PART I. FINANCIAL INFORMATION

ITEM 1.    UNAUDITED FINANCIAL STATEMENTS

AVINGER, INC.

CONDENSED BALANCE SHEETS

(unaudited)

(In thousands, except share and per share data)

AVINGER, INC.

CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(unaudited)

(In thousands, except per share data)

AVINGER, INC.

CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(unaudited)

(In thousands, except share data)

AVINGER,INC.

CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (CONTINUED)

(unaudited)

(In thousands, except share data)

AVINGER, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(unaudited)

(In thousands)

See accompanying notes.

AVINGER, INC.

Notes to Condensed Financial Statements

1. Organization

Organization, Nature of Business

Avinger, Inc. (the “Company”), a Delaware corporation, was incorporated in March 2007. The Company designs, manufactures and sells image-guided, catheter-based systems that are used by physicians to treat patients with peripheral artery disease (“PAD”). Patients with PAD have a build-up of plaque in the arteries that supply blood to areas away from the heart, particularly the pelvis and legs. The Company manufactures and sells a suite of products in the United States (“U.S.”) and in select international markets. The Company has developed its Lumivascular platform, which integrates optical coherence tomography (“OCT”) visualization with interventional catheters and is the industry’s only system that provides real-time intravascular imaging during the treatment portion of PAD procedures. The Company’s Lumivascular platform consists of a capital component, Lightbox consoles, as well as a variety of disposable catheter products. The Company’s current catheter products include Ocelot and Tigereye, which are designed to allow physicians to penetrate a total blockage in an artery, known as a chronic total occlusion (“CTO”). The Company also has image-guided atherectomy products, Pantheris and Pantheris SV, which are designed to allow physicians to precisely remove arterial plaque in PAD patients. The Company is in the process of developing next-generation CTO crossing devices to target coronary CTO markets. The Company is located in Redwood City, California.

Liquidity Matters

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40) requires the Company to make certain disclosures if it concludes that there is substantial doubt about the entity’s ability to continue as a going concern within one year from the date of the issuance of these financial statements.

In the course of its activities, the Company has incurred losses and negative cash flows from operations since its inception. As of March 31,June 30, 2023, the Company had an accumulated deficit of $407.0$411.2 million. The Company expects to incur losses for the foreseeable future. The Company believes that its cash and cash equivalents of $10.4$7.1 million at March 31,June 30, 2023 and expected revenues and funds from operations will be sufficient to allow the Company to fund its current operations through the end of the third quarter of 2023. The Company received net proceeds of approximately $4.4 million from the sale of its common stock in August 2022, $0.8$1.1 million from the sale of its common stock under an At The Market Offering Agreement from the time of activation through the quarter ended March 31,June 30, 2023 and $6.7 million from the sale of the January 2022 Series D preferred stock in January 2022. The Company may seek to raise additional funds in future equity offerings to meet its operational needs and capital requirements for product development, clinical trials and commercialization or other strategic objectives.

The Company can provide no assurance that it will be successful in raising funds pursuant to additional equity or debt financings or that such funds will be raised at prices that do not create substantial dilution for its existing stockholders. Given the volatility in the Company’s stock price, any financing that the Company may undertake in the next twelve months could cause substantial dilution to its existing stockholders, and there can be no assurance that the Company will be successful in acquiring additional funding at levels sufficient to fund its various endeavors. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. In addition, the after-effects of COVID-19 pandemic and the macroeconomic environment have in the past resulted in and could continue to result in reduced consumer and investor confidence, instability in the credit and financial markets, volatile corporate profits, restrictions on elective medical procedures, and reduced business and consumer spending, which could increase the cost of capital and/or limit the availability of capital to the Company.

If the Company is unable to raise additional capital in sufficient amounts or on terms acceptable to it, the Company may have to significantly reduce its operations or delay, scale back or discontinue the development and sale of one or more of its products. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company’s ultimate success will largely depend on its continued development of innovative medical technologies, its ability to successfully commercialize its products and its ability to raise significant additional funding.

Additionally, due to the substantial doubt about the Company’s ability to continue operating as a going concern and the “Material Adverse Change” clause in the Loan Agreement with CRG Partners III L.P. and certain of its affiliated funds (collectively “CRG”), the entire amount of outstanding borrowings at March 31,June 30, 2023 and December 31, 2022 has been classified as current in these financial statements. CRG has not purported that an Event of Default (as defined in the Loan Agreement) has occurred due to a Material Adverse Change.

Currently all of our cash and cash equivalents are held at a single financial institution, Silicon Valley Bank. On March 10, 2023, the Federal Deposit Insurance Corporation announced that Silicon Valley Bank had been closed by the California Department of Financial Protection and Innovation. While we have regained access to our accounts at Silicon Valley Bank and are evaluating our banking relationships, future disruptions of financial institutions where we bank or have credit arrangements, or disruptions of the financial services industry in general, could adversely affect our ability to access our cash and cash equivalents. If we are unable to access our cash and cash equivalents as needed, our financial position and ability to operate our business will be adversely affected.

Public Offerings

January 2022 Offering

On January 14, 2022, the Company entered into a securities purchase agreement with several institutional investors pursuant to which the Company agreed to sell and issue, in a registered direct offering (“January 2022 Offering”), an aggregate of 7,600 shares of the Company’s Series D Convertible Preferred Stock, par value of $0.001 per share, at an offering price of $1,000 per share which was convertible into common stock at a conversion price of $8.00 per share. Concurrently, the Company agreed to issue to these investors warrants to purchase up to an aggregate of 807,500 shares of the Company’s common stock (the “Common Warrants”). As a result, the Company received aggregate net proceeds of approximately $6.7 million after underwriting discounts, commissions, legal and accounting fees, and other ancillary expenses.

The 807,500 Common Warrants have an exercise price of $9.60 per share and became exercisable beginning July 14, 2022. The Common Warrants will expire five years following the time they become exercisable, or July 14, 2027. The Company also issued to the Placement Agent or its designees warrants to purchase up to an aggregate of 66,500 shares of common stock (the “Placement Agent Warrants”). The Placement Agent Warrants are subject to the same terms as the Common Warrants, except that the Placement Agent Warrants have an exercise price of $10.00 per share and a term of five years from the commencement of the sales pursuant to the January 2022 Offering, or January 12, 2027.

August 2022 Offering

On August 4, 2022, the Company entered into a securities purchase agreement with a single institutional investor for the issuance and sale of 1,484,019 shares of its common stock in a registered direct offering (“RD” or “Registered Direct”) at a purchase price of $1.752 per share, or pre-funded warrants in lieu thereof. In a concurrent private placement, the Company also agreed to issue and sell to the investor 1,369,864 shares of common stock at the same purchase price as in the registered direct offering, or pre-funded warrants in lieu thereof (“Private Placement” and together with the Registered Direct offering the “August 2022 Offering”). As a result, the Company received aggregate net proceeds of approximately $4.4 million after underwriting discounts, commissions, legal and accounting fees, and other ancillary expenses.

As a result, in the Registered Direct offering, the Company issued (i) 700,000 shares of common stock, (ii) and pre-funded warrants in lieu of common stock to purchase up to an aggregate of 784,019 shares of common stock (the “RD Pre-Funded Warrants”) and in the Private Placement, the Company issued pre-funded warrants to purchase up to an aggregate of 1,369,864 shares of common stock (the “Private Placement Pre-Funded Warrants” and together with the RD Pre-Funded Warrants the “August 2022 Pre-Funded Warrants”). As of March 31, 2023, Pre-Funded Warrants exercisable for 622,000 shares of the Company’s common stock remained outstanding. On April 20, 2023, the remaining 622,000 Private Placement Pre-Funded Warrants were exercised leaving none outstanding.outstanding as of June 30, 2023.

In addition, the Company issued to the investor in the August 2022 Offering Series A preferred investment options to purchase up to 2,853,883 additional shares of the Company’s common stock and Series B preferred investment options to purchase up to 2,853,883 additional shares of the Company’s common stock (the “Preferred Investment Options”). The Series A preferred investment options have an exercise price of $1.502 per share, are immediately exercisable, and will expire five and one-half years from the date of issuance, or February 8, 2028, and the Series B preferred investment options have an exercise price of $1.502 per share, are immediately exercisable, and will expire two years from the date of issuance, or August 8, 2024. The Company also issued to the Placement Agent or its designees preferred investment options to purchase up to an aggregate of 171,233 shares of common stock (the “Placement Agent Preferred Investment Options”). The Placement Agent Preferred Investment Options are subject to the same terms as the Preferred Investment Options, except that the Placement Agent Preferred Investment Options have an exercise price of $2.19 per share and a term of five years from the commencement of the sales pursuant to the August 2022 Offering, or August 3, 2027.

At The Market Offering Agreement

On May 20, 2022, the Company entered into an At The Market Offering Agreement (the “ATM Agreement”) with H.C. Wainwright & Co., LLC (the “Agent”), as sales agent, pursuant to which the Company may offer and sell shares of common stock, par value $0.001 per share (the “Shares”) up to an aggregate offering price of $7,000,000 from time to time, in an at the market public offering. Sales of the Shares are to be made at prevailing market prices at the time of sale, or as otherwise agreed with the Agent. The Agent will receive a commission from the Company of 3.0% of the gross proceeds of any Shares sold under the ATM Agreement. The Shares sold under the ATM Agreement are offered and sold pursuant to the Company’s shelf registration statement on Form S-3, which was initially filed with the Securities and Exchange Commission (the “SEC”) on March 29, 2022 and declared effective on April 7, 2022, and a prospectus supplement and the accompanying prospectus relating to the At The Market Offering filed with the SEC on May 20, 2022. During the year ended December 31, 2022, the Company sold 585,603 shares of common stock pursuant to the ATM Agreement at an average price of $1.67 per share for aggregate proceeds of $1.0 million, of which approximately $29,000 was paid in the form of commissions to the Agent. On August 3, 2022, the Company suspended sales under the ATM Agreement. On March 17, 2023, the Company reactivated the ATM Agreement. During the quarter ended March 31,June 30, 2023, the Company sold 11,90389,817 shares of common stock pursuant to the ATM Agreement at an average price of $0.82$0.72 per share for aggregate proceeds of $10,000,approximately $65,000, of which approximately $300$2,000 was paid in the form of commissions to the Agent. However,During the six months ended June 30, 2023, the Company sold 101,720 shares of common stock at an average price of $0.73 per share for aggregate proceeds of approximately $75,000, of which approximately $2,200 was paid in the form of commissions to the Agent. While the Company may attempt additional sales in the future, there can be no assurance that the Company will be successful in acquiring additional funding through these means.

Other than the ATM Agreement, the Company currently does not have any commitments to obtain additional funds.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) and pursuant to the rules and regulations of the SEC (“SEC”).SEC. The accompanying unaudited condensed interim financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for a fair statement of the Company’s financial information. The results for the three and six months ended March 31,June 30, 2023 are not necessarily indicative of results to be expected for the year ending December 31, 2023, or for any other interim period or for any future year. The December 31, 2022 condensed balance sheet data has been derived from audited financial statements. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to SEC rules and regulations relating to interim financial statements. These unaudited condensed financial statements and notes should be read in conjunction with the financial statements included in the Company’s Form 10-K for the fiscal year ended December 31, 2022, which was filed with the SEC on March 16, 2023 and amended on March 17, 2023. The Company’s significant accounting policies are more fully described in Note 2 of the Notes to Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements. Management uses significant judgment when making estimates related to its stock-based compensation, accruals related to compensation, the valuation of the common stock warrants, provisions for doubtful accounts receivable and excess and obsolete inventories, clinical trial accruals, and its reserves for sales returns and warranty costs. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Although these estimates are based on the Company’s knowledge of current events and actions it may undertake in the future, actual results may ultimately materially differ from these estimates and assumptions.

Concentration of Credit Risk, and Other Risks and Uncertainties

Financial instruments that potentially subject the Company to credit risk consist of cash and cash equivalents and accounts receivable to the extent of the amounts recorded on the balance sheets.

The Company’s policy is to invest in cash and cash equivalents, consisting of money market funds. These financial instruments are held in Company accounts at one financial institution, Silicon ValleyFirst Citizens Bank. The counterparties to the agreements relating to the Company’s investments consist of financial institutions of high credit standing. The Company provides for uncollectible amounts when specific credit problems arise. Management’s estimates for uncollectible amounts have been adequate, and management believes that all significant credit risks have been identified at March 31,June 30, 2023 and December 31, 2022. On March 10, 2023, the Federal Deposit Insurance Corporation announced that Silicon Valley Bank had been closed by the California Department of Financial Protection and Innovation. While we have regained access to our accounts at Silicon Valley Bank and are evaluating our banking relationships, future disruptions of financial institutions where we bank or have credit arrangements, or disruptions of the financial services industry in general, could adversely affect our ability to access our cash and cash equivalents. If we are unable to access our cash and cash equivalents as needed, our financial position and ability to operate our business will be adversely affected.

The Company’s accounts receivable are due from a variety of healthcare organizations in the United States and select international markets. At March 31,June 30, 2023, there waswere onetwo customercustomers that each represented 10%14% of the Company’s accounts receivable. At December 31, 2022, there was no customer that represented 10% or more of the Company’s accounts receivable. For the three and six months ended March 31,June 30, 2023, there was one customer that represented 13%17% and 16% of revenues.revenues, respectively. For the three and six months ended March 31,June 30, 2022, there was one customer that represented 14%16% and 15% of revenues.revenues, respectively. Disruption of sales orders or a deterioration of financial condition of its customers would have a negative impact on the Company’s financial position and results of operations.

Product Warranty Costs

The Company typically offers a one-year warranty on its products commencing upon the transfer of title and risk of loss to the customer. The Company accrues for the estimated cost of product warranties upon invoicing its customers, based on historical results. Warranty costs are reflected in the statement of operations and comprehensive loss as a cost of revenues. The warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from these estimates, revisions to the estimated warranty liability would be required. Periodically the Company assesses the adequacy of its recorded warranty liabilities and adjusts the amounts, as necessary. Warranty provisions and claims are summarized as follows (in thousands):

Net Loss per Share Attributable to Common Stockholders

Basic net loss per share attributable to common stockholders is computed by dividing the net loss applicable to common stockholders by the weighted average number of shares of common stock outstanding during the period, without consideration for potential dilutive common shares. Diluted net loss per share attributable to common stockholders is computed by dividing the net loss applicable to common stockholders by the weighted average number of shares of common stock and dilutive potential shares of common stock outstanding during the period. Any common stock shares subject to repurchase are excluded from the calculations as the continued vesting of such shares is contingent upon the holders’ continued service to the Company. As of March 31,June 30, 2023 and 2022, there were no shares subject to repurchase. Since the Company was in a loss position for bothall periods presented, basic net loss per share attributable to common stockholders is the same as diluted net loss per share attributable to common stockholders as the inclusion of all potentially dilutive common shares would have been anti-dilutive.

Net loss per share applicable to common stockholders was determined as follows (in thousands, except per share data):

The following potentially dilutive securities outstanding have been excluded from the computations of diluted weighted average shares outstanding because such securities have an anti-dilutive impact due to losses reported:

Segment and Geographical Information

The Company operates and manages its business as one reportable and operating segment. The Company’s chief executive officer, who is the chief operating decision maker, reviews financial information on an aggregate basis for purposes of allocating resources and evaluating financial performance. Primarily all of the Company’s long-lived assets, which are comprised of property and equipment, are based in the United States. For the quartersthree months ended March 31,June 30, 2023 and 2022, 92% and 94%89%, respectively, of the Company’s revenues were in the United States. For each of the six months ended June 30, 2023 and 2022, 92% of the Company’s revenues were in the United States based on the shipping location of the external customer. The remaining revenues for the quartersthree and six months ended March 31,June 30, 2023 and 2022, were primarily derived in Germany.

As of March 31,June 30, 2023 and December 31, 2022, cash equivalents were all categorized as Level 1 and consisted of money market funds. As of March 31,June 30, 2023 and December 31, 2022, there were no financial assets and liabilities categorized as Level 2 or 3. There were no transfers between fair value hierarchy levels during the three or six months ended March 31,June 30, 2023.

Recent Accounting Pronouncements

Recent accounting standards not yet adopted

In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which among other things, simplifies the accounting models for the allocation of proceeds attributable to the issuance of a convertible debt instrument. As a result, after adopting the ASU’s guidance, entities will not separately present in equity an embedded conversion feature in such debt. Instead, they will account for a convertible debt instrument wholly as debt, and for convertible preferred stock wholly as preferred stock (i.e., as a single unit of account), unless (i) a convertible instrument contains features that require bifurcation as a derivative under ASC 815 or (ii) a convertible debt instrument was issued at a substantial premium. The standard becomes effective for the Company, as a smaller reporting company as defined by the SEC, in the first quarter of 2024 and early adoption is permitted. This new standard is not expected to have a material impact on the Company’s financial statements.

3. Inventories

Inventories consisted of the following (in thousands):

4. Borrowings

CRG

On September 22, 2015, the Company entered into a Term Loan Agreement, as amended (the “Loan Agreement”) with CRG under which, subject to certain conditions, the Company had the right to borrow up to $50 million in principal amount from CRG on or before the end of the twenty-fourth (24^th)(24th) month period commencing on the first Borrowing Date (as defined in the Loan Agreement). The Company borrowed $30 million on September 22, 2015. The Company borrowed an additional $10 million on June 15, 2016 under the Loan Agreement.

On February 14, 2018, the Company and CRG further amended the Loan Agreement concurrent with the conversion of $38 million of the principal amount of the senior secured term loan (plus $3.8 million in back-end fees and prepayment premium applicable thereto) into a newly authorized Series A convertible preferred stock (see below).

The Company has entered into several amendments to the Loan Agreement (the “Amendments”) with CRG since September 2015, the most recent of which was entered into on August 10, 2022. The Amendments, among other things: (1) extended the interest-only period through December 31, 2023; (2) extended the period during which the Company may elect to pay a portion of interest in payment-in-kind, or PIK, interest payments through December 31, 2023 so long as no Default (as defined in the Loan Agreement) has occurred and is continuing; (3) permitted the Company to make the entire interest payments in PIK interest payments for through December 31, 2023 so long as no Default has occurred and is continuing; (4) extended the Stated Maturity Date (as defined in the Loan Agreement) to December 31, 2025; (5) reduced the minimum liquidity covenant to $3.5 million at all times; (6) eliminated the minimum revenue covenant for 2018, 2019 and 2020; (7) reduced the minimum revenue covenant to $8 million for 2021 and 2022; (8) added minimum revenue covenants of $10 million for 2023, $14.5 million for 2024 and $17 million for 2025; (9) changed the date under the on-going stand-alone representation regarding no “Material Adverse Change” to December 31, 2020; (10) amended the on-going stand-alone representation and stand-alone Event of Default (as defined in the Loan Agreement) regarding Material Adverse Change such that any adverse change in or effect upon the revenue of the Company and its subsidiaries due to the outbreak of COVID-19 will not constitute a Material Adverse Change; and (11) provided CRG with board observer rights.

Under the amended Loan Agreement, no cash payments for either principal or interest are required until the first quarter of 2024. The interest will be accrued and included in the debt balance based (to the extent not paid) on principal amounts outstanding at the beginning of the quarter at an interest rate of 12.5%. Beginning in the first quarter of 2024, the Company will be required to make quarterly principal payments (in addition to the interest) of $1.9 million with total principal payments of $7.5 million in 2024 and $7.5 million in 2025. The maturity date of the Loan (as defined in the Loan Agreement) is December 31, 2025.

The Company may voluntarily prepay the borrowings in full, with a prepayment premium beginning at 5.0% and declining by 1.0% annually thereafter, with no premium being payable if prepayment occurs after seven and half years of the loan. Each tranche of borrowing required the payment, on the borrowing date, of a financing fee equal to 1.5% of the borrowed loan principal, which is recorded as a discount to the debt. In addition, a facility fee equal to 15.0% of the amounts borrowed plus any PIK is to be payable at the end of the term or when the borrowings are repaid in full. A long-term liability is being accreted using the effective interest method for the facility fee over the term of the Loan Agreement with a corresponding discount to the debt. The borrowings are collateralized by a security interest in substantially all of the Company’s assets.

The Loan Agreement requires that the Company adheres to certain affirmative and negative covenants, including financial reporting requirements, certain minimum financial covenants for pre-specified liquidity and revenue requirements and a prohibition against the incurrence of indebtedness, or creation of additional liens, other than as specifically permitted by the terms of the Loan Agreement. In particular, the covenants of the amended Loan Agreement included a covenant that the Company maintain a minimum of $3.5 million of cash and certain cash equivalents, and the Company has to achieve certain minimum revenues. If the Company fails to meet the applicable minimum revenue target in any calendar year, the Loan Agreement provides the Company with a cure right if it prepays a portion of the outstanding principal equal to 2.0 times the revenue shortfall. In addition, the Loan Agreement prohibits the payment of cash dividends on the Company’s capital stock and also places restrictions on mergers, sales of assets, investments, incurrence of liens, incurrence of indebtedness and transactions with affiliates. CRG may accelerate the payment terms of the Loan Agreement upon the occurrence of certain “Events of Default” set forth therein, which include the failure of the Company to make timely payments of amounts due under the Loan Agreement, the failure of the Company to adhere to the covenants set forth in the Loan Agreement, the insolvency of the Company or upon the occurrence of a “Material Adverse Change” thereunder.

As of March 31,June 30, 2023, the Company was in compliance with all applicable covenants under the Loan Agreement.

As of March 31,June 30, 2023, principal, final facility fee and PIK payments under the Loan Agreement, as amended, were as follows (in thousands):

In connection with drawdowns under the Loan Agreement, the Company recorded aggregate debt discounts of $1.3 million as contra-debt. The debt discounts are being amortized as non-cash interest expense using the effective interest method over the term of the Loan Agreement. As of March 31,June 30, 2023 and December 31, 2022, the balance of the aggregate debt discount was approximately $228,000$208,000 and $249,000, respectively. The Company’s interest expense associated with the amortization of debt discount was approximately $20,000 and $21,000 during each of the three months ended March 31,June 30, 2023 and 2022.2022, respectively. The Company’s interest expense associated with the amortization of debt discount was approximately $41,000 and $42,000 during the six months ended June 30, 2023 and 2022, respectively. For the three months ended March 31,June 30, 2023 and 2022, the Company incurred total interest expense of approximately $507,000$531,000 and $440,000, respectively. For the six months ended June 30, 2023 and 2022, the Company incurred interest expense of approximately $1.0 million and $0.9 million, respectively.

While, as of the date hereof, CRG has not purported that an Event of Default has resulted due to a Material Adverse Change (as those terms defined in the Loan Agreement), due to the substantial doubt about the Company’s ability to continue operating as a going concern, the entire outstanding amount of borrowings under the Loan Agreement and associated aggregate debt discount at March 31,June 30, 2023 and December 31, 2022 were classified as current in these financial statements.

5. Leases

The Company’s operating lease obligations primarily consist of leased office, laboratory, and manufacturing space under a non-cancelable operating lease. In addition to the minimum future lease commitments presented below, the lease requires the Company to pay property taxes, insurance, maintenance, and repair costs. The lease includes a rent holiday concession and escalation clauses for increased rent over the lease term. Rent expense is recognized using the straight-line method over the term of the lease.

The lease will expire on November 30, 2024. The Company is obligated to pay approximately $5.8 million in base rent payments through November 2024, beginning on December 1, 2019. The weighted average remaining lease term as of March 31,June 30, 2023 is 1.71.4 years.

The operating lease was included on the balance sheet at the present value of the future base payments discounted at a 6.5% discount rate using the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term and amount equal to the lease payments in a similar economic environment as the lease does provide an implicit rate.

The Company’s operating lease expense, excluding variable maintenance fees and other expenses on a monthly basis, was approximately $105,000. Rent expense for both the three months ended March 31,June 30, 2023 and 2022 was approximately $314,000. Rent expense for both the six months ended June 30, 2023 and 2022 was approximately $628,000. The Company’s variable expenses for the three months ended March 31,June 30, 2023 and 2022 were approximately $65,000$103,000 and $66,000,$71,000, respectively. The Company’s variable expenses for the six months ended June 30, 2023 and 2022 were approximately $168,000 and $137,000, respectively. Operating right-of-use asset amortization for the three months ended March 31,June 30, 2023 and 2022 was approximately $280,000$284,000 and $264,000,$265,000, respectively. Operating right-of-use asset amortization for the six months ended June 30, 2023 and 2022 was approximately $564,000 and $531,000, respectively. Due to payments being made in excess of operating lease expense recognized, the Company recorded approximately $51,000$37,000 and $65,000 as prepaid rent included in other assets on the condensed balance sheet as of March 31,June 30, 2023 and December 31, 2022, respectively.

The following table presents the future operating lease payments and leasehold liability included on the balance sheet related to the Company’s operating lease as of March 31,June 30, 2023 (in thousands):

The following table shows ROU assets and lease liabilities, and the associated financial statement line items, as of March 31,June 30, 2023 and December 31, 2022 (in thousands):

6. Commitments and Contingencies

Purchase Obligations

Purchase obligations consist of agreements to purchase goods and services entered into in the ordinary course of business. The Company had non-cancelable commitments to suppliers for purchases totaling approximately $0.7$1.0 million as of March 31,June 30, 2023. The majority of this amount is related to commitments to purchase inventory components for our various product lines.and services related to the manufacturing of inventory.

Legal Proceedings

The Company is not currently involved in any pending legal proceedings that it believes could have a material adverse effect on our financial condition, results of operations or cash flows. From time to time, the Company may be involved in legal proceedings or investigations, which could harm our reputation, business and financial condition and divert the attention of our management from the operation of our business.

7. Stockholders’ Equity

Convertible Preferred Stock

As of March 31,June 30, 2023 and December 31, 2022, the Company’s certificate of incorporation, as amended and restated, authorizes the Company to issue up to 5,000,000 shares of convertible preferred stock with $0.001 par value per share. As of March 31,June 30, 2023 and December 31, 2022, 60,961 shares were issued and outstanding.

Series A Convertible Preferred Stock

The holders of Series A preferred stock are entitled to receive annual accruing dividends at a rate of 8%, payable in additional shares of Series A preferred stock or cash, at the Company’s option. The shares of Series A preferred stock have a liquidation preference of $1,000 per share, no voting rights and rank senior to all other classes and series of the Company’s equity in terms of repayment and certain other rights. During the year ended December 31, 2022, 4,510 additional shares were issued to CRG as payment of dividends. As of March 31,June 30, 2023 and December 31, 2022, 60,876 shares of Series A preferred stock were outstanding, which are currently convertible into shares of the Company’s common stock at $400 per share. The Series A preferred stock accrued additional dividends of approximately $1.2 million and $1.1 million during the quarters ended March 31,June 30, 2023 and 2022, respectively and approximately $2.4 million and $2.3 million during the six months ended June 30, 2023 and 2022, respectively.

Series B Convertible Preferred Stock

The Series B preferred stock has a liquidation preference of $0.001 per share, full ratchet price based anti-dilution protection, has no voting rights and is subject to certain ownership limitations. The Series B preferred stock is immediately convertible at the option of the holder, has no stated maturity, and does not pay regularly stated dividends or interest. As of March 31,June 30, 2023 and December 31, 2022, 85 shares of Series B preferred stock remained outstanding, which are currently convertible into shares of the Company’s common stock at $1.502 per share.

Series D Convertible Preferred Stock

On January 14, 2022, the Company entered into a security purchase agreement with several institutional investors, pursuant to which the Company agreed to sell and issue, in a registered direct offering (“January 2022 Offering”), an aggregate of 7,600 shares of the Company’s Series D convertible preferred stock, par value $0.001 per share at an offering price of $1,000 per share. Concurrently, the Company agreed to issue to these investors warrants to purchase up to an aggregate of 807,500 shares of the Company’s common stock (the “Common Warrants”). The shares of Series D preferred stock had a stated value of $1,000 per share and were convertible into an aggregate of 950,000 shares of common stock at a conversion price of $8.00 per share. During the year ended December 31, 2022, all 7,600 shares of Series D preferred stock were converted into a total of 950,000 shares of common stock. Consequently, there wereThere are no shares of Series D preferred stock outstanding as of March 31,June 30, 2023.

At the time of issuance, the Company evaluated the classification of the Series D preferred stock and determined equity classification was appropriate due to no mandatory or contingently redeemable redemption features. The warrants issued to the investors were considered freestanding equity classified instruments. The Company first allocated gross proceeds from the registered direct offering between the preferred stock and the warrants issued to investors using a relative fair value approach, resulting in an initial allocation to each instrument of $4.0 million and $3.6 million, respectively. On the issuance date, the Company estimated the fair value of the Common Warrants issued to investors and warrants issued to the placement agent designees using a Black-Scholes option pricing model using the following assumptions: (i) contractual term of 5.5 years, (ii) expected volatility rate of 136.61%, (iii) risk-free interest rate of 1.51%, (iv) expected dividend rate of 0%, and (v) closing price of the Company’s common stock of the day immediately preceding the registered direct offering. The fair value of preferred stock was estimated based upon equivalent common shares that preferred stock could have been converted into at the closing price of the day immediately preceding the purchase date.

The embedded conversion feature was evaluated and bifurcation from the preferred stock equity host was not considered necessary. The issuance of the Series D convertible preferred stock generated a beneficial conversion feature (“BCF”) which arose as the equity security was issued with an embedded conversion option that is beneficial to the investor or in the money at inception because the conversion option has an effective conversion price that is less than the market price of the underlying stock at the commitment date. The Company recorded the BCF as a discount to the preferred stock resulting in the amount of $5.1 million based on the intrinsic value of the beneficial conversion. As the preferred stock was immediately convertible into common stock subject to the consummation of the reverse stock split on March 14, 2022, a deemed dividend related to the discount associated with the beneficial conversion feature was recorded on that date. This one-time, non-cash charge impacted net loss applicable to common stockholders and net loss per share attributable to common stockholders for the quarterthree and six months ended March 31, 2023.June 30, 2022.

Common Stock

As of March 31,June 30, 2023, the Company’s certificate of incorporation, as amended and restated, authorizes the Company to issue up to 100,000,000 shares of common stock with $0.001 par value per share, of which 8,626,8289,338,645 shares were issued and outstanding.

Common Stock Warrants

As of March 31,June 30, 2023, the Company had outstanding warrants to purchase common stock as follows:

As of December 31, 2022, the Company had outstanding warrants to purchase common stock as follows:

January 2022 Offering

Pursuant to a purchase agreement entered into on January 14, 2022, the Company issued warrants to purchase up to an aggregate of 807,500 shares of the Company’s common stock at an exercise price of $9.60 per share and which became exercisable beginning July 14, 2022. The Common Warrants will expire five years following the time they become exercisable, or July 14, 2027.

The Company issued to the placement agent of the January 2022 Offering warrants to purchase up to an aggregate of 66,500 shares of common stock (the “Placement Agent Warrants”). The Placement Agent Warrants are subject to the same terms as the Common Warrants, except that the Placement Agent Warrants have an exercise price of $10.00 per share and a term of five years from the commencement of the sales pursuant to the January 2022 Offering, or January 12, 2027.

August 2022 Offering

Pursuant to a purchase agreement entered into on August 4, 2022, the Company issued, in a registered direct offering, Pre-Funded Warrants to purchase up to 784,019 shares of common stock (the “RD Pre-Funded Warrants”) and, in a concurrent private placement, Pre-Funded Warrants to purchase up to 1,369,864 shares of common stock (the “Private Placement Pre-Funded Warrants” and together with the RD Pre-Funded Warrants the “August 2022 Pre-Funded Warrants”). The August 2022 Pre-Funded Warrants have an exercise price of $0.0001 per share, are immediately exercisable, and have no expiration date. During the year ended December 31, 2022, 784,019 of shares of RD Pre-Funded Warrants were exercised into the equivalent number of the Company’s common stock. During the quartersix months ended March 31,June 30, 2023, an additional 747,864all the 1,369,864 Private Placement Pre-Funded Warrants were exercised. As of March 31, 2022,Consequently, there were no August 2022 Pre-Funded Warrants exercisable for 622,000 sharesoutstanding as of the Company’s common stock remained outstanding. On April 20, 2023, the remaining 622,000 Private Placement Pre-Funded Warrants were exercised leaving none outstanding.June 30, 2023.

Also in the August 2022 Offering, the Company issued Series A preferred investment options to purchase up to 2,853,883 additional shares of the Company’s common stock and Series B preferred investment options to purchase up to 2,853,883 additional shares of the Company’s common stock, collectively referred to as Preferred Investment Options. The Series A preferred investment options have an exercise price of $1.502 per share, are immediately exercisable, and will expire five and one-half years from the date of issuance, or February 8, 2028, and the Series B preferred investment options have an exercise price of $1.502 per share, are immediately exercisable, and will expire two years from the date of issuance, or August 8, 2024.

The Company also issued to the placement agent of the August 2022 Offering preferred investment options to purchase up to 171,233 shares of common stock (the “Placement Agent Preferred Investment Options”). The Placement Agent Preferred Investment Options are subject to the same terms as the Preferred Investment Options, except that the Placement Agent Preferred Investment Options have an exercise price of $2.19 per share and a term of five years from the commencement of the sales pursuant to the August 2022 Offering, or August 3, 2027.

The exercise price and the number of shares of common stock issuable upon exercise of each Common Warrants, August 2022 Pre-Funded Warrants, Preferred Investment Options, and Placement Agent Preferred Investment Options are subject to appropriate adjustments in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting the common stock. In addition, in certain circumstances, upon a fundamental transaction, a holder of Common Warrants, August 2022 Pre-Funded Warrants, Preferred Investment Options, or Placement Agent Preferred Investment Options will be entitled to receive, upon exercise, the kind and amount of securities, cash or other property that such holder would have received had they exercised the Common Warrants, August 2022 Pre-Funded Warrants, Preferred Investment Options, or Placement Agent Preferred Investment Options immediately prior to the fundamental transaction.

The Common Warrants, August 2022 Pre-Funded Warrants, Preferred Investment Options, and Placement Agent Preferred Investment Options can be exercised at the option of the holders at any time after they become exercisable provided that shares of the Common Warrants, August 2022 Pre-Funded Warrants, Preferred Investment Options, or Placement Agent Preferred Investment Options cannot be exercised into common stock if the applicable holder would beneficially own in excess of 4.99% (or, upon election by such holder prior to the issuance of any shares of Common Warrants, Preferred Investment Options, or Placement Agent Preferred Investment Options, 9.99%) of the Company’s outstanding common stock immediately after giving effect to the exercise. A holder of the Common Warrants, August 2022 Pre-Funded Warrants, Preferred Investment Options or Placement Agent Preferred Investment Options may, upon notice to the Company, increase or decrease such beneficial ownership limitation, but not in excess of 9.99%.

In the event of a fundamental transaction in which the holders of our voting securities immediately prior to such fundamental transaction will not, following such fundamental transaction, directly or indirectly own more than 50% of the voting securities of the surviving entity or successor entity, and in which the Company is not the successor entity or does not continue as a reporting issuer under the Exchange Act, then, at the request of the holder, the Company or the successor entity shall purchase the unexercised portion of the Common Warrants, Preferred Investment Options, and Placement Agent Preferred Investment Options from the holder by paying to the holder an amount, in cash, equal to the fair value of the remaining unexercised portion of the Common Warrants, Preferred Investment Options, and Placement Agent Preferred Investment Options on the date of such fundamental transaction, subject to certain limitations in the event of a fundamental transaction not within our control.

As of March 31,June 30, 2023 and December 31, 2022, warrants and preferred investment options to purchase an aggregate of 7,507,2846,885,284 and 8,255,148 shares of common stock were outstanding, respectively, all of which were classified within the equity section of the respective balance sheets.as equity.

8. Stock-Based Compensation

Stock Plans

In January 2015, the Board of Directors adopted, and the Company’s stockholders approved the 2015 Equity Incentive Plan (“2015 Plan”). On October 14, 2022, the Company’s stockholders approved an additional 1,750,000 shares of common stock for issuance under the 2015 Plan. The 2015 Plan provides for the grant of incentive stock options (“ISOs”) to employees and for the grant of non-statutory stock options (“NSOs”), restricted stock, restricted stock awards (“RSAs”), restricted stock units (“RSUs”), stock appreciation rights, performance units and performance shares to employees, directors and consultants. As of March 31,June 30, 2023, 306,638 shares were available for grant under the 2015 Plan.

The Company’s RSUs and RSAs generally vest annually over two years in equal increments. RSAs and RSUs largely contain the same contractual terms except RSAs have the ability to vote along with common holders as it is considered an outstanding security at the time of grant, subject to certain vesting and other restrictions. The Company measures the fair value of RSAs using the closing stock price of a share of the Company’s common stock on the grant date and is recognized as expense on a straight-line basis over the vesting period of the award. As of December 31, 2022, the Company had 417 shares of RSUs and no shares of RSAs outstanding. A summary of all RSA and RSU activity is presented below:

As of March 31,June 30, 2023, there was approximately $1.5$1.3 million of remaining unamortized stock-based compensation expense associated with RSAs, which will be expensed over a weighted average remaining service period of approximately 1.71.5 years. The outstanding non-vested and expected to vest RSAs at March 31,June 30, 2023 have an aggregate fair value of approximately $1.2$1.0 million. The Company used the closing market price of $0.82$0.73 per share at March 31,June 30, 2023, to determine the aggregate fair value for the RSAs outstanding at that date. For the threesix months ended March 31,June 30, 2023 and 2022, the fair value of RSAs and RSUs vested was approximately $42,000 and $3,000, respectively. For the three months ended March 31,June 30, 2023 and 2022, stock-based compensation expense recognized associated with the vesting of RSAs and RSUs was $245,000$239,000 and $52,000,$36,000, respectively. There were no RSUs granted duringFor the threesix months ended March 31, 2023. All awards outstanding asJune 30, 2023 and 2022, stock-based compensation expense recognized associated with the vesting of March 31, 2023 are RSAs.RSAs and RSUs was $0.5 million and $0.1 million, respectively.

Total noncash stock-based compensation expense relating to the Company’s RSUsRSAs and RSAsRSUs recognized, before taxes, during the three and six months ended March 31,June 30, 2023 and 2022, is as follows (in thousands):

9. Subsequent Events

Pre-Funded Warrant Exercise

On April 20, 2023, a holder of Private Placement Pre-Funded Warrants opted to exercise a portion of the warrant into common stock. A total of 622,000 shares of the Private Placement Pre-Funded Warrants were exercised resulting in the issuance of an aggregate of 622,000 shares of common stock. After giving effect to this aforementioned exercise, no August 2022 Pre-Funded Warrants remain outstanding.

Nasdaq Delisting Notice

On April 25, 2023, the Company received a letter from Nasdaq’s Listing Qualifications Department notifying the Company that they were not in compliance with Nasdaq Listing Rule 5550(a)(2), as the minimum bid price for its listed securities was less than $1 for the previous 30 consecutive business days. The Company has a period of 180 calendar days, or until October 23, 2023, to regain compliance with the rule referred to in this paragraph. To regain compliance, the bid price of its common stock must close at $1 or more for a minimum of ten consecutive business days during the 180-day compliance period. The notice has no present impact on the listing of the Company’s securities on Nasdaq.

You should read the following discussion and analysis of our financial condition and results of operations together with the unaudited financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions, that are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the sections of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K filed with the SEC on March 16, 2023 and amended on March 17, 2023, titled “Risk Factors.”

Overview

We are a commercial-stage medical device company that designs, manufactures, and sells real-time high-definition image-guided, minimally invasive catheter-based systems that are used by physicians to treat patients with peripheral artery disease (“PAD”). Patients with PAD have a build-up of plaque in the arteries that supply blood to areas away from the heart, particularly the pelvis and legs. Our mission is to significantly improve the treatment of vascular disease through the introduction of products based on our Lumivascular platform, the only intravascular real-time high-definition image-guided system available in this market.

We design, manufacture, and sell a suite of products in the United States and select international markets. We are located in Redwood City, California. Our current Lumivascular platform consists of products including our Lightbox imaging console, the Ocelot and Tigereye family of devices, which are image-guided devices designed to allow physicians to penetrate a total blockage in an artery, known as a chronic total occlusion (“CTO”), and the Pantheris family of catheters, our image-guided atherectomy catheters which are designed to allow physicians to precisely remove arterial plaque in PAD patients.

We are in the process of developing CTO crossing devices to target the coronary CTO market. However, the market for medical devices in the coronary artery disease (“CAD”) space is highly competitive, dynamic, and marked by rapid and substantial technological development and product innovation and there is no guarantee that we will be successful in developing and commercializing any new CAD product. At this stage, we are working on understanding market requirements, and initiated the development process for the new CAD product, which we anticipate will require additional expenses.

We received CE Marking for our original Ocelot product in September 2011 and received from the U.S. Food and Drug Administration, or FDA, 510(k) clearance in November 2012. We received 510(k) clearance from the FDA for commercialization of Pantheris in October 2015. We received an additional 510(k) clearance for an enhanced version of Pantheris in March 2016 and commenced sales of Pantheris in the United States and select European countries promptly thereafter. In May 2018, we received 510(k) clearance from the FDA for our current next-generation version of Pantheris. In April 2019, we received 510(k) clearance from the FDA for our Pantheris Small Vessel (“SV”), a version of Pantheris targeting smaller vessels, and commenced sales in July 2019. In September 2020, we received 510(k) clearance of Tigereye, a next-generation CTO crossing system utilizing Avinger’s proprietary image-guided technology platform. Tigereye is a product line extension of Avinger’s Ocelot family of image-guided CTO crossing catheters. In January 2022, we received 510(k) clearance from the FDA for our Lightbox 3 imaging console, an advanced version of our Lightbox that allows for easy portability and offers significant reductions in size, weight, and production cost in comparison to the incumbent version.

In January 2023, we submitted a 510(k) application to the FDA for the Pantheris LV device, a next generation image guided atherectomy system for the treatment of larger vessels, such as the superficial femoral artery (“SFA”) and popliteal arteries. Pantheris LV is a line extension of our Pantheris and Pantheris SV family of atherectomy products. This catheter offers higher speed plaque excision for efficient removal of challenging occlusive tissue and multiple features to streamline and simplify user-operation, including enhanced tissue packing and removal, a radiopaque gauge to measure volume of plaque excised during the procedure, and enhanced guidewire management.

In April 2023, we received 510(k) clearance from the FDA for Tigereye Spinning Tip (“ST”), a next-generation image-guided CTO crossing system. Tigereye ST is a line extension of our Ocelot and Tigereye family of CTO crossing catheters. This new image-guided catheter incorporates design upgrades to the tip configuration and catheter shaft to increase crossing power and procedural success in challenging lesions, as well as design enhancements for ease of image interpretation during the procedure. The low-profile Tigereye ST has a working length of 140 cm and 5 French sheath. We intend to initiateinitiated a limited launch of Tigereye ST in the second quarter of 2023 and expect to subsequently expand to full commercial availability within the United States during the third quarter of 2023.

In June 2023, we received 510(k) clearance from the FDA for Pantheris Large Vessel (“LV”), a next generation image guided atherectomy system for the treatment of larger vessels, such as the superficial femoral artery (“SFA”) and popliteal arteries. Pantheris LV is a line extension of our Pantheris and Pantheris SV family of atherectomy products. This catheter offers higher speed plaque excision for efficient removal of challenging occlusive tissue and multiple features to streamline and simplify user-operation, including enhanced tissue packing and removal, a radiopaque gauge to measure volume of plaque excised during the procedure, and enhanced guidewire management. We initiated a limited launch of the Pantheris LV during the third quarter of 2023 and expect to expand to full commercial availability within the United States during the second half of 2023.

Current treatments for PAD, including bypass surgery, can be costly and may result in complications, high levels of post-surgery pain, and lengthy hospital stays and recovery times. Minimally invasive, or endovascular, treatments for PAD include stenting, angioplasty, and atherectomy, which is the use of a catheter-based device for the removal of plaque. These treatments all have limitations in their safety or efficacy profiles and frequently result in recurrence of the disease, also known as restenosis. We believe one of the main contributing factors to high restenosis rates for PAD patients treated with endovascular technologies is the amount of vascular injury that occurs during an intervention. Specifically, these treatments often disrupt the membrane between the outermost layers of the artery, which is referred to as the external elastic lamina (“EEL”).

We believe our Lumivascular platform is the only technology that offers radiation free, high-definition real-time visualization of the inside of the artery during PAD treatment through the use of optical coherence tomography (“OCT”), a high resolution, light-based, radiation-free imaging technology. Our Lumivascular platform provides physicians with high-definition real-time OCT images from the inside of an artery, and we believe Ocelot and Pantheris are the first products to offer intravascular visualization during CTO crossing and atherectomy, respectively. We believe this approach will significantly improve patient outcomes by providing physicians with a clearer picture of the artery using radiation-free image guidance during treatment, enabling them to better differentiate between plaque and healthy arterial structures. Our Lumivascular platform is designed to improve patient safety by enabling physicians to direct treatment towards the plaque, while avoiding damage to healthy portions of the artery.

During the first quarter of 2015, we completed enrollment of patients in VISION, a clinical trial designed to support our August 2015 510(k) submission to the FDA for our Pantheris atherectomy device. VISION was designed to evaluate the safety and efficacy of Pantheris to perform atherectomy using intravascular imaging and successfully achieved all primary and secondary safety and efficacy endpoints. We believe the data from VISION allows us to demonstrate that avoiding damage to healthy arterial structures, and in particular disruption of the external elastic lamina, which is the membrane between the outermost layers of the artery, reduces the likelihood of restenosis, or re-narrowing, of the diseased artery. Although the original VISION study protocol was not designed to follow patients beyond six months, we worked with 18 of the VISION sites to re-solicit consent from previous clinical trial patients in order for them to evaluate patient outcomes through 12 and 24 months following initial treatment. Data collection for the remaining patients from participating sites was completed in May 2017, and we released the final 12- and 24-month results for a total of 89 patients in July 2017.

During the fourth quarter of 2017, we began enrolling patients in INSIGHT, a clinical trial designed to support a submission to the FDA to expand the indication for our Pantheris atherectomy device to include the treatment of in-stent restenosis. Patient enrollment began in October 2017 and was completed in July 2021. Patient outcomes were evaluated at thirty days, six months and one year following treatment. In November 2021, we received 510(k) clearance from the FDA for this new clinical indication for treating in-stent restenosis with Pantheris using the data collected and analyzed from INSIGHT. We expect this will expand our addressable market for Pantheris to include a high-incidence disease state for which there are few available indicated or effective treatment options.

We are pursuing additional clinical data programs including a post-market study, IMAGE-BTK, that is designed to evaluate the safety and efficacy of Pantheris SV in the treatment of PAD lesions below-the-knee. We are currently enrolling patients, and we expect to complete enrollment during 2023.

We focus our direct sales force, marketing efforts and promotional activities on interventional cardiologists, vascular surgeons and interventional radiologists. We also work on developing strong relationships with physicians and hospitals that we have identified as key opinion leaders. Although our sales and marketing efforts are directed at these physicians because they are the primary users of our technology, we consider the hospitals and medical centers where the procedure is performed to be our customers, as they typically are responsible for purchasing our products. We are designing additional future products to be compatible with our Lumivascular platform, which we expect to enhance the value proposition for hospitals to invest in our technology. Pantheris qualifies for existing reimbursement codes currently utilized by other atherectomy products, further facilitating adoption of our products.

We have assembled a team with extensive medical device development and commercialization experience in both start-up and large, multi-national medical device companies. We assemble all of our catheter products at our manufacturing facility but certain critical processes, such as coating and sterilization, are performed by outside vendors. Our Lightbox 3 imaging console is assembled through a qualified contract manufacturer. We expect our current manufacturing facility in California will be sufficient through at least 2023. We generated revenues of $8.8 million in 2020, $10.1 million in 2021 and $8.3 million in 2022. Revenue in 2020 was adversely affected by COVID-19 as hospitals deferred elective procedures, which among other things, created unpredictability in case volume. This unpredictability created more volatility in our revenues which continued to adversely affect our business in 2021 and 2022. The decline in revenue in 2022 was also attributable to the adverse effects of staffing shortages, resource constraints on our customers as hospitals deferred elective procedures, and the impact of a very competitive market for talent on the retention of our commercial team.

Recent Developments

Hospital Capacity and Resource Constraints Update

As a result of the effects of hospital staffing shortages, we have continued to experience a significant volatility in sales, particularly as individuals, as well as hospitals and other medical providers, deferred elective procedures in response to resource constraints and capacity issues. We have continued to experience fluctuating sales as practitioners in certain jurisdictions were able to perform elective procedures while other jurisdictions were continuing to experience capacity issues. Hospital staffing shortages have had and are likely to continue to have adverse impacts on our business and results of operations. This situation has created a significant amount of volatility in the medical industry which makes future developments and results difficult to predict.

We believe capacity issues and resource constraints and the related increased cost pressures and burdens on the hospital systems have had and may continue to have an adverse effect on our ability to generate sales due to the fluctuating and unpredictable levels of capacity medical providers have to perform procedures that require the use of our products, as was the case since 2020. In addition, we have experienced disruptions in our manufacturing and supply chain, as well as delays in site initiation and patient enrollment for our clinical studies. If we are unable to successfully complete these or other clinical studies, our business and results of operations could be harmed.

Nasdaq Delisting Notice

On April 25, 2023, we received a letternotice (the “Bid Price Deficiency Letter”) from Nasdaq’sthe Listing Qualifications Department (the “Staff”) of The Nasdaq Stock Market, LLC (“Nasdaq”) notifying us that we were not in compliance with Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Requirement”), as the minimum bid price for our listed securities was less than $1$1.00 for the previous 30 consecutive business days. We have a period of 180 calendar days, or until October 23, 2023, to regain compliance with the rule referred to in this paragraph. To regain compliance, during the 180 day period, the bid price of our common stockCommon Stock must close at $1$1.00 or more for a minimum of ten consecutive business days during the 180-day compliance period.days. The notice has no present impact on the listing of the Company’sour securities on Nasdaq.

If we do not regain compliance during such 180-day compliance period, we may be eligible for an additional 180 calendar days, provided that we meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for Nasdaq except for Nasdaq Listing Rule 5550(a)(2), and provide a written notice of itsour intention to cure this deficiency during the second compliance period, including by effecting a reverse stock split, if necessary. If it appears to Nasdaq that we will not be able to cure the deficiency, or if we are otherwise not eligible, we will receive written notification that our securities are subject to delisting. At that time, we may appeal the delisting determination to a hearings panel pursuant to the procedures set forth in the applicable Nasdaq Listing Rules.

In addition, on May 18, 2023, we received notice (the “Stockholders’ Equity Deficiency Letter”) from the Staff that we no longer satisfy the $2.5 million stockholders’ equity requirement for continued listing on The Nasdaq Capital Market, or the alternatives to that requirements – a $35 million market value of listed securities or $500,000 in net income in the most recent fiscal year or two of the last three fiscal years – as required by Nasdaq Listing Rule 5550(a) and 5550(b)(1) require us to maintain a minimum stockholders’ equity of $2.5 million.  (the “Equity Requirement”).

As of March 31, 2023, our stockholders’ equity was below $2.5 million. We have not yet received from Nasdaq a notice of non-compliance with the minimum stockholders’ equity requirement. If we are unable to regain complianceBid Price Deficiency Letter, the Stockholders’ Equity Deficiency Letter has no immediate effect on our continued listing on The Nasdaq Capital Market. In accordance with the minimum stockholders’ equity requirement, including by raising capital in a manner that provides accretive value to our equity, Nasdaq may delist our common stock. While the Nasdaq Listing Rules, provide that we maywere provided 45 calendar days, or until July 3, 2023, to submit a plan to regain compliance with the minimum stockholders’ equity requirement,Equity Requirement (the “Compliance Plan”). We submitted the Compliance Plan to Nasdaq on July 3, 2023. If the Compliance Plan is accepted, the Staff has the discretion to grant the Company an extension of up to 180 calendar days from the date of the Staff’s notice, or November 14, 2023, to regain compliance with the Equity Requirement. However, there can be no guarantee that Nasdaqthe Staff will accept such planthe Compliance Plan, or that such planwe will be successful.able to regain compliance with the Bid Price Requirement or the Equity Requirement.

If the Staff does not accept the Compliance Plan, the Staff will provide written notification to the Company that the Compliance Plan has been rejected, which determination may be appealed to a Nasdaq Hearings Panel (the “Panel”). The request for a hearing would stay any further action by the Staff at least pending a hearing before the Panel and the expiration of any extension period that the Panel may grant to the Company following the hearing.

We intend to actively monitor our bid price and stockholders’ equity and will consider available options to resolve these deficiencies and regain compliance with the Nasdaq Listing Rules. We expect that we will be required to effect a reverse stock split in order to regain compliance with the Bid Price Requirement. We also expect that regaining compliance with the Equity Requirement will require us to take actions such as converting outstanding indebtedness into equity or issuing additional shares of capital stock. However, we may not be successful in executing such transactions on terms favorable to us, or at all. In addition, there can be no guarantee that such efforts will succeed in helping us regain compliance with the Nasdaq Listing Rules.

Global Supply Chain

We are closely monitoring the general economic conditions on global supply chain, manufacturing, and logistics operations. As inflationary pressures increase, we anticipate that our production and operating costs may similarly increase, including costs and availability of materials and labor. In addition, port closures and labor shortages have resulted in manufacturing and shipping constraints generally. While we have had sufficient inventory on-hand to meet our current production requirements and customer demand, we have experienced some constraints with respect to the availability of certain materials and extended lead times from certain key suppliers. We have also experienced some delays in shipping products to our customers. Any significant delay or interruption in our supply chain could impair our ability to meet the demands of our customers in the future and could harm our business.

We may need to identify and qualify new suppliers in response to disruptions and difficulties experienced by some of our current suppliers. The process of identifying and qualifying suppliers is lengthy with no guarantee of ultimately mitigating the current issues we are experiencing. This process can include but is not limited to delays in qualification, quality issues on components, and higher costs to source these components. All of these issues may impair our ability to meet the demands of our customers in the future.

Reverse Stock Split

On March 11, 2022, our board of directors approved an amendment to our amended and restated certificate of incorporation to effect a 1-for-20 reverse stock split of our issued and outstanding common stock. The reverse stock split became effective on March 14, 2022. The par value of the common stock and preferred stock was not adjusted as a result of the reverse stock split. All common stock, stock options, and restricted stock units, and per share amounts in the financial statements have been retroactively adjusted for all periods presented to give effect to the reverse stock splits.

Financing

During the three and six months ended March 31,June 30, 2023, our net loss and comprehensive net loss was $4.6 million;$4.2 million and $8.8 million, respectively; during the years ended December 31, 2022 and 2021, it was $17.6 million and $17.4 million, respectively. We have not been profitable since inception, and as of March 31,June 30, 2023, our accumulated deficit was $407.0$411.2 million. Since inception, we have financed our operations primarily through private and public placements of our preferred and common securities and, to a lesser extent, debt financing arrangements.

In September 2015, we entered into a Term Loan Agreement (the “Loan Agreement”) with CRG Partners III L.P. and certain of its affiliated funds (collectively, “CRG”), under which we were able to borrow up to $50.0 million on or before the end of the twenty-four (24) month period commencing on the first Borrowing Date (as defined in the Loan Agreement), subject to certain terms and conditions. Under the Loan Agreement we borrowed $30.0 million on September 22, 2015 and an additional $10.0 million on June 15, 2016. Contemporaneously with the execution of the Loan Agreement, we entered into a Securities Purchase Agreement with CRG (the “Securities Purchase Agreement”), pursuant to which CRG purchased 44 shares of our common stock on September 22, 2015 at a price of $111,928 per share, which represents the 10-day average of closing prices of our common stock ending on September 21, 2015. Pursuant to the Securities Purchase Agreement, we filed a registration statement covering the resale of the shares sold to CRG and must comply with certain affirmative covenants during the time that such registration statement remains in effect.

On February 14, 2018, we entered into a Series A preferred stock Purchase Agreement (the “Series A Purchase Agreement”) with CRG, pursuant to which it agreed to convert $38.0 million of the outstanding principal amount of its senior secured term loan (plus the back-end fee and prepayment premium applicable thereto) under the Loan Agreement into a newly authorized Series A preferred stock. As discussed in the section of this report titled “Dividend Policy,” the holders of Series A preferred stock are entitled to receive annual accruing dividends at a rate of 8%, payable in additional shares of Series A preferred stock or cash, at our option. The shares of Series A preferred stock have no voting rights and rank senior to all other classes and series of the Company’s equity in terms of repayment and certain other rights.

We have entered into several amendments (collectively, the “Amendments”) to the Loan Agreement with CRG since September 2015, the most recent of which, was entered into on August 10, 2022. The Amendments, among other things: (1) extended the interest-only period through December 31, 2023; (2) extended the period during which we may elect to pay a portion of interest in payment-in-kind, or PIK, interest payments through December 31, 2023 so long as no Default (as defined in the Loan Agreement) has occurred and is continuing; (3) permitted us to make our entire interest payments in PIK interest payments through December 31, 2023 so long as no Default has occurred and is continuing; (4) extended the Stated Maturity Date (as defined in the Loan Agreement) to December 31, 2025; (5) reduced the minimum liquidity covenant to $3.5 million at all times; (6) eliminated the minimum revenue covenant for 2018, 2019 and 2020; (7) reduced the minimum revenue covenant to $8 million for 2021 and 2022; (8) added minimum revenue covenants of $10 million for 2023, $14.5 million for 2024 and $17 million for 2025; (9) changed the date under the on-going stand-alone representation regarding no “Material Adverse Change” to December 31, 2020; (10) amended the on-going stand-alone representation and stand-alone Event of Default (as defined in the Loan Agreement) regarding Material Adverse Change such that any adverse change in or effect upon the revenue of us and our subsidiaries due to the outbreak of COVID-19 will not constitute a Material Adverse Change; and (11) provided CRG with board observer rights. 

Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles.GAAP. The preparation of these financial statements requires us to make estimates and assumptions for the reported amounts of assets, liabilities, revenues, expenses and related disclosures of contingent assets and liabilities. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and any such differences may be material. There have been no significant and material changes in our critical accounting policies during the three months ended March 31,June 30, 2023, as compared to those disclosed in “Management’s Discussion and Analysis of Financial Conditions and Results of Operations - Critical Accounting Policies and Significant Judgments and Estimates” in our most recent Annual Report on Form 10-K, as filed with the SEC on March 16, 2023 and amended on March 17, 2023.

Components of Our Results of Operations

Revenues

All of our revenues are currently derived from sales of our various PAD catheters in the United States and select international markets, Lightbox consoles, and related services. We expect our revenues to increase in 2023 due to the introduction of our Tigereye ST and Pantheris LV products, (provided that Pantheris LV receives 510(k) clearance), investments in sales personnel and easing conditions involving hospital resource and capacity issues. For the three and six months ended March 31,June 30, 2023, there was one customer that represented 13%17% and 16% of revenues.revenues, respectively. For the three and six months ended March 31,June 30, 2022, there was one customer that represented 14%16% and 15% of revenues.revenues, respectively.

Revenues may fluctuate from quarter to quarter due to a variety of factors including capital equipment purchasing patterns that are typically increased towards the end of the calendar year and decreased in the first quarter and our ability to have product available in light of supply chain challenges. In addition, during the first quarter, our results can be harmed by adverse weather and by resetting of annual patient healthcare insurance plan deductibles, both of which may cause patients to delay elective procedures. In the third quarter, the number of elective procedures nationwide is historically lower than other quarters throughout the year, which we believe is primarily attributable to the summer vacations of physicians and their patients. Additionally, we believe hospital capacity and resource constraints have had and will continue to have an adverse effect on our ability to generate sales due to the fluctuating and unpredictable levels of capacity medical providers have to perform procedures that require the use of our products.

Cost of Revenues and Gross Margin

Cost of revenues consists primarily of costs related to manufacturing overhead, materials and direct labor. We expense all warranty costs and inventory provisions as cost of revenues. We periodically write-down inventory for estimated excess, obsolete and non-sellable inventories based on assumptions about future demand, past usage, changes to manufacturing processes and overall market conditions. A significant portion of our cost of revenues currently consists of manufacturing overhead costs. These overhead costs include the cost of quality assurance, material procurement, inventory control, facilities, equipment and operations supervision and management. We expect overhead costs as a percentage of revenues to become less significant as our production volume increases. Cost of revenues also includes depreciation expense for production equipment, depreciation and related maintenance expense for placed Lightboxes held by customers and certain direct costs such as those incurred for shipping our products.

We calculate gross margin as gross profit divided by revenues. Our gross margin has been and will continue to be affected by a variety of factors, primarily production volumes, manufacturing costs, product yields, headcount, charges for excess and obsolete inventories and cost-reduction strategies. We intend to use our design, engineering and manufacturing capabilities to further advance and improve the efficiency of our manufacturing processes, which we believe will reduce costs and increase our gross margin. In the future, we may seek to manufacture certain of our products outside the United States to further reduce costs. Our gross margin will likely fluctuate from quarter to quarter as we continue to introduce new products and sales channels, and as we adopt new manufacturing processes and technologies.

Research and Development Expenses

Research and development (“R&D”), expenses consist primarily of engineering, product development, clinical and regulatory affairs, consulting services, materials, depreciation and other costs associated with products and technologies in development. These expenses include employee compensation, including stock-based compensation, supplies, materials, quality assurance expenses allocated to R&D programs, consulting, related travel expenses and facilities expenses. Clinical expenses include clinical trial design, clinical site reimbursement, data management, travel expenses and the cost of manufacturing products for clinical trials. We expect R&D expenses to vary over time depending on the level and timing of our new product development efforts, as well as our clinical development, clinical trial and other related activities.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”), expenses consist primarily of compensation for personnel, including stock-based compensation, selling and marketing functions, physician education programs, business development, finance, information technology and human resource functions. Other SG&A expenses include commissions, training, travel expenses, educational and promotional activities, marketing initiatives, market research and analysis, conferences and trade shows, professional services fees, including legal, audit and tax fees, insurance costs and general corporate expenses. We expect SG&A expenses to increase as we expand our commercial efforts and additional costs related to corporate matters.

Interest Expense, Net

Interest expense, net consists primarily of interest incurred on our outstanding indebtedness and non-cash interest related to the amortization of debt discount and issuance costs associated with our debt agreement.

Other (Expense) Income, (Expense), Net

Other (expense) income, (expense), net primarily consists of gains and losses resulting from the remeasurement of foreign exchange transactions and other miscellaneous income and expenses.

Results of Operations:

Comparison of Three Months Ended March 31,June 30, 2023 and 2022

Revenues.

For the three months ended March 31,June 30, 2023, revenue remained flatdecreased by approximately $0.1 million or 4% compared to the three months ended March 31,June 30, 2022. Our revenues reflect the fluctuating demand partially due to the adverse impacts of hospital staffing shortages as capacity limitations in hospitals have limited the ability of practitioners to perform elective surgical procedures using our products in certain jurisdictions. In addition, we have experienced and expect that we will continue to experience attrition and turnover of our sales professionals which has resulted in a less experienced sales team and limited our ability to maintain an adequate presence in some markets. The attrition and turnover are largely attributable to the increasingly competitive labor market landscape, which has had an adverse effect on our ability to generate revenues for the quarter ended March 31,June 30, 2023.

Cost of Revenues and Gross Margin.

For the three months ended March 31,June 30, 2023, cost of revenues decreased by less than $0.1 million or 8%3% compared to the three months ended March 31,June 30, 2022. This decrease was primarily attributable to cost efficiencies and continuing optimization of processes.the decrease in revenues. Stock-based compensation expense within cost of revenues totaled $28,000$35,000 and $7,000 for the three months ended March 31,June 30, 2023 and 2022, respectively.

Gross margin for the three months ended March 31,June 30, 2023 increaseddecreased to 34%30%, compared to 28% in31% during the three months ended March 31,June 30, 2022. The increasedecrease in gross margin was primarily due to cost efficiencies and optimizations as well as favorable changesthe decrease in product mix.revenues which resulted in a decline in economies of scale.

Research and Development Expenses.

R&D expense for the three months ended March 31,June 30, 2023 increased $0.3decreased $0.1 million or 26%9% compared to the three months ended March 31,June 30, 2022 primarily due to the completion of our development efforts of Tigereye ST and Pantheris LV, partially offset by ongoing product development of our coronary device program. Stock-based compensation expense within R&D totaled approximately $83,000$51,000 and $13,000 for the three months ended March 31,June 30, 2023 and 2022, respectively. We expect R&D expense to fluctuate based on the ongoing product development of our coronary device.

Selling, General and Administrative Expenses.

SG&A expense for the three months ended March 31,June 30, 2023 decreased by $0.6 million or 15%,remained flat compared to the three months ended March 31,June 30, 2022 due to decreasesresulting from a decrease in sales personnel costs and decreases in third-party professional services, and other ancillary expenses.offset by increases in certain variable compensation. Stock-based compensation expense within SG&A totaled approximately $134,000$153,000 and $32,000$16,000 for the three months ended March 31,June 30, 2023 and 2022, respectively.

Interest Expense, Net.

Interest expense, net is comprised of interest expense net of interest income. Interest Expense, net for the three months ended March 31,June 30, 2023 decreased by 11% or $47,000,remained flat compared to the three months ended March 31,June 30, 2022, primarily due towhich resulted from increases in interest income due to the recent rising money market interest rates, partially offset by the higher CRG loan balance from PIK interest being compounded.

Other (Expense) Income, (Expense), Net.

Other (expense) income, (expense), net primarily consists of gains and losses resulting from the remeasurement of foreign exchange transactions, which are typically a small percentage of transaction volume, and other miscellaneous income and expenses. Other (expense) income, (expense), net for the three months ended March 31,June 30, 2023 remained flat in comparison to the three months ended March 31,June 30, 2022 as both periods consisted primarily of remeasurement gains and losses from foreign exchange transactions, resulting in nominal changes between periods.