Item 1. Condensed Consolidated
Financial Statements.
Baxano Surgical, Inc.
Condensed Consolidated Statements of
Operations and Comprehensive Loss
(in thousands, except per share amounts)
(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
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
Baxano Surgical, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share amounts)
(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
|
|
The accompanying notes are an integral part
of these condensed consolidated financial statements.
Baxano Surgical, Inc.
Condensed Consolidated Statements of
Cash Flows
(in thousands)
(Unaudited)
|
|
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 accompanying notes are an integral part
of these condensed consolidated financial statements.
Baxano Surgical, Inc.
Notes to Condensed Consolidated
Financial Statements
(Unaudited)
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 spine affecting the lumbar region. We are passionately committed to delivering innovative
technologies to our surgeon customers that benefit their patients. On May 31, 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 currently market the AxiaLIF® family
of products for single and two level lower lumbar fusion, the VEO® lateral access and interbody fusion system, iO-Flex, a proprietary
set of flexible instruments used by surgeons during spinal decompression procedures, iO-Tome instrument, which rapidly and precisely
removes bone, specifically the facet joints, which is commonly performed in spinal fusion procedures and Avance™, an MIS
pedicle screw system used in lumbar spinal fusion procedures. 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 currently
sell our products through a direct sales force, independent sales agents and distributors.
2.
|
Summary of Significant Accounting Policies
|
Basis of Presentation
We 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 our opinion, the accompanying unaudited
interim condensed consolidated financial statements have been prepared on the same basis as our annual audited consolidated financial
statements and contain all material adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion
of Company’s management necessary to present fairly our financial condition, 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 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 common stock. Actual results could differ from those estimates. The
condensed consolidated balance sheet that we have presented as of December 31, 2013 has been derived from the audited consolidated
financial statements on that date, but does not include all of the information and footnotes required by U.S. GAAP for complete
financial statements.
Our
financial statements 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.
At 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.
Significant Accounting Policies
A 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.”
Inventory
The following table presents the components
of inventory (in thousands):
|
|
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
|
|
Segment and Geographic Reporting
We apply the relevant guidance which establishes
standards for the reporting by business enterprises of information about operating segments, products and services, geographic
areas, and major customers. We have determined that we did not have any separately reportable segments. All our products provide
surgical treatment for the lumbar region of the spine. Long-lived assets are primarily located in the United States.
The following table summarizes revenue
by geographic area (in thousands):
|
|
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
|
|
Net Loss per Common Share
We calculate basic earnings per share based
upon the weighted average number of common shares outstanding. We calculate diluted earnings per share based upon the weighted
average number of common shares outstanding plus the dilutive effect of common share equivalents calculated using the 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:
|
|
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
|
|
|
|
-
|
|
Recently Issued Accounting Standards
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.
On May 31, 2013, we, through our wholly-owned
subsidiary Merger Sub, consummated our acquisition of Baxano (the “Merger”) pursuant to the Merger Agreement. Additional
information regarding the Merger can be found in Note 3, “Merger and Financing Transaction,” of the footnotes to our
annual audited consolidated financial statements included in our 2013 Form 10-K.
The 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 six months
ended June 30, 2013 presented below reflect our historical data and the historical data of the Baxano business adjusted for amortization
of intangibles, interest costs associated with Baxano preferred stock and convertible debt, and elimination of intercompany 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, 2013, or that we may achieve in the future.
The following table presents the pro forma
results (in thousands, except per share data):
|
|
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
|
)
|
4.
|
Goodwill and Intangible Assets
|
The goodwill and intangible assets amounts
as of June 30, 2014 and December 31, 2013, were recorded as part of the purchase price allocation for the Merger. The carrying
amount of goodwill 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.
Intangible assets as of June 30, 2014 consisted
of the following (in thousands):
|
|
|
|
|
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 and trademarks are tested annually
for impairment and between annual tests if an event occurs or circumstances change that would more likely than not reduce the
fair value of 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.
5.
|
Credit Facility, Convertible Notes and Common Stock Warrants
|
Credit Facility with Hercules Technology
Growth Capital, Inc.
On December 3, 2013 (the “Credit
Facility Closing Date”), we obtained a credit facility of up to $15.0 million (the “Credit Facility”) from Hercules
Technology Growth Capital, Inc., a Maryland corporation (“Hercules”). The Credit Facility is governed by a loan and
security agreement, 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 components of the Credit Facility (in thousands):
|
|
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 Credit Facility has a term of 39 months
and accrues interest at a rate equal to the prime rate plus 7.75% (with the prime rate subject to a floor of 4.75%), 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.
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.
The 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. 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.
The estimated fair value of the debt (categorized
as a Level 2 liability for fair value measurement purposes) is determined using current market factors and our ability to
obtain debt at comparable terms to those that are currently in place. We believe the estimated fair value at June 30, 2014 and
December 31, 2013 approximates the carrying amount.
In 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.
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.
Convertible Notes
On March 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 million in aggregate principal amount of subordinated convertible debentures (the
“Convertible Notes”), together with warrants (the “Convertible Warrants”) to purchase 9,428,000 shares
of our 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”).
Convertible notes as of June 30, 2014 consisted
of the following (in thousands):
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
|
|
The three-year Convertible Notes will be
convertible into shares of Common Stock at an initial conversion price of $1.06 per share, for an aggregate of approximately 9,428,000
shares of 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 (“Equity Conditions”) are met each payment period, in shares of 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 selling stockholders
received 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.
The Convertible Notes are subordinated
to the 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 Purchasers until the Credit Facility is no longer outstanding). 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. The
Convertible Notes 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.
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.
We accounted for the Convertible Notes
as an instrument that has the characteristics of a debt host contract containing several embedded derivative features that would
require bifurcation and separate accounting as a derivative instrument pursuant to the provisions of ASC 815. We elected not to
use the fair value option to account for the Convertible Notes and embedded derivatives as one hybrid instrument. We accounted
for the derivative and warrants as liabilities due to certain adjustment provisions, which requires that they be recorded at fair
value. The derivative and warrant liabilities are subject to revaluation at each balance sheet date and any 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 which time
the liabilities will be reclassified to equity. The debt discount associated with the initial value of the derivatives and warrants
will be amortized to interest expense over the term of the Convertible Notes.
The estimated fair value of the Convertible
Notes (categorized as a Level 2 liability for fair value measurement purposes) is determined using current market factors
and our ability to obtain debt at comparable terms to those that are currently in place. We believe the estimated fair value at
June 30, 2014 approximates the carrying amount. The valuation assumptions are based on a the Convertible Debenture face amount
of $10.0 million, cash coupon rate of 6%, time to maturity of 2.8 years, and a yield bond rate of 30%.
Warrants and Derivative Liabilities
Our derivative liability and common stock
warrant liabilities are considered Level 3 instruments under ASC 820,
Fair Value Measurements
. The following table sets
forth a summary of the changes in the fair value of our financial instruments (in thousands):
|
|
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
|
|
We valued the warrant liability associated
with the Credit Facility using the Black-Scholes-Merton option pricing model. Following is a summary of the key assumptions used
to calculate the fair value of the Credit Facility Warrant:
|
|
|
|
|
|
|
|
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
|
|
We used a Monte Carlo simulation analysis to value the warrant liability associated with the Convertible
Notes by modeling scenarios associated with the possible “strike price” reset provision. For the embedded derivative
related to the conversion feature, as there is a conversion price reset feature, we recognized that the possible values for the
Convertible Notes were path-dependent, and thus also chose to use a Monte Carlo simulation analysis to value this derivative.
Following is a summary of the key assumptions
used to value the warrant liability associated with the Convertible Warrants:
|
|
|
|
|
Issuance
|
|
|
|
June 30,
|
|
|
April 22,
|
|
|
|
2014
|
|
|
2014
|
|
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
|
|
Following is a summary of the key assumptions
used to value the embedded derivatives associated with the Convertible Notes:
|
|
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
|
%
|
|
6.
|
Commitments
and Contingencies
|
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.
Information regarding the material pending legal proceedings to which we are a party or to which any of our property is subject
and other material legal proceedings may be found in Part I, Item 3 of our 2013 Form 10-K. There have been no material changes
to such proceedings.
Our Certificate of Incorporation, which
was adopted in connection with our initial public offering, authorized up to 80,000,000 shares of capital stock, of which 75,000,000
shares were designated as common stock, $0.0001 par value per share (“Common Stock”) and 5,000,000 shares were designated
as preferred stock, $0.0001 par value per share. On April 17, 2014 the Certificate of Incorporation was amended to authorize up
to 155,000,000 shares of capital stock, of which 150,000,000 shares were designated Common Stock and 5,000,000 shares were designated
as preferred stock. At June 30, 2014 and December 31, 2013, there were 48,659,826 and 46,156,921 shares of Common Stock issued
and outstanding, respectively, and there were no shares of preferred stock issued and outstanding.
On 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.
Stock Purchase Agreement
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.
As 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
Stock Purchase Agreement Modification
Effective July 11, 2014, we modified our
Purchase Agreement with Lincoln Park to, among other things, (i) increase the number of shares of Common Stock that we have the
right to sell to Lincoln Park from 100,000 shares to 125,000 shares as often as every business day, which amount may be further
increased in accordance with the Purchase Agreement, (ii) increase the aggregate amount of Common Stock that we have the right,
subject to certain limitations, to direct Lincoln Park to purchase over the 36-month term of the Purchase Agreement from $7.0 million
to $8.2 million, and (iii) decrease the floor closing price that the Common Stock must trade above in order for sales to be made
to Lincoln Park under the Purchase Agreement from $1.00 to $0.50 per share. Following the modification, the number of shares potentially
issuable by us on a pro rata basis as and when Lincoln Park purchases Common Stock under the Purchase Agreement increased to 657,895
shares.
Warrant Agreement
In connection with the Credit Facility,
we issued to Hercules the Warrant. The aggregate number of shares issuable upon exercise is limited to 1,176,471. The Warrant
is exercisable until the fifth anniversary of the Credit Facility Closing Date and will be exercised automatically on a net issuance
basis if not exercised prior to the expiration date. See further details under “Common Stock Warrant Liability for Hercules”
in Note 5.
8.
|
Stock Incentive Plans and Stock-Based Compensation
|
We have an employee stock purchase plan
and other long-term incentive plans, which provide for the grant of awards in the form of incentive stock options, nonqualified
stock options and restricted stock units (RSUs), to eligible employees, directors, and consultants. We established the Baxano Surgical,
Inc. 2007 Stock Incentive Plan (as amended, the “2007 Plan”) in October 2007. Under the 2007 Plan, we may grant options
to employees, directors or service providers and contractors for a maximum of 7,600,000 shares of Common Stock. Share-based compensation
expense was $0.3 million for the three months ended June 30, 2014 and 2013 and $0.7 million and $0.6 million for the six months
ended June 30, 2014 and 2013, respectively.
Stock Option Program
The following table is a summary of stock
option activity for the six months ended June 30, 2014:
|
|
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
|
|
The aggregate intrinsic value in the table
above represents the difference between the $0.57 closing price of Common Stock as reported by The NASDAQ Global Market on June
30, 2014 and the weighted average exercise price, multiplied by the number of options outstanding or exercisable. We do not record
the aggregate intrinsic value for financial accounting purposes and the value changes based upon changes in the fair value of Common
Stock.
The following weighted-average assumptions
were used to estimate the fair value of stock options granted during the six months ended June 30, 2014:
Risk-free interest rate
|
|
|
1.9
|
%
|
Expected term
|
|
|
6.0
|
|
Expected volatility
|
|
|
63.4
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
Restricted Stock Unit Retention Program
On January 2, 2014, the Compensation Committee
of 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:
|
·
|
75% is time-based (25% vests on first
anniversary of grant date, 37.5% vests on second and third anniversaries of grant date);
|
|
·
|
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).
|
The following table is a summary of restricted
stock activity for the six months ended June 30, 2014:
Outstanding as of December 31, 2013
|
|
|
-
|
|
Granted
|
|
|
3,055,997
|
|
Forfeited
|
|
|
(865,778
|
)
|
Outstanding as of June 30, 2014
|
|
|
2,190,219
|
|
No provisions for federal or state income
taxes have been recorded as we have incurred net operating losses since inception.
10.
|
Other Condensed Consolidated Balance Sheet Information
|
Information regarding other accounts on our condensed consolidated
balance sheets is as follows (in thousands):
Property and equipment, net
|
|
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
|
|
Accrued expenses
|
|
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
|
|
In 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. There were no costs associated with
this plan that were required to be recognized in the consolidated condensed financial statement for the period ended June 30, 2014.
Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations.
Cautionary Note Regarding Forward-Looking Statements
The following discussion of our
financial condition and results of 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, this report contains “forward-looking statements” within the meaning of Section
27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934,
as amended, or the Exchange Act, that concern matters that involve risks and uncertainties that could cause actual results to
differ materially from those projected in the forward-looking statements. These forward-looking statements are intended to
qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. All
statements other than statements of historical fact contained in this report, including statements regarding future events,
our future financial performance, our future business strategy and the plans and objectives of management for future
operations, are forward-looking statements. We have attempted to identify forward-looking statements by terminology including
“anticipates,” “believes,” “can,” “continue,” “could,”
“estimates,” “expects,” “intends,” “may,” “plans,”
“potential,” “predicts,” “should” or “will” or the negative of these terms or
other comparable terminology. Although we do not make forward-looking statements unless we believe we have a reasonable basis
for doing so, we cannot guarantee their accuracy. Such forward-looking statements are subject to risks, uncertainties and
other factors that could cause actual results and the timing of certain events to differ materially from future results
expressed or implied by such forward-looking statements.
These risks include, without limitation, the pace of adoption
of the Company’s product technology by spine surgeons, limited clinical data about the efficacy of these products, the
outcome of coverage and reimbursement decisions by the government and third party payors, the success of continuing product
development efforts, the effect on the business of existing and new regulatory requirements, cost pressures in the healthcare
industry, competitive pressures from substitute products and larger companies, the historical lack of profitability, the
dependence on key employees, regulatory approval and market acceptance for new products, compliance with complex and evolving
healthcare laws and regulations, the Company’s ability to raise additional capital, the ability to comply with the
settlement agreement and Corporate Integrity Agreement (“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 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.
Business Overview
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 spine affecting the lumbar region. We are passionately committed to delivering innovative
technologies to our surgeon customers that benefit their patients. On May 31, 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 currently market the AxiaLIF® family
of products for single and two level lower lumbar fusion, the VEO® lateral access and interbody fusion system, iO-Flex, a proprietary
set of flexible instruments used by surgeons during spinal decompression procedures, iO-Tome instrument, which rapidly and precisely
removes bone, specifically the facet joints, which is commonly performed in spinal fusion procedures and Avance™, 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.
Our family of AxiaLIF 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.
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.
Since inception, we have been unprofitable.
As of June 30, 2014, we had an accumulated deficit of $185.9 million. For the three months ended June 30, 2014, our revenues were
$4.7 million and our net loss was $5.9 million. For the six months ended June 30, 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.
At 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.
2014 Updates
Avance
™
MIS Pedicle
Screw System
On April 10, 2014, we announced that we
had received U.S. Food and Drug Administration 510(k) clearance (k133743) of our Avance™ MIS Pedicle Screw System, which
may be used as an adjunct to fusion in numerous degenerative and complex spinal pathologies. The design of Avance provides a quick
and easy-to-use, percutaneous pedicle screw system that addresses single, complex and multi-level spinal pathologies with minimal
tissue disruption and trauma. The Avance system will be in limited market release in the second and third quarter of 2014 and
is planned for full launch in the fourth quarter of 2014.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial
condition and results of operations is based upon our condensed 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 assumptions that affect the reported amounts of 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 common stock. We base our estimates on historical experience and various other assumptions that we believe to
be reasonable, the results of which form the basis for making judgments about the carrying value of assets and liabilities that
are not apparent from other sources. Actual results could differ from those estimates under different assumptions or conditions.
For a description of our critical accounting
policies and estimates, please refer to the “Critical Accounting Policies and Estimates” section of the “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” section contained in our 2013 Form 10-K. There
have been no material changes in any of our accounting policies since December 31, 2013. We periodically review our critical accounting
policies and estimates with the audit committee of our Board of Directors.
Goodwill and other intangible assets are
tested annually for impairment and between annual tests if an event occurs or circumstances change that would more likely than
not reduce the fair value of our outstanding common stock below our net equity carrying amount. 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.
Results of Operations
Primary Revenue and Expense Components
The
following is a description of the primary components of our revenue and expenses:
|
·
|
Revenue.
Our revenue reflects product
revenue 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.
|
|
·
|
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.
|
|
·
|
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.
|
|
·
|
Sales and Marketing.
Sales and
marketing expenses consist primarily of personnel costs, sales commissions paid to our direct sales representatives, independent
sales agents and independent distributors and costs associated with physician training programs, promotional activities and participation
in medical and trade conferences.
|
|
·
|
General and Administrative.
General
and administrative expenses consist of personnel costs related to the executive, finance and human resource functions, as well
as professional service fees, legal fees, accounting fees, insurance costs, bad debt expense and general corporate expenses.
|
|
·
|
Charges Related to U.S. Government
Settlement.
Charges related to U.S. Government settlement consist of legal fees related to the subpoena issued by the Office
of Inspector General in October 2011 and the June 2013 settlement with the U.S. Department of Justice.
|
|
·
|
Merger and Integration Expenses.
Merger
expenses consist primarily of legal, accounting, consulting and other professional fees related to the Merger. Integration expenses
consist of costs incurred in planning for and integrating our operations.
|
|
·
|
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.
|
The subsequent discussion and analysis
provides information which management believes is relevant to an assessment and understanding of our consolidated results of operations.
You are encouraged to read the following discussion and analysis of our financial condition and results of operations together
with our unaudited interim condensed consolidated financial statements and related footnotes included elsewhere in this Quarterly
Report on Form 10-Q (Quarterly Report) and the audited consolidated financial statements, included in our 2013 Form 10-K.
Three Months Ended June 30, 2014 Compared to Three Months
Ended June 30, 2013
The following table contains information
regarding our results of operations for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013
(Baxano Inc. results are included from the Merger date, May 31, 2013) (in thousands).
|
|
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
|
)%
|
The following table contains information
regarding our revenue (iO-Flex revenue is included from the Merger date, May 31, 2013) (in thousands):
|
|
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
|
%
|
Revenue.
The $0.8 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. In March 2012, the Current Procedural Terminology (“CPT”) Editorial
Panel (the “Panel”), voted to approve an application for a new Category I CPT code, 22586. This CPT code, which applies
to our AxiaLIF 1-Level devices (Legacy and Plus), is a bundled lumbar arthrodesis procedure that includes bone graft and posterior
instrumentation. The Medicare final rule was released in November 2012, which stated a value for the Category I CPT code 22586
and became effective January 1, 2013. Starting January 1, 2013, surgeons tried the Category I CPT code for AxiaLIF Plus 1-Level
with private payors; however, coverage with certain private payors was denied sometimes after the case. The AxiaLIF Plus 1-Level
reimbursement challenges and lower than expected utilization of our AxiaLIF Plus 2-Level are the primary factors in the $0.7 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 as we implemented the hybrid sales model during the second quarter of 2014 and have decreased 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. Many of the products in the Other category
are add on products to fusion cases and their usage directly correlates with the amount of fusion cases performed done. The decrease
in international revenue primarily stems from a drop of stocking orders.
Cost of Revenue and Gross Profit
.
Cost of revenue increased to $1.4 million in 2014 from $1.3 million in 2013. Gross margins increased to 69.6% in 2014 from 66.6%
in 2013. The increase in gross margin from 2013 to 2014 was primarily due to operational efficiencies.
Research and Development.
The $1.0
million increase in research and development expenses from 2013 to 2014 was primarily due to an increase of $0.3 million in personnel-related
costs as we increased head count in support of a larger product portfolio and $0.7 million increase in prototypes for the second
and third quarter limited market release of Avance.
Sales and Marketing.
Sales and marketing
expenses from 2013 to 2014 in total remained consistent. From 2013 to 2014 there was an increase of $0.2 million in personnel-related
costs as we integrated our sales force and expanded our sales territory, an increase of $0.2 million in distributor commissions,
stemming from an expanded distributor network and an increase of $0.1 million in travel and meeting expenses. These increases were
primarily offset by a decrease of $0.3 million in outside services and a decrease of approximately $0.2 million in training materials,
which were rebranded as a result of the 2013 Merger.
General 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.
Merger and Integration Expenses.
The $1.6 million incurred during 2013 related to the Merger with Baxano.
U.S. Government Settlement Charges.
The $0.1 million incurred during 2013 related to legal fees for the U.S. Department of Justice investigation.
Non-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.
Six Months Ended June 30, 2014
Compared to six Months Ended June 30, 2013
The following table contains information
regarding 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).
|
|
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
|
)%
|
The following table contains information regarding our revenue
(iO-Flex revenue is included from the Merger date, May 31, 2013) (in thousands):
|
|
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
|
%
|
Revenue.
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.
Cost of Revenue and Gross Profit
.
Cost of revenue increased to $2.7 million in 2014 from $2.3 million in 2013. Gross margins increased to 70.4% in 2014 from 66.6%
in 2013. The increase in gross margin from 2013 to 2014 was primarily due to operational efficiencies.
Research and Development.
The $1.7
million increase in research and development expenses from 2013 to 2014 was primarily due to an increase of $0.7 million in personnel-related
costs as we increased head count in support of a larger product portfolio, $0.2 million increase in compliance expenses to support
the implementation and monitoring of the Corporate Integrity Agreement with the Office of Inspector General and $0.8 million increase
in prototypes for the second and third quarter limited market release of Avance.
Sales and Marketing.
The $2.3 million
increase in sales and marketing expenses from 2013 to 2014 was primarily due to an increase of $1.8 million in personnel-related
costs as we integrated our sales force and expanded our sales territory, an increase of $0.7 million in distributor commissions,
stemming from an expanded distributor network, and an increase of $0.3 million in travel and meeting expenses primarily offset
by a decrease of $0.5 million in outside services.
General and Administrative.
The
increase in general and administrative expenses of $1.7 million from 2013 to 2014 was primarily due to a $0.4 million increase
in legal, audit and other professional services; $0.1 million increase in depreciation expense and an increase of $0.7 million
in amortization expenses of the intangible assets acquired in the Merger.
Merger and Integration Expenses.
There was a decrease in merger and integration expenses from 2013 to 2014 of $2.9 million related to the Merger with Baxano.
U.S. Government Settlement Charges.
The $0.2 million incurred during 2013 related to legal fees for the U.S. Department of Justice investigation.
Non-Operating Items.
Non-operating
items expense decreased from 2013 to 2014 driven by a $2.6 million fair value adjustment gain related to derivative and common
stock warrant liabilities, offset by a $1.1 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.
Liquidity and Capital Resources
Cash Flows Analysis
Net Cash Used in Operating Activities
.
Net cash used in operating activities was $16.9 million and $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.
Net Cash Used in Investing Activities
.
Net cash used in investing activities was $0.5 million and $3.4 million for the six months ended June 30, 2014 and 2013, respectively.
The 2014 amount reflects purchases of property and equipment, primarily for reusable instrument kits. The 2013 amount reflected
the net cash paid, net of cash acquired, of $2.7 million for the Merger and purchases of property and equipment of $0.6 million,
primarily for reusable instrument kits used in the field and up-fitting our new headquarters in Raleigh, North Carolina.
Net Cash Provided by Financing Activities
.
Net cash provided by financing activities in the six months ended June 30, 2014 was $11.1 million, which represented approximately
$10.0 million in principal for the sale of convertible debentures, offset by related fees of $1.4 million. During the six months
ended June 30, 2014 we sold 2.4 million shares of Common Stock for proceeds of approximately $2.5 million under the Purchase Agreement
with Lincoln Park. Net cash provided by financing activities in the six months ended June 30, 2013 was $17.1 million, which represented
the net proceeds from the sale of common stock for the Merger, 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.
Access to Capital and Cash Requirements
In May 2011, we filed a “universal
shelf” Registration Statement on Form S-3 (File No. 333-174255), or the Shelf Registration Statement, with the SEC, which
became effective on August 1, 2011 and which we used for our September 2011 stock offering 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.
On April 17, 2014, our stockholders approved
an amendment to our Fifth Amended and Restated Certificate of Incorporation to increase the number of authorized shares of Common
Stock from 75,000,000 to 150,000,000. The amendment became effective on April 17, 2014 upon filing with the Delaware Secretary
of State.
On 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.
At 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. As of June 30,
2014, our liabilities included the Credit Facility advance of $7.5 million and a payable of $3.5 million related to our settlement
agreement with the U.S. Government, payable over five remaining quarters. On July 1, 2014, we agreed with the U.S. Government
to defer the scheduled payment of $0.7 million and are working with them to establish revised quarterly payments to conclude over
the original term ending July 1, 2015.
The Credit Facility terms provided for
up to two additional advances totaling $7.5 million. 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.
As of June 30, 2014, pursuant to the Purchase
Agreement with Lincoln Park we had sold 3.1 million shares of Common Stock to Lincoln Park for approximately $3.2 million, leaving
approximately $3.8 million for future issuance of stock. Effective July 11, 2014, we modified the Purchase Agreement with Lincoln
Park to, among other things, (i) increase the number of shares of Common Stock that we have the right to sell to Lincoln Park from
100,000 shares to 125,000 shares as often as every business day, which amount may be further increased in accordance with the Purchase
Agreement, (ii) increase the aggregate amount of Common Stock that we have the right, subject to certain limitations, to direct
Lincoln Park to purchase over the 36-month term of the Purchase Agreement from $7.0 million to $8.2 million, and (iii) decrease
the floor closing price that the Common Stock must trade above in order for sales to be made to Lincoln Park under the Purchase
Agreement from $1.00 to $0.50 per share. As of August 1, 2014, we had sold 3.9 million shares of Common Stock to Lincoln Park for
approximately $3.6 million, leaving approximately $4.6 million for 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.
On March 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 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 the Warrants can be 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.
In 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.
Our 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.
With 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 to meet our
cash needs through the third quarter of 2014. 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 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.
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. We 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 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.
Recent Developments
Additional information regarding subsequent
events can be found in Note 11, “Subsequent Events,” included in the unaudited interim condensed consolidated financial
statements and related footnotes included elsewhere in this Quarterly Report.
Off-Balance Sheet Arrangements
As of June 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.