaction ~~business~~was ~~locations;~~subject ~~and~~to ~~engage~~stockholder inapproval, ~~businesses~~which ~~that~~was ~~are~~attained ~~not~~at ~~related~~our to2014 ~~the~~annual meeting ~~Company’s~~of ~~existing~~stockholders ~~business.~~on InApril ~~addition~~17, ~~the~~2014. ~~Amended~~The ~~Loan~~Private ~~Agreement~~Placement ~~requires~~closed ~~the~~on ~~Company~~April ~~to raise at least $10~~22,~~000,000~~ in2014 ~~net cash proceeds from~~ (the ~~sale~~“Private ofPlacement ~~its equity securities before December 31, 2013~~Closing Date”).

11Convertible notes as of June 30, 2014 consisted of the following (in thousands):

11. Commitments and Contingencies

Principal	$	9,994
Discounts, including common stock warrant and embedded derivative		(4,524	)
Total long-term debt		5,470
Less: Current portion of convertible notes		-
Total convertible notes, net of current portion	$	5,470

InThe ~~October~~three-year ~~2011,~~Convertible ~~the~~Notes ~~Company~~will ~~received~~be convertible ainto ~~subpoena~~shares ~~issued~~of byCommon ~~the~~Stock ~~Department~~at ofan ~~Health~~initial ~~and~~conversion ~~Human~~price ~~Services, Office~~ of ~~Inspector~~$1.06 ~~General~~per ~~(“OIG”)~~share, ~~under~~for ~~the~~an ~~authority~~aggregate of ~~the~~approximately ~~federal~~9,428,000 shares ~~healthcare~~of ~~fraud~~Common ~~and false claims statutes~~Stock. The ~~subpoena~~Convertible ~~sought~~Notes ~~documents~~bear ~~for~~interest ~~the~~at ~~period~~a ~~January 1,~~rate ~~2008~~of ~~through October~~ 6,% ~~2011.~~per ~~The~~annum, ~~Company cooperated~~payable ~~with~~monthly ~~the~~in ~~government’s~~cash ~~request. On December 24~~or, ~~2012~~at ~~the~~our ~~Company~~discretion provided ~~reached~~certain aconditions ~~tentative~~(“Equity ~~agreement~~Conditions”) inare ~~principle~~met ~~with~~each ~~the~~payment ~~U.S.~~period, ~~Department of Justice related to the subpoena issued~~ in ~~October~~shares ~~2011. The Company and the staff~~ of ~~the~~Common ~~Department~~Stock ofat ~~Justice~~a ~~agreed~~price equal to ~~settle~~90% ~~its~~of ~~federal~~a ~~investigation~~calculated ~~for~~market ~~$6.0~~price ~~million.~~per ~~The final agreement was executed in June 2013~~share. ~~The~~ ~~$6.0~~In ~~million~~connection ~~settlement,~~with ~~plus~~the ~~accrued~~purchase ~~interest~~ of ~~2%,~~the ~~will~~Convertible ~~be paid in nine quarterly installments~~Notes, ~~with~~ the ~~first~~selling ~~installment~~stockholders received ~~paid~~five-year inConvertible ~~July~~Warrants ~~2013.~~to ~~The~~purchase ~~Company~~an ~~also~~aggregate ~~signed~~of ~~the~~approximately ~~CIA~~9,428,000 ~~with~~shares ~~the~~of ~~OIG~~Common inStock, ~~June~~which ~~2013~~were exercisable ~~and~~immediately isupon inissuance ~~the~~at ~~process~~an ofexercise ~~implementing~~price ~~the requirements~~ of ~~the~~$1.19 ~~CIA~~per share.

The ~~following~~Convertible ~~table~~Notes ~~presents~~are subordinated to the ~~components~~Credit Facility and pursuant to a subordination agreement with Hercules (the “Subordination Agreement”), cash payments by us to the Purchasers under the transaction documents related to the Private Placement Transaction are subject to a $1.5 million cap for so long as the Credit Facility remains outstanding (with any amounts in excess of that cap to be held in abeyance for the UPurchasers until the Credit Facility is no longer outstanding).S In connection with obtaining Hercules’ consent for the Private Placement Transaction, we paid Hercules a one-time non-refundable cash facility fee in the amount of $300,000. ~~Government~~The Convertible ~~settlement~~Notes ~~liability:~~also contain certain cross default provisions with respect to the Credit Facility. The Convertible Notes contain no financial covenants. The Convertible Notes contain customary debt instrument covenants. Upon the occurrence of an “Event of Default,” the interest rate on the Convertible Notes increases to 15% and we can be required to redeem the Convertible Notes in whole or in part in cash at 110% of the outstanding balance.

	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

For one year after the date of issuance, the conversion price of the Convertible Notes and the exercise price of the Convertible Warrants are subject to adjustment upon the issuance of any Common Stock or securities convertible into Common Stock below the then-existing conversion or exercise price, as applicable, subject to certain exceptions. In the event of certain change in control transactions, the holders of the Convertible Notes and Convertible Warrants will be entitled to (i) receive upon conversion or exercise the same kind and amount of securities, cash or property which the holders would have received had they converted or exercised their Convertible Notes or Convertible Warrants, as applicable, immediately prior to such transaction; and (ii) have their securities assumed by the surviving entity. In addition, if such a transaction involves cash consideration, is a going private transaction, or involves securities not listed on the NYSE or NASDAQ, the holders of the Convertible Warrants will be entitled to have their Convertible Warrants repurchased at a calculated Black-Scholes value of such Convertible Warrants at any time within 60 days after the transaction. Subject to limited exceptions, the Company will not permit the conversion of the Convertible Notes or exercise of the Convertible Warrants of any Purchaser, if after such conversion or exercise such Purchaser would beneficially own more than 4.99% of the outstanding shares of Common Stock subject to adjustment of 9.99% with 60 days’ notice by the Purchasers.

InWe ~~the~~accounted ~~nine~~for ~~months~~the ~~ended~~Convertible ~~September~~Notes as ~~30,~~an ~~2013~~instrument ~~and~~that ~~2012,~~has the ~~Company~~characteristics ~~expensed~~of ~~legal~~a ~~fees~~debt ofhost ~~$192,000~~contract containing several embedded derivative features that would require bifurcation and ~~$1.7~~separate ~~million,~~accounting ~~respectively,~~as ~~related~~a derivative instrument pursuant to ~~this~~the ~~investigation~~provisions of ASC 815. InWe elected not to use the ~~fourth~~fair ~~quarter~~value ofoption ~~2012,~~to account for the ~~Company~~Convertible ~~expensed~~Notes ~~the~~and $6embedded derivatives as one hybrid instrument.0 ~~million~~We ~~related~~accounted for the derivative and warrants as liabilities due to ~~the~~certain ~~tentative~~adjustment ~~settlement~~provisions, which requires that they be recorded at fair value. The ~~Company~~derivative ~~had~~and ~~accrued~~warrant ~~$5.5~~liabilities ~~million~~are subject to revaluation at ~~September~~each ~~30,~~balance ~~2013~~sheet date and ~~$6.8~~any ~~million~~change in fair value will be recorded as a change in fair value in non-operating items until the earlier of expiration or its exercise at ~~December~~which ~~31,~~time the ~~2012~~liabilities ~~for~~will be reclassified to equity. The debt discount associated with the ~~settlement~~initial value of the derivatives and ~~related~~warrants will ~~legal~~be ~~fees~~amortized to interest expense over the term of the Convertible Notes.

OnThe ~~January~~estimated ~~24,~~fair ~~2012,~~value of the ~~Company~~Convertible Notes ~~received~~(categorized ~~notice~~as ~~that~~ a ~~putative~~Level 2 ~~class~~liability ~~action~~for ~~lawsuit~~fair ~~had~~value ~~been~~measurement ~~filed~~purposes) inis ~~the~~determined ~~U.S.~~using ~~District~~current ~~Court~~market ~~Eastern~~factors and ~~District,~~our ~~North~~ability ~~Carolina,~~to onobtain ~~behalf~~debt ofat ~~all~~comparable ~~persons,~~terms ~~other~~to ~~than~~those ~~defendants,~~that ~~who~~are ~~purchased~~currently ~~the~~in ~~Company’s~~place. ~~securities~~We ~~between~~believe ~~February~~the ~~21,~~estimated ~~2008~~fair ~~and~~value ~~October~~at June 1730, ~~2011. The~~2014 ~~complaint~~approximates ~~alleged violations of~~ the ~~Securities~~carrying ~~Exchange~~amount. ~~Act~~The ofvaluation ~~1934,~~assumptions asare ~~amended,~~ based ~~upon~~on ~~purported~~a ~~omissions and/or false and misleading statements concerning~~ the ~~Company’s~~Convertible ~~financial~~Debenture ~~statements~~face ~~and~~amount of ~~reimbursement practices~~$10. ~~The~~0 ~~complaint sought damages sustained by the putative class~~million, ~~pre-~~cash ~~and~~coupon ~~post-judgment~~rate ~~interest,~~of ~~and attorneys’ fees and other costs. On September 7~~6%, ~~2012,~~time ~~the Company filed a motion~~ to ~~dismiss~~maturity ~~the complaint for failure to meet the heightened pleading requirements~~ of ~~the Private Securities Litigation Reform Act of 1995, among other grounds~~2. On8 ~~September 19~~years, ~~2013, the Company’s motion was granted~~ and ~~the complaint was dismissed with prejudice. On October 17, 2013, the plaintiff filed~~ a ~~motion~~yield tobond ~~alter~~rate orof ~~amend the order dismissing the complaint with prejudice~~30%.

~~12. Closing~~Warrants ~~of Merger~~ and ~~Financing~~Derivative ~~Transaction~~Liabilities

OnOur ~~May~~derivative ~~31,~~liability ~~2013,~~and ~~the~~common ~~Company,~~stock warrant ~~through~~liabilities ~~its~~are ~~wholly-owned~~considered ~~subsidiary~~Level ~~Racer~~3 Xinstruments ~~Acquisition~~under ~~Corp.~~ASC ~~(“Merger Sub”)~~820, ~~consummated~~ ~~the~~Fair ~~Merger~~Value ~~with Baxano pursuant to an Agreement and Plan of Merger (the “Merger Agreement”)~~Measurements. ~~Under~~ ~~the~~The ~~terms~~following oftable ~~the~~sets forth ~~Merger Agreement, Merger Sub merged with and into Baxano, with Baxano remaining as the surviving corporation and as~~ a ~~wholly-owned~~summary ~~subsidiary~~ of the ~~Company. Immediately~~changes ~~following~~in the ~~closing~~fair value of ~~the~~our ~~Merger~~financial oninstruments ~~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.~~thousands):

1210

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.

	Derivative Liability Associated with Convertible Notes			Common Stock Warrant Liability Associated with Convertible Notes			Common Stock Warrant Liability Associated with Credit Facility
Fair value as of December 31, 2013	$	—		$	—		$	528
Fair value of financial instruments issued		1,980			2,734			—
Change in fair value		(1,042	)		(1,280	)		(302	)

Fair value as of June 30, 2014	$	938		$	1,454		$	226

~~Upon~~We ~~the~~valued ~~closing of~~ the ~~Merger,~~warrant ~~and~~liability ~~in accordance~~ associated with the ~~terms~~Credit ofFacility ~~the~~using ~~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 thirdBlack-~~party escrow account to secure certain indemnification obligations of the Baxano securityholders and to fund any post~~Scholes-~~closing~~Merton ~~adjustment~~option ~~payable~~pricing ~~to the Company~~model. ~~Upon~~Following ~~the~~is ~~determination~~a ~~that~~summary ~~no post-closing adjustment was required, 265,584 escrow shares were distributed to the Baxano securityholders. The remainder~~ of the ~~escrow~~key ~~shares~~assumptions ~~will be distributed~~ used to ~~the~~calculate ~~Baxano securityholders promptly following~~ the ~~first~~fair ~~anniversary~~value of the ~~closing~~Credit ~~date~~Facility ~~to the extent such escrow shares are not then subject to indemnification claims by the Company.~~Warrant:

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.

							Issuance
	June 30,			December 31,			December 3,
	2014			2013			2013
Stock Price	$	0.57		$	1.01		$	1.18
Risk-free interest rate		1.6	%		1.8	%		1.4	%
Expected annual dividend yield		—	%		—	%		—	%
Expected volatility		73.9	%		73.6	%		74.2	%
Term (years)		4.4			4.9			5.0

AtWe ~~the~~used ~~closing~~a ofMonte ~~the~~Carlo ~~Merger,~~simulation ~~each~~analysis ~~outstanding share of capital stock of Baxano was cancelled and extinguished and converted into the right~~ to ~~receive~~value ~~a portion of~~ the ~~merger~~warrant ~~consideration~~liability inassociated ~~accordance~~ with the ~~Merger Agreement. The Baxano~~ Convertible Notes ~~were~~by ~~terminated~~modeling atscenarios ~~closing~~associated ofwith the ~~Merger,~~possible ~~and~~“strike ~~the~~price” ~~holders~~reset ofprovision. ~~such~~For ~~Baxano~~the ~~Notes~~embedded ~~were~~derivative related ~~entitled~~ to ~~receive merger consideration in accordance with~~ the ~~Merger~~conversion ~~Agreement. Because~~feature, ~~the~~as ~~merger~~there ~~consideration~~is ~~was~~a ~~allocated~~conversion ~~first~~price toreset ~~holders~~feature, ofwe ~~Baxano~~recognized ~~Notes~~that ~~and~~the ~~then~~possible tovalues ~~Baxano~~for ~~stockholders~~the Convertible ~~in accordance with Baxano’s certificate of incorporation, only holders of Baxano~~ Notes ~~and~~were ~~Baxano Series C Preferred Stock received merger consideration. All stock option plans or other stock or equity~~path-~~related plans of Baxano~~dependent, ~~all~~and ~~employee~~thus ~~stock~~also ~~purchase~~chose ~~plans, each outstanding option~~ to ~~purchase~~use ~~common~~a ~~stock~~Monte ofCarlo ~~Baxano,~~simulation ~~whether~~analysis ~~vested or unvested, and each warrant~~ to ~~acquire~~value ~~capital~~this ~~stock of Baxano were terminated prior to the closing of the Merger~~derivative.

~~The~~Following ~~following~~is ~~table~~a ~~summarizes~~summary of the ~~purchase~~key ~~price~~assumptions used ~~(in~~to ~~thousands)~~value the warrant liability associated with the Convertible Warrants:

Value of common shares issued	$	21,278
				Issuance
Cash paid at closing		250
	June 30,			April 22,
Pre-acquisition amounts due from Baxano, net		2,509
	2014			2014
	$	24,037
Stock price	$	0.57		$	0.97
Strike price		1.19			1.19
Risk-free interest rate		1.6	%		1.4	%
Expected annual dividend yield		—	%		—	%
Expected volatility		30.0	%		30.0	%
Term (years)		4.8			5.0

13Following is a summary of the key assumptions used to value the embedded derivatives associated with the Convertible Notes:

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.

	June 30,			Issuance April 22,
	2014			2014
Principal outstanding	$	9,994		$	9,994
Stock Price		0.57		$	0.97
Risk-free interest rate		0.88	%		0.93	%
Expected annual dividend yield		—%			—%
Expected volatility		72.7	%		71.6	%
Term (years)		2.8			3.0
Conversion price	$	1.06		$	1.06
Bond yield		30	%		30	%
Coupon rate		6.0	%		6.7	%

~~The following table summarizes the allocation of the purchase price to the net assets acquired (in thousands):~~11

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

Commitments and Contingencies

~~The~~We ~~Company~~are ~~allocated~~subject ~~$8.3~~to ~~million~~legal ofproceedings and claims in the ~~purchase~~ordinary ~~price~~course toof ~~identifiable~~our ~~intangible~~business. ~~assets~~These ~~that~~claims ~~met~~potentially ~~the~~cover ~~separability~~a ~~and~~variety ~~contractual~~of ~~legal~~allegations ~~criterion~~spanning ofour ~~ASC~~entire ~~805~~business. ~~The~~ Information ~~following~~regarding ~~summarizes~~ the ~~intangible~~material ~~assets~~pending ~~that~~legal ~~were~~proceedings ~~acquired~~to ~~and~~which ~~the~~we ~~period~~are ~~over~~a party or to which ~~the~~any ~~Company~~of ~~will~~our ~~recognize~~property ~~amortization~~is ~~cost~~subject and ~~using~~other ~~the~~material ~~straight-line~~legal ~~method~~proceedings (may be found in ~~thousands):~~Part I, Item 3 of our 2013 Form 10-K. There have been no material changes to such proceedings.

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

7.	Stockholders’ Equity

~~The~~Our ~~results~~Certificate of ~~operations~~Incorporation, ofwhich was ~~Baxano~~adopted ~~have~~in ~~been~~connection ~~included~~with in our ~~consolidated~~initial ~~financial~~public ~~statements~~offering, ~~from~~authorized ~~the~~up ~~date~~to of80,000,000 ~~the~~shares ~~acquisition. The~~of ~~following~~capital ~~pro~~stock, ~~forma~~of ~~results~~which of75,000,000 shares ~~operations~~were ~~assume~~designated ~~the~~as ~~acquisition~~common ofstock, ~~Baxano~~$0.0001 onpar ~~January~~value ~~1, 2012. The~~per ~~pro~~share ~~forma~~(“Common ~~results~~Stock”) ~~for~~and ~~the~~5,000,000 ~~nine~~shares ~~months~~were ~~ended~~designated as ~~September~~preferred 30stock, ~~2013~~$0.0001 ~~and~~par ~~2012~~value ~~presented~~per ~~below~~share. ~~reflect~~On ~~our~~April ~~historical~~17, ~~data~~2014 ~~and~~ the ~~historical~~Certificate ~~data~~ of ~~the~~Incorporation ~~Baxano~~was ~~business~~amended ~~adjusted~~to ~~for~~authorize ~~amortization~~up to ~~of intangibles~~155,000,000 ~~interest~~shares ~~costs~~of ~~associated~~capital ~~with Baxano preferred~~ stock, ~~and~~of ~~convertible~~which ~~debt~~150,000,000 ~~and~~shares ~~elimination~~were ofdesignated ~~intercompany~~Common ~~G&A~~Stock ~~expenses. The~~and ~~pro~~5,000,000 ~~forma~~shares ~~results~~were ofdesignated as ~~operations~~preferred ~~presented~~stock. ~~below~~At ~~may~~June ~~not~~30, be2014 ~~indicative~~and ofDecember ~~the~~31, ~~results~~2013, ~~the~~there ~~Company~~were ~~would~~48,659,826 ~~have~~and ~~achieved~~46,156,921 ~~had~~shares ~~the~~of ~~Company~~Common ~~completed~~Stock ~~the~~issued and ~~acquisition on January 1~~outstanding, ~~2012~~respectively, orand ~~that~~there ~~the~~were ~~Company~~no ~~may~~shares ~~achieve~~of inpreferred ~~the~~stock ~~future~~issued and outstanding.

14On June 3, 2014, we received a notification letter from The NASDAQ OMX Group (“NASDAQ”) indicating that the bid price of our Common Stock for the last 30 consecutive business days had closed below the minimum $1.00 per share required for continued listing under NASDAQ Listing Rule 5450(a)(1). The notification letter has no effect on the listing of Common Stock at this time, which will continue to trade on the NASDAQ Global Market under the symbol “BAXS”. We have been provided a period of 180 calendar days, or until December 1, 2014, to regain compliance. The letter states that the NASDAQ staff will provide written notification that we have regained compliance if at any time before December 1, 2014, the bid price of Common Stock closes at $1.00 per share or more for a minimum of 10 consecutive business days. In the event we do not regain compliance within the 180-day grace period, we may be eligible for additional time if we meet the continued listing requirement for market value of publicly held shares and all other initial listing standards, with the exception of the bid price requirement, and provide written notice to NASDAQ of our intent to cure the deficiency by effecting a reverse stock split, if necessary. If we are able to meet these requirements, the NASDAQ staff will inform us that we have been granted an additional 180 calendar days. If we fail to regain compliance after the second 180-day grace period, our Common Stock may be subject to delisting by NASDAQ. We intend to actively monitor the bid price for Common Stock and will consider available options to resolve the deficiency and regain compliance with the NASDAQ minimum bid price requirement.

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

	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)

On December 3, 2013, we entered into a purchase agreement (the “Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”), pursuant to which we have the right to sell to Lincoln Park up to $7.0 million in shares of Common Stock, subject to certain limitations. Pursuant to the Purchase Agreement, we have the right, on any business day and as often as every other business day over the 36-month term of the Purchase Agreement, at our sole discretion and subject to certain conditions, to direct Lincoln Park to purchase up to 100,000 shares of Common Stock, which amount may be increased, in accordance with the Purchase Agreement. The purchase price of shares of Common Stock related to the future funding will be based upon the prevailing market prices of the Common Stock at the time of sales, and shares will be sold to Lincoln Park on any date that the closing price of the Common Stock is above the floor price as set forth in the Purchase Agreement. In addition, we may direct Lincoln Park to purchase additional amounts as accelerated purchases if, on the date of a regular purchase, the closing sale price of the Common Stock is not below a threshold price as set forth in the Purchase Agreement.

15As consideration for its commitment to purchase Common Stock pursuant to the Purchase Agreement, we issued to Lincoln Park 182,609 shares of Common Stock immediately upon entering the Purchase Agreement and will issue up to 60,870 shares pro rata as and when Lincoln Park purchases Common Stock under the Purchase Agreement. We will not receive any cash proceeds from the issuance of these commitment shares. As of June 30, 2014, 210,433 commitment shares were issued to Lincoln Park. During the three and six months ended June 30, 2014, we sold 0.7 million and 2.4 million shares, respectively, of Common Stock to Lincoln Park for an aggregate purchase price of $0.7 million and $2.5 million, respectively

~~Item~~Stock ~~2. Management’s~~Purchase ~~Discussion~~Agreement ~~and Analysis of Financial Condition and Results of Operations.~~Modification

~~The~~Effective ~~following~~July ~~discussion~~11, of2014, ~~our~~we ~~financial~~modified ~~condition~~our Purchase ~~and~~Agreement ~~results of operations should be read in conjunction~~ with ~~our~~Lincoln ~~consolidated~~Park ~~financial statements and the related notes~~ to, ~~our~~among ~~consolidated~~other ~~financial statements included in this report. In addition to historical financial information~~things, ~~this~~(i) ~~report~~increase ~~contains “forward-looking statements” within~~ the ~~meaning~~number of ~~Section~~shares ~~27A~~ of ~~the~~Common ~~Securities~~Stock ~~Act~~that ofwe ~~1933,~~have ~~as amended, and Section 21E of~~ the right ~~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~~sell ~~materially from those projected in the forward-looking statements. These forward-looking statements are intended~~ to ~~qualify~~Lincoln ~~for~~Park ~~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~~100,000 ~~including~~shares ~~statements~~to ~~regarding future events~~125,000 ~~our~~shares ~~future~~as ~~financial~~often ~~performance,~~as ~~our~~every ~~future~~ business ~~strategy and the plans and objectives of management for future operations~~day, ~~are~~which ~~forward-looking~~amount ~~statements.~~may Webe ~~have~~further increased ~~attempted~~in toaccordance ~~identify~~with ~~forward-looking~~the ~~statements~~Purchase ~~by terminology including “anticipates~~Agreement,” ~~“believes,”~~(ii) ~~“can,”~~increase ~~“continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should” or “will” or~~ the ~~negative~~aggregate amount of ~~these~~Common ~~terms~~Stock orthat ~~other comparable terminology. Although~~ we ~~do not make forward-looking statements unless we believe we~~ have athe ~~reasonable basis for doing so~~right, ~~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~~limitations, to ~~differ~~direct ~~materially~~Lincoln ~~from~~Park ~~future~~to ~~results~~purchase ~~expressed~~over orthe ~~implied by such forward~~36-~~looking~~month ~~statements.~~term ~~These risks include, without limitation, the pace~~ of ~~adoption of~~ the ~~Company’s~~Purchase ~~product~~Agreement 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~~$7.0 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 million to ~~raise~~$8.2 ~~additional capital~~million, ~~the ability to comply with the settlement agreement~~ and ~~Corporate Integrity Agreement~~ (~~the “CIA”~~iii) ~~with~~decrease ~~certain entities of~~ the ~~U.S.~~floor ~~government, the~~closing ~~reliance~~price onthat ~~a limited number of suppliers to provide~~ the ~~Company’s~~Common ~~products~~Stock ~~and~~must ~~their~~trade ~~components,~~above ~~changes~~ in ~~economic~~order ~~conditions,~~for ~~the ability to effectively manage a~~ sales ~~force~~ to ~~meet~~be ~~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~~Lincoln ~~interested~~Park ~~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~~Purchase ~~“Management’s~~Agreement ~~Discussion~~from ~~and~~$1.00 ~~Analysis of Financial Condition and Results of Operations”, “Risk Factors”, “Financial Statements” and “Notes~~ to ~~Consolidated~~$0.50 ~~Financial~~per ~~Statements”~~share. inFollowing ~~this~~the ~~report~~modification, ~~as well as~~ the ~~disclosures~~number ~~made under the captions “Management’s Discussion and Analysis~~ of ~~Financial~~shares ~~Condition~~potentially issuable ~~and~~by ~~Results~~us ~~of Operations”, “Risk Factors”, “Consolidated Financial Statements” and “Notes to Consolidated Financial Statements” included in our Annual Report~~ on ~~Form~~a ~~10-K~~pro ~~for~~rata ~~the~~basis ~~year~~as ~~ended December 31, 2012,~~ and inwhen ~~other~~Lincoln ~~filings~~Park wepurchases ~~make~~Common ~~with~~Stock ~~the~~under ~~Securities and Exchange Commission, or~~ the ~~SEC.~~Purchase ~~Furthermore,~~Agreement ~~such~~increased ~~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”657, ~~“we”, “our”, “us”, or the “Company” refer to Baxano Surgical, Inc~~895 shares.

1612

Warrant ~~Overview~~Agreement

WeIn ~~are~~connection awith ~~medical~~the ~~device~~Credit ~~company focused on designing~~Facility, we ~~developing~~issued ~~and marketing minimally invasive products~~ to ~~treat degenerative conditions of~~ Hercules the ~~spine affecting the lumbar region~~Warrant. WeThe ~~are~~aggregate ~~committed~~number ~~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~~shares ~~for~~issuable ~~single~~upon ~~and~~exercise ~~two~~is ~~level~~limited ~~lower~~to ~~lumbar fusion~~1, ~~the VEO® lateral access and interbody fusion system~~176,471. ~~the~~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 Warrant is ~~commonly~~exercisable ~~performed~~until ~~in spinal fusion procedures. Our AxiaLIF products use our pre-sacral approach, through which a surgeon can access discs in~~ the ~~lumbar~~fifth ~~region~~anniversary of the ~~spine~~Credit ~~through~~Facility anClosing ~~incision~~Date ~~adjacent to the tailbone~~ and ~~perform~~will anbe ~~interbody~~exercised ~~fusion~~automatically ~~procedure~~on ~~through~~a ~~instrumentation~~net ~~that~~issuance basis ~~provides~~if ~~direct~~not ~~access~~exercised prior to the ~~intervertebral~~expiration ~~space~~date. WeSee ~~developed~~further ~~our~~details ~~pre-sacral~~under ~~approach~~“Common toStock ~~allow~~Warrant ~~spine~~Liability ~~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~~ Hercules” in ~~the~~Note ~~highly competitive lateral fusion segment~~5. 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~~8. ~~Our~~Stock ~~VEO~~Incentive ~~lateral~~Plans ~~access~~ and ~~interbody fusion system was commercially launched in November 2011, our iO~~Stock-~~Flex~~Based 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.Compensation

InWe ~~March~~have ~~2012,~~an weemployee ~~announced~~stock ~~that~~purchase ~~the~~plan and ~~Current~~other ~~Procedural~~long-term ~~Terminology~~incentive ~~(“CPT”)~~plans, ~~Editorial~~which ~~Panel,~~provide orfor the ~~Panel,~~grant ~~voted~~of toawards ~~approve~~in anthe ~~application~~form ~~for~~of aincentive ~~new~~stock ~~Category I CPT code~~options, ~~22586,~~nonqualified stock ~~for~~options ~~L5/S1~~and ~~spinal~~restricted ~~fusion~~stock ~~utilizing~~units ~~our AxiaLIF implant when performing a pre-sacral interbody fusion. In addition~~(RSUs), ~~the Panel voted~~ to ~~establish~~eligible ~~a new Category III CPT code~~employees, ~~0309T~~directors, asand anconsultants. ~~add-on~~We ~~code~~established to the ~~new~~Baxano ~~Category~~Surgical, Inc. I2007 ~~code~~Stock ~~for~~Incentive ~~use~~Plan ~~with~~(as ~~22586~~amended, ~~when~~the ~~performing~~“2007 ~~L4/5~~Plan”) ~~spinal~~in ~~fusion~~October 2007. ~~The~~Under ~~new CPT codes were announced on~~ the ~~American~~2007 ~~Medical Association’s website on March 2~~Plan, ~~2012,~~we ~~and~~may ~~became~~grant ~~effective~~options to ~~on January 1~~employees, ~~2013.~~directors ~~The~~or ~~Medicare~~service ~~final~~providers ~~rule~~and ~~was~~contractors ~~released~~for ~~in November 2012, which stated~~ a ~~valuation~~maximum of ~~the~~7,600,000 ~~Category~~shares Iof ~~CPT~~Common ~~code~~Stock. ~~22586 for pre~~Share-~~sacral~~based ~~interbody~~compensation expense ~~single~~was ~~level spinal fusion at L5-S1, and became effective January 1, 2013~~$0. ~~This~~3 ~~CPT~~million ~~code,~~for ~~which~~the ~~applies~~three tomonths ~~our~~ended ~~AxiaLIF~~June ~~Plus 1-Level device~~30, is2014 aand ~~bundled~~2013 ~~lumbar~~and ~~arthrodesis~~$0.7 ~~procedure~~million ~~that includes bone graft, posterior instrumentation~~ and ~~fixation~~$0.6 ~~With~~million for the ~~establishment~~six ofmonths ended aJune ~~Category~~30, I2014 ~~CPT~~and ~~code effective January 1,~~ 2013, ~~we believe that we are in a position to transition to a period of sustainable revenue growth~~respectively.

17Stock Option Program

~~We rely on third parties to manufacture virtually all of our AxiaLIF, VEO and certain other products and their components.~~ The ~~majority~~following oftable ~~our iO-Flex and iO-Tome product manufacturing, including subassemblies, final assemblies, packaging, and product release,~~ is ~~performed~~a atsummary ~~our~~of ~~San~~stock option ~~Jose~~activity ~~facility. Our outsourcing partners are manufacturers that meet U.S. Food and Drug Administration, International Organization~~ for ~~Standardization~~the orsix ~~other~~months ~~internal~~ended ~~quality~~June ~~standards~~30, ~~where applicable.~~2014:

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.

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Outstanding as of December 31, 2013		3,985,590		$	3.31		7.71	$	11,125
Options granted		1,294,000			0.78		9.84		-
Options exercised		(2,000	)		0.28		0.03		856
Options expired or canceled		(174,701	)		5.32		6.24		-
Options forfeited		(694,925	)		1.93		-		-
Outstanding as of June 30, 2014		4,407,964		$	2.71		7.77	$	3,855
Exercisable at June 30, 2014		2,199,577		$	3.89		6.35	$	3,855
Vested and expected to vest as of June 30, 2014		4,188,471		$	2.77		7.69	$	3,855

~~Upon~~The ~~the~~aggregate ~~closing~~intrinsic ofvalue ~~the Merger, and~~ in ~~accordance with~~ the ~~terms~~table above ofrepresents the ~~Merger~~difference ~~Agreement,~~between wethe ~~issued~~$0.57 anclosing ~~aggregate~~price of ~~10,329,035~~Common ~~shares~~Stock ~~of our common stock~~ as ~~merger~~reported ~~consideration. In~~by ~~connection~~The ~~with~~NASDAQ ~~the~~Global ~~closing~~Market ofon ~~the Merger~~June 30, ~~796,772~~2014 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~~weighted ~~that~~average noexercise ~~post-closing adjustment was required~~price, ~~265,584~~multiplied ~~escrow~~by ~~shares were distributed to~~ the ~~Baxano~~number ~~securityholders. The remainder~~ of ~~the~~options ~~escrow~~outstanding ~~shares~~or ~~will~~exercisable. beWe ~~distributed~~do tonot record the ~~Baxano~~aggregate ~~securityholders~~intrinsic ~~promptly~~value ~~following~~for ~~the~~financial ~~first~~accounting ~~anniversary~~purposes ofand the ~~closing~~value ~~date~~changes tobased ~~the~~upon ~~extent~~changes ~~such~~in ~~escrow~~the ~~shares~~fair ~~are~~value ~~not~~of ~~then subject to indemnification claims by us~~Common Stock.

~~Concurrent~~The ~~with~~following ~~the~~weighted-average ~~closing~~assumptions were ofused ~~the~~to ~~Merger,~~estimate ~~and in accordance with~~ the ~~terms~~fair value of astock ~~Securities~~options ~~Purchase~~granted ~~Agreement,~~during ~~dated March 3, 2013, or~~ the ~~Securities~~six ~~Purchase~~months ~~Agreement,~~ended weJune ~~issued and sold to certain investors 7~~30,~~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.~~2014:

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.

Risk-free interest rate	1.9	%
Expected term	6.0
Expected volatility	63.4	%
Expected dividend yield	0	%

~~Since inception, we have been unprofitable. As of September 30, 2013 we had an accumulated deficit of $162.4 million.~~ 13

WeRestricted ~~expect~~Stock toUnit ~~continue~~Retention 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.Program

~~Results~~On January 2, 2014, the Compensation Committee of ~~Operations~~our Board of Directors approved the terms of the 2014 Restricted Stock Unit Retention Program (the “RSU Program”) and the grant of restricted stock units (“RSUs”) to all our executives and management pursuant to the RSU Program and our 2007 Stock Incentive Plan, as amended. Each award amount equals a number of stock-settled RSUs reflecting one times the employee’s current salary at a target value of $3.00 per share of Common Stock. A portion of the RSU awards is subject to time-based vesting and a portion of the RSU awards is subject to performance-based vesting as outlined below:

~~Our~~· ~~results~~75% ofis ~~operations~~time-based ~~include~~(25% ~~the~~vests ~~acquired~~on ~~Baxano~~first ~~operations~~anniversary ~~from~~of ~~the~~grant ~~Merger~~ date, ~~May~~37.5% ~~31,~~vests ~~2013,~~on ~~forward.~~second and third anniversaries of grant date);

18· 25% is performance-based (100% vests upon the achievement of a 30% increase in Company revenue year-over-year for two successive quarters by the end of fiscal 2016).

	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	%

The following table is a summary of restricted stock activity for the six months ended June 30, 2014:

Revenue

Outstanding as of December 31, 2013	-
Granted	3,055,997
Forfeited	(865,778	)
Outstanding as of June 30, 2014	2,190,219

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 assured9. WeIncome 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.Taxes

~~Cost~~No ofprovisions ~~Revenue~~for federal or state income taxes have been recorded as we have incurred net operating losses since inception.

~~Cost of revenue consists primarily of material and overhead costs related to our products, including reusable kit depreciation, product royalties and medical device taxes~~10. ~~Overhead~~ ~~costs~~Other ~~include~~Condensed ~~facilities-related~~Consolidated ~~costs,~~Balance ~~such~~Sheet ~~as rent and utilities.~~Information

~~Research~~Information ~~and~~regarding ~~Development~~other accounts on our condensed consolidated balance sheets is as follows (in thousands):

~~Research~~Property and ~~development expenses consist primarily of personnel costs within our product development~~equipment, 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.net

Sales and Marketing

	June 30,			December 31,
	2014			2013
Furniture and fixtures	$	494		$	484
Equipment		7,127			6,459
Computer software		501			496
Leasehold improvements		1,080			1,080
Capital leases of buildings		51			51
Construction in process		32			-
		9,285			8,570
Less: accumulated depreciation and amortization		(6,711	)		(5,523	)
	$	2,574		$	3,047

~~Sales~~Accrued ~~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.

	June 30,		December 31,
	2014		2013
Accrued payroll, bonuses, and employee benefits	$	1,738	$	2,343
Legal and professional fees		390		638
Interest payable		209		100
Royalties		206		243
Business taxes and licenses		92		122
Travel and entertainment		359		48
Other		114		99
Total accrued expenses	$	3,108	$	3,593

~~General~~11. ~~and~~Subsequent ~~Administrative~~Event

~~General~~In ~~and~~connection ~~administrative~~with ~~expenses~~the ~~consist~~expiration of ~~personnel~~the lease ~~costs~~on ~~related~~our toSan ~~the~~Jose ~~executive,~~facility ~~finance~~in early December 2014 and ~~human~~after ~~resource~~careful ~~functions~~consideration of all of our options, aswe ~~well~~commenced asa ~~professional~~plan in ~~service~~July ~~fees,~~2014 ~~legal~~that ~~fees,~~is ~~accounting~~designed ~~fees,~~to ~~insurance~~improve ~~costs,~~our ~~bad~~operational ~~debt~~performance ~~expense~~ for the future. The plan calls for us to close the San Jose facility and ~~general~~outsource ~~corporate~~the ~~expenses.~~manufacturing Inof ~~future~~the ~~periods~~iO-Flex, weiO-Tome ~~expect~~sterile ~~general~~assemblies and ~~administrative~~AxiaLIF ~~expenses~~Blade Subassembly conducted at the facility. We expect the product transfer to ~~increase~~be completed in the fourth quarter of 2014. There were no costs associated with this plan that were required to ~~support~~be ~~our~~recognized ~~sales,~~in ~~marketing,~~the ~~research~~consolidated ~~and~~condensed ~~development~~financial ~~efforts~~statement for the period ended June 30, 2014.

~~Charges Related to U.S. Government Settlement~~14

~~Charges~~Item ~~related to U~~2.S. ~~Government~~Management’s ~~settlement~~Discussion ~~consist of settlement costs~~ and ~~legal~~Analysis ~~fees related to the subpoena issued by the Department~~ of ~~Health~~Financial ~~and~~Condition ~~Human Services, Office of Inspector General, or the OIG, in October 2011~~ and ~~the~~Results ~~June 2013 settlement with the U.S. Department~~ of ~~Justice~~Operations.

~~Merger~~Cautionary ~~and~~Note ~~Integration~~Regarding ~~Expenses~~Forward-Looking Statements

~~Merger~~The ~~expenses~~following ~~consist~~discussion ~~primarily~~of our financial condition and results of ~~legal~~operations should be read in conjunction with our condensed consolidated financial statements and the related notes to our condensed consolidated financial statements included in this report. In addition to historical financial information, ~~accounting~~this report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, ~~consulting~~as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, that concern matters that involve risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements other ~~professional~~than ~~fees~~statements ~~related~~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 ~~Merger~~negative of these terms or other comparable terminology. ~~Integration~~Although ~~expenses~~we ~~consist~~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 ~~costs~~certain ~~incurred~~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 ~~planning~~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 ~~integrating~~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 (“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 risks inherent in operating in foreign jurisdictions, the ability to effectively manage a sales force to meet the Company’s objectives, the ability to conduct successful clinical studies, the impact of our ~~operations~~indebtedness on our financial health, the Company's ability to comply with the terms and covenants pursuant to the Private Placement Transaction and our credit facility and other economic and competitive factors, as well as the risks described in Item 1A under the caption “Risk Factors” in our most recent Annual Report on Form 10-K, any subsequent Quarterly Reports on Form 10-Q and other reports we file with the Securities and Exchange Commission (“SEC”). 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”, “Condensed Financial Statements” and “Notes to Condensed 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, 2013 filed with the SEC on March 10, 2014 (“2013 Form 10-K”), any subsequent Quarterly Reports on Form 10-Q and other and in other filings we make with the SEC. You are cautioned not to place undue reliance on these forward looking statements, which are based on the Company's expectations as of the date of this report and speak only as of the date of this report. The Company undertakes no obligation to publicly update or revise any forward looking statement, whether as a result of new information, future events or otherwise. 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.

~~Other Expense~~15

~~Other~~Business 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.Overview

~~Comparison~~Baxano Surgical, Inc. (“we” or the “Company”) is a medical device company focused on designing, developing and marketing minimally invasive products to treat degenerative conditions of the ~~Three~~spine ~~Months~~affecting ~~Ended~~the ~~September~~lumbar 30region. We are passionately committed to delivering innovative technologies to our surgeon customers that benefit their patients. On May 31, ~~2012~~2013, we, through our wholly-owned subsidiary Racer X Acquisition Corp. (“Merger Sub”), consummated our acquisition of Baxano, Inc. (“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 (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. Our condensed consolidated statements of operations reflect the Baxano results, including the iO-Flex® and iO-Tome® products, from the Merger date, May 31, 2013.

We ~~Revenue Revenue~~currently ~~increased~~market ~~from~~the ~~$3.2~~AxiaLIF® ~~million~~family of inproducts for single and two level lower lumbar fusion, the ~~three~~VEO® ~~months~~lateral ~~ended~~access ~~September~~and 30interbody fusion system, ~~2012~~iO-Flex, toa ~~$5.7~~proprietary set ~~million~~of inflexible instruments used by surgeons during spinal decompression procedures, iO-Tome instrument, which rapidly and precisely removes bone, specifically the ~~three~~facet ~~months~~joints, ~~ended~~which ~~September~~is 30commonly performed in spinal fusion procedures and Avance™, ~~2013~~an MIS pedicle screw system used in lumbar spinal fusion procedures. We currently sell our products through a direct sales force, independent sales agents and distributors.

~~Revenue~~Our byfamily ~~product~~of ~~line~~AxiaLIF ~~was:~~products, commercially launched between 2004 and 2010, use the pre-sacral approach. This technique allows a surgeon to access the discs in the lower lumbar region through an incision adjacent to the tailbone. In this manner, an interbody fusion procedure can be accomplished through a single tissue plane, which minimizes damage to surrounding tissues. Traditional methods of accessing the lower lumbar spine for fusion either involve cutting ligament and bone if approaching from the back, or navigating around important organs and blood vessels if approaching from the front. Our VEO lateral access and interbody fusion system, commercially launched in 2011, 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 identify and avoid the nerves running through this muscle that, when damaged, can cause numbness and pain in the leg and groin post spinal surgery. Our iO-Flex instruments, commercially launched in 2009, were developed to allow surgeons to perform a direct decompression while sparing the facet joints and posterior midline structures. Our iO-Flex minimally invasive set of flexible instruments allow surgeons to target lumbar stenosis of the spine with minimal disruption to the patient’s healthy anatomy critical for maintaining spinal stability. With traditional rigid instrumentation, surgeons have to remove bone that helps stabilize the spine in order to get to the area of the bone that is impinging on the exiting nerve roots. Our iO-Tome disposable instrument, commercially launched in the fourth quarter of 2013, allows surgeons to perform rapid facetectomies while working above the exiting nerves. The iO-Tome instrument utilizes the iO-Flex instrument platform to rapidly and precisely remove the facet joint, which is commonly performed in spinal fusion applications.

	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

We also market other products that complement these primary offerings, including our Vectre™ facet screw system, Bi-Ostetic™ bone void filler, bowel retractors, discectomy tools, and a bone graft harvesting system that can be used to extract bone graft from the patient’s hip for use in fusion procedures. We also have a TLIF system under development, with a limited market launch expected in the fourth quarter of 2014. The new TLIF system will be used in conjunction with the iO-Tome instrument to provide a less invasive means of performing a TLIF procedure. 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.

~~Note:~~Since ~~iO-Flex~~inception, ~~revenue~~we ishave ~~included~~been ~~from~~unprofitable. As of June 30, 2014, we had an accumulated deficit of $185.9 million. For the ~~Merger~~three ~~date~~months ended June 30, ~~May~~2014, 31our revenues were $4.7 million and our net loss was $5.9 million. For the six months ended June 30, ~~2013~~2014, our revenues were $9.1 million and our net loss was $15.0 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.

20At June 30, 2014, our principal sources of liquidity consisted of cash and cash equivalents of $2.3 million and accounts receivable, net of $3.8 million. Our independent registered public accounting firm has indicated in its audit report on our fiscal 2013 financial statements, included in our 2013 Form 10-K, that our recurring losses and negative cash flows from operations raise substantial doubt about our ability to continue as a going concern. Our ability to fund our cash and future liquidity requirements will be dependent on our ability to raise additional capital, increase revenues, maintain our relationships with certain vendors, successfully avoid an event of default under our debt agreements, maintain tight controls over spending and attain our other business objectives on a timely basis. To meet our capital needs, we are actively pursuing multiple alternatives to raise additional funds, including additional debt or equity financings and other sources of funding. If we are unable to obtain the necessary capital from cash flows from operations and the infusion of additional capital to fund our operations in the near term, we will need to implement further expense reduction measures, including workforce reductions, the consolidation of operations and/or the delay or cancellation of certain operational programs, pursue a plan to license or sell our assets, or to cease operations. Please refer to “—Liquidity and Capital Resources” below for a discussion of our cash requirements and efforts to obtain additional capital.

~~The~~2014 ~~$2.5~~Updates 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~~Avance of™ ~~Revenue Cost~~MIS ofPedicle Screw ~~revenue~~System 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~~On ~~and~~April ~~Development Research~~10, ~~and~~2014, ~~development~~we ~~expenses~~announced ~~increased~~that ~~from~~we had $1received U.4S. ~~million~~Food inand ~~the~~Drug ~~three~~Administration ~~months~~510(k) ~~ended~~clearance ~~September~~(k133743) 30of our Avance™ MIS Pedicle Screw System, ~~2012~~which may tobe ~~$1.9~~used ~~million~~as inan ~~the~~adjunct ~~three~~to ~~months~~fusion ~~ended~~in ~~September~~numerous ~~30,~~degenerative ~~2013~~and complex spinal pathologies. ~~Personnel-related~~ ~~expenses~~The ~~increased~~design byof ~~$0.4~~Avance ~~million~~provides ~~from~~a ~~the~~quick and ~~three~~easy-to-use, ~~months~~percutaneous ~~ended~~pedicle ~~September~~screw 30system that addresses single, ~~2012~~complex ~~compared~~and tomulti-level ~~three~~spinal ~~months~~pathologies ~~ended~~with ~~September~~minimal tissue ~~30,~~disruption ~~2013~~and astrauma. weThe ~~increased~~Avance ~~the~~system ~~headcount~~will be in ~~our~~limited ~~regulatory~~market release in the second and ~~clinical~~third ~~functions,~~quarter ~~including~~of an2014 ~~increase~~and is inplanned ~~headcount~~for ~~related~~full tolaunch in the ~~Merger~~fourth quarter of 2014.

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.16

21Critical Accounting Policies and Estimates

~~General~~Our discussion and ~~Administrative General~~analysis of our financial condition and ~~administrative~~results ~~expenses~~of ~~increased~~operations ~~from~~is ~~$1.7~~based ~~million~~upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the ~~three~~United ~~months~~States. ~~ended~~The ~~September~~preparation ~~30,~~of ~~2012~~financial statements requires management to ~~$2.8~~make ~~million~~estimates inand assumptions that affect the ~~three~~reported ~~months~~amounts ~~ended~~of ~~September~~assets ~~30,~~and ~~2013. The~~liabilities ~~increase~~and indisclosure ~~expenses~~of contingent assets and liabilities at the date of $1the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.1 ~~million~~The ~~was~~principal ~~primarily~~estimates ~~due~~relate to anaccounts ~~increase~~receivable inreserves, ~~personnel-related~~inventory ~~expense~~valuation, valuation of ~~$0.4~~stock-based ~~million~~compensation, ~~including~~accrued ~~headcount~~expenses, ~~increases~~deferred ~~related~~tax toasset ~~the~~valuation ~~Merger~~reserves, ~~increased bad~~and ~~debt~~the ~~expense~~valuation of $0embedded derivatives and warrants for common stock.6 ~~million,~~ We base our estimates on historical experience and ~~amortization~~various other assumptions that we believe to be reasonable, the results of which form the ~~intangible~~basis ~~assets~~for ~~acquired~~making injudgments about the ~~merger~~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.

~~U.S. Government~~For ~~Settlement Charges In December 2012, we reached~~ a ~~tentative~~description ~~agreement~~of inour ~~principle~~critical ~~with~~accounting policies ~~the~~and ~~U.S.~~estimates, ~~Department~~please ofrefer ~~Justice related~~ to the ~~subpoena~~“Critical ~~issued~~Accounting inPolicies ~~October 2011. Baxano Surgical~~ and ~~the~~Estimates” ~~staff~~section of the ~~Department~~“Management’s Discussion ofand ~~Justice~~Analysis ~~agreed~~of toFinancial ~~settle~~Condition ~~its~~and ~~federal~~Results ~~investigation~~of ~~for~~Operations” ~~$6.0~~section ~~million.~~contained ~~The final agreement was executed~~ in ~~June~~our 2013~~. The~~ $6Form 10-K.0 ~~million~~There have ~~settlement,~~been ~~plus~~no ~~accrued~~material ~~interest~~changes ofin ~~2%,~~any ~~will~~of beour ~~paid~~accounting inpolicies ~~nine~~since ~~quarterly~~December ~~installments~~31, ~~with the first installment paid in July~~ 2013. We ~~also~~periodically ~~incurred~~review ~~legal~~our ~~fees~~critical ~~related~~accounting policies ~~to the investigation of $0.6 million in the three months ended September 30, 2012~~ and ~~$32,000~~estimates inwith the ~~three~~audit ~~months~~committee ~~ended~~of ~~September~~our ~~30,~~Board ~~2013~~of Directors.

~~Merger~~Goodwill and ~~Integration~~other ~~Expenses We~~intangible ~~have~~assets ~~incurred~~are tested ~~$0.5~~annually ~~million~~for ofimpairment ~~merger~~ and ~~integration~~between ~~related~~annual ~~expenses~~tests ~~for~~if an event occurs or circumstances change that would more likely than not reduce the ~~three~~fair ~~months~~value ~~ended~~of ~~September~~our ~~30,~~outstanding ~~2013~~common ~~related~~stock below our net equity carrying amount. Should our stock price continue to decline whereby the ~~Merger~~fair ~~with~~value ~~Baxano. These~~of ~~expenses~~our ~~consist~~common ~~primarily~~stock is below our book value of ~~legal~~equity, ~~expenses~~we may have to consider an impairment charge related to the ~~Merger~~carrying ~~and~~value ~~employee~~of ~~severance~~goodwill and ~~retention~~other ~~costs~~intangible asassets weduring ~~integrate~~a ~~the~~future ~~businesses~~quarter.

~~Other~~Results 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.Operations

~~Comparison~~Primary ofRevenue ~~the Nine Months Ended September 30, 2012~~ and ~~2013~~Expense Components

The following ~~Revenue Revenue~~is ~~increased~~a ~~from~~description ~~$10.4~~of ~~million in~~ the ~~nine~~primary ~~months~~components ~~ended~~of ~~September~~our ~~30,~~revenue ~~2012~~and ~~to $12.6 million in the nine months ended September 30, 2013.~~expenses:

· Revenue. byOur revenue reflects product ~~line~~revenue ~~was:~~primarily consisting of our AxiaLIF and VEO fusion systems as well as our iO-Flex and iO-Tome instruments utilized in lumbar spinal surgeries. The product revenue may also include revenue for other disposable surgical products also used in those surgeries including bone void filler and bone graft harvester.

	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

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

22· 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. Research and development expenses are expensed as incurred.

~~Note:~~· ~~iO-Flex~~Sales ~~revenue~~and isMarketing. ~~included~~Sales ~~from~~and ~~the~~marketing ~~Merger~~expenses ~~date~~consist primarily of personnel costs, ~~May~~sales 31commissions paid to our direct sales representatives, ~~2013~~independent sales agents and independent distributors and costs associated with physician training programs, promotional activities and participation in medical and trade conferences.

~~The~~· ~~$2.2~~General 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~~Administrative.6 ~~million~~General 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~~administrative ~~into~~expenses ~~existing~~consist 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~~personnel ~~iO-Flex~~costs ~~products~~related ~~for~~to the ~~nine months ended September 30~~executive, ~~2013~~finance ~~were $3.4 million, which represented 922 cases. Sales of our VEO lateral access~~ and ~~interbody~~human ~~fusion~~resource ~~system increased from $1.2 million in the nine months ended September 30~~functions, ~~2012~~as towell ~~$1.8 million in the nine months ended September 30, 2013,~~ as ~~the~~professional ~~number~~service ~~of cases increased from 122 in the nine months ended September 30~~fees, ~~2012,~~legal ~~to 174 in the nine months ended September 30~~fees, ~~2013. Other~~accounting 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 30fees, ~~2012~~insurance ~~to $1.1 million in the nine months ended September 30~~costs, ~~2013. There~~bad ~~was~~debt ~~$0.1~~expense 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,~~general ~~92%~~corporate ~~of our revenues were generated in the United States~~expenses.

~~Cost~~· ofCharges ~~Revenue Cost~~Related ~~of revenue increased from $2.7 million for the nine months ended September 30, 2012~~ to $3U.~~8 million for the nine months ended September 30, 2013~~S. ~~Gross~~ ~~margin~~Government ~~decreased from 73~~Settlement.7% inCharges ~~the~~related ~~nine months ended September 30, 2012~~ to 69U.~~7% in the nine months ended September 30, 2013~~S. ~~The~~ ~~decrease~~Government insettlement ~~gross~~consist ~~margin~~of ~~was~~legal ~~primarily~~fees ~~due~~related to ~~increased~~ ~~depreciation~~the ~~expense~~subpoena onissued ~~reusable~~by ~~kits,~~the ~~primarily~~Office ~~due to upgrading reusable kits as we launched our next generation~~ of ~~AxiaLIF~~Inspector ~~and~~General ~~VEO~~in ~~products,~~October ~~increased~~2011 ~~royalty expenses~~ and the ~~medical~~June ~~device~~2013 ~~tax~~settlement ~~that~~with ~~became~~the ~~effective~~U.S. onDepartment ~~January~~of ~~1, 2013~~Justice.

· ~~Research~~Merger and ~~Development Research~~Integration ~~and development expenses increased from $3~~Expenses.9 ~~million~~Merger ~~in the nine months ended September 30, 2012 to $4.7 million in the nine months ended September 30, 2013. Personnel-related~~ expenses ~~increased~~consist byprimarily ~~$0.7~~of ~~million from the nine months ended September 30~~legal, ~~2012 compared to nine months ended September 30~~accounting, ~~2013~~consulting ~~as we increased our headcount in our regulatory~~ and ~~clinical~~other ~~functions,~~professional ~~primarily~~fees related to the Merger. ~~and~~Integration ~~R&D~~expenses ~~project~~consist ~~spending, partially offset by a decrease~~ of ~~clinical~~costs ~~trial~~incurred ~~spending and licensing agreements~~ in ~~the~~planning ~~nine~~for ~~months~~and ~~ended~~integrating ~~September~~our ~~30, 2013 compared to the nine months ended September 30, 2012~~operations.

23· Non-Operating Items. Non-operating items is primarily composed of interest expense on the long-term debt, convertible debentures and U.S. Government settlement, interest earned on our cash and cash equivalents, gain or loss on disposal of fixed assets and the change in the estimated fair value of derivative and common stock liabilities.

~~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.

The ~~General~~subsequent ~~and~~discussion ~~Administrative General~~ and ~~administrative~~analysis provides ~~expenses~~information ~~increased~~which ~~from~~management ~~$4.7~~believes ~~million~~is inrelevant ~~the nine months ended September 30, 2012~~ to ~~$6.2~~an ~~million~~assessment inand ~~the~~understanding ~~nine~~of ~~months~~our ~~ended~~consolidated ~~September~~results ~~30,~~of ~~2013~~operations. ~~The~~ You ~~increase~~are inencouraged ~~expenses~~to ofread ~~$1.5~~the ~~million~~following ~~was~~discussion ~~primarily~~and ~~due~~analysis toof anour ~~increase~~financial incondition ~~personnel-related~~and ~~expense~~results of ~~$0.5~~operations ~~million,~~together with ~~including~~our ~~headcount~~unaudited ~~increases~~interim ~~related~~condensed toconsolidated ~~the~~financial ~~Merger,~~statements ~~increased~~and ~~bad~~related ~~debt~~footnotes ~~expense~~included ofelsewhere ~~$0.6~~in ~~million,~~this ~~increased~~Quarterly Report ~~legal~~on ~~and~~Form ~~professional~~10-Q ~~fees~~(Quarterly ofReport) ~~$0.4 million~~ and ~~amortization~~the ofaudited ~~the~~consolidated ~~intangible~~financial ~~assets~~statements, ~~acquired~~included in ~~the~~our ~~merger~~2013 Form 10-K.

~~U.S.~~Three ~~Government~~Months ~~Settlement~~Ended ~~Charges In~~June ~~December 2012~~30, we2014 ~~reached~~Compared ~~a tentative agreement in principle with the U.S. Department of Justice related~~ to ~~the~~Three ~~subpoena~~Months Ended ~~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~~The ~~and~~following ~~Integration~~table ~~Expenses We~~contains ~~have~~information regarding ~~incurred~~our ~~$3.4~~results ~~million~~ of ~~merger~~operations ~~and integration related expenses~~ for the ~~nine~~three months ended ~~September~~June 30, ~~2013~~2014 ~~related~~as compared to the ~~Merger~~three ~~with~~months ~~Baxano.~~ended ~~These~~June ~~expenses~~30, ~~consist~~2013 (Baxano ~~primarily~~Inc. ofresults ~~legal~~are ~~expenses~~included ~~related~~from to the Merger ~~and~~date, ~~employee~~May ~~severance~~31, ~~and~~2013) ~~retention~~(in ~~costs as we integrate the businesses~~thousands).

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.

	June 30,						Change
	2014			2013			$			%

Revenue	$	4,656		$	3,877		$	779			20.1	%
Cost of revenue		1,417			1,295			122			9.4	%
Gross profit		3,239			2,582			657			25.4	%
Operating expenses:
Research and development		2,465			1,509			956			63.4	%
Sales and marketing		6,001			6,032			(31	)		(0.5	)%
General and administrative		2,567			1,860			707			38.0	%
Merger and integration expenses		-			1,583			(1,583	)		(100.0	)%
U.S. Government settlement		-			69			(69	)		(100.0	)%
Total operating expenses		11,033			11,053			(20	)		(0.2	)%
Operating loss		(7,794	)		(8,471	)		677			(8.0	)%
Non-operating items:
Interest expense		(759	)		(73	)		(686	)		939.7	%
Change in fair value of derivative and warrants		2,676			-			2,676			0.0	%
Other income, net		10			13			(3	)		(23.1	)%
Net loss	$	(5,867	)	$	(8,531	)	$	2,664			(31.2	)%

~~Liquidity~~The ~~and~~following ~~Capital~~table ~~Resources~~contains information regarding our revenue (iO-Flex revenue is included from the Merger date, May 31, 2013) (in thousands):

Sources of Liquidity

	June 30,				Change
	2014		2013		$			%

Domestic revenue:
AxiaLIF	$	1,270	$	2,017	$	(747	)		(37.0	)%
VEO		513		682		(169	)		(24.8	)%
iO-Flex		2,491		810		1,681			207.5	%
iO-Tome		127		12		115			958.3	%
Other		81		166		(85	)		(51.2	)%
Total		4,482		3,687		795			21.6	%
International revenue		174		190		(16	)		(8.4	)%
Total revenue	$	4,656	$	3,877	$	779			20.1	%

~~Since~~Revenue. ~~our~~The ~~inception~~$0.8 million increase in ~~2000,~~revenue wefrom ~~have~~2013 ~~incurred~~to ~~significant~~2014 ~~losses~~was ~~and,~~due to the addition of the iO-Flex family of products to our portfolio as of ~~September~~May 3031, 2013, weoffset by ~~had~~lower anrevenues ~~accumulated~~primarily ~~deficit~~from ofour ~~$162.4~~AxiaLIF ~~million~~product. We ~~have~~In ~~not~~March ~~yet~~2012, ~~achieved~~the ~~profitability,~~Current ~~and~~Procedural weTerminology ~~cannot~~(“CPT”) ~~assure~~Editorial Panel ~~investors~~(the ~~that~~“Panel”), wevoted ~~will~~to ~~achieve~~approve ~~profitability~~an ~~with~~application ~~our~~for ~~existing~~a ~~capital~~new ~~resources. Our~~Category ~~recurring~~I ~~losses~~CPT ~~raise~~code, ~~substantial~~22586. ~~doubt~~This ~~about~~CPT ~~our~~code, ~~ability~~which applies to ~~continue~~our asAxiaLIF a1-Level ~~going~~devices ~~concern.~~(Legacy Asand Plus), is a ~~result,~~bundled ~~our~~lumbar ~~independent~~arthrodesis ~~registered~~procedure ~~public~~that ~~accounting~~includes ~~firm~~bone ~~included~~graft anand ~~explanatory~~posterior instrumentation. ~~paragraph~~The Medicare final rule was released in ~~its~~November ~~report~~2012, onwhich ~~our~~stated ~~financial~~a ~~statements~~value asfor ofthe Category I CPT code 22586 and ~~for~~became effective January 1, 2013. Starting January 1, 2013, surgeons tried the ~~year~~Category ~~ended~~I ~~December~~CPT 31code for AxiaLIF Plus 1-Level with private payors; however, ~~2012~~coverage with ~~respect~~certain toprivate ~~this~~payors ~~uncertainty.~~was Wedenied ~~expect~~sometimes toafter ~~continue~~the tocase. ~~fund~~The ~~research~~AxiaLIF ~~and~~Plus ~~development,~~1-Level reimbursement ~~sales~~challenges and ~~marketing~~lower ~~and~~than ~~general~~expected ~~and~~utilization ~~administrative~~of ~~expenses~~our atAxiaLIF ~~similar~~Plus to2-Level ~~current~~are orthe ~~higher~~primary ~~levels~~factors ~~and,~~in asthe a$0.7 ~~result,~~million decrease wein ~~will~~AxiaLIF ~~need~~sales. toThe ~~generate~~decrease ~~significant~~in ~~revenues~~VEO torevenue ~~achieve~~of ~~profitability~~$0. ~~Prior~~2 million from 2013 to ~~our~~2014 ~~October~~was ~~2007~~primarily ~~initial~~due ~~public~~to ~~offering,~~change ~~our~~in ~~operations~~the ~~were~~size of ~~funded~~the ~~primarily~~salesforce ~~with~~as we implemented the ~~gross~~hybrid ~~proceeds~~sales ~~from~~model during the ~~sale~~second quarter of ~~preferred~~2014 ~~stock~~and ofhave ~~$40.5~~decreased ~~million.~~the ~~The~~direct ~~net~~sales force ~~proceeds~~and ~~from~~are in the process of identifying distributors who will carry our ~~October~~full ~~2007~~line ~~initial~~of ~~public~~products. ~~offering~~The decrease in Other product revenue of $860.71 million, ~~the~~from ~~net~~2013 ~~proceeds~~to of2014 ~~our~~was ~~September~~primarily ~~2011~~due ~~stock~~to ~~offering~~decreased offusion ~~$18~~volume.2 ~~million~~Many ~~and~~of the ~~net~~products ~~proceeds~~in the Other category are add on products to fusion cases and their usage directly correlates with the amount of ~~$17.0~~fusion ~~million~~cases ~~from~~performed ~~our~~done. ~~May~~The ~~2013~~decrease in ~~private~~international ~~placement~~revenue ~~transaction~~primarily ~~have~~stems ~~funded~~from ~~our~~a ~~operations~~drop ~~since~~of ~~then~~stocking orders.

2418

InCost ~~May~~of ~~2011,~~Revenue weand ~~filed~~Gross ~~a “universal shelf” Registration Statement on Form S-3 (File No~~Profit. Cost ~~333-174255),~~of orrevenue ~~the~~increased ~~Shelf~~to ~~Registration Statement, with the SEC, which became effective on August~~ $1~~, 2011 and which we used for our September 2011 stock offering~~. ~~Depending~~4 onmillion ~~our~~in ~~non-affiliated~~2014 ~~public~~from ~~equity float during the time period prior to consummating a financing transaction, the Shelf Registration Statement allows us to raise up to an additional~~ $291.853 million ~~through~~in ~~the~~2013. ~~sale~~Gross ofmargins ~~debt~~increased ~~securities,~~to ~~common~~69.6% ~~stock,~~in ~~preferred~~2014 ~~stock,~~from or66.6% in ~~warrants, or any combination thereof~~2013. The ~~timing~~increase ~~and~~in ~~terms~~gross ofmargin ~~any~~from ~~additional~~2013 ~~financing transactions pursuant~~ to ~~the~~2014 ~~Shelf~~was ~~Registration~~primarily ~~Statement,~~due ~~or otherwise, have not yet been determined. Any additional financing may not be available in amounts or on terms acceptable~~ to ~~us,~~operational ~~if at all~~efficiencies.

AsResearch ofand ~~September~~Development. ~~30,~~The ~~2013, our liabilities included an outstanding debt financing arrangement in the amount of~~ $21.8 0 million, ~~payable~~increase ~~monthly~~in ~~over~~research ~~36 months,~~ and adevelopment ~~payable~~expenses offrom ~~$5.5~~2013 ~~million related~~ to ~~our~~2014 ~~settlement~~was ~~agreement~~primarily ~~with~~due ~~the~~to ~~U.S.~~an ~~Government,~~increase ~~payable quarterly over three years. We have working capital~~ of $140.43 million atin ~~September~~personnel-related costs ~~30,~~as ~~2013~~we ~~and~~increased ~~our~~head ~~primary~~count ~~source~~in support of ~~liquidity~~a ~~was~~larger ~~$11.6~~product ~~million~~portfolio ~~in cash~~ and ~~cash equivalents~~$0. We7 ~~currently~~million ~~invest~~increase ~~our~~in ~~cash~~prototypes ~~and~~for ~~cash~~the ~~equivalents~~second and ~~primarily~~third inquarter ~~money~~limited market ~~treasury~~release ~~funds~~of Avance.

~~Cash~~Sales and ~~cash~~Marketing. ~~equivalents~~Sales ~~decreased~~and marketing expenses from ~~$21.5~~2013 ~~million~~to at2014 ~~December~~in ~~31,~~total ~~2012~~remained consistent. From 2013 to 2014 there was an increase of $110.62 million atin ~~September~~personnel-related costs 30as we integrated our sales force and expanded our sales territory, ~~2013. The~~an ~~decrease~~increase of $90.92 million ~~was~~in ~~primarily~~distributor ~~the~~commissions, stemming ~~result~~from ofan ~~net~~expanded ~~cash~~distributor ~~used~~network inand ~~operating~~an ~~activities~~increase of $~~23.~~0.1 million, ~~payments~~in ~~under~~travel ~~the~~and ~~Baxano~~meeting ~~acquisition~~expenses. These increases were primarily offset by a decrease of $20.73 million ~~and~~in ~~purchases~~outside ofservices ~~property~~ and ~~equipment~~a decrease of approximately $10.42 million, ~~partially~~in ~~offset~~training bymaterials, which ~~the~~were ~~net~~rebranded ~~proceeds~~as ~~from~~a ~~our~~result ~~private~~of ~~placement~~the ~~transaction~~2013 ~~of $17~~Merger.~~0 million.~~

~~Cash~~General ~~Flows~~and Administrative. The increase in general and administrative expenses of $0.7 million from 2013 to 2014 was primarily due to a $0.2 million increase in legal, audit and other professional services and an increase of $0.4 million in amortization expenses of the intangible assets acquired in the Merger.

~~Net~~Merger ~~Cash~~and ~~Used~~Integration ~~in Operating Activities~~Expenses. The ~~Net cash used in operating activities was~~ $231.06 million inincurred ~~the~~during ~~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~~Merger with ~~the U~~Baxano.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~~U. ~~Net cash used in investing activities was $4~~S.0 ~~million~~Government inSettlement ~~the nine months ended September 30, 2013~~Charges. The ~~This amount reflected the net cash paid, net of cash acquired, of~~ $20.71 million ~~for~~incurred ~~the~~during ~~Baxano~~2013 ~~acquisition~~related ~~and~~to ~~purchases~~legal offees ~~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~~U. ~~Net cash provided by investing activities was $4~~S.2 ~~million~~Department ~~in the nine months ended September 30, 2012. This amount reflected sales and maturities~~ of ~~short-term~~Justice ~~investments of $6~~investigation.~~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.~~

25Non-Operating Items. Non-operating items expense decreased from 2013 to 2014 driven by a $2.7 million fair value adjustment gain related to derivative and common stock warrant liabilities, offset by a $0.7 million increase in interest expense for the U.S. Government settlement, the Credit Facility and convertible notes, which includes amortization of debt issuance costs and discounts.

~~Net~~Six ~~Cash~~Months ~~Provided~~Ended byJune ~~Financing Activities. Net cash provided by financing activities in the nine months ended September~~ 30, ~~2013~~2014 Compared ~~was~~to ~~$17.1~~six ~~million,~~Months ~~which~~Ended ~~represented~~June 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.~~2013

~~Operating~~The ~~Capital~~following ~~and~~table ~~Capital~~contains ~~Expenditure~~information regarding ~~Requirements~~our results of operations for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 (Baxano Inc. results are included from the Merger date, May 31, 2013) (in thousands).

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.

	June 30,						Change
	2014			2013			$			%

Revenue	$	9,068		$	6,977		$	2,091			30.0	%
Cost of revenue		2,680			2,327			353			15.2	%
Gross profit		6,388			4,650			1,738			37.4	%
Operating expenses:
Research and development		4,452			2,794			1,658			59.3	%
Sales and marketing		13,275			10,959			2,316			21.1	%
General and administrative		5,115			3,411			1,704			50.0	%
Merger and integration expenses		19			2,895			(2,876	)		(99.3	)%
U.S. Government settlement		-			160			(160	)		(100.0	)%
Total operating expenses		22,861			20,219			2,642			13.1	%
Operating loss		(16,473	)		(15,569	)		(904	)		5.8	%
Non-operating items:
Interest expense		(1,135	)		(73	)		(1,062	)		1,454.8	%
Change in fair value of derivative and warrants		2,624			-			2,624			100.0	%
Other income, net		8			11			(3	)		(27.3	)%
Net loss	$	(14,976	)	$	(15,631	)	$	655			(4.2	)%

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.19

~~During~~The ~~April~~following ~~and~~table ~~May~~contains ~~2013,~~information ~~Baxano~~regarding ~~issued~~our ~~promissory~~revenue (iO-Flex ~~notes,~~revenue oris ~~the~~included ~~Bridge~~from ~~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 15date, ~~2012,~~May ~~among Oxford Finance LLC~~31, ~~the~~ ~~lender~~2013) ~~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.thousands):

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.

	June 30,				Change
	2014		2013		$			%

Domestic revenue:
AxiaLIF	$	2,419	$	3,886	$	(1,467	)		(37.8	)%
VEO		1,074		1,272		(198	)		(15.6.	)%
iO-Flex		4,838		810		4,028			497.3	%
iO-Tome		258		12		246			2050.0	%
Other		156		301		(145	)		(48.2	)%
Total		8,745		6,281		2,464			39.2	%
International revenue		323		696		(373	)		(53.6	)%
Total revenue	$	9,068	$	6,977	$	2,091			30.0	%

26Revenue. The $2.1 million increase in revenue from 2013 to 2014 was due to the addition of the iO-Flex family of products to our portfolio as of May 31, 2013, offset by lower revenues primarily from our AxiaLIF product. The AxiaLIF Plus 1-Level reimbursement challenges discussed above and lower utilization of our AxiaLIF Plus 2-Level are the primary factors in the $1.5 million decrease in AxiaLIF sales. The decrease in VEO revenue of $0.2 million from 2013 to 2014 was primarily due to change in the size of the salesforce in 2014 as we implemented the hybrid sales model by decreasing the direct sales force and are in the process of identifying distributors who will carry our full line of products. The decrease in Other product revenue of $0.1 million from 2013 to 2014 was primarily due to decreased fusion volume. The decrease in international revenue primarily stems from fewer stocking orders in 2014.

~~Concurrent~~Cost ~~with the closing~~ of ~~the~~Revenue ~~Merger,~~ and inGross ~~accordance~~Profit. Cost ~~with the terms~~ of ~~the~~revenue ~~Securities~~increased ~~Purchase~~to ~~Agreement,~~$2.7 wemillion ~~issued~~in ~~and~~2014 ~~sold~~from ~~to certain~~$2.3 ~~investors~~million ~~7,522,009~~in ~~shares~~2013. ofGross ~~our~~margins ~~common~~increased ~~stock,~~to at70.4% ain ~~purchase~~2014 ~~price~~from of66.6% in $22013.28 The ~~per~~increase ~~share,~~in ~~resulting~~gross inmargin ~~net~~from ~~proceeds~~2013 to us2014 ofwas ~~approximately~~primarily ~~$17.0~~due ~~million~~to operational efficiencies.

~~Pursuant~~Research toand ~~the~~Development. ~~Securities~~The ~~Purchase~~$1.7 million ~~Agreement,~~increase wein ~~agreed~~research toand ~~register~~development ~~the~~expenses ~~resale~~from of2013 ~~the~~to ~~shares~~2014 ofwas ~~our~~primarily ~~common~~due ~~stock~~ to bean ~~issued~~increase ~~pursuant~~of to$0.7 ~~the~~million ~~Merger~~in ~~Agreement~~personnel-related costs ~~and~~as ~~the~~we ~~Securities~~increased ~~Purchase~~head ~~Agreement~~count ~~under~~in support of a ~~registration~~larger ~~statement~~product onportfolio, ~~Form~~$0.2 ~~S-3~~million ~~(or~~increase ~~another~~in ~~appropriate~~compliance ~~form~~expenses ifto ~~Form~~support the ~~S-3~~implementation isand ~~not~~monitoring ~~then~~of ~~available~~the toCorporate ~~us).~~Integrity ~~The~~Agreement ~~Registration~~with ~~Statement~~the onOffice ~~Form~~of ~~S-3~~Inspector ~~(File~~General Noand $0.8 ~~333-189617)~~million ~~was~~increase in ~~declared~~prototypes ~~effective~~for by the ~~SEC~~second onand ~~July~~third ~~11,~~quarter ~~2013~~limited market release of Avance.

InSales ~~connection~~and ~~with~~Marketing. ~~the~~The ~~Merger,~~$2.3 wemillion increase ~~assumed~~in sales and ~~became~~marketing ~~the~~expenses ~~borrower~~from ~~under~~2013 ~~Baxano’s outstanding credit facility pursuant~~ to ~~the~~2014 ~~terms~~was ofprimarily ~~the~~due ~~First Amendment~~ to ~~Loan~~an ~~and~~increase ~~Security Agreement, dated as~~ of ~~May~~$1.8 ~~31,~~million ~~2013,~~in orpersonnel-related costs ~~the First Amendment to Loan Agreement, among us, Oxford Finance LLC,~~ as ~~collateral~~we ~~agent,~~integrated orour ~~the~~sales ~~Collateral~~force ~~Agent,~~ and ~~Oxford~~expanded ~~Finance~~our ~~Funding~~sales Iterritory, ~~LLC~~an ~~and~~increase ~~Silicon~~of ~~Valley Bank, as lenders, or the Lenders~~$0. ~~The~~7 ~~First~~million ~~Amendment~~in todistributor ~~Loan Agreement amends the Loan and Security Agreement~~commissions, stemming ~~dated~~from asan ofexpanded ~~March~~distributor 15network, ~~2012,~~and ~~among~~an ~~the~~increase ~~Collateral~~of ~~Agent,~~$0.3 ~~the~~million ~~lenders~~in ~~party~~travel ~~thereto,~~ and ~~Baxano,~~meeting orexpenses asprimarily sooffset by ~~amended,~~a ~~the~~decrease ~~Amended~~of ~~Loan Agreement~~$0. ~~The~~5 ~~Amended~~million ~~Loan~~in ~~Agreement~~outside ~~evidences a term loan, which will mature on May 1, 2016, or the Term Loan~~services.

~~The~~General ~~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~~Administrative. ~~Commencing~~The increase ~~December 2013, the Amended Loan Agreement provides for the amortization of principal (~~in ~~the~~general ~~form of level monthly payments of principal~~ and ~~interest).~~administrative ~~The~~expenses ~~Term Loan will be required to be prepaid if the Term Loan is accelerated following an event~~ of ~~default~~$1.7 Inmillion ~~addition,~~from we2013 ~~are permitted~~ to ~~prepay~~2014 ~~the~~was ~~Term~~primarily ~~Loan~~due ~~in full at any time upon 15 days’ written notice~~ to ~~the~~a ~~Lenders~~$0.4 ~~Upon~~million ~~the~~increase in ~~earliest to occur of the maturity date~~legal, ~~acceleration~~audit ofand ~~the~~other ~~Term~~professional ~~Loan,~~services; or$0.1 ~~prepayment~~million ofincrease ~~the~~in ~~Term~~depreciation ~~Loan,~~expense weand ~~are~~an ~~required~~increase ~~to make a final payment equal to the original principal amount~~ of ~~the Term Loan multiplied by 7~~$0.~~00%,~~7 ormillion in ~~the~~amortization ~~Final~~expenses ~~Payment Fee. Any prepayment, whether mandatory or voluntary, must include the Final Payment Fee, the prepayment fee (equal to 2%~~ of the ~~principal~~intangible ~~amount~~assets ~~prepaid~~acquired ifin ~~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 LendersMerger.

~~The~~Merger ~~Amended Loan Agreement is secured by a security interest in substantially all of our assets~~ and ~~any~~Integration ~~future subsidiaries, other than intellectual property~~Expenses. There ~~The~~was ~~Amended Loan Agreement contains customary representations (tested on~~ a ~~continual~~decrease 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,~~merger ~~acquisitions,~~ and ~~asset~~integration ~~sales;~~expenses ~~transact~~from ~~with~~2013 ~~affiliates; be party~~ to ~~material~~2014 ~~litigation;~~of ~~fail~~$2.9 tomillion ~~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~~Merger ~~Loan~~with ~~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~~Baxano.

27U.S. Government Settlement Charges. The $0.2 million incurred during 2013 related to legal fees for the U.S. Department of Justice investigation.

~~The~~Non-Operating ~~events~~Items. ofNon-operating items ~~default~~expense ~~under~~decreased ~~the~~from ~~Amended~~2013 ~~Loan~~to ~~Agreement~~2014 ~~include,~~driven ~~without~~by ~~limitation,~~a ~~the~~$2.6 ~~following:~~million ~~payment~~fair ~~default;~~value ~~other~~adjustment ~~breach~~gain ofrelated ~~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~~derivative ~~agreements~~ and ~~other~~common stock ~~debt;~~warrant ~~and~~liabilities, ~~the~~offset ~~occurrence~~by of a ~~material adverse change~~$1.1 Ifmillion anincrease ~~event~~in ofinterest ~~default~~expense ~~occurs,~~for the ~~Lenders~~U.S. ~~would~~Government ~~be entitled to take various enforcement actions~~settlement, ~~including acceleration of amounts due under~~ the ~~Amended~~Credit Facility ~~Loan Agreement~~ and ~~all~~convertible ~~other~~notes, ~~actions~~which ~~permitted~~includes ~~under~~amortization ~~the~~of ~~Amended~~debt ~~Loan~~issuance ~~Agreement~~costs and ~~applicable law~~discounts.

~~Critical Accounting Policies and Estimates~~20

~~Our~~Liquidity ~~discussion~~ and ~~analysis~~Capital 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.Resources

~~For~~Cash aFlows ~~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~~Net ~~Intangible~~Cash ~~Assets~~Used in Operating Activities. Net cash used in operating activities was $16.9 million and ~~Goodwill~~$15.7 million for the six months ended June 30, 2014 and 2013, respectively. For both periods the amounts are attributable primarily to the net loss after adjustment for non-cash items, such as depreciation, stock-based compensation, debt discount amortization and revaluation of derivative and common stock warrant liabilities, plus the net change in operating assets and liabilities.

~~Identifiable~~Net ~~intangible~~Cash ~~assets~~Used ~~are~~in ~~recorded~~Investing atActivities. Net ~~cost,~~cash orused ~~when~~in ~~acquired~~investing asactivities ~~part~~was of$0.5 amillion ~~business~~and ~~acquisition~~$3.4 million for the six months ended June 30, at2014 ~~estimated~~and ~~fair~~2013, ~~value~~respectively. ~~Certain~~ The ~~intangible~~2014 ~~assets~~amount ~~are~~reflects ~~amortized~~purchases ~~over~~of ~~periods~~property ~~ranging~~and ~~from~~equipment, 10primarily tofor 17reusable ~~years~~instrument kits. ~~Similar~~ toThe ~~tangible~~2013 ~~personal~~amount ~~property,~~reflected the ~~plant~~net ~~and~~cash ~~equipment~~paid, wenet ~~periodically~~of ~~evaluate~~cash ~~identifiable~~acquired, ~~intangible~~of ~~assets~~$2.7 million for ~~impairment~~the ~~whenever~~Merger ~~events~~and orpurchases ~~changes~~of inproperty ~~circumstances~~and ~~indicate~~equipment ~~that~~of $0.6 million, primarily for reusable instrument kits used in the ~~carry~~field ~~amount~~and ~~may~~up-fitting ~~not~~our benew ~~recoverable~~headquarters in Raleigh, North Carolina.

~~Indefinite-lived~~Net ~~intangible~~Cash ~~assets~~Provided by Financing Activities. Net cash provided by financing activities in the six months ended June 30, ~~such~~2014 aswas ~~goodwill~~$11.1 ~~and~~million, ~~certain~~which ~~trademarks~~represented approximately $10.0 million in principal for the sale of convertible debentures, ~~are~~offset ~~not~~by ~~amortized~~related fees of $1. We4 ~~test~~million. During the ~~carrying~~six ~~amounts~~months ended June 30, 2014 we sold 2.4 million shares of ~~these~~Common ~~assets~~Stock for ~~recoverability~~proceeds onof anapproximately ~~annual~~$2.5 ~~basis~~million orunder ~~when~~the ~~events~~Purchase orAgreement with ~~changes~~Lincoln Park. Net cash provided by financing activities in ~~circumstances~~the ~~indicate~~six ~~evidence~~months ended June 30, 2013 was $17.1 million, which represented the net proceeds from the sale of ~~potential~~common ~~impairment~~stock ~~exists~~for the Merger, ~~using~~purchases aof ~~fair~~common ~~value~~stock ~~based~~under ~~test~~our employee stock purchase plan and from the issuance of shares of common stock upon the exercise of stock options.

28Access to Capital and Cash Requirements

~~Debt~~In ~~Issuance~~May ~~Costs~~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 and 2013 and 2014 equity financing with Lincoln Park Pursuant to Rule 415(a)(5) under the Securities Act, the Shelf Registration Statement was scheduled to expire on August 1, 2014. On July 31, 2014, we filed a Registration Statement on Form S-3 with the SEC in accordance with Rule 415(a)(6) under the Securities Act solely for the purpose of continuing to provide us with the ability to sell from time to time the remaining initial offering price of unsold securities registered under the Shelf Registration Statement. 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.

WeOn ~~capitalize~~April ~~costs~~17, ~~associated~~2014, ~~with~~our ~~the~~stockholders ~~issuance~~approved an ofamendment ~~debt~~to ~~instruments~~our ~~and~~Fifth ~~amortize~~Amended ~~these~~and ~~costs~~Restated toCertificate ~~interest~~of ~~expense~~Incorporation ~~over~~to increase the ~~term~~number of ~~the~~authorized ~~related~~shares ~~debt~~of ~~agreement~~Common Stock ~~using~~from ~~the~~75,000,000 ~~effective~~to ~~yield amortization method~~150,000,000. ~~Unamortized~~ ~~debt~~The ~~issuance~~amendment ~~costs~~became ~~will~~effective beon ~~charged~~April to17, ~~operations~~2014 ~~when~~upon ~~indebtedness~~filing ~~under~~with the ~~related~~Delaware ~~credit~~Secretary of ~~facility is repaid prior to maturity~~State.

~~Business~~On ~~Acquisitions~~June 3, 2014, we received a notification letter from The NASDAQ OMX Group (“NASDAQ”) indicating that the bid price of our Common Stock for the last 30 consecutive business days had closed below the minimum $1.00 per share required for continued listing under NASDAQ Listing Rule 5450(a)(1). The notification letter has no effect on the listing of Common Stock at this time, which will continue to trade on the NASDAQ Global Market under the symbol “BAXS”. We have been provided a period of 180 calendar days, or until December 1, 2014, to regain compliance. The letter states that the NASDAQ staff will provide written notification that we have regained compliance if at any time before December 1, 2014, the bid price of Common Stock closes at $1.00 per share or more for a minimum of 10 consecutive business days. In the event we do not regain compliance within the 180-day grace period, we may be eligible for additional time if we meet the continued listing requirement for market value of publicly held shares and all other initial listing standards, with the exception of the bid price requirement, and provide written notice to NASDAQ of our intent to cure the deficiency by effecting a reverse stock split, if necessary. If we are able to meet these requirements, the NASDAQ staff will inform us that we have been granted an additional 180 calendar days. If we fail to regain compliance after the second 180-day grace period, our Common Stock may be subject to delisting by NASDAQ. We intend to actively monitor the bid price for Common Stock and will consider available options to resolve the deficiency and regain compliance with the NASDAQ minimum bid price requirement.

~~Business~~At ~~acquisitions~~June ~~are~~30, ~~accounted~~2014, ~~for~~our ~~using~~principal ~~the~~sources of ~~acquisition~~liquidity ~~method~~consisted of ~~accounting~~cash inand ~~accordance~~cash ~~with~~equivalents ~~Accounting~~of ~~Standards Codification, or ASC 805, “Business Combinations~~$2.~~” ASC~~3 ~~805~~million ~~requires,~~and ~~among~~accounts ~~other things~~receivable, ~~that~~net ~~assets~~of ~~acquired~~$3.8 ~~and~~million. ~~liabilities~~As ~~assumed~~of beJune ~~recognized at their fair values~~30, 2014, asour ~~determined~~liabilities inincluded ~~accordance~~the ~~with~~Credit ~~ASC~~Facility ~~820,~~advance ~~“Fair Value Measurements,” as~~ of ~~the acquisition date~~$7. ~~For~~5 ~~certain~~million ~~assets~~ and ~~liabilities,~~a ~~book~~payable ~~value~~of ~~approximates fair value~~$3. In5 ~~addition,~~million ~~ASC~~related ~~805~~to ~~establishes~~our ~~that~~settlement agreement ~~consideration~~with ~~transferred be measured at~~ the ~~closing~~U.S. ~~date of the acquisition at the then-current market price~~Government, ~~which~~payable ~~may~~over befive ~~different~~remaining ~~that the amount of consideration assumed in the pro forma financial statements~~quarters. ~~Under~~ ~~ASC~~On ~~805,~~July ~~acquisition related costs (i.e.~~1, ~~advisory~~2014, ~~legal,~~we ~~valuation~~agreed ~~and~~with ~~other professional fees) and certain acquisition-related restructuring charges impacting~~ the ~~target company are expensed in the period in which the costs are incurred~~U. ~~The~~S. ~~application of the acquisition method of accounting requires us~~ Government to ~~make~~defer ~~estimates and assumptions related to~~ the ~~estimated~~scheduled ~~fair~~payment ~~values~~ of ~~net assets acquired~~$0. ~~Significant~~7 ~~judgments~~million and are ~~used~~working ~~during this process, particularly~~ with ~~respect~~them to ~~intangible~~establish ~~assets. Generally,~~revised ~~intangible~~quarterly ~~assets~~payments ~~are~~to ~~amortized~~conclude over the ~~their~~original ~~estimated~~term ~~useful~~ending ~~lives. Goodwill~~July ~~and other indefinite-lived intangibles are not amortized~~1, ~~but are annually assessed for impairment~~2015. ~~Therefore, the purchase price allocation to intangible assets and goodwill has a significant impact on future operating results.~~

~~New Accounting Standards~~21

InThe ~~February~~Credit ~~2013,~~Facility ~~the~~terms ~~Financial~~provided ~~Accounting~~for up ~~Standards~~to ~~Board,~~two oradditional ~~the~~advances ~~FASB,~~totaling ~~issued~~$7.5 ~~guidance (ASU No~~million. ~~2013-02)~~The ~~finalizing~~availability ~~the reporting~~ of ~~amounts~~the ~~reclassified~~second ~~out~~advance of ~~accumulated~~$2.5 ~~other~~million ~~comprehensive~~was ~~income.~~dependent ~~The~~upon our ~~new~~achieving ~~standard~~$6.0 ~~requires~~million ~~either~~ in agross ~~single~~commercial ~~note~~revenue orfor ~~parenthetically on~~ the ~~face~~fourth ofquarter ~~the financial statements, the effect~~ of ~~significant~~our ~~amounts~~2013 ~~reclassified~~fiscal ~~from~~year. ~~each~~The ~~component~~availability of ~~accumulated~~the third ~~other~~advance ~~comprehensive~~of ~~income~~$5.0 ~~based~~million onwas ~~its~~dependent ~~source~~upon ~~and~~our ~~the~~achieving ~~income~~$7.0 ~~statement~~million ~~line~~in ~~items~~gross ~~affected~~commercial byrevenue for the ~~reclassification.~~first ~~The~~quarter ~~guidance~~of our is2014 ~~effective~~fiscal ~~for~~year ~~annual reporting periods~~ and ~~interim~~net ~~periods~~proceeds ~~within~~of ~~those~~at ~~years,~~least ~~beginning after December~~ $15~~, 2012~~.0 Inmillion ~~the~~from ~~first~~sales ~~quarter~~ of ~~2013,~~our weequity ~~adopted~~securities ~~the~~on ~~guidance~~or ~~and~~before ~~determined~~June ~~that~~15, ~~there~~2014. We ~~were~~did nonot ~~amounts~~achieve ~~reclassified~~the inrequirements ~~the~~to ~~period~~draw ~~that~~the ~~would~~second ~~require~~or ~~enhanced~~third ~~disclosure~~advances.

InAs ~~July~~of ~~2013~~June 30, 2014, pursuant to the ~~FASB~~Purchase Agreement ~~issued~~with ~~guidance~~Lincoln ~~(ASU~~Park Nowe had sold 3.1 ~~2013-11)~~million ~~updating~~shares ~~the~~of ~~financial~~Common ~~statement~~Stock ~~presentation~~to Lincoln Park for approximately $3.2 million, leaving approximately $3.8 million for future issuance of anstock. ~~unrecognized~~Effective ~~tax~~July ~~benefit~~11, ~~when~~2014, awe ~~net~~modified ~~loss~~the ~~carryforward~~Purchase Agreement with Lincoln Park to, ~~similar~~among ~~tax~~other ~~loss~~things, or(i) ~~tax~~increase ~~credit~~the ~~carryforward~~number ~~exists.~~of ~~The~~shares ~~guidance~~of ~~requires~~Common anStock ~~unrecognized~~that ~~tax~~we ~~benefit~~have the right to besell ~~presented~~to Lincoln Park from 100,000 shares to 125,000 shares as aoften ~~decrease~~as every business day, which amount may be further increased in aaccordance ~~deferred~~with ~~tax~~the ~~asset~~Purchase Agreement, ~~where~~(ii) aincrease ~~net~~the ~~operating~~aggregate ~~loss~~amount of Common Stock that we have the right, asubject ~~similar~~to ~~tax~~certain ~~loss~~limitations, orto adirect Lincoln ~~tax~~Park ~~credit~~to ~~carryforward~~purchase ~~exists~~over ~~and~~the ~~certain~~36-month ~~criteria~~term ~~are~~of ~~met~~the Purchase Agreement from $7.0 ~~The~~million ~~guidance~~to is$8.2 ~~effective~~million, and (iii) decrease the floor closing price that the Common Stock must trade above in order for ~~annual~~sales ~~reporting~~to ~~periods~~be ~~and~~made ~~interim~~to ~~periods~~Lincoln ~~within~~Park ~~those~~under ~~years,~~the ~~beginning~~Purchase Agreement ~~after~~from ~~December~~$1.00 ~~15,~~to ~~2013~~$0.50 ~~Based~~per onshare. ~~our~~As ~~cumulative~~of ~~net~~August ~~operating~~1, ~~losses~~2014, we dohad ~~not~~sold ~~expect~~3.9 ~~that~~million ~~adoption~~shares of ~~ASU~~Common NoStock to Lincoln Park for approximately $3.6 ~~2013-11~~million, ~~will~~leaving ~~have~~approximately ~~any~~$4.6 ~~impact~~million onfor ~~our~~future issuance of stock. Additional information regarding the Purchase Agreement can be found in Note 7, “Stockholders’ Equity,” included in the unaudited interim condensed consolidated financial statements and related footnotes included elsewhere in this Quarterly Report.

~~Item~~On 3March 11, 2014, we entered into a securities purchase agreement (the “Securities Purchase Agreement”) with certain institutional investors (the “Purchasers”) whereby we agreed to sell approximately $10.0 ~~Quantitative~~million in aggregate principal amount of subordinated convertible debentures (the “Convertible Notes”), together with warrants (the “Warrants”) to purchase 9,428,000 shares of Common Stock in a private placement transaction (the “Private Placement Transaction”). The closing of the full amount of securities in the Private Placement Transaction was subject to stockholder approval, which was attained at our 2014 annual meeting of stockholders on April 17, 2014. The Private Placement closed on April 22, 2014 (the “Private Placement Closing Date”). Additional information regarding the Private Placement Transaction, the Convertible Notes and ~~Qualitative~~the ~~Disclosures~~Warrants ~~About~~can ~~Market~~be ~~Risk~~found in Note 5, “Credit Facility, Convertible Notes and Common Stock Warrants,” included in the unaudited interim condensed consolidated financial statements and related footnotes included elsewhere in this Quarterly Report.

~~Not~~In ~~applicable~~connection with the expiration of the lease on our San Jose facility in early December 2014 and after careful consideration of all of our options, we commenced a plan in July 2014 that is designed to improve our operational performance for the future. The plan calls for us to close the San Jose facility and outsource the manufacturing of the iO-Flex, iO-Tome sterile assemblies and AxiaLIF Blade Subassembly conducted at the facility. We expect the product transfer to be completed in the fourth quarter of 2014. We expect to incur certain costs related to transfer of assets and severance costs which will primarily be recognized during the third and fourth quarters of 2014.

29Our audited financial statements for the fiscal year ended December 31, 2013, included in our 2013 Form 10-K, and our unaudited condensed financial statements were prepared on the basis that our business would continue as a going concern in accordance with U.S. GAAP. This basis of presentation assumes that we will continue in operation for the foreseeable future and will be able to realize our assets and discharge our liabilities and commitments in the normal course of business. However, our independent registered public accounting firm has indicated in its audit report on our fiscal 2013 financial statements that our recurring losses and negative cash flows from operations raise substantial doubt about our ability to continue as a going concern.

~~Item~~With 4the cash infusions generated from sales of our common stock pursuant to the Purchase Agreement with Lincoln Park as discussed above, we believe that our current cash and cash equivalents, together with cash received from sales of our products, will be sufficient to meet our cash needs through the third quarter of 2014. ~~Controls~~ Our ability to sell common stock under the Lincoln Park Purchase Agreement is contingent upon our shares trading at a price per share above the $0.50 floor price of the Lincoln Park Purchase Agreement and, ~~Procedures~~as a result, there can be no guarantee that we will be able to make additional sales under that Purchase Agreement in the future. On August 13, 2014, the closing price of our common stock on the NASDAQ Global Market was approximately $0.40 per share. If the price of our common stock continues to trade below $0.50 per share and we are unable to generate cash from additional sales of common stock under the Lincoln Park Purchase Agreement, we believe we will have sufficient cash to fund our operations until mid-September 2014. Our ability to fund our cash and future liquidity requirements will be dependent on our ability to raise additional capital, increase revenues, maintain our relationships with certain vendors, successfully avoid an event of default under our debt agreements, maintain tight controls over spending and attain our other business objectives on a timely basis.

~~Evaluation~~To meet our capital needs, we are actively pursuing multiple alternatives to raise additional funds, including additional debt or equity financings and other sources of funding. ~~Disclosure~~We ~~Controls~~have received a proposal setting forth the primary terms of a senior secured term loan facility for up to $15.0 million. The proposal does not represent a binding commitment on the part of the lender, and ~~Procedures~~any closing of the term loan facility will be subject to the terms and conditions delineated in the proposal, including completion of due diligence and preparation and negotiation of final documentation. Such due diligence review has not been completed and we can give no assurance that any term loan facility will close. There can be no assurance that we will be able to complete any such transaction on acceptable terms, in a timely manner or otherwise. If we are unable to obtain the necessary capital from cash flows from operations and the infusion of additional capital to fund our operations in the near term, we will need to implement further expense reduction measures, including workforce reductions, the consolidation of operations and/or the delay or cancellation of certain operational programs, pursue a plan to license or sell our assets, or to cease operations.

~~Our~~Recent 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.Developments

~~Changes~~Additional information regarding subsequent events can be found in ~~Internal~~Note ~~Control~~11, ~~over~~“Subsequent ~~Financial~~Events,” ~~Reporting~~included in the unaudited interim condensed consolidated financial statements and related footnotes included elsewhere in this Quarterly Report.

~~There has been no change in our internal control over financial reporting (as such term is defined in Rules 13a~~Off-~~15(f)~~Balance ~~and~~Sheet ~~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.~~Arrangements

~~PART~~As ~~II.~~of ~~OTHER~~June ~~INFORMATION~~30, 2014, we did not have any off-balance sheet arrangements that are material or reasonably likely to be material to our consolidated financial position or results of operations.

~~Item 1. Legal Proceedings.~~22

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. ofQuantitative ~~our Annual Report on Form 10-K for the year ended December 31, 2012~~ and ~~our~~Qualitative ~~Quarterly~~Disclosures ~~Reports~~about onMarket ~~Form 10-Q for the quarters ended March 31, 2013 and June 30, 2013~~Risk.

OnNot ~~January 24, 2012, we received notice that a putative class action lawsuit had been filed in the U~~applicable.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.

30Item 4. Controls and Procedures.

~~Item~~Evaluation ~~1A. Risk~~of ~~Factors.~~Disclosure Controls and Procedures

WeOur ~~discuss~~management, ~~various~~with ~~risks~~the ~~that~~participation of ~~may~~our ~~materially~~principal ~~affect~~executive ~~our~~officer ~~business~~and inprincipal financial officer, evaluated the effectiveness of our ~~Annual~~disclosure ~~Report~~controls onand procedures ~~Form~~(as 10such term is defined in Rules 13a-K15(e) ~~for~~and 15d-15(e) under the ~~year~~Exchange ~~ended~~Act) ~~December~~as 31of June 30, ~~2012~~2014. We maintain disclosure controls and ~~our~~procedures ~~Quarterly~~that ~~Reports~~are ondesigned ~~Form~~to ~~10-Q~~provide ~~for~~reasonable assurance that information required to be disclosed in our reports filed or submitted under the ~~quarters~~Exchange ~~ended~~Act ~~March~~is 31recorded, ~~2013~~processed, summarized and ~~June~~reported ~~30,~~within ~~2013. There~~the ~~have~~time ~~been~~periods specified noin ~~material~~the ~~changes~~SEC’s torules and forms and that such ~~risks~~information is accumulated and communicated to our management, ~~except~~including our ~~(1)~~principal ~~that~~executive ~~the~~officer ~~risk~~and ~~factor~~principal ~~relating~~financial officer, as appropriate, to ~~the~~allow ~~acquisition~~for oftimely ~~Baxano~~decisions ~~being~~regarding ~~delayed~~required disclosure. orOur ~~not~~management ~~consummated~~recognizes that any controls and procedures, no ~~longer~~matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies ~~because~~its judgment in evaluating the ~~acquisition~~cost-benefit relationship of ~~Baxano~~possible ~~closed~~controls and procedures. Based on ~~May~~the 31evaluation of our disclosure controls and procedures as of June 30, ~~2013~~2014, our principal executive officer and ~~(2)~~principal financial officer concluded that, as ~~set~~of ~~forth~~such ~~below~~date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes ~~Our~~in ~~indebtedness~~Internal ~~could~~Control ~~negatively~~over ~~impact our financial health.~~Financial Reporting

There Inhas ~~connection~~been ~~with~~no ~~the~~change ~~Merger,~~in weour ~~assumed~~internal control ~~and~~over ~~became~~financial ~~the~~reporting ~~borrower~~(as ~~under~~such ~~Baxano’s~~term ~~outstanding~~is ~~credit~~defined ~~facility,~~in Rules 13a-15(f) and we15d-15(f) ~~may~~under ~~incur~~the ~~additional~~Exchange ~~indebtedness~~Act) in during the ~~future.~~fiscal ~~Our~~quarter ~~indebtedness~~ended ~~could~~June ~~have~~30, ~~important~~2014 ~~consequences~~that has materially affected, or is reasonably likely to usmaterially affect, ~~including~~our ~~the~~internal control ~~following:~~over financial reporting.

·PART itII. ~~may~~OTHER 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.INFORMATION

~~One~~Item ~~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~~1. If weLegal 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 allProceedings. ~~As a result, we could default on those obligations.~~

We Inare ~~addition,~~subject ~~the~~to ~~Amended~~legal ~~Loan~~proceedings ~~Agreement contains financial~~ and claims ~~other~~in ~~restrictive~~the ~~covenants~~ordinary ~~that~~course ~~limit~~of our ~~ability~~business. toThese ~~engage~~claims inpotentially ~~activities~~cover ~~that~~a ~~may~~variety beof inallegations spanning our ~~long-term~~entire ~~best interests~~business. Information ~~Our~~regarding ~~failure~~the tomaterial ~~comply~~pending ~~with~~legal ~~these~~proceedings ~~covenants~~to ~~could~~which ~~result~~we inare ana ~~event~~party ofor ~~default~~to which, ifany ~~not~~of ~~cured~~our orproperty ~~waived,~~is ~~could~~subject may ~~result~~be found in ~~the~~Part ~~acceleration~~I, ofItem ~~all~~3 of our ~~indebtedness,~~2013 ~~which~~Form ~~would~~10-K. ~~adversely~~There ~~affect~~have ~~our~~been ~~financial~~no ~~health~~material ~~and~~changes ~~could~~to ~~prevent~~such ~~us from fulfilling our obligations~~proceedings.

~~Item 6. Exhibits~~23

~~The~~Item ~~exhibits~~1A. ~~filed~~Risk ~~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~~Factors.

An investment in our securities involves a high degree of risk. In addition to the other information included in this Quarterly report on Form 10-Q, you are urged to carefully consider the risks described in Item 1A under the caption “Risk Factors” in our most recent Annual Report on Form 10-K for the year ended December 31, 2013 (the “2013 Form 10-K”) and in Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 for a discussion of the various risks that may materially affect our business. There have been no material changes to the risks set forth in Item 1A of our 2013 Form 10-K, except as set forth in our Form 10-Q for the quarter ended March 31, 2014 and as set forth below. The risks and uncertainties not presently known to us or that we currently deem immaterial may also materially harm our business, operating results and financial condition and could result in a complete loss of your investment.

RISKS ~~SIGNATURES~~RELATED TO LIQUIDITY AND CAPITAL RESOURCES

~~Pursuant~~Although toour ~~the~~financial ~~requirements~~statements have ofbeen ~~the~~prepared ~~Securities~~on ~~Exchange~~a ~~Act~~going ofconcern ~~1934~~basis, ~~the~~we ~~registrant~~must ~~has~~raise ~~duly~~additional ~~caused~~capital ~~this~~in ~~report~~near term to befund ~~signed~~our onoperations ~~its~~in ~~behalf~~order byto ~~the~~continue as ~~undersigned~~a ~~thereunto~~going ~~duly authorized~~concern.

		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

Our independent registered public accounting firm for the fiscal year ended December 31, 2013, has included an explanatory paragraph in their opinion that accompanies our audited consolidated financial statements as of and for the year ended December 31, 2013, indicating that our recurring losses and negative cash flows from operations raise substantial doubt about our ability to continue as a going concern. If we are unable to improve our liquidity position we may not be able to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result if we are unable to continue as a going concern and, therefore, be required to realize our assets and discharge our liabilities other than in the normal course of business which could cause investors to suffer the loss of all or a substantial portion of their investment. Our existing liquidity is not sufficient to fund operations, anticipated capital expenditures, working capital and other financing requirements. We must obtain additional financing in the form of debt or equity in order to continue operations.

32With the cash infusions generated from sales of our common stock pursuant to the Purchase Agreement with Lincoln Park as discussed above, we believe that our current cash and cash equivalents, together with cash received from sales of our products, will be sufficient only to meet our cash needs through the third quarter of 2014. Further, our ability to sell common stock under the Lincoln Park Purchase Agreement is contingent upon our shares trading at a price per share above the $0.50 floor price of the Lincoln Park Purchase Agreement and, as a result, there can be no guarantee that we will be able to make additional sales under that Purchase Agreement in the future. On August 13, 2014, the closing price of our common stock on the NASDAQ Global Market was approximately $0.40 per share. If the price of our common stock continues to trade below $0.50 per share and we are unable to generate cash from additional sales of common stock under the Lincoln Park Purchase Agreement, we will have sufficient cash to fund our operations only until mid-September 2014. Our ability to fund our cash and future liquidity requirements will be dependent on our ability to raise additional capital, increase revenues, maintain our relationships with certain vendors, successfully avoid an event of default under our debt agreements, maintain tight controls over spending and attain our other business objectives on a timely basis. To meet our capital needs, we are actively pursuing multiple alternatives to raise additional funds, including additional debt or equity financings and other sources of funding. There can be no assurance that we will be able to complete any such transaction on acceptable terms, in a timely manner or otherwise. If we are unable to obtain the necessary capital from cash flows from operations and the infusion of additional capital to fund our operations in the near term, we will need to implement further expense reduction measures, including workforce reductions, the consolidation of operations and/or the delay or cancellation of certain operational programs, pursue a plan to license or sell our assets, or to cease operations.

~~Baxano~~The ~~Surgical,~~change ~~Inc~~in value of our derivative liabilities could have a material effect on our financial results.

~~Exhibit~~Included ~~Index~~on our balance sheet at June 30, 2014 are common stock warrants and derivative liabilities. At each reporting period, we are required to determine the fair value of such common stock warrants and derivatives and record the fair value adjustments as non-cash unrealized gains or losses. The share price of our common stock represents the primary underlying variable that impacts the value of the common stock warrants and derivative instruments. Due to the volatile nature of our share price, we expect that we will recognize non-cash gains or losses on our common stock warrants and derivative instruments each reporting period and that the amount of such gains or losses could be material.

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

33Risks Relating to the Private Placement Transaction

Our stockholders are subject to significant dilution pursuant to the anti-dilution provisions of our convertible notes and certain of outstanding warrants, which could result in a decrease in our stock price.

The issuance of the shares reserved for future issuance upon the exercise of our outstanding warrants and conversion of our convertible notes, as well as future sales of substantial amounts of such shares to the public, would have a significantly dilutive effect on our existing stockholders and could result in a decrease in our stock price. As of July 30, 2014, we had approximately 21,520,982 shares of our common stock reserved or designated for future issuance upon the exercise of outstanding warrants and conversion of outstanding convertible debt. Included in the shares of common stock designated for future issuance are 882,353 shares that are subject to warrant contracts issued in December 2013 related to our Credit Facility that are currently exercisable at $1.02 per share. The Convertible Notes issued in April 2014, will be convertible into shares of our Common Stock at an initial conversion price of $1.06 per share, for an aggregate of approximately 9,428,000 shares of our Common Stock. In connection with the purchase of the Convertible Notes, we also issued five-year Convertible Warrants to purchase an aggregate of approximately 9,428,000 shares of Common Stock, which were exercisable immediately upon issuance at an exercise price of $1.19 per share. Subject to certain conditions, we may also issue shares of common stock at a price equal to 90% of a calculated market price per share in lieu of cash interest payments on the Convertible Notes.

For one year after the date of issuance of these warrants and convertible notes, if we sell or issue (or are deemed to sell or issue) shares of our common stock or rights, warrants, options or other convertible securities for shares of our common stock at a price below the then current exercise price or conversion price per share for such securities, the applicable exercise and conversion prices of these securities is reset to the lowest price per share of the newly-issued securities. Any such adjustments to the exercise price of the warrants and convertible notes will have a dilutive effect on our existing stockholders and could result in a decrease in our stock price. Further, if the price of the convertible notes is adjusted, this would lead to the issuance of additional shares of our common stock upon conversion. If and when issued, these shares of common stock would further substantially dilute the ownership percentage and voting power of our current stockholders.

In addition, we filed a registration statement with the SEC to register the resale of all of the shares of common stock issuable upon conversion of the convertible notes and a portion of the shares of common stock issuable upon exercise of the Convertible Warrants The registration statement facilitates the resale of such shares of common stock into the public market, and any such resale would increase the number of shares of our common stock available for public trading. Sales of a substantial number of shares of our common stock in the public market, or the perception that such sales may occur, could have the effect of depressing the market price for our common stock and make it more difficult for you to sell shares of our common stock at times and prices that you feel are appropriate or for us to sell equity securities in the future at a time and price that we might otherwise wish to effect sales.

Risks Related to Our Business and Operations

We may not be able to comply with all applicable listing requirements or standards of the NASDAQ Global Market and NASDAQ could delist our common stock.

Our common stock is listed on the NASDAQ Global Market. In order to maintain that listing, we must satisfy minimum financial and other continued listing requirements and standards. There can be no assurances that we will be able to comply with applicable listing standards. In the event that our common stock is not eligible for quotation on another market or exchange, trading of our common stock could be conducted in the over-the-counter market or on an electronic bulletin board established for unlisted securities such as the Pink Sheets or the OTC Bulletin Board. In such event, it could become more difficult to dispose of, or obtain accurate price quotations for, our common stock, and there would likely also be a reduction in our coverage by security analysts and the news media, which could cause the price of our common stock to decline further. Also, it may be difficult for us to raise additional capital if we are not listed on a major exchange.

On June 3, 2014, we received a notification letter from the NASDAQ indicating that the bid price of our Common Stock for the last 30 consecutive business days had closed below the minimum $1.00 per share required for continued listing under NASDAQ Listing Rule 5450(a)(1). The notification letter has no effect on the listing of Common Stock at this time, which will continue to trade on the NASDAQ Global Market under the symbol “BAXS”. We have been provided a period of 180 calendar days, or until December 1, 2014, to regain compliance. The letter states that the NASDAQ staff will provide written notification that we have regained compliance if at any time before December 1, 2014, the bid price of Common Stock closes at $1.00 per share or more for a minimum of 10 consecutive business days. In the event we do not regain compliance within the 180-day grace period, we may be eligible for additional time if we meet the continued listing requirement for market value of publicly held shares and all other initial listing standards, with the exception of the bid price requirement, and provide written notice to NASDAQ of our intent to cure the deficiency by effecting a reverse stock split, if necessary. If we are able to meet these requirements, the NASDAQ staff will inform us that we have been granted an additional 180 calendar days. If we fail to regain compliance after the second 180-day grace period, our Common Stock may be subject to delisting by NASDAQ. We intend to actively monitor the bid price for Common Stock and will consider available options to resolve the deficiency and regain compliance with the NASDAQ minimum bid price requirement.

On August 13, 2014, the closing price of our common stock on the NASDAQ Global Market was approximately $0.40 per share, which remains below the minimum $1.00 per share required for continued listing. If we fail to continue to meet all applicable continued listing requirements for The NASDAQ Global Market in the future and NASDAQ determines to delist our Common Stock, the delisting could adversely affect the market liquidity of our common stock, our ability to obtain financing to repay debt and fund our operations.

We have a significant amount of goodwill and other intangible assets on our balance sheet. If our goodwill or other intangible assets become impaired, we may be required to record a significant charge to earnings and reduce our stockholders' equity.

As of June 30, 2014, approximately 55% of our total consolidated assets reflected on the consolidated balance sheet included in this report consist of goodwill or other intangible assets. Under generally accepted accounting principles, goodwill and intangible assets must generally be tested for impairment on an annual basis or more frequently whenever events or circumstances indicate that their carrying value may not be recoverable. We performed our annual impairment analysis during the fourth quarter of 2013 and determined that goodwill and intangible assets were not impaired. If our intangible assets are determined to be impaired in the future, we may be required to record significant, non-cash charges to earnings and a corresponding reduction in our net asset value in the period in which the impairment is determined. The assessment of whether goodwill is impaired is sensitive to our stock price. Should our stock price continue to decline whereby the fair value of our common stock is below our book value of equity, we may have to consider an impairment charge related to the carrying value of goodwill and other intangible assets during a future quarter.

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

On March 11, 2014, we entered into the Securities Purchase Agreement, providing for the issuance, in a private placement, of $9,993,680 in aggregate principal amount of the Convertible Notes, together with the Warrants, to the Purchasers. The closing of the full amount of securities in the Private Placement Transaction was subject to stockholder approval of the Private Placement Transaction, which was attained at our 2014 annual meeting of stockholders on April 17, 2014. The Private Placement Transaction closed on April 22, 2014.

The three-year Convertible Notes are convertible into shares of our common stock at an initial conversion price of $1.06 per share, for an aggregate of approximately 9,428,000 shares of our common stock. The Convertible Notes bear interest at a rate of 6% per annum, payable monthly in cash or, at our discretion provided certain conditions are met each payment period, in shares of our common stock at a price equal to 90% of a calculated market price per share. In connection with the purchase of the Convertible Notes, the Purchasers received five-year Warrants to purchase an aggregate of approximately 9,428,000 shares of our common stock, which were exercisable immediately upon issuance at an exercise price of $1.19 per share. We could receive up to a maximum of $11,219,320 in proceeds from the cash exercise of all Warrants held by the Purchasers. As of the date hereof, none of the Warrants have been exercised. We cannot precisely estimate the allocation of the net proceeds from any exercise of the Warrants for cash. Accordingly, in the event the Warrants are exercised for cash, our management will have broad discretion in the application of the net proceeds of such exercises.

For one year after the date of issuance, the conversion price of the Convertible Notes and the exercise price of the Warrants are subject to adjustment upon the issuance of any common stock or securities convertible into shares of our common stock below the then-existing conversion or exercise price, as applicable, subject to certain exceptions. In the event of certain change in control transactions, the holders of the Convertible Notes and Warrants will be entitled to (i) receive upon conversion or exercise the same kind and amount of securities, cash or property which the holders would have received had they converted or exercised their Convertible Notes or Warrants, as applicable, immediately prior to such transaction and (ii) have their securities assumed by the surviving entity. In addition, if such a transaction involves cash consideration, is a going private transaction, or involves securities not listed on the New York Stock Exchange or NASDAQ, the holders of the Warrants will be entitled to have their Warrants repurchased at a calculated Black-Scholes value of such Warrants at any time within 60 days after the transaction. Subject to limited exceptions, we will not permit the conversion of the Convertible Notes or exercise of the Warrants of any Purchaser, if after such conversion or exercise such Purchaser would beneficially own more than 4.99% of our outstanding shares of common stock.

The foregoing sale of securities was made in reliance upon the exemption for registration provided by Section 4(a)(2) of the Securities Act (and/or Regulation D promulgated thereunder) for transactions by an issuer not involving a public offering. All of the foregoing securities are deemed restricted securities for the purposes of the Securities Act.

Item 5. Other Information.

Not applicable.

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.

SIGNATURES

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

		Baxano Surgical, Inc.

Date: August 14, 2014		By: /s/ Ken Reali

		Ken Reali
		President and Chief Executive Officer
		(Principal Executive Officer)

Date: August 14, 2014		By: /s/ Timothy M. Shannon

		Timothy M. Shannon
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

Baxano Surgical, Inc.

Exhibit Index

Exhibit
No.		Description

3.1		Amended and Restated Certificate of Incorporation as amended on April 17, 2014 (incorporated by reference to Exhibit 3.1 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2014).

4.1		Specimen common stock certificate (incorporated by reference to Exhibit 4.1 to our Registration Statement on Form S-3 (File No. 333-189617) filed with the Commission on June 26, 2013).

4.2		Form of Securities Purchase Agreement, dated March 11, 2014, by and among Baxano Surgical, Inc. and the purchasers (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the Commission on March 14, 2014).

4.3		Form of Subordinated Convertible Debenture (included as an exhibit to Exhibit 4.2).

4.4		Form of Warrant to Purchase Common Stock (included as an exhibit to Exhibit 4.2).

4.5		Form of Registration Rights Agreement, dated March 11, 2014, by and among Baxano Surgical, Inc. and the purchasers (included as an exhibit to Exhibit 4.2).

10.1		Modification Agreement, dated July 11, 2014, by and between Baxano Surgical, Inc. and Lincoln Park Capital Fund, LLC. (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the Commission on July 14, 2014).

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.

+	Filed herewith.

++	Furnished herewith.

Filing Compare · BAXANO SURGICAL, INC.