Avinger Inc
Annual Report 2015

Plain-text annual report

Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549 FORM 10-K (Mark One) x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2015 or o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934 Commission File Number: 001-36817 AVINGER, INC.(Exact name of registrant as specified in its charter) Delaware20-8873453(State or other jurisdiction of(I.R.S. Employerincorporation or organization)Identification Number) 400 Chesapeake DriveRedwood City, California 94063(Address of principal executive offices and zip code) (650) 241-7900(Telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class:Name of Each Exchange on which RegisteredCommon Stock, par value $0.001 per shareThe NASDAQ Global Market Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes x No o Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files). Yes x No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to thebest of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to thisForm 10-K. o Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer oAccelerated filer oNon-accelerated filer x(Do not check if asmaller reporting company)Smaller reporting company o Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the closing price of ashare of the registrant’s common stock on June 30, 2015 as reported by the NASDAQ Global Market on such date was approximately $158.0 million. Thiscalculation does not reflect a determination that certain persons are affiliates of the registrant for any other purpose. As of March 7, 2016, the number of outstanding shares of the registrant’s common stock, par value $0.001 per share, was 12,692,189.  Table of Contents AVINGER, INC.ANNUAL REPORT ON FORM 10-KFOR THE FISCAL YEAR ENDED DECEMBER 31, 2015TABLE OF CONTENTS PagePart IItem 1.Business2Item 1A.Risk Factors22Item 1B.Unresolved Staff Comments44Item 2.Properties44Item 3.Legal Proceedings44Item 4.Mine Safety Disclosures44 Part IIItem 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities45Item 6.Selected Financial Data47Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations48Item 7A.Quantitative and Qualitative Disclosures About Market Risk59Item 8.Financial Statements and Supplementary Data59Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure59Item 9A.Controls and Procedures59Item 9B.Other Information60 Part IIIItem 10.Directors, Executive Officers and Corporate Governance61Item 11.Executive Compensation68Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters81Item 13.Certain Relationships and Related Transactions, and Director Independence82Item 14.Principal Accountant Fees and Services84 Part IVItem 15.Exhibits and Financial Statement Schedules85Signatures116Exhibit Index117 “Avinger,” “Ocelot,” “Pantheris,” and “Lumivascular” are trademarks of our company. Our logo and our other trade names, trademarks and servicemarks appearing in this Annual Report on Form 10-K are our property. Other trade names, trademarks and service marks appearing in this Annual Report onForm 10-K are the property of their respective owners. Solely for convenience, our trademarks and trade names referred to in this Annual Report on Form 10-Kappear without the ™ symbol, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law,our rights, or the right of the applicable licensor to these trademarks and trade names. Certain market and industry data used in this Annual Report onForm 10-K, where noted, is attributable to Millennium Research Group, Inc. Millennium Research Group asserts copyright protection over the use of suchinformation and reserves all rights with respect to its use. This information has been reprinted with Millennium Research Group’s permission and thereproduction, distribution, transmission or publication of such information is prohibited without its consent. Table of Contents SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains forward-looking statements concerning our business, operations and financial performance andcondition, as well as our plans, objectives and expectations for our business, operations and financial performance and condition. Any statements containedherein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statementsby terminology such as “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,”“objective,” “plan,” “predict,” “potential,” “positioned,” “seek,” “should,” “target,” “will,” “would” and other similar expressions that are predictions of orindicate future events and future trends, or the negative of these terms or other comparable terminology. These forward-looking statements include, but arenot limited to, statements about: · the outcome of our clinical studies and plans to conduct further clinical studies; · our plans to modify our current products, or develop new products, to address additional indications; · the expected timing of 510(k) submission to FDA, and associated marketing clearances by FDA, for enhanced versions of Pantheris; · the expected growth in our business and our organization; · our expectations regarding government and third-party payor coverage and reimbursement; · our ability to retain and recruit key personnel, including the continued development of our sales and marketing infrastructure; · our ability to obtain and maintain intellectual property protection for our products; · our estimates of our expenses, ongoing losses, future revenue, capital requirements and our needs for, or ability to obtain, additional financing; · our expectations regarding the time during which we will be an emerging growth company under the Jumpstart Our Business Startups Act; · our ability to identify and develop new and planned products and acquire new products; · our financial performance; · our ability to remain in compliance with laws and regulations that currently apply or become applicable to our business, both in the UnitedStates and internationally; and · developments and projections relating to our competitors or our industry. We believe that it is important to communicate our future expectations to our investors. However, there may be events in the future that we are notable to accurately predict or control and that may cause our actual results to differ materially from the expectations we describe in our forward-lookingstatements. These forward-looking statements are based on management’s current expectations, estimates, forecasts and projections about our business andthe industry in which we operate and management’s beliefs and assumptions and are not guarantees of future performance or development and involveknown and unknown risks, uncertainties and other factors that are in some cases beyond our control. As a result, any or all of our forward-looking statementsin this Annual Report on Form 10-K may turn out to be inaccurate. Factors that may cause actual results to differ materially from current expectations include,among other things, those listed in Part I, Item 1A under “Risk Factors” and elsewhere in this Annual Report on Form 10-K. Potential investors are urged toconsider these factors carefully in evaluating the forward-looking statements. These forward-looking statements speak only as of the date of this AnnualReport on Form 10-K. We assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomesavailable in the future. You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in theforward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected inthe forward-looking statements will be achieved or occur. Except as required by law, we undertake no obligation to update publicly any forward-lookingstatements for any reason after the date of this Annual Report on Form 10-K to conform these statements to actual results or to changes in our expectations. You should read this Annual Report on Form 10-K and the documents that we reference in this Annual Report on Form 10-K and have filed with theSEC as exhibits to the Annual Report on Form 10-K with the understanding that our actual future results, levels of activity, performance and events andcircumstances may be materially different from what we expect. 1Table of Contents PART I ITEM 1. BUSINESS Overview We are a commercial-stage medical device company that designs, manufactures and sells image-guided, catheter-based systems that are used byphysicians to treat patients with peripheral artery disease, or PAD. Patients with PAD have a build-up of plaque in the arteries that supply blood to areas awayfrom the heart, particularly the pelvis and legs. Our mission is to dramatically improve the treatment of vascular disease through the introduction of productsbased on our Lumivascular platform, the only intravascular image-guided system available in this market. We manufacture and sell a suite of products in theUnited States and select European markets. Our current products include our Lightbox imaging console, as well as our Wildcat, Kittycat, and the Ocelotfamily of catheters, which are designed to allow physicians to penetrate a total blockage in an artery, known as a chronic total occlusion, or CTO, andPantheris, our image-guided atherectomy device, designed to allow physicians to precisely remove arterial plaque in PAD patients. In October 2015, wereceived 510(k) clearance from the U.S. Food and Drug Administration, or FDA, for commercialization of Pantheris, and in March 2016 received FDAapproval for an enhanced version of Pantheris, and promptly thereafter we commenced sales of Pantheris in the U.S. and in select European countries. Webelieve that Pantheris will significantly enhance our market opportunity within PAD and can expand the overall addressable market for PAD endovascularprocedures. According to an article published in The Lancet, the global prevalence of PAD was estimated at 202 million people in 2010. The prevalence of PADin the United States alone was estimated at 18 million people in 2010 and is projected to grow to 21 million people by 2020 according to the Sage Group.Despite its prevalence, PAD is underdiagnosed and undertreated relative to many other serious vascular conditions, including coronary artery disease, orCAD, in part because many PAD patients are asymptomatic or dismiss their symptoms as normal signs of aging. Despite the relative undertreatment of PAD,Millennium Research Group estimates that over 570,000 catheter-based PAD procedures in the pelvis and legs were performed in the United States in 2013,which corresponded to a $1.0 billion market. Millennium Research Group also estimates that the number of catheter-based PAD procedures will grow toalmost 700,000 in 2017, representing a $1.3 billion market in the United States. Higher diagnosis and intervention rates resulting from greater physician andpatient awareness of PAD, as well as higher prevalence, may significantly expand the market opportunity for PAD treatments, according to the MillenniumResearch Group. Current treatments for PAD, including bypass surgery, can be costly and may result in complications, high levels of post-surgery pain and lengthyhospital stays and recovery times. Minimally invasive, or endovascular, treatments include stents, angioplasty, and atherectomy devices, which are catheter-based products for the removal of plaque. These treatments also have limitations in their safety or efficacy profiles and frequently result in recurrence of thedisease, also known as restenosis. We believe one of the main contributing factors to high restenosis rates for PAD patients treated with endovasculartechnologies is the amount of vascular injury that occurs during an intervention. Specifically, these treatments often disrupt the membrane between theoutermost layers of the artery, which is referred to as the external elastic lamina, or EEL. Our Lumivascular platform is the only technology that offers real-time visualization of the inside of the artery during PAD treatment. We believe thisapproach will significantly improve patient outcomes by providing physicians with a clearer picture of the artery using radiation-free image guidance duringtreatment, enabling them to better differentiate between plaque and healthy arterial structures. Our Lumivascular platform is designed to improve patientsafety by enabling physicians to direct treatment towards the plaque, while avoiding healthy portions of the artery. In March 2015, we completed enrollment of 134 patients in VISION, a clinical trial designed to support our August 2015 510(k) filing with the FDAfor our Pantheris atherectomy device. VISION was designed to evaluate the safety and efficacy of Pantheris to perform atherectomy using intravascularimaging and successfully achieved all primary and secondary safety and effectiveness endpoints. We believe the data from VISION will also allow us todemonstrate that avoiding damage to healthy arterial structures, and in particular disruption of the EEL, reduces the likelihood of restenosis, or re-narrowing,of the diseased artery. We have recently commenced commercialization of Pantheris as part of our Lumivascular platform in the United States and in selectEuropean countries after obtaining the required marketing authorizations. We have assembled a team with extensive medical device development and commercialization capabilities, including our founder, John B.Simpson, Ph.D., M.D., who founded Advanced Cardiovascular Systems, FoxHollow Technologies and Perclose, among other vascular medical devicecompanies. We began commercializing our initial non-Lumivascular platform products in 2009 and introduced our Lumivascular platform products in theUnited States in late 2012. We generated revenues of $10.7 million in 2015, $11.2 million in 2014 and $13.0 million in 2013. 2Table of Contents Overview of Peripheral Arterial Disease Atherosclerosis is a progressive, degenerative condition in which plaque, consisting of lipids, cholesterol, calcium and other substances found in theblood stream, accumulates on the arterial wall. The accumulation of plaque can result in the narrowing of an artery, which may lead to serious healthproblems. Plaque can occur in many areas of the body and may vary in composition, density and size. These blockages sometimes contain hard areas,characterized as calcified plaque, as well as softer deposits consisting of fibrous or fatty tissue. As plaque continues to accumulate, it can completely blockthe artery, making it particularly difficult for physicians to treat. Comparison of a normal artery to an atherosclerotic artery 3Table of Contents PAD is atherosclerosis in the arteries that supply blood to areas other than the heart, particularly the pelvis and legs, and may lead to serioussymptoms such as pain, fatigue or numbness. Genetic predisposition, diabetes, smoking, hypertension, physical inactivity, high cholesterol, obesity andaging all increase the risk of developing PAD. In extreme cases, PAD can lead to critical limb ischemia, or CLI, which, if left untreated, can resultin ulceration, infection, or gangrene in the feet and legs and eventually limb amputation or death. The Transatlantic Intersociety Consensus for theManagement of Peripheral Arterial Disease, or TASC II, estimates that 55% of CLI patients will undergo amputation or die within one year after the diagnosis. Current Treatments for PAD and Their Limitations Physicians have several options available to treat PAD. For mild cases, lifestyle changes or drug therapy may slow or stabilize progression of thedisease and alleviate symptoms. For more advanced cases of PAD, a physician may employ minimally-invasive endovascular procedures, or surgicalinterventions such as bypass or amputation. Medical Management The large majority of cases of diagnosed PAD in the United States are medically managed, according to the Society of Interventional Radiology. Forthis population, lifestyle changes, including improved diet, regular exercise and smoking cessation, as well as drug treatment are often prescribed. Althoughthese measures can be effective, many people are unable to sustain them. In addition, these measures may reduce the symptoms, but do not treat theunderlying causes of the disease. Physicians may also prescribe medications that lower cholesterol and reduce blood pressure. These drug therapies aregenerally prescribed for the life of the patient and do not treat the obstruction, making them an ineffective treatment for many patients. As a result, many ofthese patients will ultimately require more aggressive treatments. Surgery Bypass Surgery. More severe cases of PAD may be treated by surgeons with bypass surgery. This procedure entails using a synthetic graft orharvesting a healthy vessel from another area of the body and grafting it around a blocked portion of an artery. This procedure diverts blood flow around theoccluded area to ensure that the tissue supplied by these arteries receives sufficient blood flow. Given its invasive nature, bypass surgery is performed byphysicians in an operating room with the patient under general anesthesia. Bypass surgery involves multi-day hospital stays for healing and rehabilitation.General anesthesia and the potential for surgical infections make this approach less suitable for patients with conditions such as high blood pressure, heartfailure, chronic obstructive pulmonary disease or poor kidney function. We estimate there were over 150,000 lower extremity bypass surgeries performed inthe United States in 2013. Amputation. CLI is a serious form of PAD caused by severe lack of blood flow to the legs and often results in pain at rest and tissue breakdown.Physicians may recommend full or partial amputation of the leg or foot for patients with CLI. TASC II estimates that 30% of patients with CLI will require anamputation within one year of diagnosis, and 15% of patients who undergo amputation of one leg will undergo amputation of the other leg within two yearsof the first amputation. According to TASC II, the mortality rate for patients with CLI is 25% at one year from the development of the condition. The SageGroup estimates that approximately 200,000 amputations occur annually as a result of CLI. Endovascular Interventions In recent years, technologies and techniques have improved such that many forms of PAD can now be treated by physicians with endovascularapproaches. We believe PAD endovascular interventions will continue to increase due to improved safety and effectiveness of endovascular proceduresrelative to surgical alternatives, together with greater physician and patient awareness of the disease. The most common endovascular treatments includeballoon angioplasty, stenting and atherectomy. These procedures involve a physician feeding a catheter over a guidewire through a small incision, typicallywhile using fluoroscopy, or x-ray, as a visual guide. In the event that the patient has a CTO, the physician may require a specialized guidewire, supportcatheter or other device to cross the CTO prior to treatment consisting of balloon angioplasty, stenting, atherectomy or some combination thereof. Fluoroscopy is the primary imaging tool currently used during endovascular treatments but delivers limited information to physicians. Thistechnology provides an external view of the artery and does not allow physicians to differentiate between plaque and healthy arterial structures.Additionally, fluoroscopy exposes physicians, hospital staff and patients to radiation, which can lead to cataracts, cancer and abnormal blood cell counts. Inaddition, physicians frequently perform angiography in combination with fluoroscopy to assess the location and severity of the blockage. Angiographyrequires the use of contrast dye, which can increase the risk of kidney damage and may lead to acute kidney failure. 4Table of Contents Importance of the External Elastic Lamina. Scientific research has identified the importance of minimizing vascular injury during an endovascularintervention, and specifically the disruption of the membrane between the outer most layers of the artery, which is referred to as the external elastic lamina, orEEL. A study by the Sanford Burnham Institute concluded that disruption of the area around the EEL creates an inflammatory response significantly greaterthan when the EEL is not injured, ultimately leading to accelerated narrowing of the artery. This narrowing of the artery is known as restenosis, which canlead to the restriction of blood flow. EEL disruption can be caused by wire-based CTO crossing, dissection from balloon angioplasty, stent placement, or anatherectomy device cutting through this area. Lumivascular ViewCross-Sectional View Image of the EEL using our visualization compared to a cross sectional view of an artery. A study from New York’s Mount Sinai Medical Center, published in the Journal of Endovascular Therapy in 2015, demonstrated the correlationbetween restenosis rates and vascular injury during directional atherectomy procedures. Specifically, the study examined the composition of the tissueremoved during treatment of 116 patients and assessed restenosis rates after one year. The study found that in 53% of the patients, the extracted tissuecontained evidence of vascular injury. In this group of patients the restenosis rate, one-year after treatment, was 97%, while in the group of patients withoutevidence of vascular injury, the restenosis rate was only 11%. The data from the Mount Sinai Medical Center study are summarized in the following chart: Atherectomy Procedures — Restenosis Rates at 1-Year We believe balloon angioplasty, stenting and current atherectomy procedures often result in vascular injury, limiting their safety and efficacy, andincrease restenosis rates associated with these treatments. 5Table of Contents Balloon Angioplasty. In an angioplasty procedure, a miniature balloon attached to the tip of the treatment catheter opens the blood vessel byexpanding the vessel and compressing plaque against the arterial wall. While angioplasty catheters are relatively easy to use, they stretch the arterial wall,often leading to dissections of, and damage to, the EEL. Furthermore, angioplasty does not actually remove the plaque, which remains in the artery. Differentvariations of balloon catheters have been developed for the treatment of PAD, claiming additional benefits compared to standard angioplasty. These includecutting or scoring balloons designed to treat blockages with lower inflation pressures, as well as drug-coated balloons designed to suppress the inflammatoryresponse to minimize restenosis. According to TASC II, 35% of angioplasty treatments result in restenosis at one year and 52% at three years. MillenniumResearch Group estimates that 500,000 PAD angioplasty procedures in the pelvis and legs were performed in the United States in 2013, 62% of whichrequired the additional use of a stent. Stenting. A stent is a wire-mesh tube that acts as a scaffold inside the artery to maintain adequate blood flow. Stents are currently available in baremetal and drug-coated varieties, with the latter designed to inhibit restenosis. Since stents rely on a similar expansion mechanism as balloons, we believethey also cause injury to the arterial wall and damage healthy arterial structures during placement. According to TASC II, 27% of PAD stent treatments resultin restenosis at one year and 36% at three years. Additionally, according to a study in the Journal of the American College of Cardiology, stents placed in thelegs fracture in approximately 25% of cases and, in such cases, have one-year patency, or absence of restenosis, rates of 41%, compared to 84% in cases withno stent fractures. Stents placed in the legs are often longer than coronary stents due to the diffuse nature of the lesions and the arterial anatomy, and longerstents have significantly higher fracture rates. Once a stent is implanted, it cannot be removed, which may limit future treatment options such as angioplasty,additional stenting, atherectomy and bypass surgery. Millennium Research Group estimates that 370,000 PAD stent procedures in the pelvis and legs wereperformed in the United States in 2013. Atherectomy. Atherectomy is a procedure in which plaque is cleared from the arterial walls using a catheter-based technology with a mechanism toremove or displace diseased tissue. There are several types of atherectomy devices, including directional, rotational and laser, each with different mechanismsof action to remove or displace plaque. Except for Pantheris, currently available atherectomy devices rely on fluoroscopy rather than on- board imaging toprovide visual guidance throughout the entire procedure. These atherectomy treatments frequently require the use of a stent or balloon to achieve the desiredoutcome and cannot selectively target the removal of only diseased tissue. As a result, traditional atherectomy technologies can damage the blood vesselbeing treated, which we believe increases the risk of restenosis. According to an article published in the Journal of Invasive Cardiology reviewing publishedclinical data, one-year restenosis rates for existing atherectomy technologies range from 22% to 46%. According to Millennium Research Group, there were80,000 atherectomy procedures performed in the pelvis and legs in the United States in 2013, 86% of which required the use of a stent or balloon. Our Solution Our pioneering Lumivascular platform combines best-in-class interventional devices with optical coherence tomography, or OCT, a high resolution,light-based, radiation-free intravascular imaging technology. Our Lumivascular platform provides physicians with real-time OCT images from the inside ofan artery, and we believe Ocelot and Pantheris are the first products to offer intravascular visualization during CTO crossing and atherectomy, respectively. Visualization using our Lumivascular technology compared to standard fluoroscopy imaging We believe the combination of enhanced visualization and the ability to precisely target the diseased portion of an artery will allow physicians toaccess difficult-to-treat areas and significantly improve the safety and efficacy of endovascular procedures for patients. Market acceptance of ourLumivascular platform products may be hindered if physicians are not presented with compelling data from long-term studies of the safety and efficacy of ourLumivascular platform products as compared to alternative procedures such as angioplasty, stenting, bypass surgery or other atherectomy procedures.Physicians will also need to appreciate the value of real-time imaging in improving patient outcomes in order to change current methods for treating PADpatients. We believe that our Lumivascular platform provides the following benefits to physicians, hospitals and patients, as compared to balloons, stents andother atherectomy procedures: 6Table of Contents · Improved efficacy through reduced risk of restenosis. Clinical evidence supports the proposition that more desirable outcomes in treating PADare achieved by minimizing injury to the vessel wall during treatment, thereby reducing the risk of restenosis. Our Lumivascular platform isdesigned to provide physicians with a clear picture from inside the artery during treatment. In addition, the directional nature of our catheters isdesigned to enable physicians to accurately target the diseased area, resulting in less damage to arterial structures and allowing for the preciseremoval of plaque. Our VISION clinical trial demonstrated that the average percent area of adventitial component was only 1% of the totaltissue section from histopathological analysis of 162 lesion specimens in the primary cohort. We believe that the low level of adventitiaexcision means less EEL disruption and will correlate to lower restenosis rates and improved long-term outcomes for patients treated withPantheris. Additionally, a study conducted at Mount Sinai Medical Center, New York involving 116 patients found one-year restenosis rates of97% and 17% in patients with and without evidence of EEL disruption, respectively. The Mount Sinai Medical Center study was not conductedusing our products. Although we believe that our products would achieve similar results to those achieved with existing atherectomy devices inwhich no EEL disruption occurred, we can provide no assurance that this would have been the case. · Safety of endovascular procedures. Serious adverse events such as perforations and dissections may be reduced during endovascularprocedures using our Lumivascular platform. The results of our CONNECT II trial showed the benefit of our Lumivascular platform, asdemonstrated by the 98% safety rates in CTO cases using Ocelot, and there were no clinically significant perforations or dissections caused byPantheris in our VISION trial. · Expanded patient population eligible for endovascular treatment of PAD. Our Lumivascular platform is designed to allow physicians to treatcomplex PAD cases where a traditional guidewire may not be successful due to the high CTO crossing success rates of Ocelot in such cases.There are 150,000 peripheral bypass procedures and 200,000 amputations performed each year in the United States. We believe theseprocedures are frequently performed as a result of an inability to cross a CTO with endovascular techniques. In our CONNECT II trial, Ocelotdemonstrated a 97% CTO crossing rate in cases where a traditional guidewire was not successful. This crossing effectiveness enables theendovascular treatment of patients who may have previously been required to undergo bypass surgery or amputation. In addition, due toimproved safety of our Lumivascular platform products, we believe physicians will be more likely to use our products to treat patients whowould otherwise be medically managed. · Decreased radiation exposure for physicians and patients. In current endovascular treatments for PAD, physicians use fluoroscopy as theprimary means of imaging and navigating to the target vessel and assessing results of the treatment. This standard practice exposes physicians,hospital staff and patients to harmful x-ray radiation for a significant period of time. Radiation exposure can be especially high for physiciansand hospital staff who may perform multiple endovascular PAD procedures per day. Our Lumivascular platform, which utilizes radiation-freeOCT imaging, provides real-time visualization from the inside of the artery. When using our Lumivascular platform, physicians may elect to useless fluoroscopy during a procedure as a result of having an additional means of visualization that does not involve radiation. · Reduced use of balloons and stents and preservation of future treatment options. Pantheris is designed to enable physicians to successfullyperform atherectomy procedures and remove plaque blockages in PAD patients using fewer balloons and stents. Current atherectomy proceduresoften require the use of balloons and stents, which may result in restenosis and limit future treatment options. In our VISION trial, balloonangioplasty was used following Pantheris in less than half of the lesions treated, and stents were used in just 4% of treated lesions. By avoidingthe use of stents in atherectomy procedures, we believe that Pantheris better preserves future treatment options. We believe our Lumivascularplatform can replace other endovascular technologies, lower restenosis rates and reduce overall healthcare costs. · Lumivascular platform designed for ease of adoption by physicians and hospitals. Our Lumivascular platform products, while providingimage-guided assistance to physicians, are used in a similar fashion to traditional catheters. Consequently, we believe the more than 10,000interventional cardiologists, vascular surgeons and interventional radiologists in the United States that are trained in endovascular techniquescan generally adopt our Lumivascular platform and products without extensive training. We are designing future products to be compatiblewith our Lumivascular platform, which we expect will enhance the value proposition for hospitals to invest in our technology. We also believethat Pantheris qualifies for existing reimbursement codes currently utilized by other atherectomy products, further facilitating adoption of ourproducts. Risks of using the Lumivascular platform include the risks that are common to endovascular procedures and generally may include perforation,dissection, embolization, bleeding, infection, restenosis and limb loss. We are aware of certain characteristics and features of our Lumivascular platform thatmay prevent widespread market adoption, including that in procedures using Pantheris, 7Table of Contents some physicians may prefer to have a technician or second physician assisting with the operation of the catheter and that training for technicians andphysicians will be required to enable them to effectively operate our Lumivascular platform products. Our current products are contraindicated, and thereforeshould not be used, in the iliac, coronary, cerebral, renal and carotid arteries. Our Strategy Our goal is to become the leading provider of image-guided medical devices for physicians to treat vascular diseases. The key elements of ourstrategy are to: · Increase the installed base and penetration of our Lumivascular platform. Our current sales efforts focus on establishing new Lumivascularplatform sites by marketing our products to physicians and hospital administrators through our direct sales force in the United States.Additionally, we seek to increase the use of our Lumivascular platform products by our current customers through case coverage, clinicaltraining and other programs. We expect to continue to grow our sales force in order to better support current customers and attract new users ofour Lumivascular platform products. We believe that expanding our U.S. commercial infrastructure and establishing distributor relationships inselect regions outside the United States will drive further adoption of our Lumivascular platform. · Perform additional post-market studies to demonstrate the clinical and economic benefits of our Lumivascular platform. We intend to initiatepost-market studies that will examine clinical outcomes of our Lumivascular platform products. We plan to conduct observational registrystudies as well as randomized trials comparing the safety, efficacy and cost of our Lumivascular platform products to other endovasculartreatments for PAD. We may also conduct studies to support additional clinical indications. · Assist hospitals in raising awareness of our Lumivascular platform for patients suffering from PAD. We are focused on increasing theawareness of our Lumivascular platform and the benefits it offers to patients and physicians. We work with our hospital customers to build aLumivascular platform-based program through clinical training, public relations and physician education. The main focus of our clinical valueproposition is to demonstrate how the Lumivascular platform allows physicians to avoid injury to the healthy arterial structures duringintervention, while addressing the other limitations of competing endovascular approaches. We plan to continue working with our customers toposition our Lumivascular platform as an offering they can use to demonstrate their commitment to using the most advanced technologies incaring for their patients. · Leverage our technology platform to develop new products and further enhance our intellectual property portfolio. We intend to continue toinvest in initiatives to improve the safety, efficacy and ease of use of our Lumivascular platform, as well as to reduce costs and procedure times.We have also identified a number of future expansion opportunities designed to position our Lumivascular platform as the standard of care forvascular disease. We expect our Pantheris atherectomy device to be an important addition to our Lumivascular platform. We also intend toexplore the feasibility of seeking new indications for our Lumivascular platform to address unmet clinical needs within the CAD market. Webelieve we have a strong intellectual property portfolio and will continue to enhance this portfolio as we develop new technologies. · Optimize our manufacturing operations to achieve cost and production efficiencies while maintaining quality. We design, develop andmanufacture all of our products in-house at our headquarters in Redwood City, California using some components and sub-assemblies providedby third-party suppliers. We believe that controlling the manufacturing and assembly of our products allows us to innovate more quickly andproduce higher quality products than if we outsourced manufacturing. We have the capacity to significantly increase our manufacturing volumewithin our current facilities. We intend to use our design, engineering and manufacturing capabilities to further advance and improve theefficiency of our manufacturing processes, which we believe will reduce unit costs and increase our gross margins. To further reduce costs, wemay seek to manufacture certain of our products or subassemblies outside the United States or through third-party contract manufacturers. 8Table of Contents Our Products Our current products include our Lightbox console and our various catheters used in PAD treatment. Each of our current products is, and our futureproducts will be, designed to address significant unmet clinical needs in the treatment of vascular disease. LUMIVASCULAR PRODUCTS Name ClinicalIndication Size (Length, Diameter) Regulatory Status OriginalClearance DateLightboxOCT ImagingN/AFDA ClearedNovember 2012CE MarkSeptember 2011Pantheris 8FAtherectomy110cm, 8 French (F)FDA ClearedOctober 2015CE MarkJune 2015Pantheris 7FAtherectomy110cm, 7FFDA ClearedMarch 2016CE MarkJune 2015OcelotCTO Crossing110cm, 6FFDA ClearedNovember 2012CE MarkSeptember 2011Ocelot MVRXCTO Crossing110cm, 6FFDA ClearedDecember 2012Ocelot PIXLCTO Crossing135/150cm, 5FFDA ClearedDecember 2012CE MarkOctober 2012 (1) Lightbox is cleared for use with compatible Avinger products. (2) The Ocelot system is intended to facilitate the intra-luminal placement of conventional guidewires beyond stenotic lesions including suband chronic total occlusions in the peripheral vasculature prior to further percutaneous interventions using OCT-assisted orientation andimaging. The system is an adjunct to fluoroscopy and provides images of vessel lumen and wall structures. The Ocelot system iscontraindicated for use in the iliac, coronary, cerebral, renal and carotid vasculature. NON-IMAGING PRODUCTS Name Indication Size (Length, Diameter) Regulatory Status OriginalClearance DateWildcatGuidewire Support110cm, 6FFDA ClearedFebruary 2009CTO Crossing110cm, 6FFDA ClearedAugust 2011CE MarkMay 2011Kittycat 2CTO Crossing150cm, 5FFDA ClearedOctober 2011CE MarkSeptember 2011 (1) The Wildcat catheter is intended to facilitate the intraluminal placement of conventional guidewires beyond stenotic lesions (including suband chronic total occlusions) in the peripheral vasculature prior to further percutaneous intervention. The Wildcat catheter iscontraindicated for use in the iliac, coronary, cerebral, renal and carotid vasculature. The Wildcat catheter is intended to be used to supportsteerable guidewires in accessing discrete regions of the peripheral vasculature. It may be used to facilitate placement and exchange ofguidewires and other interventional devices. It may also be used to deliver saline or contrast. (2) The Kittycat 2 catheter is intended to facilitate the intraluminal placement of conventional guidewires beyond stenotic lesions (includingsub and chronic total occlusions) in the peripheral vasculature prior to further percutaneous intervention. The Kittycat 2 catheter iscontraindicated for use in the iliac, coronary, cerebral, renal and carotid vasculature. (3) This original clearance date is for the 7F version of Wildcat. The commercially available version of Wildcat is listed and was cleared inAugust 2010. 9(1)(2)(2)(2)(1)(3)(2)Table of Contents Lumivascular Platform Overview Our Lumivascular platform integrates OCT visualization with interventional catheters and is the industry’s only system that provides real-timeintravascular imaging during the treatment portion of PAD procedures. Our Lumivascular platform consists of a capital component, Lightbox, and a variety ofdisposable catheter products, including Ocelot, Ocelot PIXL, Ocelot MVRX and Pantheris. Lightbox Lightbox is our proprietary imaging console, which enables the use of Lumivascular catheters during PAD procedures. The console contains anoptical transceiver that transmits light into the artery through an optical fiber and displays a cross-sectional image of the vascular tissue to the physician on ahigh definition monitor during the procedure. Lightbox is configured with two monitors, one for the physicians, and one for the Lightbox technician. LightboxOCT image, showing layered structures (artery wall) on the right and non-layered structures (atherosclerotic plaque) on the left. Lightbox displays a cross-sectional view of the vessel, which provides physicians with detailed information about the orientation of the catheter andthe surrounding artery and plaque. Layered structures represent relatively healthy portions of the artery and non-layered structures represent the plaque that isblocking blood flow in the artery. Navigational markers allow the physician to orient the catheter toward the treatment area, helping to avoid damage to theblack line during a procedure. Lightbox received FDA 510(k) clearance in November 2012 and CE Mark in Europe in September 2011. Pantheris We believe Pantheris is the first atherectomy catheter to incorporate real-time OCT intravascular imaging. Pantheris may be used alone or followinga CTO crossing procedure using Ocelot or other products. Pantheris is a single-use product and will provide physicians with the ability to see a cross-sectional view of the artery throughout the procedure. The device restores blood flow by shaving thin strips of plaque using a high-speed directional cuttingmechanism that specifically targets the portion of the artery where the plaque resides while minimizing disruption to healthy arterial structures. The excisedplaque is deposited in the nosecone of the device and removed from the artery. We believe Pantheris represents a meaningful advancement in the treatment ofPAD and will expand the existing treatable market. 10Table of Contents Pantheris positioned prior to a cut Pantheris excising plaque To perform atherectomy procedures using Pantheris, physicians advance Pantheris to the diseased portion of the vessel using fluoroscopy prior toactivating the cutting tip. The OCT image provides the physician with a cross-sectional view of the treatment site and the relative orientation of the cutter.Visual cues are used to orient the cutting mechanism to target diseased sections of the artery and the plaque is removed by activating the cutter andadvancing the catheter through the blockage. A balloon beneath the cutter is inflated to move the catheter closer to the plaque, enabling the physician tostabilize the device and adjust the cut depth into the plaque as necessary. Multiple cuts can be made with the same device until sufficient plaque has beenremoved to restore adequate blood flow in the artery. In July 2014, FDA granted us an investigational device exemption, or IDE, for Pantheris and wecommenced enrollment of our 133-patient VISION trial. We completed enrollment of the VISION trial in March 2015 and we submitted for 510(k) clearancefrom FDA in August 2015. In October 2015, we received 510(k) clearance from the FDA for commercialization of Pantheris. We have made minormodifications to Pantheris since the VISION trial and have recently commenced U.S. sales following receipt of FDA approval this enhanced version ofPantheris in March, 2016. We received CE Mark for Pantheris in June 2015 and in August 2015 for the enhanced version of Pantheris. Ocelot, Ocelot PIXL and Ocelot MVRX Ocelot is the first ever CTO crossing catheter to incorporate real-time OCT imaging, which allows physicians to see the inside of an artery during aCTO crossing procedure. Physicians have traditionally relied solely on fluoroscopy and tactile feedback to guide catheters through complicated blockages.Ocelot allows physicians to accurately navigate through CTOs by utilizing the OCT images to precisely guide the device through the arterial blockage, whileminimizing disruption to the healthy arterial structures. 11Table of Contents Ocelot crossing a chronic total occlusion, or CTOLightbox visualization Ocelot has a corkscrew-like tip that rotates to facilitate advancement of the catheter through a CTO. Marker bands are displayed on the OCT imageand allow the tip of the catheter to be steered towards the blockage and away from the arterial wall as it moves through the blockage. Once through theblockage, a guidewire can be extended and Ocelot is removed, leaving the wire in place for additional therapies such as the use of an atherectomy catheterlike Pantheris. We received CE Mark for Ocelot in September 2011 and received FDA 510(k) clearance in November 2012. We also offer Ocelot PIXL, a lower profile CTO-crossing device for below-the-knee arteries and Ocelot MVRX, which offers a different tip design forabove-the-knee arteries. We received CE Mark for Ocelot PIXL in October 2012 and received FDA 510(k) clearance in December 2012. We received FDA510(k) clearance for Ocelot MVRX in December 2012. Other Products Our first-generation CTO-crossing catheters, Wildcat and Kittycat 2, employ a proprietary design that uses a rotational spinning technique, allowingthe physician to switch between passive and active modes when navigating across a CTO. Once across the CTO, Wildcat and Kittycat 2 allow for placementof a guidewire and removal of the catheter while leaving the wire in place for additional therapies. Both products require the use of fluoroscopy rather thanour Lumivascular platform for imaging. Wildcat was our first commercial product and has received both FDA 510(k) clearance in the United States and CEMark in Europe for crossing peripheral artery CTOs. Kittycat 2 has FDA 510(k) clearance in the United States and CE Mark clearance in Europe for thetreatment of peripheral artery CTOs. Clinical Development We have conducted several clinical trials to evaluate the safety and efficacy of our products and we received FDA clearance for Wildcat and Ocelotfor CTO crossing in 2011 and 2012, respectively, and for Pantheris in October 2015. CONNECT (Wildcat) Our clinical trial for the Wildcat catheter, known as the CONNECT trial, was a prospective, multi-center, non-randomized trial that evaluated thesafety and efficacy of Wildcat in crossing CTOs in arteries of the upper leg. The CONNECT trial enrolled 88 patients with CTOs at 15 centers in the UnitedStates. Patients were followed for 30 days post-procedure and an independent group of physicians verified the results to determine crossing efficacy andsafety endpoints. The CONNECT trial demonstrated that Wildcat was able to cross 89% of CTOs following unsuccessful attempts to cross with standardguidewire techniques. The trial demonstrated a 95% freedom from major adverse events, or MAEs. In the CONNECT trial, MAEs were defined as clinicallysignificant perforations or embolizations and/or Grade C or greater dissections occurring within 30 days of the procedure. These results represent the second-highest reported CTO crossing rate of any published CTO clinical trial, exceeded only by our subsequent CONNECT II clinical trial results. 12Table of Contents CONNECT II (Ocelot) Our clinical trial for Ocelot, known as CONNECT II, was a prospective, multi- center, non-randomized trial that evaluated the safety and efficacy ofOcelot in crossing CTOs in arteries of the upper leg using OCT intravascular imaging. The CONNECT II trial enrolled 100 patients with CTOs at 14 centers inthe United States and two centers in Europe. Patients were followed for 30 days post-procedure and an independent group of physicians verified the results toconfirm the primary efficacy and safety endpoints. Results from the CONNECT II trial demonstrated that Ocelot surpassed its primary efficacy endpoint bysuccessfully crossing the CTO in 97% of the cases following unsuccessful attempts to cross with standard guidewire techniques. Ocelot achieved these rateswith 98% freedom from MAEs. VISION (Pantheris) VISION was our pivotal, non-randomized, prospective, single-arm trial to evaluate the safety and effectiveness of Pantheris across 20 sites within theUnited States and Europe. The objective of the clinical trial was to demonstrate that Pantheris can be used to effectively remove plaque from diseased lowerextremity arteries while using on-board visualization as an adjunct to fluoroscopy. Two groups of patients were treated in VISION: (1) optional roll-ins,which are typically the first two procedures at a site, and (2) the primary cohort, which are the analyzable group of patients. The data for these two groups wasreported separately in our 510(k) submission to FDA. Based on final enrollment, the primary cohort included 130 patients. In March 2015, we completedenrollment of patients in the VISION clinical trial and we submitted for 510(k) clearance from the FDA in August 2015. In October 2015, we received510(k) clearance from the FDA for commercialization of Pantheris. We have made minor modifications to Pantheris subsequent to the completion of VISIONand received 510(k) clearance on the enhanced version of Pantheris in March 2016. VISON’s primary efficacy endpoint requires that at least 87% of lesions treated by physicians using Pantheris have a residual stenosis of less than50%, as verified by an independent core laboratory. The primary safety endpoint required that less than 43% of patients experience an MAE through six-month follow-up as adjudicated by an independent Clinical Events Committee, or CEC. MAEs as defined in VISION included cardiovascular-related death,unplanned major index limb amputation, clinically driven target lesion revascularization, or TLR, heart attack, clinically significant perforation, dissection,embolus, and pseudoaneurysm. Results from the VISION trial demonstrated that Pantheris surpassed its primary efficacy and safety endpoints; residualrestenosis of less than 50% was achieved in 96.3% of lesions treated in the primary cohort, while MAEs were experienced in 17.6% of patients. Although not mandated by the FDA to support the market clearance of Pantheris, the protocol for the VISION trial allowed for routinehistopathological analysis of the tissue extracted by Pantheris to be conducted. This process allowed us to determine the amount of adventitia present in thetissue, which in turn indicated the extent to which the external elastic lamina had been disrupted during Pantheris procedures. We completedhistopathological analysis on tissue from 129 patients in the primary cohort, representing 162 lesions and determined that the average percent area ofadventitia was only 1.0% of the total excised tissue. We believe the low level of EEL disruption will correlate to lower restenosis rates and improved long-term outcomes for patients treated with Pantheris, but we do not intend to make any promotional claims to that effect based on the data from this study. Wepublished the results of the histopathological analysis in conjunction with the primary safety and efficacy endpoint data from the VISION trial. Final VISION trial data is summarized in the table below. Roll-InCohort PrimaryCohort Total Patients Treated28130158 Lesions treated34164198Primary Efficacy EndpointLesions analyzed by core lab34164198Lesions meeting primary efficacy endpoint criterion of residual restenosis of lessthan 50% by core lab100%96.3%97%(34/34)(158/164)(192/198)Primary Safety Endpoint (MAEs through 6 months)Total MAEs Reported32225Reported MAEs as a percentage of patients enrolled11.5%17.6%16.6%(3/26)(22/125)(25/151)Histopathology Results (Non-Endpoint Data)Lesions with histopathology results34162196Average percent area of adventitia in all lesions with histopathology results0.56%1.02%0.94% 13Table of Contents Sales and Marketing We focus our sales and marketing efforts primarily on the approximately 10,000 interventional cardiologists, vascular surgeons and interventionalradiologists in the United States that are potential users of our Lumivascular platform products. Our marketing efforts are focused on developing strongrelationships with physicians and hospitals that we have identified as key opinion leaders based on their knowledge of our products, clinical expertise andreputation. We also use continuing medical education programs and other opportunities to train interventional cardiologists, vascular surgeons, andinterventional radiologists in the use of our Lumivascular platform products and educate them as to the benefits of our products as compared to alternativeprocedures such as angioplasty, stenting, bypass surgery or other atherectomy procedures. In addition, we work with physicians to help them develop theirpractices and with hospitals to market themselves as centers of excellence in PAD treatment by making our products available to physicians for treatingpatients. Our sales team consists of a vice president, directors, regional managers, sales representatives and clinical specialists. Our sales representatives aredivided into two primary roles, one focused on sale and use of our disposable catheters and the other focused on sale and service of our Lightbox console. Wehave an extensive hands-on sales training program, focused on our technologies, Lumivascular image interpretation, case management, sales processes, salestools and implementing our sales and marketing programs and compliance with applicable federal and state laws and regulations. Our sales team is supportedby a highly specialized marketing team, which is divided into three areas of focus: clinical education, marketing program implementation and technologyawareness and product development. We also have a small team of field engineers responsible for installation, service and maintenance of our Lightboxconsoles. As of December 31, 2015, we had 70 employees focused on sales and marketing. Our sales, general and administrative expenses for the years endedDecember 31, 2015, 2014 and 2013 were $29.2 million, $18.5 million and $25.8 million, respectively. Competition The medical device industry is highly competitive, subject to rapid change and significantly affected by new product introductions, results ofclinical research, corporate combinations and other factors relating to our industry. Because of the market opportunity and the high growth potential of thePAD treatment market, competitors and potential competitors have historically dedicated, and will continue to dedicate, significant resources to aggressivelydevelop and commercialize their products. Our products compete with a variety of products or devices for the treatment of PAD, including other CTO crossing devices, stents, balloons andatherectomy catheters, as well as products used in vascular surgery. Large competitors in the CTO crossing, stent and balloon market segments includeAbbott Laboratories, Boston Scientific, Cardinal Health, Cook Medical, CR Bard and Medtronic. Competitors in the atherectomy market include BostonScientific, Cardiovascular Systems, Medtronic, Philips and Spectranetics. Some competitors have attempted to combine intravascular imaging withatherectomy and may have current programs underway to do so. These and other companies may attempt to incorporate on-board visualization into theirproducts in the future. Other competitors include pharmaceutical companies that manufacture drugs for the treatment of symptoms associated with mild tomoderate PAD and companies that provide products used by surgeons in peripheral and coronary bypass procedures. These competitors and other companiesmay introduce new products that compete with our solution. Many of our competitors have substantially greater financial, manufacturing, marketing and technical resources than we do. Furthermore, many ofour competitors have well-established brands, widespread distribution channels and broader product offerings, and have established stronger and deeperrelationships with target customers. To compete effectively, we have to demonstrate that our products are attractive alternatives to other devices and treatments on the basis of: · procedural safety and efficacy;· acute and long-term outcomes;· ease of use and procedure time;· price;· size and effectiveness of sales force;· radiation exposure for physicians, hospital staff and patients; and· third-party reimbursement. 14Table of Contents Intellectual property In order to remain competitive, we must develop and maintain protection of the proprietary aspects of our technologies. We rely on a combination ofpatents, copyrights, trademarks, trade secret laws and confidentiality and invention assignment agreements to protect our intellectual property rights. It is our policy to require our employees, consultants, contractors, outside scientific collaborators and other advisors to execute non-disclosure andassignment of invention agreements on commencement of their employment or engagement. Agreements with our employees also forbid them from using theproprietary rights of third parties in their work for us. We also require confidentiality or material transfer agreements from third parties that receive ourconfidential data or materials. As of December 31, 2015, we held six issued U.S. patents and had 20 U.S. utility patent applications and 3 PCT applications pending. As ofDecember 31, 2015, we also had 10 issued patents from outside of the United States. As of December 31, 2015, we had 39 pending patent applicationsoutside of the United States, including in Australia, Canada, China, Europe, India and Japan. As we continue to research and develop our Pantheristechnology, we intend to file additional U.S. and foreign patent applications related to the design, manufacture and therapeutic uses of our atherectomydevices. Our issued patents expire between the years 2028 and 2032. Our patent applications may not result in issued patents and our patents may not be sufficiently broad to protect our technology. Any patents issuedto us may be challenged by third parties as being invalid, or third parties may independently develop similar or competing technology that avoids ourpatents. The laws of certain foreign countries do not protect our intellectual property rights to the same extent as do the laws of the United States. As of December 31, 2015, we held three registered U.S. trademarks and two pending U.S. trademark applications, one of which has been allowed. InEurope we hold two registered trademarks. In addition, we held one International Registration under the Madrid Protocol with pending extensions to China,Europe, Japan, and Korea. Research and Development Our ongoing research and development activities are primarily focused on improving and enhancing our Lumivascular platform, specifically ourcore competency of integrating OCT intravascular imaging onto therapeutic catheters. Our research objectives target areas of unmet clinical need, increasethe utility of the Lumivascular platform and adoption of our products by healthcare providers. · Product line improvements and extensions. We are developing improvements to our Lumivascular platform, including additional catheters foruse in different clinical applications. For example, we are developing versions of Pantheris designed to treat smaller vessels and with enhancedcutting capability. We are also developing a next-generation CTO crossing device to target both the peripheral and coronary CTO markets. · Additional treatment indications. We intend to seek additional regulatory clearances from FDA to expand the indications for which ourproducts can be marketed within PAD, as well as in other areas of the body. This includes both expanding the marketed indications for ourcurrent products, as well as development of new products. · Next-generation console. We are focusing our console development efforts on miniaturization, equipment integration and increased processingpower in anticipation of future catheter products. We may also develop a version of our Lumivascular platform that integrates OCT imaging intoexisting catheterization lab and operating room imaging systems. · Improved software and user interface. We are actively improving our software to provide more information and control to our end users duringa procedure. We use physician and staff feedback to improve the features and user functionality of our Lumivascular platform. As of December 31, 2015, we had 25 employees focused on research and development. In addition to our internal team, we retain third-partycontractors from time to time to provide us with assistance on specialized projects. We also work closely with experts in the medical community tosupplement our internal research and development resources. Research and development expenses for the years ended December 31, 2015, 2014 and 2013were $15.7 million, $11.2 million and $16.0 million, respectively. Manufacturing Prior to the introduction of our Lumivascular platform, our non-imaging catheter products were manufactured by a third-party. All of our productsare now manufactured in-house using components and sub-assemblies manufactured both in-house at our facilities in Redwood City, California and byoutside vendors. We expect our current manufacturing facility will be sufficient to meet our anticipated growth through at least 2017. We assemble all of ourproducts at our manufacturing facility but certain critical processes such as coating and sterilization are done by outside vendors. 15Table of Contents Our manufacturing operations are subject to regulatory requirements of 21 CFR part 820 of the Federal Food, Drug and Cosmetic Act, or FFDCA; theQuality System Regulation, or QSR, for medical devices sold in the United States, which is enforced by FDA; the Medical Devices Directive 93/42/EEC,which is required for doing business in the European Union; and applicable requirements relating to the environment, waste management and health andsafety matters, including measures relating to the release, use, storage, treatment, transportation, discharge, disposal and remediation of hazardous substances,and the sale, labeling, collection, recycling, treatment and disposal of products containing hazardous substances. We cannot ensure that we will not incurmaterial costs or liability in connection with our operations, or that our past or future operations will not result in claims by or injury to employees or thepublic. Order quantities and lead times for components purchased from outside suppliers are based on our forecasts derived from historical demand andanticipated future demand. Lead times for components may vary significantly depending on the size of the order, time required to fabricate and test thecomponents, specific supplier requirements and current market demand for the components and subassemblies. To date, we have not experienced significantdelays in obtaining any of our components or subassemblies. We rely on single and limited source suppliers for several of our components. For example, we rely on one vendor for, among other components, ourtorque shaft and drive cable. These components are critical to our products and there are relatively few alternative sources of supply for them. We do not carrya significant inventory of these components. Identifying and qualifying additional or replacement suppliers for any of the components used in our productscould involve significant time and cost. Any supply interruption from our vendors or failure to obtain additional vendors for any of the components used tomanufacture our products would limit our ability to manufacture our product and could therefore harm our business, financial condition and results ofoperations. Our suppliers have no contractual obligations to supply us with, and we are not contractually obligated to purchase from them, any of our supplies.Any supply interruption from our vendors or failure to obtain additional vendors for any of the components would limit our ability to manufacture ourproduct and could have a material adverse effect on our business, financial condition and results of operations. We have registered with FDA as a medical device manufacturer and have obtained a manufacturing license from the California Department of HealthServices, or CDRH. We and our component suppliers are required to manufacture our products in compliance with FDA’s QSR in 21 CFR part 820 of theFFDCA. The QSR regulates extensively the methods and documentation of the design, testing, control, manufacturing, labeling, quality assurance,packaging, storage and shipping of our products. FDA enforces the QSR through periodic unannounced inspections that may include the manufacturingfacilities of our subcontractors. Since we began manufacturing onsite, our Quality System has undergone 14 external audits, the last of which occurred onJuly 7 through July 9, 2015 and resulted in zero non-conformances. Our failure or the failure of our component suppliers to maintain compliance with the QSR requirements could result in the shutdown of ourmanufacturing operations or the recall of our products, which would harm our business. In the event that one of our suppliers fails to maintain compliancewith our or governmental quality requirements, we may have to qualify a new supplier and could experience manufacturing delays as a result. We have optedto maintain quality assurance and quality management certifications to enable us to market our products in the member states of the European Union, theEuropean Free Trade Association and countries which have entered into Mutual Recognition Agreements with the European Union. Our Redwood Cityfacilities meet the requirements set forth by ISO 13485:2003 Medical devices—Quality management systems—Requirements for regulatory purposes andMDD 93/42/EEC European Union Council Medical Device Directive. Government Regulation In general, medical device companies must navigate a challenging regulatory environment. The FDA regulates the medical device market to ensurethe safety and efficacy of these products. The FDA allows for two primary pathways for a medical device to gain approval for commercialization: a successfulpre-market approval, or PMA application or 510(k) clearance. A completely novel product must go through the more rigorous PMA process, or premarketapproval, if it cannot receive authorization through a 510(k). The FDA has established three different classes of medical devices that indicate the level of riskassociated with using a device and consequent degree of regulatory controls needed to govern its safety and efficacy. Level I and Level II devices areconsidered lower risk and often can gain approval for commercial distribution by submitting a notification request to the FDA, generally known as the510(k) process. The devices regarded as the highest risk by the FDA are designated Class III status and generally require the submission of a PMA applicationfor approval to commercialize a product. These generally include life-sustaining, life-supporting, or implantable devices or devices without a knownpredicate technology already approved by the FDA. 16Table of Contents The 510(k) clearance path can be significantly less time-consuming and arduous than PMA approval, making this route preferable for a medicaldevice company. Through a 510(k), a company must provide documentation that its device is substantially equivalent to a technology already approvedthrough a 510(k) or in distribution before May 28, 1976 for which the FDA has not yet required a PMA submission. The FDA has 90 days from the date of thepremarket equivalence submission to authorize or decline commercial distribution of the device. However, similar to the PMA process, approval may takelonger than this three-month window, as the FDA can request additional data. If the FDA resolves that the product is not substantially equivalent to apredicate device, then the device acquires a Class III designation. All of our currently marketed products have received commercial clearance and associatedindications for use through the 510(k) regulatory pathway with the FDA, some with the support of clinical data. A PMA application must be accompanied by substantial data that supports the safety and efficacy of the device, which includes the provision ofpreclinical, clinical, technical, manufacturing and labeling information. If the FDA deems the application acceptable to pass through the first level ofscrutiny, it has 180 days to review the submission, but it can typically take longer (up to several years) as this regulatory body can request additionalinformation or clarifications. The FDA may also impose additional regulatory hurdles for a PMA, including the institution of an outside advisory panel ofexperts to assess the application or provide recommendations as to whether to approve the device. Although the FDA in the end approves or disapproves thedevice, in nearly all cases the FDA follows the recommendation from the independent panel concerning approvability of the new device. As part of thisprocess, the FDA will also inspect the manufacturing operations of the company requesting approval to verify compliance with quality control regulations.Significant changes in the fabrication of a device, or alterations in the labeling or design of a product require new PMA applications or PMA supplements fora product originally approved under a PMA. This creates substantial regulatory risk for devices undergoing the PMA route. Pervasive and Continuing Regulation After a device is placed on the market, numerous regulatory requirements continue to apply. These include: · The FDA’s QSR which requires manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentationand other quality assurance procedures during all aspects of the manufacturing process; · labeling regulations and FDA prohibitions against the promotion of products for uncleared, unapproved or off-label uses; · clearance or approval of product modifications that could significantly affect safety or efficacy or that would constitute a major change inintended use; · medical device reporting, or MDR, regulations, which require that manufacturers report to the FDA if their device may have caused orcontributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if themalfunction were to recur; and · post-market surveillance regulations, which apply when necessary to protect the public health or to provide additional safety and effectivenessdata for the device. After a device receives 510(k) clearance or PMA approval, any modification that could significantly affect its safety or effectiveness, or that wouldconstitute a major change in its intended use, will require a new clearance or approval. The FDA requires each manufacturer to make this determinationinitially, but the FDA can review any such decision and can disagree with a manufacturer’s determination. If the FDA disagrees with the determination not toseek a new 510(k) clearance or PMA, the FDA may retroactively require a new 510(k) clearance or premarket approval. The FDA could also require amanufacturer to cease marketing and distribution and/or recall the modified device until 510(k) clearance or premarket approval is obtained. Also, in thesecircumstances, it may be subject to significant regulatory fines, penalties, and warning letters. The MDR regulations require that we report to the FDA any incident in which our product may have caused or contributed to a death or seriousinjury or in which our product malfunctioned and, if the malfunction were to recur, would likely cause or contribute to death or serious injury. We have registered with the FDA as a medical device manufacturer and have obtained a manufacturing license from the CDHS. The FDA has broadpost-market and regulatory enforcement powers. We are subject to unannounced inspections by the FDA and the Food and Drug Branch of CDHS todetermine our compliance with the QSR and other regulations, and these inspections may include the manufacturing facilities of our suppliers. BSI, ourEuropean Notified Body, inspected our facility in 2013 and 2015 and 17Table of Contents found zero non-conformances. Our current facility was inspected by the FDA in 2009, 2011 and 2013, and two, three and zero observations, respectively,were noted during those inspections. In the latest FDA audit, there were no findings that involved a material violation of regulatory requirements, and nonon-conformances were noted. Our responses to these observations noted in 2009 and 2011 were accepted by the FDA, and we believe that we are insubstantial compliance with the QSR. Failure to comply with applicable regulatory requirements can result in enforcement action by FDA, which may include any of the followingsanctions: · warning letters, fines, injunctions, consent decrees and civil penalties; · repair, replacement, refunds, recall or seizure of our products; · operating restrictions, partial suspension or total shutdown of production; · refusing our requests for 510(k) clearance or premarket approval of new products, new intended uses or modifications to existing products; · withdrawing 510(k) clearance or premarket approvals that have already been granted; and · criminal prosecution. Regulatory System for Medical Devices in Europe The European Union consists of 25 member states and has a coordinated system for the authorization of medical devices. The E.U. Medical DevicesDirective, or MDD, sets out the basic regulatory framework for medical devices in the European Union. This directive has been separately enacted in moredetail in the national legislation of the individual member states of the European Union. The system of regulating medical devices operates by way of a certification for each medical device. Each certificated device is marked with CEmark which shows that the device has a Certificat de Conformité. There are national bodies known as Competent Authorities in each member state whichoversee the implementation of the MDD within their jurisdiction. The means for achieving the requirements for CE mark varies according to the nature of thedevice. Devices are classified in accordance with their perceived risks, similarly to the U.S. system. The class of a product determines the requirements to befulfilled before CE mark can be placed on a product, known as a conformity assessment. Conformity assessments for our products are carried out as requiredby the MDD. Each member state can appoint Notified Bodies within its jurisdiction. If a Notified Body of one member state has issued a Certificat deConformité, the device can be sold throughout the European Union without further conformance tests being required in other member states. Health Insurance Portability and Accountability Act The Health Insurance Portability and Accountability Act of 1996, or HIPAA, established for the first time comprehensive federal protection for theprivacy and security of health information. The HIPAA standards apply to three types of organizations, or Covered Entities: health plans, healthcare clearinghouses, and healthcare providers which conduct certain healthcare transactions electronically. Title II of HIPAA, the Administrative Simplification Act,contains provisions that address the privacy of health data, the security of health data, the standardization of identifying numbers used in the healthcaresystem and the standardization of certain healthcare transactions. The privacy regulations protect medical records and other protected health information bylimiting their use and release, giving patients the right to access their medical records and limiting most disclosures of health information to the minimumamount necessary to accomplish an intended purpose. The HIPAA security standards require the adoption of administrative, physical, and technicalsafeguards and the adoption of written security policies and procedures. HIPAA requires Covered Entities to obtain a written assurance of compliance fromindividuals or organizations who provide services to Covered Entities involving the use or disclosure of protected health information (“BusinessAssociates”). On February 17, 2009, Congress enacted Subtitle D of the Health Information Technology for Economic and Clinical Health Act, or HITECH,provisions of the American Recovery and Reinvestment Act of 2009. HITECH amends HIPAA and, among other things, expands and strengthens HIPAA,creates new targets for enforcement, imposes new penalties for noncompliance and establishes new breach notification requirements for Covered Entities andBusiness Associates. Regulations implementing major provisions of HITECH were finalized on January 25, 2013 through publication of the HIPAA OmnibusRule, or the Omnibus Rule. The Omnibus Rule contained significant changes for Covered Entities and Business Associates with respect to permitted uses anddisclosures of Protected Health Information. 18Table of Contents Under HITECH’s new breach notification requirements, Covered Entities must report breaches of protected health information that has not beenencrypted or otherwise secured in accordance with guidance from the Secretary of the U.S. Department of Health and Human Services, or the Secretary.Required breach notices must be made as soon as is reasonably practicable, but no later than 60 days following discovery of the breach. Reports must bemade to affected individuals and to the Secretary and in some cases, they must be reported through local and national media, depending on the size of thebreach. We are currently subject to the HIPAA regulations. We are subject to audit under the U.S. Department of Health and Human Services, or HHS,HITECH-mandated audit program. We may also be audited in connection with a privacy complaint. We are subject to prosecution and/or administrativeenforcement and increased civil and criminal penalties for non-compliance, including a new, four-tiered system of monetary penalties adopted underHITECH. We are also subject to enforcement by state attorneys general who were given authority to enforce HIPAA under HITECH. To avoid penalties underthe HITECH breach notification provisions, we must ensure that breaches of protected health information are promptly detected and reported within thecompany, so that we can make all required notifications on a timely basis. However, even if we make required reports on a timely basis, we may still besubject to penalties for the underlying breach. In addition to the federal privacy regulations, there are a number of state laws regarding the privacy and security of health information and personaldata that are applicable to clinical laboratories. The compliance requirements of these laws, including additional breach reporting requirements, and thepenalties for violation vary widely and new privacy and security laws in this area are evolving. Requirements of these laws and penalties for violations varywidely. We believe that we have taken the steps required of us to comply with health information privacy and security statutes and regulations in alljurisdictions, both state and federal. However, we may not be able to maintain compliance in all jurisdictions where we do business. Failure to maintaincompliance, or changes in state or federal laws regarding privacy or security, could result in civil and/or criminal penalties and could have a material adverseeffect on our business. If we or our operations are found to be in violation of HIPAA, HITECH or their implementing regulations, we may be subject to penalties, includingcivil and criminal penalties, fines, and exclusion from participation in U.S. federal or state health care programs, and the curtailment or restructuring of ouroperations. HITECH increased the civil and criminal penalties that may be imposed against Covered Entities, their Business Associates and possibly otherpersons, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws andseek attorney’s fees and costs associated with pursuing federal civil actions. In addition to federal privacy regulations, there are a number of state laws governing confidentiality of health information that are applicable to ouroperations. New laws governing privacy may be adopted in the future as well. We have taken steps to comply with health information privacy requirementsthat are applicable to us. Federal, State and Foreign Fraud and Abuse Laws Because of the significant federal funding involved in Medicare and Medicaid, Congress and the states have enacted, and actively enforce, a numberof laws to eliminate fraud and abuse in federal healthcare programs. Our business is subject to compliance with these laws. In March 2010, the RecipientProtection and Affordable Care Act, as amended by the Healthcare and Education Affordability Reconciliation Act, which we refer to collectively as theAffordable Care Act, was enacted in the United States. The provisions of the Affordable Care Act are effective on various dates. The Affordable Care Actexpands the government’s investigative and enforcement authority and increases the penalties for fraud and abuse, including amendments to both the Anti-Kickback Statute and the False Claims Act, to make it easier to bring suit under these statutes. The Affordable Care Act also allocates additional resourcesand tools for the government to police healthcare fraud, with expanded subpoena power for HHS, additional funding to investigate fraud and abuse across thehealthcare system and expanded use of recovery audit contractors for enforcement. Anti-Kickback Statutes. The federal healthcare programs’ Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, offering,receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing or arranging for agood or service, for which payment may be made under a federal healthcare program such as Medicare or Medicaid. The definition of “remuneration” has been broadly interpreted to include anything of value, including, for example, gifts, certain discounts, thefurnishing of free supplies, equipment or services, credit arrangements, payment of cash and waivers of payments. Several courts have interpreted the statute’sintent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered businesses,the statute has been violated. Penalties for violations include criminal penalties and civil sanctions such as fines, imprisonment and possible exclusion fromMedicare, Medicaid and other federal healthcare programs. In addition some kickback allegations have been claimed to violate the Federal False Claims Act,discussed in more detail below. 19Table of Contents The Anti-Kickback Statute is broad and prohibits many arrangements and practices that are otherwise lawful in businesses outside of the healthcareindustry. Recognizing that the Anti-Kickback Statute is broad and may technically prohibit many innocuous or beneficial arrangements, Congressauthorized the Office of Inspector General, or OIG, of HHS to issue a series of regulations known as “safe harbors.” These safe harbors set forth provisions that,if all their applicable requirements are met, will assure healthcare providers and other parties that they will not be prosecuted under the Anti-KickbackStatute. The failure of a transaction or arrangement to fit precisely within one or more safe harbors does not necessarily mean that it is illegal or thatprosecution will be pursued. However, conduct and business arrangements that do not fully satisfy an applicable safe harbor may result in increased scrutinyby government enforcement authorities such as OIG. Many states have adopted laws similar to the Anti-Kickback Statute. Some of these state prohibitions apply to referral of recipients for healthcareitems or services reimbursed by any source, not only the Medicare and Medicaid programs. Government officials have focused their enforcement efforts on the marketing of healthcare services and products, among other activities, andrecently have brought cases against companies, and certain individual sales, marketing and executive personnel, for allegedly offering unlawful inducementsto potential or existing customers in an attempt to procure their business. Federal False Claims Act. Another development affecting the healthcare industry is the increased use of the federal False Claims Act, and inparticular, action brought pursuant to the False Claims Act’s “whistleblower” or “qui tam” provisions. The False Claims Act imposes liability on any personor entity that, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment by a federal healthcare program. Thequi tam provisions of the False Claims Act allow a private individual to bring actions on behalf of the federal government alleging that the defendant hasviolated the False Claims Act and to share in any monetary recovery. In recent years, the number of suits brought against healthcare providers by privateindividuals has increased dramatically. In addition, various states have enacted false claims laws analogous to the False Claims Act, and many of these statelaws apply where a claim is submitted to any third-party payor and not just a federal healthcare program. When an entity is determined to have violated the False Claims Act, it may be required to pay up to three times the actual damages sustained by thegovernment, plus civil penalties of between $5,500 and $11,000 for each separate instance of false claim. As part of any settlement, the government may askthe entity to enter into a corporate integrity agreement, which imposes certain compliance, certification and reporting obligations. There are many potentialbases for liability under the False Claims Act. Liability arises, primarily, when an entity knowingly submits, or causes another to submit, a false claim forreimbursement to the federal government. The federal government has used the False Claims Act to assert liability on the basis of inadequate care, kickbacksand other improper referrals, and improper use of Medicare numbers when detailing the provider of services, in addition to the more predictable allegations asto misrepresentations with respect to the services rendered. In addition, the federal government has prosecuted companies under the False Claims Act inconnection with off-label promotion of products. Our future activities relating to the reporting of wholesale or estimated retail prices of our products, thereporting of discount and rebate information and other information affecting federal, state and third-party reimbursement of our products and the sale andmarketing of our products may be subject to scrutiny under these laws. While we are unaware of any current matters, we are unable to predict whether we will be subject to actions under the False Claims Act or a similarstate law, or the impact of such actions. However, the costs of defending such claims, as well as any sanctions imposed, could significantly affect our financialperformance. The Sunshine Act. The Physician Payment Sunshine Act, or the Sunshine Act, which was enacted as part of the Affordable Care Act, requires allentities that operate in the United States and manufacturers of a drug, device, biologic or other medical supply that is covered by Medicare, Medicaid or theChildren’s Health Insurance Program to report annually to the Secretary of HHS: (i) payments or other transfers of value made by that entity, or by a third-party as directed by that entity, to physicians and teaching hospitals or to third parties on behalf of physicians or teaching hospitals; and (ii) physicianownership and investment interests in the entity. The payments required to be reported include the cost of meals provided to a physician, travelreimbursements and other transfers of value, including those provided as part of contracted services such as speaker programs, advisory boards, consultationservices and clinical trial services. The final rule implementing the Sunshine Act required data collection on payments to begin on August 1, 2013. The firstannual report, comprised of data collected from August 1, 2013 to December 31, 2013, was due March 31, 2014. The statute requires the federal governmentto make reported information available to the public starting September 2014, which it has. Failure to comply with the reporting requirements can result insignificant civil monetary penalties ranging from $1,000 to $10,000 for each payment or other transfer of value that is not reported (up to a maximum perannual report of $150,000) and from $10,000 to $100,000 for each knowing failure to report (up to a maximum per annual report of $1.0 million).Additionally, there are criminal penalties if an entity intentionally makes false statements in such reports. We are subject to the Sunshine Act and theinformation we disclose may lead to greater scrutiny, which may result in modifications to established practices and additional costs. Additionally, similarreporting requirements have also been enacted on the state level domestically, and an increasing number of countries worldwide either have adopted or areconsidering similar laws requiring transparency of interactions with healthcare professionals. 20Table of Contents Foreign Corrupt Practices Act. The Foreign Corrupt Practices Act, or FCPA, prohibits any United States individual or business from paying,offering, or authorizing payment or offering of anything of value, directly or indirectly, to any foreign official, political party or candidate for the purpose ofinfluencing any act or decision of the foreign entity in order to assist the individual or business in obtaining or retaining business. The FCPA also obligatescompanies whose securities are listed in the United States to comply with accounting provisions requiring us to maintain books and records that accuratelyand fairly reflect all transactions of the corporation, including international subsidiaries, if any, and to devise and maintain an adequate system of internalaccounting controls for international operations. International Laws. In Europe various countries have adopted anti-bribery laws providing for severe consequences, in the form of criminal penaltiesand/or significant fines, for individuals and/or companies committing a bribery offense. Violations of these anti-bribery laws, or allegations of suchviolations, could have a negative impact on our business, results of operations and reputation. For instance, in the United Kingdom, under the Bribery Act2010, which went into effect in July 2011, a bribery occurs when a person offers, gives or promises to give a financial or other advantage to induce or rewardanother individual to improperly perform certain functions or activities, including any function of a public nature. Bribery of foreign public officials alsofalls within the scope of the Bribery Act 2010. Under the new regime, an individual found in violation of the Bribery Act of 2010, faces imprisonment of upto 10 years. In addition, the individual can be subject to an unlimited fine, as can commercial organizations for failure to prevent bribery. There are also international privacy laws that impose restrictions on the access, use, and disclosure of health information. All of these laws mayimpact our business. Our failure to comply with these privacy laws or significant changes in the laws restricting our ability to obtain required patientinformation could significantly impact our business and our future business plans. U.S. Healthcare Reform Changes in healthcare policy could increase our costs and subject us to additional regulatory requirements that may interrupt commercialization ofour current and future solutions. Changes in healthcare policy could increase our costs, decrease our revenues and impact sales of and reimbursement for ourcurrent and future solutions. The Affordable Care Act substantially changes the way healthcare is financed by both governmental and private insurers, andsignificantly impacts our industry. The Act contains a number of provisions that impact our business and operations, some of which in ways we cannotcurrently predict, including those governing enrollment in federal healthcare programs and reimbursement changes. There will continue to be proposals by legislators at both the federal and state levels, regulators and third-party payors to reduce costs whileexpanding individual healthcare benefits. Certain of these changes could impose additional limitations on the prices we will be able to charge for our currentand future solutions or the amounts of reimbursement available for our current and future solutions from governmental agencies or third-party payors. Whilein general it is too early to predict specifically what effect the Affordable Care Act and its implementation or any future healthcare reform legislation orpolicies will have on our business, current and future healthcare reform legislation and policies could have a material adverse effect on our business andfinancial condition. Third-Party Reimbursement Payment for patient care in the United States is generally made by third-party payors, including private insurers and government insurance programs,such as Medicare and Medicaid. The Medicare program, the largest single payor in the United States, is a federal governmental health insurance programadministered by the Centers for Medicare and Medicaid Services, or CMS, and covers certain medical care expenses for eligible elderly and disabledindividuals. Because a large percentage of the population with PAD includes Medicare beneficiaries, and private insurers may follow the coverage andpayment policies of Medicare, Medicare’s coverage and payment policies are significant to our operations. Medicare pays PAD treatment facilities, including hospitals and physician office-based labs, pre-determined amounts for each procedure performed.These payment amounts differ based on a variety of factors, including: · Type of procedure performed—angioplasty, stent or atherectomy; · Patient-specific complexities and comorbidities; · Type of facility—hospital, teaching hospital or office-based lab; · Inpatient or outpatient status; and · Geographic region. 21Table of Contents We receive payment from the treatment facility for our products, and the Medicare reimbursement to the facility is intended to cover the overall costof treatment, including the cost of products used during the procedure as well as the overhead cost associated with the facility where the procedure isperformed. For procedures performed in hospitals, the physician who performs the procedure is reimbursed separately under the Medicare physician feeschedule. Claims for PAD procedures are typically submitted by the treatment facility and physician to Medicare or other health insurers using establishedbilling codes. These codes identify the procedures performed and are relied upon to determine third-party payor reimbursement amounts. Medicare reimbursement levels for fiscal year 2016 went into effect as of October 1, 2015. National average Medicare payment rates for PADprocedures for fiscal year 2016 are $10,175 - $19,410 for inpatient procedures and, $4,592 - $14,612 for outpatient procedures. These amounts include thecost of disposable catheters such as Ocelot and Pantheris. While reimbursement varies based on the type of procedure performed (i.e., angioplasty, stent oratherectomy), additional device-specific reimbursement is not available. The amount of reimbursement can vary substantially by geographical region and byfacility. Payment rates of other third-party payors may follow Medicare rates, or they may be higher or lower, depending on their particular reimbursementmethodology. Because of the wide variability, it is not possible to identify an average rate for third-party payors other than Medicare. Employees As of December 31, 2015, we had 186 employees, including 52 in manufacturing and operations, 69 in sales and marketing, 25 in research anddevelopment, 17 in clinical affairs, regulatory affairs, and quality assurance and 23 in finance, general administrative and executive administration. All186 employees are full time employees. None of our employees are represented by a labor union or are parties to a collective bargaining agreement and webelieve that our employee relations are good. Corporate and other Information We were incorporated in Delaware on March 8, 2007. Our principal executive offices are located at 400 Chesapeake Drive, Redwood City,California 94063, and our telephone number is (650) 241-7900. Our website address is www.avinger.com. References to our website address do not constituteincorporation by reference of the information contained on the website, and the information contained on the website is not part of this document. We make available, free of charge on our corporate website, copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, CurrentReports on Form 8-K, Proxy Statements, and all amendments to these reports, as soon as reasonably practicable after such material is electronically filed withor furnished to the Securities and Exchange Commission, or the SEC, pursuant to Section 13(a) or 15(d) of the Securities Exchange Act. We also show detailabout stock trading by corporate insiders by providing access to SEC Forms 3, 4 and 5. This information may also be obtained from the SEC’s on-linedatabase, which is located at www.sec.gov. Our common stock is traded on the NASDAQ Global Market under the symbol “AVGR”. We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012. As such, we are eligible for exemptions fromvarious reporting requirements applicable to other public companies that are not emerging growth companies, including, but not limited to, not beingrequired to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and reduced disclosure obligations regardingexecutive compensation. We will remain an emerging growth company until the earlier of (1) December 31, 2019, (2) the last day of the fiscal year (a) inwhich we have total annual gross revenue of at least $1.0 billion or (b) in which we are deemed to be a large accelerated filer, which means the market valueof our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30th, and (3) the date on which we have issued more than$1.0 billion in non-convertible debt securities during the prior three-year period. Item 1A. Risk Factors We have identified the following risks and uncertainties that may have a material adverse effect on our business, financial condition, results ofoperations and future growth prospects. Our business could be harmed by any of these risks. The risks and uncertainties described below are not the onlyones we face. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. In assessingthese risks, you should also refer to the other information contained in this Annual Report on Form 10-K, including our financial statements and relatednotes. Please also see “Cautionary Notes Regarding Forward-Looking Statements.” 22Table of Contents Risks Related to Our Business Our quarterly and annual results may fluctuate significantly, may not fully reflect the underlying performance of our business and may result in decreasesin the price of our common stock. Our quarterly and annual results of operations, including our revenues, profitability and cash flow, may vary significantly in the future and period-to-period comparisons of our operating results may not be meaningful. Accordingly, the results of any one quarter or period should not be relied upon as anindication of future performance. Our quarterly and annual financial results may fluctuate as a result of a variety of factors, many of which are outside ourcontrol and, as a result, may not fully reflect the underlying performance of our business. Fluctuation in quarterly and annual results may decrease the valueof our common stock. Factors that may cause fluctuations in our quarterly and annual results include, without limitation: · our ability to obtain and maintain FDA clearance and approval from foreign regulatory authorities for our products, particularly Pantheris,which we commenced commercialization in March 2016; · market acceptance of our Lumivascular platform; · the availability of reimbursement for our Lumivascular platform products; · our ability to attract new customers and grow our business with existing customers; · results of our clinical trials; · the timing and success of new product and feature introductions by us or our competitors or any other change in the competitive dynamics ofour industry, including consolidation among competitors, customers or strategic partners; · the amount and timing of costs and expenses related to the maintenance and expansion of our business and operations; · changes in our pricing policies or those of our competitors; · general economic, industry and market conditions; · the regulatory environment; · the hiring, training and retention of key employees, including our ability to expand our sales team; · litigation or other claims against us; · our ability to obtain additional financing; and · advances and trends in new technologies and industry standards. We have a history of net losses and we may not be able to achieve or sustain profitability. We have incurred significant losses in each period since our inception in 2007. We incurred net losses of $47.3 million in 2015, $32.0 million in2014 and $39.9 million in 2013. As of December 31, 2015, we had an accumulated deficit of approximately $196.3 million. These losses and ouraccumulated deficit reflect the substantial investments we have made to develop our Lumivascular platform and acquire customers. We expect our costs and expenses to increase in the future due to anticipated increases in cost of revenues, sales and marketing expenses, researchand development expenses and general and administrative expenses and, therefore, we expect our losses to continue for the foreseeable future as we continueto make significant future expenditures to develop and expand our business. In addition, as a public company, we will incur significant legal, accounting andother expenses that we did not incur as a private company. Accordingly, we cannot assure you that we will achieve profitability in the future or that, if we dobecome profitable, we will sustain profitability. Our failure to achieve and sustain profitability would negatively impact the market price of our commonstock. 23Table of Contents Our limited commercialization experience and number of approved products makes it difficult to evaluate our current business, predict our futureprospects and forecast our financial performance and growth. We were incorporated in 2007, began commercializing our initial non-Lumivascular platform products in 2009 and introduced our firstLumivascular platform products in the United States in late 2012. Our limited commercialization experience and number of approved products make itdifficult to evaluate our current business and predict our future prospects. We have encountered and will continue to encounter risks and difficultiesfrequently experienced by companies in rapidly-changing industries. These risks and uncertainties include the risks inherent in clinical trials and increasingand unforeseen expenses as we continue to attempt to grow our business. Our short commercialization experience and limited number of approved products also make it difficult for us to forecast our future financialperformance and growth and such forecasts are limited and subject to a number of uncertainties, including our ability to obtain FDA clearance for newversions of Pantheris and other Lumivascular platform products we intend to commercialize in the United States. If our assumptions regarding the risks anduncertainties we face, which we use to plan our business, are incorrect or change due to circumstances in our business or our markets, or if we do not addressthese risks successfully, our operating and financial results could differ materially from our expectations and our business could suffer. Our success depends in large part on a limited number of products, particularly Pantheris, all of which have a limited commercial history. If these productsfail to gain, or lose, market acceptance, our business will suffer. Ocelot, Ocelot PIXL, Ocelot MVRX, Lightbox, Wildcat, Kittycat 2 and Pantheris are our only products currently cleared for sale, and our currentrevenues are wholly dependent on them. Sales of Wildcat and Kittycat 2 have declined and are continuing to decline as we focus on the promotion of ourLumivascular platform products. In addition, the long-term viability of our company is largely dependent on the successful commercialization and continueddevelopment of Pantheris and we expect that sales of Pantheris and our other current and future Lumivascular platform products in the United States willaccount for substantially all of our revenues for the foreseeable future. Accordingly, our success depends on the continued and growing acceptance ofPantheris and our other Lumivascular platform products by the medical community. All of our products have a limited commercial history. For example, wereceived 510(k) clearance from the FDA to commercialize Pantheris in October 2015 as well as a separate FDA approval to market an enhanced version ofPantheris in March 2016. As such, increased acceptance among physicians of these products may not occur. Our ability to successfully market Pantheris willalso be limited due to a number of factors including regulatory restrictions in our labeling. We cannot assure you that demand for Pantheris and our otherLumivascular platform products will continue to grow and our products may not significantly penetrate current or new markets. If demand for Pantheris andour other Lumivascular platform products do not increase as we anticipate and we cannot sell our products as planned, our financial results will be harmed. Inaddition, market acceptance may be hindered if physicians are not presented with compelling data from long-term studies of the safety and efficacy of ourLumivascular platform products compared to alternative procedures, such as angioplasty, stenting, bypass surgery or other atherectomy procedures. Forexample, if patients undergoing treatment with our Lumivascular platform products have retreatment rates higher than or comparable with the retreatmentrates of alternative procedures, it will be difficult to demonstrate the value of our Lumivascular platform products. Any studies we may conduct comparingour Lumivascular platform with alternative procedures will be expensive, time consuming and may not yield positive results. Physicians will also need toappreciate the value of real-time imaging in improving patient outcomes in order to change current methods for treating PAD patients. In addition, demandfor our Lumivascular platform products may decline or may not increase as quickly as we expect. Failure of our Lumivascular platform products tosignificantly penetrate current or new markets, or our failure to successfully commercialize Pantheris, would harm our business, financial condition andresults of operations. We are also aware of certain characteristics and features of our Lumivascular platform that may prevent widespread market adoption. For example, inprocedures using Pantheris, some physicians may prefer to have a technician or second physician assisting with the operation of the catheter as well as aseparate technician to operate the Lightbox, making the procedure less financially attractive for physicians and their hospitals. It may take significant timeand expense to modify our products to allow a single physician to operate the entire system and we can provide no guarantee that we will be able to makesuch modifications, or obtain any additional and necessary regulatory clearances for such modifications. Also, although the OCT images created by ourLightbox may make it possible for physicians to reduce the degree to which fluoroscopy and contrast dye are used when using our Lumivascular platformproducts compared to competing endovascular products, physicians are still using both fluoroscopy and contrast dye, particularly with Pantheris. As a result,risks of complications from radiation and contrast dye are still present and may limit the commercial success of our products. Finally, it will require trainingfor technicians and physicians to effectively operate our Lumivascular platform products, including interpreting the OCT images created by our Lightbox,which may affect adoption of our products by physicians. These or other characteristics and features of our Lumivascular platform may cause our products notto be widely adopted and harm our business, financial condition and results of operation. 24Table of Contents We may not be able to secure additional financing on favorable terms, or at all, to meet our future capital needs and our failure to obtain additionalfinancing when needed could force us to delay, reduce or eliminate our product development programs and commercialization efforts. We believe that the net proceeds from the follow-on offering we intend to conduct whereby we may issue and sell shares of common stock having anaggregate value of up to $50.0 million, together with our cash and cash equivalents at December 31, 2015 and expected revenues from operations and debtfinancing currently available under our Loan Agreement with CRG Partners III L.P. and certain of its affiliated funds, or CRG, will be sufficient to satisfy ourcapital requirements and fund our operations for at least the next 12 months. We can provide no assurance that we will be successful in raising funds pursuantto our follow-on offering or that such funds will be raised at prices that do not create substantial dilution for our existing stockholders. We will likely needadditional funds through our intended follow-on offering or in separate financing to meet our operational needs and capital requirements for productdevelopment, clinical trials and commercialization. To date, we have financed our operations primarily through sales of our products and net proceeds from the issuance of our preferred stock and debtfinancings and our initial public offering, or IPO. We do not know when or if our operations will generate sufficient cash to fund our ongoing operations. Wecannot be certain that additional capital will be available as needed on acceptable terms, or at all. In the future, we may require additional capital in order to(i) continue to conduct research and development activities, (ii) conduct post-market clinical studies, as well as clinical trials to obtain regulatory clearancesand approvals necessary to commercialize our Lumivascular platform products, (iii) expand our sales and marketing infrastructure and (iv) acquirecomplementary business technology or products; or (v) respond to business opportunities, challenges, a decline in sales, increased regulatory obligations orunforeseen circumstances. Our future capital requirements will depend on many factors, including: · the costs, timing and outcomes of clinical trials and regulatory reviews associated with our future products; · the costs and expenses of expanding our sales and marketing infrastructure and our manufacturing operations; · the costs and timing of developing variations of our Lumivascular platform products, especially Pantheris, and, if necessary, obtaining FDAclearance of such variations; · the degree of success we experience in commercializing our Lumivascular platform products, particularly Pantheris; · the extent to which our Lumivascular platform is adopted by hospitals for use by interventional cardiologists, vascular surgeons andinterventional radiologists in the treatment of PAD; · the number and types of future products we develop and commercialize; · the costs of preparing, filing and prosecuting patent applications and maintaining, enforcing and defending intellectual property-related claims;and · the extent and scope of our general and administrative expenses. We may raise funds in equity or debt financings or enter into credit facilities in order to access funds for our capital needs. Any debt financingobtained by us in the future would cause us to incur additional debt service expenses and could include restrictive covenants relating to our capital raisingactivities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and pursue business opportunities.If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution intheir percentage ownership of our company, and any new equity securities we issue could have rights, preferences and privileges senior to those of holders ofour common stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, we may terminate or delay thedevelopment of one or more of our products, delay clinical trials necessary to market our products, or delay establishment of sales and marketing capabilitiesor other activities necessary to commercialize our products. If this were to occur, our ability to continue to grow and support our business and to respond tobusiness challenges could be significantly limited. We have a significant amount of debt, which may affect our ability to operate our business and secure additional financing in the future. As of December 31, 2015, we had $29.6 million in principal and interest outstanding under a Term Loan Agreement, or the Loan Agreement, withCRG. Our debt with CRG is collateralized by substantially all of our assets and contains customary financial and operating covenants limiting our ability to,among other things, incur debt, grant liens, make investments, make acquisitions, make certain restricted payments and sell assets, in each case subject tocertain exceptions. We are also subject to standard event of default provisions under the Loan Agreement that, if triggered, would allow the debt to beaccelerated, which could significantly deplete our cash resources, cause us to raise additional capital at unfavorable terms, require us to sell portions of ourbusiness or result in us becoming insolvent. We used the initial net proceeds under the Loan Agreement to repay and terminate our credit facility with 25Table of Contents PDL Biopharma, Inc., or PDL, however, our obligation to continue to make royalty payments to PDL out of our quarterly revenues through April 18, 2018remain in effect. Additionally, until there are no further obligations to periodically pay to PDL a percentage of our net revenue, we must comply with certainaffirmative covenants and negative covenants limiting our ability to, among other things, undergo a change in control or dispose of assets, in each casesubject to certain exceptions. The existing collateral pledged under the Loan Agreement, the covenants to which we are bound and the obligation to pay acertain percentage of our future revenues to PDL, even though the PDL debt has been repaid, may prevent us from being able to secure additional debt orequity financing on favorable terms, or at all, or to pursue business opportunities, including potential acquisitions. Our ability to compete is highly dependent on demonstrating the benefits of our Lumivascular platform to physicians, hospitals and patients. In order to generate sales, we must be able to clearly demonstrate that our Lumivascular platform is both a more effective treatment system and morecost-effective than the alternatives offered by our competitors. If we are unable to convince physicians that our Lumivascular platform leads to significantlylower rates of restenosis, or narrowing of the artery, and leads to fewer adverse events during treatment than those using competing technologies, our businesswill suffer. In order to use Pantheris or our Ocelot family of catheters, hospitals must make an investment in our Lightbox. Accordingly, we must convincehospitals and physicians that our Lumivascular platform results in significantly better patient outcomes at a competitive overall cost. For example, we mayneed to demonstrate that the investment hospitals must make when purchasing our Lightbox and the incremental costs of having a technician or a secondphysician operate Pantheris can be justified based on the benefits to patients, physicians and hospitals. If we are unable to develop robust clinical data tosupport these claims we will be unable to convince hospitals and third-party payors of these benefits and our business will suffer. Our value proposition to physicians and hospitals is largely dependent upon our contention that the rate of arterial damage when physicians areusing our products is lower than with competing products. If minimizing arterial damage does not significantly impact patient outcomes, meaning either(i) that restenosis is often triggered without disrupting healthy arterial structures, or (ii) arteries can be damaged during treatment without triggeringrestenosis, then we may be unable to demonstrate our Lumivascular platform’s benefits are any different than competing technologies. Furthermore,physicians may find our imaging system difficult to use and we may not be able to provide physicians with adequate training to be able to realize the benefitsof our Lumivascular platform. If physicians do not value the benefits of on-board imaging and the enhanced visualization enabled by our products during anendovascular intervention as compared to our competitor’s products, or do not believe that such benefits improve clinical outcomes, our Lumivascularplatform products may not be widely adopted. The use, misuse or off-label use of the products in our Lumivascular platform may result in injuries that lead to product liability suits, which could becostly to our business. We require limited training in the use of our Lumivascular platform products because we market primarily to physicians who are experienced in theinterventional techniques required to use our device. If demand for our Lumivascular platform continues to grow, less experienced physicians will likely usethe devices, potentially leading to more injury and an increased risk of product liability claims. The use or misuse of our Lumivascular platform products hasin the past resulted, and may in the future result, in complications, including damage to the treated artery, infection, internal bleeding, and limb loss,potentially leading to product liability claims. Our Lumivascular platform products are contraindicated for use in the carotid, cerebral, coronary, iliac, orrenal arteries. Our sales force does not promote the use of our products for off-label indications, and our U.S. instructions for use specify that our Lumivascularplatform products are not intended for use in the carotid, cerebral, coronary, iliac or renal arteries. However, we cannot prevent a physician from using ourLumivascular platform products for these off-label applications. The application of our Lumivascular platform products to coronary arteries, as opposed toperipheral arteries, is more likely to result in complications that have serious consequences. For example, if excised plaque were not captured properly in ourdevice, it could be carried by the bloodstream to a more narrow location, blocking a coronary artery, leading to a heart attack, or blocking an artery to thebrain, leading to a stroke. If our Lumivascular platform products are defectively designed, manufactured or labeled, contain defective components or aremisused, we may become subject to costly litigation initiated by our customers or their patients. Product liability claims are especially prevalent in themedical device industry and could harm our reputation, divert management’s attention from our core business, be expensive to defend and may result insizable damage awards against us. Although we maintain product liability insurance, the amount or breadth of our coverage may not be adequate for theclaims that are made against us. The expense and potential unavailability of insurance coverage for liabilities resulting from our products could harm us and our ability to sell ourLumivascular platform products. We may not have sufficient insurance coverage for future product liability claims. We may not be able to obtain insurance in amounts or scopesufficient to provide us with adequate coverage against all potential liabilities. Any product liability claims brought against us, with or without merit, couldincrease our product liability insurance rates or prevent us from securing continuing coverage, harm our reputation in the industry, significantly increase ourexpenses, and reduce product sales. Product liability claims in excess of our insurance coverage would be paid out of cash reserves, harming our financialcondition and operating results. 26Table of Contents Some of our customers and prospective customers may have difficulty in procuring or maintaining liability insurance to cover their operations anduse of our Lumivascular platform products. Medical malpractice carriers are also withdrawing coverage in certain states or substantially increasing premiums.If this trend continues or worsens, our customers may discontinue using our Lumivascular platform products and potential customers may opt againstpurchasing our Lumivascular platform products due to the cost or inability to procure insurance coverage. Our ability to compete depends on our ability to innovate successfully. The market for medical devices in general, and in the PAD market in particular, is highly competitive, dynamic, and marked by rapid and substantialtechnological development and product innovation. There are few barriers that would prevent new entrants or existing competitors from developing productsthat compete directly with ours. Demand for our Lumivascular platform products could be diminished by equivalent or superior products and technologiesoffered by competitors. If we are unable to innovate successfully, our Lumivascular platform products could become obsolete and our revenues would declineas our customers purchase our competitors’ products. The medical device market is characterized by extensive research and development and rapid technological change. Technological progress or newdevelopments in our industry could harm sales of our products. Our products could be rendered obsolete because of future innovations in the treatment ofPAD. In order to remain competitive, we must continue to develop new product offerings and enhancements to our existing Lumivascular platform products.Maintaining adequate research and development personnel and resources to meet the demands of the market is essential. If we are unable to developproducts, applications or features due to certain constraints, such as insufficient cash resources, inability to raise sufficient cash in future equity or debtfinancings, high employee turnover, inability to hire sufficient research and development personnel or a lack of other research and development resources, wemay miss market opportunities. Furthermore, many of our competitors expend a considerably greater amount of funds on their research and developmentprograms than we do, and those that do not may be acquired by larger companies that would allocate greater resources to our competitors’ research anddevelopment programs. Our failure or inability to devote adequate research and development resources or compete effectively with the research anddevelopment programs of our competitors could harm our business. We compete against companies that have longer operating histories, more established products and greater resources, which may prevent us fromachieving significant market penetration, increasing our revenues or becoming profitable. Our products compete with a variety of products and devices for the treatment of PAD, including other CTO crossing devices, stents, balloons andatherectomy catheters, as well as products used in vascular surgery. Large competitors in the CTO crossing, stent and balloon markets include AbbottLaboratories, Boston Scientific, Cardinal Health, Cook Medical, CR Bard and Medtronic. Competitors in the atherectomy market include Boston Scientific,Cardiovascular Systems, Medtronic, Philips and Spectranetics. Some competitors have previously attempted to combine intravascular imaging withatherectomy and may have current programs underway to do so. These and other companies may attempt to incorporate on-board visualization into theirproducts in the future and may remain competitive with us in marketing traditional technologies. Other competitors include pharmaceutical companies thatmanufacture drugs for the treatment of symptoms associated with mild to moderate PAD and companies that provide products used by surgeons in peripheraland coronary bypass procedures. These competitors and other companies may introduce new products that compete with our products. Many of ourcompetitors have significantly greater financial and other resources than we do and have well-established reputations, as well as broader product offeringsand worldwide distribution channels that are significantly larger and more effective than ours. Competition with these companies could result in price-cutting, reduced profit margins and loss of market share, any of which would harm our business, financial condition and results of operations. Our ability to compete effectively depends on our ability to distinguish our company and our Lumivascular platform from our competitors and theirproducts, and includes such factors as: · procedural safety and efficacy; · acute and long-term outcomes; · ease of use and procedure time; · price; · size and effectiveness of sales force; · radiation exposure for physicians, hospital staff and patients; and · third-party reimbursement. 27Table of Contents In addition, competitors with greater financial resources than ours could acquire other companies to gain enhanced name recognition and marketshare, as well as new technologies or products that could effectively compete with our existing products, which may cause our revenues to decline and wouldharm our business. If our clinical trials are unsuccessful or significantly delayed, or if we do not complete our clinical trials, our business may be harmed. Clinical development is a long, expensive, and uncertain process and is subject to delays and the risk that products may ultimately prove unsafe orineffective in treating the indications for which they are designed. Completion of clinical trials may take several years or more and failure of the trial canoccur at any time. We cannot provide any assurance that our clinical trials will meet their primary endpoints or that such trials or their results will be acceptedby the FDA or foreign regulatory authorities. Even if we achieve positive early or preliminary results in clinical trials, these results do not necessarily predictfinal results, and positive results in early trials may not indicate success in later trials. Many companies in the medical device industry have sufferedsignificant setbacks in late-stage clinical trials, even after receiving promising results in earlier trials or in the preliminary results from these late-stage clinicaltrials. We may experience numerous unforeseen events during, or because of, the clinical trial process that could delay or prevent us from receivingregulatory clearance or approval for new products or modifications of existing products, including new indications for existing products, including: · negative or inconclusive results that may cause us to decide, or regulators may require us, to conduct additional clinical and/or preclinicaltesting which may be expensive and time consuming; · trial results that do not meet the level of statistical significance required by the FDA or other regulatory authorities; · findings by the FDA or similar foreign regulatory authorities that the product is not sufficiently safe for investigational use in humans; · interpretations of data from preclinical testing and clinical testing by the FDA or similar foreign regulatory authorities that may be differentfrom our own; · delays or failure to obtaining approval of our clinical trial protocols from the FDA or other regulatory authorities; · delays in obtaining institutional review board approvals or government approvals to conduct clinical trials at prospective sites; · findings by the FDA or similar foreign regulatory authorities that our or our suppliers’ manufacturing processes or facilities are unsatisfactory; · changes in the review policies of the FDA or similar foreign regulatory authorities or the adoption of new regulations that may negatively affector delay our ability to bring a product to market or receive approvals or clearances to treat new indications; · trouble in managing multiple clinical sites; · delays in agreeing on acceptable terms with third-party research organizations and trial sites that may help us conduct the clinical trials; and · the suspension or termination by us, or regulators, of our clinical trials because the participating patients are being exposed to unacceptablehealth risks. 28Table of Contents Failures or perceived failures in our clinical trials will delay and may prevent our product development and regulatory approval process, damage ourbusiness prospects and negatively affect our reputation and competitive position. From time to time, we engage outside parties to perform services related to certain of our clinical studies and trials, and any failure of those parties tofulfill their obligations could increase costs and cause delays. From time to time, we engage consultants to help design, monitor, and analyze the results of certain of our clinical studies and trials. The consultantswe engage interact with clinical investigators to enroll patients in our clinical trials. We depend on these consultants and clinical investigators to helpfacilitate the clinical studies and trials and monitor and analyze data from these studies and trials under the investigational plan and protocol for the study ortrial and in compliance with applicable regulations and standards, commonly referred to as good clinical practices. We may face delays in our regulatoryapproval process if these parties do not perform their obligations in a timely, compliant or competent manner. If these third parties do not successfully carryout their duties or meet expected deadlines, or if the quality, completeness or accuracy of the data they obtain is compromised due to the failure to adhere toour clinical trial protocols or for other reasons, our clinical studies or trials may be extended, delayed or terminated or may otherwise prove to beunsuccessful, and we may have to conduct additional studies, which would significantly increase our costs, in order to obtain the regulatory clearances thatwe need to commercialize our products. We have no long-term data regarding the safety and efficacy of our Lumivascular platform products, including Pantheris. Any long-term data that isgenerated by clinical trials involving our Lumivascular platform may not be positive or consistent with our short-term data, which would harm our abilityto obtain clearance to market and sell our products. Our Lumivascular platform is a novel system, and our success depends on its acceptance by the medical community as being safe and effective, andimproving clinical outcomes. Important factors upon which the efficacy of our Lumivascular platform products, including Pantheris, will be measured arelong-term data on the rate of restenosis following our procedure, and the corresponding duration of patency, or openness of the artery, and publication of thatdata in peer-reviewed journals. Another important factor that physicians will consider is the rate of reintervention, or retreatment, following the use of ourLumivascular platform products. The long-term clinical benefits of procedures that use our Lumivascular platform products, including Pantheris, are notknown. The results of short-term clinical experience of our Lumivascular platform products, including Pantheris, do not necessarily predict long-termclinical benefit. Restenosis rates typically increase over time. We believe that physicians will compare the rates of long-term restenosis and reintervention forprocedures using our Lumivascular platform products against alternative procedures, such as angioplasty, stenting, bypass surgery and other atherectomyprocedures. If the long-term rates of restenosis and reintervention do not meet physicians’ expectations, our Lumivascular platform products may not becomewidely adopted and physicians may recommend alternative treatments for their patients. Another significant factor that physicians will consider is acutesafety data on complications that occur during the use of our Lumivascular platform products. If the results obtained from any post-market studies that weconduct or post-clearance surveillance indicate that the use of our Lumivascular platform products are not as safe or effective as other treatment options or ascurrent short-term data would suggest, adoption of our product may suffer and our business would be harmed. Even if we believe the data collected fromclinical studies or clinical experience indicate positive results, each physician’s actual experience with our products will vary. Physicians who are technicallyproficient participate in our clinical trials and are high-volume users of our Lumivascular platform products. Consequently, the results of our clinical trialsand their experiences using our products may lead to better patient outcomes than those of physicians that are less proficient, perform fewer procedures orwho use our products infrequently. Our ability to market our current products in the United States is limited to use in peripheral vessels, and if we want to market our products for other uses,we will need to file for FDA clearances or approvals and may need to conduct trials to support expanded use, which would be expensive, time-consumingand may not be successful. Our current products are cleared in the United States only for crossing sub-total and chronic total occlusions and for performing atherectomy in theperipheral vasculature. These clearances prohibit our ability to market or advertise our products for any other indication within the peripheral vasculature,which restricts our ability to sell these products and could affect our growth. Additionally, our products are contraindicated for use in the cerebral, carotid,coronary, iliac, and renal arteries. While off-label uses of medical devices are common and the FDA does not regulate physicians’ choice of treatments, theFDA does restrict a manufacturer’s communications regarding such off-label use. We are not allowed to actively promote or advertise our products for off-label uses. In addition, we cannot make comparative claims regarding the use of our products against any alternative treatments without conducting head-to-head comparative clinical studies, which would be expensive and time consuming. If our promotional activities fail to comply with the FDA’s regulations orguidelines, we may be subject to FDA warnings or enforcement action by the FDA and other government agencies. In the future, if we want to market avariation of Ocelot or Pantheris in the United States for use in coronary arteries, we will need to make modifications to these products, conduct further clinicaltrials and obtain new clearances or approvals from the FDA. There can be no assurance that we will successfully develop these modifications, that futureclinical studies will be successful or that the expense of these activities will be offset by additional revenues. 29Table of Contents The continuing development of many of our products, including Pantheris, depends upon maintaining strong working relationships with physicians. The development, marketing, and sale of our products, including Pantheris, depends upon our ability to maintain strong working relationships withphysicians. We rely on these professionals to provide us with considerable knowledge and experience regarding the development, marketing and sale of ourproducts. Physicians assist us in clinical trials and as researchers, marketing and product consultants and public speakers. If we cannot maintain our strongworking relationships with these professionals and continue to receive their advice and input, the development and marketing of our products could suffer,which could harm our business, financial condition and results of operations. The medical device industry’s relationship with physicians is under increasingscrutiny by the OIG, the Department of Justice, or DOJ, state attorneys general, and other foreign and domestic government agencies. Our failure to complywith laws, rules and regulations governing our relationships with physicians, or an investigation into our compliance by the OIG, DOJ, state attorneys generaland other government agencies, could significantly harm our business. If we fail to grow our sales and marketing capabilities and develop widespread brand awareness cost effectively, our growth will be impeded and ourbusiness may suffer. We plan to continue to expand and optimize our sales infrastructure in order to grow our customer base and our business. Identifying and recruitingqualified personnel and training them in the use of our Lumivascular platform, and on applicable federal and state laws and regulations and our internalpolicies and procedures, requires significant time, expense and attention. It could take several months before any new sales representatives are fully trainedand productive. Our business may be harmed if our efforts to expand and train our sales force do not generate a corresponding increase in revenues. Inparticular, if we are unable to hire, develop and retain talented sales personnel or if new sales personnel are unable to achieve desired productivity levels in areasonable period of time, we may not be able to realize the expected benefits of this investment or increase our revenues. Our ability to increase our customer base and achieve broader market acceptance of our Lumivascular platform will depend to a significant extent onour ability to expand our marketing operations. We plan to dedicate significant financial and other resources to our marketing programs. Our business will beharmed if our marketing efforts and expenditures do not generate an increase in revenue. In addition, we believe that developing and maintaining widespread awareness of our brand in a cost-effective manner is critical to achievingwidespread acceptance of our Lumivascular platform and attracting new customers. Brand promotion activities may not generate customer awareness orincrease revenues, and even if they do, any increase in revenues may not offset the costs and expenses we incur in building our brand. If we fail tosuccessfully promote, maintain and protect our brand, we may fail to attract or retain the customers necessary to realize a sufficient return on our brand-building efforts, or to achieve the widespread brand awareness that is critical for broad customer adoption of our Lumivascular platform. If we are unable to manage the anticipated growth of our business, our future revenues and operating results may be harmed. Any growth that we experience in the future could provide challenges to our organization, requiring us to expand our sales personnel andmanufacturing operations and general and administrative infrastructure. We expect to continue to grow our sales force and manufacturing infrastructure.Rapid expansion in personnel could mean that less experienced people produce and sell our products, which could result in inefficiencies and unanticipatedcosts and disruptions to our operations. We have limited experience manufacturing our Lumivascular platform products in commercial quantities, which could harm our business. Because we have only limited experience in manufacturing our Lumivascular platform products in commercial quantities, we may encounterproduction delays or shortfalls. Such production delays or shortfalls may be caused by many factors, including the following: · we intend to significantly expand our manufacturing capacity, and our production processes may have to change to accommodate this growth; · key components and sub-assemblies of our Lumivascular platform products are currently provided by a single supplier or limited number ofsuppliers, and we do not maintain large inventory levels of these components and sub-assemblies; if we experience a shortage in any of thesecomponents or sub-assemblies, we would need to identify and qualify new supply sources, which could increase our expenses and result inmanufacturing delays; 30Table of Contents · we may experience a delay in completing validation and verification testing for new controlled-environment rooms at our manufacturingfacilities; · we have limited experience in complying with the FDA’s QSR, which applies to the manufacture of our Lumivascular platform products; and · to increase our manufacturing output significantly, we will have to attract and retain qualified employees, who are in short supply, for ourmanufacturing operations. If we are unable to keep up with demand for our Lumivascular platform products, our revenues could be impaired, market acceptance for ourLumivascular platform products could be harmed and our customers might instead purchase our competitors’ products. Our inability to successfullymanufacture our Lumivascular platform products would materially harm our business. Our manufacturing facilities and processes and those of our third-party suppliers are subject to unannounced FDA and state regulatory inspectionsfor compliance with QSR. Developing and maintaining a compliant quality system is time consuming and expensive. Failure to maintain, or not fully complywith the requirements of, a quality system could result in regulatory authorities initiating enforcement actions against us and our third-party suppliers, whichcould include the issuance of warning letters, seizures, prohibitions on product sales, recalls and civil and criminal penalties, any one of which couldsignificantly impact our manufacturing supply and impair our financial results. If our manufacturing facility becomes damaged or inoperable, or we are required to vacate the facility, or our electronic systems are compromised, ourability to manufacture and sell our Lumivascular platform products and to pursue our research and development efforts may be jeopardized. We currently manufacture and assemble our Lumivascular platform products in-house. Our products are comprised of components sourced from avariety of contract manufacturers, with final assembly completed at our facility in Redwood City, California. Our facility and equipment, or those of oursuppliers, could be harmed or rendered inoperable by natural or man-made disasters, including fire, earthquake, terrorism, flooding and power outages.Further, our electronic systems may experience service interruptions, denial-of-service and other cyber-attacks, computer viruses or other events. Any of thesemay render it difficult or impossible for us to manufacture products, pursue our research and development efforts or otherwise run our business for someperiod of time. If our facility is inoperable for even a short period of time, the inability to manufacture our current products, and the interruption in researchand development of any future products, may result in harm to our reputation, increased costs, lower revenues and the loss of customers. Furthermore, it couldbe costly and time-consuming to repair or replace our facilities and the equipment we use to perform our research and development work and manufacture ourproducts. We depend on third-party vendors to manufacture some of our components and sub-assemblies, which could make us vulnerable to supply shortages andprice fluctuations that could harm our business. We currently manufacture some of our components and sub-assemblies at our Redwood City facility and rely on third-party vendors for othercomponents and sub-assemblies used in our Lumivascular platform. Our reliance on third-party vendors subjects us to a number of risks that could impact ourability to manufacture our products and harm our business, including: · interruption of supply resulting from modifications to, or discontinuation of, a supplier’s operations; · delays in product shipments resulting from uncorrected defects, reliability issues or a supplier’s failure to consistently produce qualitycomponents; · price fluctuations due to a lack of long-term supply arrangements with our suppliers for key components; · inability to obtain adequate supply in a timely manner or on commercially reasonable terms; · difficulty identifying and qualifying alternative suppliers for components in a timely manner; · inability of the manufacturer or supplier to comply with QSR as enforced by the FDA and state regulatory authorities; · inability to control the quality of products manufactured by third parties; 31Table of Contents · production delays related to the evaluation and testing of products from alternative suppliers and corresponding regulatory qualifications; and · delays in delivery by our suppliers due to changes in demand from us or their other customers. Any significant delay or interruption in the supply of components or sub-assemblies, or our inability to obtain substitute components, sub-assemblies or materials from alternate sources at acceptable prices in a timely manner, could impair our ability to meet the demand of our customers and harmour business. We depend on single and limited source suppliers for some of our product components and sub-assemblies, and if any of those suppliers are unable orunwilling to produce these components and sub-assemblies or supply them in the quantities that we need, we would experience manufacturing delays. We rely on single and limited source suppliers for several of our components and sub-assemblies. For example, we rely on single vendors for ouroptical fiber and drive cables that are key components of our catheters, and we rely on a single vendor for our data acquisition card in Lightbox. Thesecomponents are critical to our products and there are relatively few alternative sources of supply. We do not carry a significant inventory of thesecomponents. Identifying and qualifying additional or replacement suppliers for any of the components or sub-assemblies used in our products could involvesignificant time and cost. Any supply interruption from our vendors or failure to obtain additional vendors for any of the components or sub-assembliesincorporated into our products would limit our ability to manufacture our products and could therefore harm our business, financial condition and results ofoperations. Our future growth depends on physician adoption of our Lumivascular platform products, which may require physicians to change their current practices. We intend to educate physicians on the capabilities of our Lumivascular platform products and advances in treatment for PAD patients. We targetour sales efforts to interventional cardiologists, vascular surgeons and interventional radiologists because they are often the physicians diagnosing andtreating both coronary artery disease and PAD. However, the initial point of contact for many patients may be general practitioners, podiatrists, nephrologistsand endocrinologists, each of whom commonly treat patients experiencing complications or symptoms resulting from PAD. If these physicians are not madeaware of our Lumivascular platform products, they may not refer patients to interventional cardiologists, vascular surgeons and interventional radiologists fortreatment using our Lumivascular platform procedure, and those patients may instead be surgically treated or treated with an alternative interventionalprocedure. In addition, there is a significant correlation between PAD and coronary artery disease, and many physicians do not routinely screen for PAD whilescreening for coronary artery disease. If we are not successful in educating physicians about screening for PAD and about the capabilities of our Lumivascularplatform products, our ability to increase our revenues may be impaired. We depend on our senior management team and the loss of one or more key employees or an inability to attract and retain highly skilled employees couldharm our business. Our success largely depends upon the continued services of our executive management team and key employees and the loss of one or more of ourexecutive officers or key employees could harm us and directly impact our financial results. Our employees may terminate their employment with us at anytime. Changes in our executive management team resulting from the hiring or departure of executives could disrupt our business. In particular, our founderand Executive Chairman, Dr. John Simpson, is the visionary behind many of our product development activities and he actively supports our clinical trialsand physician education and training efforts. If Dr. Simpson was no longer working at our company, our industry credibility, product development efforts andphysician relationships would be harmed. We do not currently maintain key person life insurance policies on any of our employees, including Dr. Simpson. To execute our growth plan, we must attract and retain highly qualified personnel. Competition for skilled personnel is intense, especially forengineers with high levels of experience in designing and developing medical devices and for sales executives. We have, from time to time, experienced, andwe expect to continue to experience, difficulty in hiring and retaining employees with appropriate qualifications. Many of the companies with which wecompete for experienced personnel have greater resources than we have. If we hire employees from competitors or other companies, their former employersmay attempt to assert that these employees or we have breached legal obligations, resulting in a diversion of our time and resources and, potentially,damages. In addition, job candidates and existing employees, particularly in the San Francisco Bay Area, often consider the value of the stock awards theyreceive in connection with their employment. If the perceived value of our stock awards declines, it may harm our ability to recruit and retain highly skilledemployees. In addition, we invest significant time and expense in training our employees, which increases their value to competitors who may seek to recruitthem. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects would be harmed. 32Table of Contents We do not currently intend to devote significant additional resources in the near-term to market our Lumivascular platform internationally, which willlimit our potential revenues from our Lumivascular platform products. Marketing our Lumivascular platform outside of the United States would require substantial additional sales and marketing, regulatory andpersonnel expenses. As part of our product development and regulatory strategy, we plan to expand into select European markets, but we do not currentlyintend to devote significant additional resources to market our Lumivascular platform internationally in order to focus our resources and efforts on the U.S.market. Our decision to market our products primarily in the United States in the near-term will limit our ability to reach all of our potential markets and willlimit our potential sources of revenue. In addition, our competitors will have an opportunity to further penetrate and achieve market share outside of theUnited States until such time, if ever, that we devote significant additional resources to market our Lumivascular platform products or other productsinternationally. Our ability to utilize our net operating loss carryforwards may be limited. As of December 31, 2015, we had federal and state net operating loss carryforwards, or NOLs, due to prior period losses of $171.2 million and$161.2 million, respectively, which if not utilized will begin to expire in 2027 for federal purposes and 2015 for state purposes. We may use these NOLs tooffset against taxable income for U.S. federal income tax purposes. However, Section 382 of the Internal Revenue Code of 1986, as amended, may limit theNOLs we may use in any year for U.S. federal income tax purposes in the event of certain changes in ownership of our company. A Section 382 “ownershipchange” generally occurs if one or more stockholders or groups of stockholders who own at least 5% of our stock increase their ownership by more than50 percentage points over their lowest ownership percentage within a rolling three-year period. Similar rules may apply under state tax laws. This offering orfuture issuances or sales of our stock (including certain transactions involving our stock that are outside of our control) could cause an “ownership change.”If an “ownership change” occurs, Section 382 would impose an annual limit on the amount of pre-ownership change NOLs and other tax attributes we can useto reduce our taxable income, potentially increasing and accelerating our liability for income taxes, and also potentially causing those tax attributes to expireunused. Any limitation on using NOLs could (depending on the extent of such limitation and the NOLs previously used) result in our retaining less cash afterpayment of U.S. federal income taxes during any year in which we have taxable income (rather than losses) than we would be entitled to retain if such NOLswere available as an offset against such income for U.S. federal income tax reporting purposes, which could harm our profitability. The forecasts of market growth included in this Annual Report on Form10-K may prove to be inaccurate, and even if the markets in which we competeachieve the forecasted growth, our business may not grow at similar rates, if at all. Growth forecasts are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. The forecastsin this Annual Report on Form 10-K relating to, among other things, the expected growth in PAD prevalence, diagnosis and endovascular PAD proceduresand the markets therefor and increased awareness, higher diagnosis, and intervention rates, may prove to be inaccurate. Even if these markets experience the forecasted growth described in this Annual Report on Form 10-K, we may not grow our business at similar rates,or at all. Our growth is subject to many factors, including whether the market for PAD treatments continues to grow, our ability to successfully commercializePantheris, the rate of market acceptance of our Lumivascular platform products versus the products of our competitors and our success in implementing ourbusiness strategies, each of which is subject to many risks and uncertainties. Accordingly, the forecasts of market growth included in this Annual Report onForm 10-K should not be taken as indicative of our future growth. We may acquire other companies or technologies, which could divert our management’s attention, result in additional dilution to our stockholders andotherwise disrupt our operations and harm our operating results. We may in the future seek to acquire or invest in businesses, applications or technologies that we believe could complement or expand ourLumivascular platform, enhance our technical capabilities or otherwise offer growth opportunities. The pursuit of potential acquisitions may divert theattention of management and cause us to incur various costs and expenses in identifying, investigating and pursuing suitable acquisitions, whether or notthey are consummated. We may not be able to identify desirable acquisition targets or be successful in entering into an agreement with any particular targetor obtain the expected benefits of any acquisition or investment. To date, the growth in our business has been organic, and we have no experience in acquiring other businesses. In any acquisition, we may not beable to successfully integrate acquired personnel, operations and technologies, or effectively manage the combined business following the acquisition.Acquisitions could also result in dilutive issuances of equity securities, the use of our available cash, or the incurrence of debt, which could harm ouroperating results. In addition, if an acquired business fails to meet our expectations, our operating results, business and financial condition may suffer. 33Table of Contents Risks Related to Our Intellectual Property We may in the future be a party to intellectual property litigation or administrative proceedings that could be costly and could interfere with our ability tosell our Lumivascular platform products. The medical device industry has been characterized by extensive litigation regarding patents, trademarks, trade secrets, and other intellectualproperty rights, and companies in the industry have used intellectual property litigation to gain a competitive advantage. It is possible that U.S. and foreignpatents and pending patent applications or trademarks controlled by third parties may be alleged to cover our products, or that we may be accused ofmisappropriating third parties’ trade secrets. Additionally, our products include hardware and software components that we purchase from vendors, and mayinclude design components that are outside of our direct control. Our competitors, many of which have substantially greater resources and have madesubstantial investments in patent portfolios, trade secrets, trademarks, and competing technologies, may have applied for or obtained or may in the futureapply for or obtain, patents or trademarks that will prevent, limit or otherwise interfere with our ability to make, use, sell and/or export our products or to useproduct names. We may become a party to patent or trademark infringement or trade secret claims and litigation as a result of these and other third-partyintellectual property rights being asserted against us. The defense and prosecution of these matters are both costly and time consuming. Vendors from whomwe purchase hardware or software may not indemnify us in the event that such hardware or software is accused of infringing a third-party’s patent ortrademark or of misappropriating a third-party’s trade secret. Further, if such patents, trademarks, or trade secrets are successfully asserted against us, this may harm our business and result in injunctionspreventing us from selling our products, license fees, damages and the payment of attorney fees and court costs. In addition, if we are found to willfullyinfringe third-party patents or trademarks or to have misappropriated trade secrets, we could be required to pay treble damages in addition to other penalties.Although patent, trademark, trade secret, and other intellectual property disputes in the medical device area have often been settled through licensing orsimilar arrangements, costs associated with such arrangements may be substantial and could include ongoing royalties. We may be unable to obtainnecessary licenses on satisfactory terms, if at all. If we do not obtain necessary licenses, we may not be able to redesign our Lumivascular platform products toavoid infringement. Similarly, interference or derivation proceedings provoked by third parties or brought by the U.S. Patent and Trademark Office, or USPTO, may benecessary to determine the priority of inventions or other matters of inventorship with respect to our patents or patent applications. We may also becomeinvolved in other proceedings, such as re-examination, inter partes review, or opposition proceedings, before the USPTO or other jurisdictional body relatingto our intellectual property rights or the intellectual property rights of others. Adverse determinations in a judicial or administrative proceeding or failure toobtain necessary licenses could prevent us from manufacturing and selling our Lumivascular platform products or using product names, which would have asignificant adverse impact on our business. Additionally, we may need to commence proceedings against others to enforce our patents or trademarks, to protect our trade secrets or know-how,or to determine the enforceability, scope and validity of the proprietary rights of others. These proceedings would result in substantial expense to us andsignificant diversion of effort by our technical and management personnel. We may not prevail in any lawsuits that we initiate and the damages or otherremedies awarded, if any, may not be commercially meaningful. We may not be able to stop a competitor from marketing and selling products that are thesame or similar to our products or from using product names that are the same or similar to our product names, and our business may be harmed as a result. We are aware of patents held by third parties that may be asserted against us in litigation that could be costly and could limit our ability to sell ourLumivascular platform products. We are aware of patent families related to catheter positioning, optical coherence tomography, occlusion cutting and atherectomy owned by thirdparties. With regard to atherectomy patents, one of our founders, Dr. John Simpson, founded FoxHollow Technologies prior to founding our company.FoxHollow Technologies developed an atherectomy device that is currently sold by Medtronic, and Dr. Simpson and our Chief Technology Officer,Himanshu Patel, are listed as inventors on patents covering that device that are now held by Medtronic. We are not currently aware of any claims Medtronichas made or intends to make against us with respect to Pantheris or any other product or product under development. Because of a doctrine known as“assignor estoppel,” if any of Dr. Simpson’s earlier patents are asserted against us by Medtronic, we may be prevented from asserting an invalidity defenseregarding those patents, and our defense may be compromised. Medtronic has significantly greater financial resources than we do to pursue patent litigationand could assert these patent families against us at any time. Adverse determinations in any such litigation could prevent us from manufacturing or sellingPantheris or other products or products under development, which would significantly harm our business. 34Table of Contents Intellectual property rights may not provide adequate protection, which may permit third parties to compete against us more effectively. In order to remain competitive, we must develop and maintain protection of the proprietary aspects of our technologies. We rely on a combination ofpatents, copyrights, trademarks, trade secret laws and confidentiality and invention assignment agreements to protect our intellectual property rights. As ofDecember 31, 2015, we held six issued U.S. patents and had 20 U.S. utility patent applications and 3 PCT applications pending. As of December 31, 2015, wealso had 10 issued patents outside of the United States. As of December 31, 2015, we had 39 pending patent applications outside of the United States,including in Australia, Canada, China, Europe, India and Japan. Our patents and patent applications include claims covering key aspects of the design,manufacture and therapeutic use of OCT imaging catheters, occlusion-crossing catheters, atherectomy devices and our imaging console. Our patentapplications may not result in issued patents and our patents may not be sufficiently broad to protect our technology. Any patents issued to us may bechallenged by third parties as being invalid, or third parties may independently develop similar or competing technology that avoids our patents. Shouldsuch challenges be successful, competitors might be able to market products and use manufacturing processes that are substantially similar to ours. We maynot be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by consultants, vendors or former or currentemployees, despite the existence generally of confidentiality agreements and other contractual restrictions. Monitoring unauthorized use and disclosure ofour intellectual property is difficult, and we do not know whether the steps we have taken to protect our intellectual property will be adequate. In addition,the laws of many foreign countries will not protect our intellectual property rights to the same extent as the laws of the United States. Consequently, we maybe unable to prevent our proprietary technology from being exploited abroad, which could affect our ability to expand to international markets or requirecostly efforts to protect our technology. To the extent our intellectual property protection is incomplete, we are exposed to a greater risk of directcompetition. In addition, competitors could purchase our products and attempt to replicate some or all of the competitive advantages we derive from ourdevelopment efforts or design around our protected technology. Our failure to secure, protect and enforce our intellectual property rights could substantiallyharm the value of our Lumivascular platform, brand and business. We use certain open source software in Lightbox. We may face claims from companies that incorporate open source software into their products orfrom open source licensors, claiming ownership of, or demanding release of, the source code, the open source software or derivative works that weredeveloped using such software, or otherwise seeking to enforce the terms of the applicable open source license. These claims could result in litigation andcould require us to cease offering Lightbox unless and until we can re-engineer it to avoid infringement. This re-engineering process could require significantadditional research and development resources, and we may not be able to complete it successfully. These risks could be difficult to eliminate or manage,and, if not addressed, could harm our business, financial condition and operating results. Risks Related to Government Regulation Failure to comply with laws and regulations could harm our business. Our business is subject to regulation by various federal, state, local and foreign governmental agencies, including agencies responsible formonitoring and enforcing employment and labor laws, workplace safety, environmental laws, consumer protection laws, anti-bribery laws, import/exportcontrols, federal securities laws and tax laws and regulations. In certain jurisdictions, these regulatory requirements may be more stringent than those in theUnited States and in other circumstances these requirements may be more stringent in the United States. Noncompliance with applicable regulations orrequirements could subject us to investigations, sanctions, mandatory recalls, enforcement actions, adverse publicity, disgorgement of profits, fines, damages,civil and criminal penalties or injunctions and administrative actions. If any governmental sanctions, fines or penalties are imposed, or if we do not prevail inany possible civil or criminal litigation, our business, operating results and financial condition could be harmed. In addition, responding to any action willlikely result in a significant diversion of management’s attention and resources and substantial costs. Enforcement actions and sanctions could further harmour business, operating results and financial condition. If we fail to obtain and maintain necessary regulatory clearances or approvals for our Lumivascular platform products, or if clearances or approvals forfuture products and indications are delayed or not issued, our commercial operations would be harmed. Our Lumivascular platform products are medical devices that are subject to extensive regulation by FDA in the United States and by regulatoryagencies in other countries where we do business. Government regulations specific to medical devices are wide-ranging and govern, among other things: · product design, development and manufacture; · laboratory, preclinical and clinical testing, labeling, packaging, storage and distribution; 35Table of Contents · premarketing clearance or approval; · record keeping; · product marketing, promotion and advertising, sales and distribution; and · post-marketing surveillance, including reporting of deaths or serious injuries and recalls and correction and removals. Before a new medical device, or a new intended use for, an existing product can be marketed in the United States, a company must first submitand receive either 510(k) clearance or premarketing approval from FDA, unless an exemption applies. Either process can be expensive, lengthy andunpredictable. We may not be able to obtain the necessary clearances or approvals or may be unduly delayed in doing so, which could harm our business.Furthermore, even if we are granted regulatory clearances or approvals, they may include significant limitations on the indicated uses for the product, whichmay limit the market for the product. Although we have obtained 510(k) clearance to market Pantheris, our image-guided atherectomy device, and our Ocelotfamily of catheters for crossing sub and total occlusions in the peripheral vasculature, our clearance can be revoked if safety or efficacy problems develop.Delays in obtaining clearance or approval could increase our costs and harm our revenues and growth. In addition, we are required to timely file various reports with the FDA, including reports required by the MDRs that require that we report to theregulatory authorities if our devices may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause orcontribute to a death or serious injury if the malfunction were to recur. If these reports are not filed timely, regulators may impose sanctions and sales of ourproducts may suffer, and we may be subject to product liability or regulatory enforcement actions, all of which could harm our business. For example, to datewe have submitted to the FDA five MDRs regarding our Ocelot family of catheters, which included four perforations and one related to removal of theguidewire coating. If we initiate a correction or removal for one of our devices to reduce a risk to health posed by the device, we would be required to submit apublically available Correction and Removal report to the FDA and in many cases, similar reports to other regulatory agencies. This report could be classifiedby the FDA as a device recall which could lead to increased scrutiny by the FDA, other international regulatory agencies and our customers regarding thequality and safety of our devices. Furthermore, the submission of these reports has been and could be used by competitors against us in competitive situationsand cause customers to delay purchase decisions or cancel orders and would harm our reputation. The FDA and the Federal Trade Commission, or FTC, also regulate the advertising and promotion of our products to ensure that the claims we makeare consistent with our regulatory clearances, that there are adequate and reasonable data to substantiate the claims and that our promotional labeling andadvertising is neither false nor misleading in any respect. If the FDA or FTC determines that any of our advertising or promotional claims are misleading, notsubstantiated or not permissible, we may be subject to enforcement actions, including Warning Letters, and we may be required to revise our promotionalclaims and make other corrections or restitutions. The FDA and state authorities have broad enforcement powers. Our failure to comply with applicable regulatory requirements could result inenforcement action by the FDA or state agencies, which may include any of the following sanctions: · adverse publicity, warning letters, fines, injunctions, consent decrees and civil penalties;· repair, replacement, refunds, recall or seizure of our products;· operating restrictions, partial suspension or total shutdown of production;· refusing our requests for 510(k) clearance or premarket approval of new products, new intended uses or modifications to existing products;· withdrawing 510(k) clearance or premarket approvals that have already been granted; and· criminal prosecution. If any of these events were to occur, our business and financial condition would be harmed. Material modifications to our Lumivascular platform products may require new 510(k) clearances or premarket approvals or may require us to recall orcease marketing our Lumivascular platform products until clearances are obtained. Material modifications to the intended use or technological characteristics of our Lumivascular platform products will require new 510(k) clearancesor premarket approvals or require us to recall or cease marketing the modified devices until these clearances or approvals are obtained. Based on publishedFDA guidelines, the FDA requires device manufacturers to initially make and document a 36Table of Contents determination of whether or not a modification requires a new approval, supplement or clearance; however, the FDA can review a manufacturer’s decision.Any modification to an FDA-cleared device that would significantly affect its safety or efficacy or that would constitute a major change in its intended usewould require a new 510(k) clearance or possibly a premarket approval. We may not be able to obtain additional 510(k) clearances or premarket approvals fornew products or for modifications to, or additional indications for, our Lumivascular platform products in a timely fashion, or at all. Delays in obtainingrequired future clearances would harm our ability to introduce new or enhanced products in a timely manner, which in turn would harm our future growth. Wehave made modifications to our Lumivascular platform products in the past and will make additional modifications in the future that we believe do not orwill not require additional clearances or approvals. If the FDA disagrees and requires new clearances or approvals for the modifications, we may be required torecall and to stop selling or marketing our Lumivascular platform products as modified, which could harm our operating results and require us to redesign ourLumivascular platform products. In these circumstances, we may be subject to significant enforcement actions. We plan to make further modifications to thedesign of Pantheris to enhance cutting efficiency and access smaller vessels. Future versions of Pantheris incorporating these enhancements may requireadditional regulatory clearances or approvals. If we or our suppliers fail to comply with the FDA’s QSR, our manufacturing operations could be delayed or shut down and Lumivascular platform salescould suffer. Our manufacturing processes and those of our third-party suppliers are required to comply with the FDA’s QSR, which covers the procedures anddocumentation of the design, testing, production, control, quality assurance, labeling, packaging, storage and shipping of our Lumivascular platformproducts. We are also subject to similar state requirements and licenses. In addition, we must engage in extensive recordkeeping and reporting and must makeavailable our manufacturing facilities and records for periodic unannounced inspections by governmental agencies, including the FDA, state authorities andcomparable agencies in other countries. If we fail a QSR inspection, our operations could be disrupted and our manufacturing interrupted. Failure to takeadequate corrective action in response to an adverse QSR inspection could result in, among other things, a shut-down of our manufacturing operations,significant fines, suspension of marketing clearances and approvals, seizures or recalls of our device, operating restrictions and criminal prosecutions, any ofwhich would cause our business to suffer. Furthermore, our key component suppliers may not currently be or may not continue to be in compliance withapplicable regulatory requirements, which may result in manufacturing delays for our product and cause our revenues to decline. We have registered with the FDA as a medical device manufacturer and have obtained a manufacturing license from the CDHS. The FDA has broadpost-market and regulatory enforcement powers. We are subject to unannounced inspections by the FDA and the Food and Drug Branch of CDHS todetermine our compliance with the QSR and other regulations, and these inspections may include the manufacturing facilities of our suppliers. Our currentfacility has been inspected by the FDA in 2009, 2011 and 2013, and two, three and zero observations, respectively, were noted during those inspections. BSI,our European Notified Body, inspected our facility in 2013 and in 2015 and found zero non-conformances. We can provide no assurance that we willcontinue to remain in compliance with the QSR. If the FDA, CDHS or BSI inspect our facility and discover compliance problems, we may have to shut downour facility and cease manufacturing until we can take the appropriate remedial steps to correct the audit findings. Taking corrective action may beexpensive, time consuming and a distraction for management and if we experience a shutdown or delay at our manufacturing facility we may be unable toproduce our Lumivascular platform products, which would harm our business. Our Lumivascular platform products may in the future be subject to product recalls that could harm our reputation. FDA and similar governmental authorities in other countries have the authority to require the recall of commercialized products in the event ofmaterial regulatory deficiencies or defects in design or manufacture. A government mandated or voluntary recall by us could occur as a result of componentfailures, manufacturing errors or design or labeling defects. Recalls of our Lumivascular platform products would divert managerial attention, be expensive,harm our reputation with customers and harm our financial condition and results of operations. A recall announcement would negatively affect our stockprice. Changes in coverage and reimbursement for procedures using our Lumivascular platform products could affect the adoption of our Lumivascular platformand our future revenues. Currently, our Lumivascular platform procedure is typically reimbursed by third-party payors, including Medicare and private healthcare insurancecompanies, under existing reimbursement codes. These payors may change their coverage and reimbursement policies, as well as payment amounts, in a waythat would prevent or limit reimbursement for our products, which would significantly harm our business. Also, healthcare reform legislation or regulationmay be proposed or enacted in the future, which may adversely affect such policies and amounts. We cannot predict whether and to what extent existingcoverage and reimbursement will continue to be available. If physicians, hospitals and other providers are unable to obtain adequate coverage andreimbursement for procedures performed using our Lumivascular platform products, they are significantly less likely to use our Lumivascular platformproducts and our business would be harmed. 37Table of Contents Healthcare reform measures could hinder or prevent our planned products’ commercial success. In the United States, there have been, and we expect there will continue to be, a number of legislative and regulatory changes to the healthcaresystem in ways that could harm our future revenues and profitability and the future revenues and profitability of our potential customers. Federal and statelawmakers regularly propose and, at times, enact legislation that would result in significant changes to the healthcare system, some of which are intended tocontain or reduce the costs of medical products and services. For example, one of the most significant healthcare reform measures in decades, the PatientProtection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, or Affordable Care Act, was enacted in2010. The Affordable Care Act contains a number of provisions, including those governing enrollment in federal healthcare programs, reimbursementchanges and fraud and abuse measures, all of which will impact existing government healthcare programs and will result in the development of newprograms. The Affordable Care Act, among other things, imposed an excise tax of 2.3% on the sale of most medical devices, including ours, and any failure topay this amount could result in the imposition of an injunction on the sale of our products, fines and penalties. Effective January 1, 2016, the excise tax of2.3% on the sale of medical devices has been suspended for two years. It remains unclear whether changes will be made to the Affordable Care Act. We cannot assure you that the Affordable Care Act, as currently enactedor as amended in the future, will not harm our business and financial results and we cannot predict how future federal or state legislative or administrativechanges relating to healthcare reform will affect our business. There likely will continue to be legislative and regulatory proposals at the federal and state levels directed at containing or lowering the cost ofhealth care. We cannot predict the initiatives that may be adopted in the future or their full impact. The continuing efforts of the government, insurancecompanies, managed care organizations and other payors of healthcare services to contain or reduce costs of health care may harm: · our ability to set a price that we believe is fair for our products; · our ability to generate revenues and achieve or maintain profitability; and · the availability of capital. If we fail to comply with healthcare regulations, we could face substantial penalties and our business, operations and financial condition could beadversely affected. Even though we do not and will not control referrals of healthcare services or bill directly to Medicare, Medicaid or other third-party payors, certainfederal and state healthcare laws and regulations pertaining to fraud and abuse and patients’ rights are and will be applicable to our business. We could besubject to healthcare fraud and abuse and patient privacy regulation by both the federal government and the states in which we conduct our business. Theregulations that will affect how we operate include: · the federal healthcare program Anti-Kickback Statute, which prohibits, among other things, any person from knowingly and willfully offering,soliciting, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or thepurchase, order or recommendation of, any good or service for which payment may be made under federal healthcare programs, such as theMedicare and Medicaid programs; · the federal False Claims Act, which prohibits, among other things, individuals or entities from knowingly presenting, or causing to bepresented, false claims, or knowingly using false statements, to obtain payment from the federal government; · federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating tohealthcare matters; · the Sunshine Act, created under the Affordable Care Act, and its implementing regulations, which require manufacturers of drugs, medicaldevices, biologicals and medical supplies for which payment is available under Medicare, Medicaid, or the Children’s Health InsuranceProgram to report annually to the HHS information related to payments or other transfers of value made to physicians and teaching hospitals, aswell as ownership and investment interests held by physicians and their immediate family members; 38Table of Contents · HIPAA, as amended by the HITECH Act, which governs the conduct of certain electronic healthcare transactions and protects the security andprivacy of protected health information; and · state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or servicesreimbursed by any third-party payor, including commercial insurers. The Affordable Care Act, among other things, amends the intent requirement of the Federal Anti-Kickback Statute and criminal healthcare fraudstatutes. A person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. In addition, the Affordable Care Actprovides that the government may assert that a claim including items or services resulting from a violation of the Federal Anti-Kickback Statute constitutes afalse or fraudulent claim for purposes of the False Claims Act. Efforts to ensure that our business arrangements will comply with applicable healthcare laws may involve substantial costs. It is possible thatgovernmental and enforcement authorities will conclude that our business practices do not comply with current or future statutes, regulations or case lawinterpreting applicable fraud and abuse or other healthcare laws and regulations. If any such actions are instituted against us, and we are not successful indefending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of civil, criminal andadministrative penalties, damages, disgorgement, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcareprograms, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of our operations, any of which could harm ourability to operate our business and our results of operations. In addition, the clearance or approval and commercialization of any of our products outside theUnited States will also likely subject us to foreign equivalents of the healthcare laws mentioned above, among other foreign laws. Compliance with environmental laws and regulations could be expensive. Failure to comply with environmental laws and regulations could subject us tosignificant liability. Our research and development and manufacturing operations involve the use of hazardous substances and are subject to a variety of federal, state,local and foreign environmental laws and regulations relating to the storage, use, discharge, disposal, remediation of, and human exposure to, hazardoussubstances and the sale, labeling, collection, recycling, treatment and disposal of products containing hazardous substances. In addition, our research anddevelopment and manufacturing operations produce biological waste materials, such as human and animal tissue, and waste solvents, such as isopropylalcohol. These operations are permitted by regulatory authorities, and the resultant waste materials are disposed of in material compliance withenvironmental laws and regulations. Liability under environmental laws and regulations can be joint and several and without regard to fault or negligence.Compliance with environmental laws and regulations may be expensive and non-compliance could result in substantial liabilities, fines and penalties,personal injury and third part property damage claims and substantial investigation and remediation costs. Environmental laws and regulations couldbecome more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violations. We cannot assure you thatviolations of these laws and regulations will not occur in the future or have not occurred in the past as a result of human error, accidents, equipment failure orother causes. The expense associated with environmental regulation and remediation could harm our financial condition and operating results. Regulations related to “conflict minerals” may force us to incur additional expenses, may result in damage to our business reputation and may adverselyimpact our ability to conduct our business. Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC promulgated final rules regarding disclosure of the use ofcertain minerals, known as conflict minerals, that are mined from the Democratic Republic of the Congo and adjoining countries, as well as proceduresregarding a manufacturer’s efforts to prevent the sourcing of such minerals and metals produced from those minerals. These disclosure requirements requireongoing due diligence efforts and disclosure obligations. There are costs associated with complying with these disclosure requirements, including fordiligence in regards to the sources of any conflict minerals used in our products, in addition to the cost of remediation and other changes to products,processes, or sources of supply as a consequence of such verification activities. In addition, our ongoing implementation of these rules could adversely affectthe sourcing, supply, and pricing of materials used in our products. We may face reputational harm if we determine that certain of our components containminerals not determined to be conflict free or if we are unable to alter our processes or sources of supply to avoid using such materials. Reputational harmcould adversely affect our business, financial condition or results of operations. 39Table of Contents Risks Related to Ownership of Our Common Stock Our stock price may be volatile, and purchasers of our common stock could incur substantial losses. Our stock price has fluctuated since our IPO and is likely to continue to fluctuate substantially. As a result of this price fluctuation, investors mayexperience losses on their investments in our stock. In addition, the development stage of our operations may make it difficult for investors to evaluate thesuccess of our business to date and to assess our future viability. The market price for our common stock may be influenced by many factors, including: · the results of our clinical trials; · changes in analysts’ estimates, investors’ perceptions, recommendations by securities analysts or our failure to achieve analysts’ estimates; · quarterly variations in our or our competitors’ results of operations; · the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections; · general market conditions and other factors unrelated to our operating performance or the operating performance of our competitors; · changes in operating performance and stock market valuations of other technology companies generally, or those in the medical deviceindustry in particular; · the loss of key personnel, including changes in our board of directors and management; · legislation or regulation of our business; · lawsuits threatened or filed against us; · the announcement of new products or product enhancements by us or our competitors; · announcements related to patents issued to us or our competitors and to litigation; and · developments in our industry. In addition, the stock prices of many companies in the medical device industry have experienced wide fluctuations that have often been unrelated tothe operating performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of marketvolatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of managementfrom our business and harm our business, results of operations, financial condition, reputation and cash flows. These factors may materially and adverselyaffect the market price of our common stock. If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our share price andtrading volume could decline. The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or ourbusiness, our market and our competitors. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our sharesor change their opinion of our shares, our share price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularlypublish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline. If our operating resultsfail to meet the forecast of analysts, our stock price will likely decline. Sales of a substantial number of shares of our common stock in the public market, including by our existing stockholders, could cause our stock price tofall. Sales of a substantial number of shares of our common stock in the public market, or the perception that these sales might occur, could depress themarket price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict theeffect that these sales and others may have on the prevailing market price of our common stock. 40Table of Contents We maintain a shelf registration statement on Form S-3, or the Registration Statement, with the SEC pursuant to which we may, from time to time,sell up to an aggregate of $150.0 million of our common stock, preferred stock, depositary shares, warrants, units, subscription rights or debt securities. Wehave also established, and may in the future establish, “at-the-market” offerings pursuant to which we may offer and sell shares of our common stock pursuantto the Registration Statement. The Registration Statement has not yet been declared effective by the SEC. In addition, pursuant to our Securities PurchaseAgreement with CRG, the Registration Statement also registers for resale 348,262 shares of common stock held by CRG. Once the Registration Statement isdeclared effective by the SEC, shares held by CRG may be sold freely in the public market. If these additional shares are sold, or if it is perceived that theywill be sold, in the public market, the trading price of our common stock could decline. Sales of newly issued securities under the Registration Statement willresult in dilution of our stockholders and could cause our stock price to fall. We have also registered shares of our common stock that we may issue under our employee equity incentive plans. These shares will be able to besold freely in the public market upon issuance. Our directors, officers and their affiliates have significant voting power and may take actions that may not be in the best interests of our otherstockholders. As of February 29, 2016, our directors, officers and their affiliates collectively control approximately 30.5% of our outstanding common stock,assuming the exercise of all options and warrants held by such persons. As a result, these stockholders, if they act together, would be able to exert significantinfluence over the management and affairs of our company and most matters requiring stockholder approval, including the election of directors and approvalof significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control, might adverselyaffect the market price of our common stock and may not be in the best interests of our other stockholders. We previously identified and remediated a material weakness in our internal control over financial reporting. We may identify additional materialweaknesses in the future that may cause us to fail to meet our reporting obligations or result in material misstatements of our financial statements. If wefail to remediate any material weaknesses or if we fail to establish and maintain effective control over financial reporting, our ability to accurately andtimely report our financial results could be adversely affected. Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financialreporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements inaccordance with US generally accepted accounting principles. A material weakness is a deficiency, or a combination of deficiencies, in internal control overfinancial reporting such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented ordetected on a timely basis. Prior to the completion of our IPO, we were a private company with limited accounting personnel and other resources to address our internal controlover financial reporting. During the course of preparing for our IPO, we determined that we had a material weakness in our internal control over financialreporting as of December 31, 2013 and 2012. The material weakness we identified related to not maintaining sufficient complement of resources with anappropriate level of accounting knowledge, experience and training commensurate with our structure and financial reporting requirements. The actions we have taken to remediate the material weakness are subject to continued review, supported by confirmation and testing by managementas well as audit committee oversight. While we have remediated this weakness, we cannot assure you that additional material weaknesses or significantdeficiencies in our internal control over financial reporting will not be identified in the future. Any failure to maintain or implement required new orimproved controls, or any difficulties we encounter in their implementation, could result in additional material weaknesses or significant deficiencies, causeus to fail to meet our periodic reporting obligations or result in material misstatements in our financial statements. Any such failure could also adverselyaffect the results of periodic management evaluations regarding the effectiveness of our internal control over financial reporting. The existence of a materialweakness or significant deficiency could result in errors in our financial statements that could result in a restatement of financial statements, cause us to fail tomeet our reporting obligations and cause investors to lose confidence in our reported financial information, leading to a decline in our stock price. The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain executivemanagement and qualified board members. As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, theSarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of The NASDAQ Global Market and other applicable securities laws, rules and regulations.Compliance with these laws, rules and regulations have increased our legal and financial compliance costs and will make some activities more difficult, time-consuming or costly and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company.” The ExchangeAct requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results. The Sarbanes-Oxley Actrequires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial 41Table of Contents reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet thisstandard, significant resources and management oversight may be required. Our management and other personnel now need to devote a substantial amount oftime to these compliance initiatives. As a result, management’s attention may be diverted from other business concerns and our costs and expenses willincrease, which could harm our business and operating results. We may need to hire more employees in the future or engage outside consultants to complywith these requirements, which will increase our costs and expenses. In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for publiccompanies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards aresubject to varying interpretations, in many cases due to their lack of specificity and, as a result, their application in practice may evolve over time as newguidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costsnecessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations andstandards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended byregulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against usand our business may be harmed. We will incur additional compensation costs in the event that we decide to pay our executive officers cash compensation closer to that of executiveofficers of other public medical device companies, which would increase our general and administrative expense and could harm our profitability. Any futureequity awards will also increase our compensation expense. We also expect that being a public company and compliance with applicable rules andregulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incursubstantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified executive officers andmembers of our board of directors, particularly to serve on our audit committee and compensation committee. As a result of disclosure of information in this Annual Report on Form 10-K and in filings required of a public company, our business and financialcondition will become more visible, which could be advantageous to our competitors and clients and could result in threatened or actual litigation, includingby competitors and other third parties. If such claims are successful, our business and operating results could be harmed, and even if the claims are resolved inour favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and harm our business andoperating results. We are an emerging growth company and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies willmake our common stock less attractive to investors. We are an emerging growth company. For as long as we continue to be an emerging growth company, we may take advantage of certain exemptionsfrom reporting requirements that are applicable to other public companies including, but not limited to, not being required to comply with the auditorattestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reportsand proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval ofany golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we will rely onthese exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and ourstock price may be more volatile or decline. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of our IPO, (b) inwhich we have total annual gross revenue of at least $1.0 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market valueof our common stock that is held by non- affiliates exceeds $700 million as of the prior June 30th, and (2) the date on which we have issued more than$1.0 billion in non-convertible debt securities during the prior three-year period. We cannot predict if investors will find our common stock less attractivebecause we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for ourcommon stock and our stock price may suffer or be more volatile. Anti-takeover provisions in our amended and restated certificate of incorporation and bylaws and Delaware law could discourage a takeover. Our amended and restated certificate of incorporation and bylaws contain provisions that might enable our management to resist a takeover. Theseprovisions include: · a classified board of directors; · advance notice requirements applicable to stockholders for matters to be brought before a meeting of stockholders and requirements as to theform and content of a stockholder’s notice; · a supermajority stockholder vote requirement for amending certain provisions of our amended and restated certificate of incorporation andbylaws; 42Table of Contents · the right to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostileacquirer; · allowing stockholders to remove directors only for cause; · a requirement that the authorized number of directors may be changed only by resolution of the board of directors; · allowing all vacancies, including newly created directorships, to be filled by the affirmative vote of a majority of directors then in office, even ifless than a quorum, except as otherwise required by law; · a requirement that our stockholders may only take action at annual or special meetings of our stockholders and not by written consent; · limiting the forum for certain litigation against us to Delaware; and · limiting the persons that can call special meetings of our stockholders to our board of directors, the chairperson of our board of directors, thechief executive officer or the president (in the absence of a chief executive officer). These provisions might discourage, delay or prevent a change in control of our company or a change in our management. The existence of theseprovisions could adversely affect the voting power of holders of common stock and limit the price that investors might be willing to pay in the future forshares of our common stock. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware GeneralCorporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested”stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder. Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware will be the sole and exclusive forumfor substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputeswith us or our directors, officers or employees. Our amended and restated certificate of incorporation provides that, unless we consent to the selection of an alternative forum, the Court ofChancery of the State of Delaware is the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting aclaim of breach of fiduciary duty owed by any of our directors, officers or other employees to us or to our stockholders, (iii) any action asserting a claimarising pursuant to the Delaware General Corporation Law or our certificate of incorporation or bylaws (iv) any action to interpret apply, enforce or determinethe validity of our certificate of incorporation or bylaws or (v) any action asserting a claim governed by the internal affairs doctrine. The choice of forumprovision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or otheremployees, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find the choice offorum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additionalcosts associated with resolving such action in other jurisdictions, which could harm our business, operating results and financial condition. We have not paid dividends in the past and do not expect to pay dividends in the future, and any return on investment may be limited to the value of ourstock. We have never paid cash dividends and do not anticipate paying cash dividends in the foreseeable future. The payment of dividends will depend onour earnings, capital requirements, financial condition, prospects and other factors our board of directors may deem relevant. In addition, our Loan Agreementwith CRG prohibits us from, among other things, paying any dividends or making any other distribution or payment on account of our common stock. If wedo not pay dividends, our stock may be less valuable because a return on your investment will only occur if you sell our common stock after our stock priceappreciates. 43Table of Contents ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES We maintain our principal executive offices, comprising 44,200 square feet in two buildings in Redwood City, California, under a lease agreementthat expires in November 2019. We have the option to extend the lease through November 2022. Our facility houses our research and development, sales,marketing, manufacturing, finance and administrative activities. We believe that our current facilities are adequate for our current and anticipated futureneeds through at least 2017. ITEM 3. LEGAL PROCEEDINGS We are not currently a party to any material legal proceedings. From time to time we may be involved in legal proceedings or investigations, whichcould have an adverse impact on our reputation, business and financial condition and divert the attention of our management from the operation of ourbusiness. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. 44Table of Contents PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIES MARKET INFORMATION FOR COMMON STOCK Our common stock began trading on The NASDAQ Global Market on January 30, 2015 and trades under the symbol “AVGR”. Prior to January 30, 2015,there was no public market for our common stock. In our IPO, our common stock priced at $13.00 per share on January 29, 2015. The following table setsforth for the periods indicated the high and low sales prices per share of our common stock as reported on The NASDAQ Global Market: LowHighFiscal Year ending December 31, 2015First Quarter (beginning January 30, 2015)$10.00$13.32Second Quarter$10.50$13.15Third Quarter$12.52$16.45Fourth Quarter$14.67$24.75 On March 7, 2016, the last reported sale price of our common stock as reported on The NASDAQ Global Market was $12.96 per share. HOLDERS OF RECORD As of March 7, 2016, there were 12,692,189 shares of our common stock held by 236 holders of record of our common stock. The actual number ofstockholders is greater than this number of record holders, and includes stockholders who are beneficial owners, but whose shares are held in street name bybrokers and other nominees. This number of holders of record also does not include stockholders whose shares may be held in trust by other entities. STOCK PRICE PERFORMANCE GRAPH The following stock performance graph compares our total stock return with the total return for (i) the NASDAQ Composite Index and the (ii) theNASDAQ Medical Equipment Index for the period from January 30, 2015 (the date our common stock commenced trading on the NASDAQ Global Market)through December 31, 2015. The figures represented below assume an investment of $100 in our common stock at the closing price of $13.50 on January 30,2015 and in the NASDAQ Composite Index and the NASDAQ Medical Equipment Index on January 30, 2015 and the reinvestment of dividends into sharesof common stock. The comparisons in the table are required by the SEC and are not intended to forecast or be indicative of possible future performance of ourcommon stock. This graph shall not be deemed “soliciting material” or be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934,as amended, or the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into anyof our filings under the Securities Act of 1933, as amended, or the Securities Act, whether made before or after the date hereof and irrespective of any generalincorporation language in any such filing. 45Table of Contents $100 investment in stock or indexTickerJanuary 30, 2015March 31, 2015June 30, 2015September 30, 2015December 31, 2015Avinger, Inc.AVGR$100.00$82.15$95.63$108.96$168.22NASDAQ Composite IndexIXIC$100.00$106.00$108.15$100.49$109.24NASDAQ Medical EquipmentNQUSB4535T$100.00$108.12$105.82$97.45$108.78 DIVIDEND POLICY We have never declared or paid, and do not anticipate declaring or paying, any cash dividends on any of our capital stock. We do not anticipate payingany dividends in the foreseeable future, and we currently intend to retain all available funds and any future earnings for use in the operation of our businessand to finance the growth and development of our business. Future determination as to the declaration and payment of dividends, if any, will be at thediscretion of our board of directors and will depend on then existing conditions, including our operating results, financial condition, contractual restrictions,capital requirements, business prospects and other factors our board of directors may deem relevant. Our Loan Agreement with CRG prohibits us from payingany dividends or making any other distribution or payment on account of our common stock. SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS All of our equity compensation plans have been approved by our stockholders. The equity compensation plans are described in Notes 12 and 13 toour financial statements included in this Annual Report on Form 10-K. The following table provides information as of December 31, 2015, with respect to theshares of our common stock that may be issued under our existing equity compensation plans. Plan Category (a) Number of Securities tobe Issued Upon Exercise ofOutstanding Options,Warrants and Rights(b) Weighted AverageExercise Price of Outstanding Options,Warrants and Rights (2)(c) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securites Reflected in Column (a))Equity compensation plans approved bystockholders (1)5,643,434$9.53884,509 (1) Includes the following plans: our 2009 Stock Plan, our 2015 Equity Incentive Plan and our 2015 Employee Stock Purchase Plan. Our 2015 EquityIncentive Plan provides that on the first day of each fiscal year commencing in fiscal year 2016, the number of shares authorized for issuance under the2015 Plan is automatically increased by a number equal to the lesser of (i) 1,690,000 shares of common stock, (ii) 5.0% of the aggregate number of sharesof common stock outstanding on the last day of the preceding fiscal year, or (iii) such number of shares that may be determined by our board of directors.Our 2015 Employee Stock Purchase Plan provides that on the first day of each fiscal year commencing in fiscal year 2016 the number of sharesauthorized for issuance under our 2015 Employee Stock Purchase Plan is automatically increased by a number equal to the lesser of (i) 493,000 shares ofcommon stock, (ii) 1.5% of the aggregate number of shares of common stock outstanding on such date, or (iii) an amount determined by our board ofdirectors or a duly authorized committee of our board of directors.(2) The weighted average exercise price does not take into account outstanding restricted stock, or RSUs, which have no exercise price. RECENT SALES OF UNREGISTERED SECURITIES There were no sales of unregistered securities during fiscal 2015 other than those transactions previously reported to the SEC on our Current Reports onForm 8-K. USE OF PROCEEDS FROM PUBLIC OFFERING OF COMMON STOCK Our IPO of 5,000,000 shares of common stock was effected through a registration statement on Form S-1 (File No. 333-201322), which was declaredeffective on January 29, 2015. Our IPO closed on February 4, 2015 and resulted in net proceeds of approximately $56.9 million, after deducting underwritingdiscounts and commissions of approximately $4.5 million and other expenses of approximately $3.6 million. No payments for such expenses were madedirectly or indirectly to any of our officers or directors or to persons owning 10% or more of our common stock. Canaccord Genuity Inc., Cowen and Company, LLC, Oppenheimer & Co. Inc., BTIG, LLC and Stephens Inc. acted as the underwriters. There has beenno material change in the planned use of proceeds from our IPO as described in our final prospectus filed with the SEC on January 30, 2015 pursuant toRule 424(b) of the Securities Act. 46Table of Contents PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS None. ITEM 6. SELECTED FINANCIAL DATA You should read the following selected financial data together with the section of this Annual Report on Form 10-K entitled “Management’s discussionand analysis of financial condition and results of operations” and our financial statements and the related notes included in this Annual Report on Form 10-K. The statement of operations data for the years ended December 31, 2015, 2014 and 2013 and the balance sheet data as of December 31, 2015 and 2014 arederived from our audited financial statements included elsewhere in this Annual Report on Form 10-K. We have included, in our opinion, all adjustments,consisting only of normal recurring adjustments that we consider necessary for a fair presentation of the financial information set forth in those statements.Our historical results are not necessarily indicative of the results to be expected in the future or any other period. Statements of Operations Data: Year EndedDecember 31,2015201420132012(in thousands, except per share data)Revenues$10,713$11,213$12,964$8,560Cost of revenues6,4786,5138,2054,151Gross profit4,2354,7004,7594,409 Operating expenses:Research and development15,69411,22415,97315,416Selling, general and administrative29,23118,50325,75822,848Total operating expenses44,92529,72741,73138,264Loss from operations(40,690)(25,027)(36,972)(33,855) Interest income (expense), net(5,127)(6,014)(2,923)19Other income (expense), net(1,527)(909)5(19)Loss before provision for income taxes(47,344)(31,950)(39,890)(33,855)Provision for income taxes—14119Net loss and comprehensive loss(47,344)(31,964)(39,901)(33,864)Adjustment to net loss resulting from convertiblepreferred stock modification(2,384)———Net loss and comprehensive loss attributable tocommon stockholders$(49,728)$(31,964)$(39,901)$(33,864) Net loss attributable to common stockholders pershare, basic and diluted$(4.38)$(132.63)$(170.52)$(162.03) Weighted average common shares used to computenet loss per share, basic and diluted11,362241234209 Balance Sheets Data: As of December 31,2015 2014 2013 2012(in thousands)Cash and cash equivalents$43,059$12,316$12,221$20,617Working capital43,5769,91715,73422,462Total assets54,10424,43724,50830,324Long-term borrowings29,56518,22819,622—Convertible notes and accrued interest—8,60913,661—Convertible preferred stock—132,26099,65499,659Accumulated deficit(196,261)(146,533)(114,569)(74,668)Total stockholders’ equity (deficit)15,589(143,868)(112,782)(73,644) 47Table of Contents ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis of our financial condition and results of operations together with the section of this AnnualReport on Form 10-K entitled “Selected financial data” and our financial statements and related notes included elsewhere in this Annual Report onForm 10-K. This discussion and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties,such as statements of our plans, objectives, expectations and intentions. 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 section of this AnnualReport on Form 10-K entitled “Risk factors.” Overview We are a commercial-stage medical device company that designs, manufactures and sells image-guided, catheter-based systems that are used byphysicians to treat patients with peripheral artery disease, or PAD. Patients with PAD have a build-up of plaque in the arteries that supply blood to area awayfrom the heart, particularly the pelvis and legs. Our mission is to dramatically improve the treatment of vascular disease through the introduction of productsbased on our Lumivascular platform, the only intravascular image-guided system available in this market. We manufacture and sell a suite of products in theUnited States and select European markets. Our current products include our Lightbox imaging console, as well as our Wildcat, Kittycat, and the Ocelotfamily of catheters, which are designed to allow physicians to penetrate a total blockage in an artery, known as a chronic total occlusion, or CTO, andPantheris, our image-guided atherectomy device which is designed to allow physicians to precisely remove arterial plaque in PAD patients. In October 2015,we received 510(k) clearance from the U.S. Food and Drug Administration, or FDA, for commercialization of Pantheris, and we received an additional510(k) clearance for an enhanced version of Pantheris in March 2016 and commenced sales of Pantheris in the U.S. and select European countries promptlythereafter. We believe that Pantheris will significantly enhance our market opportunity within PAD and can expand the overall addressable market for PADendovascular procedures. During the first quarter of 2015, we completed enrollment of patients in VISION, a clinical trial designed to support our August 2015 510(k) filingwith the FDA for our Pantheris atherectomy device. VISION was designed to evaluate the safety and efficacy of Pantheris to perform atherectomy usingintravascular imaging and successfully achieved all primary and secondary safety and efficacy endpoints. We believe the data from VISION will also allow usto demonstrate that avoiding damage to healthy arterial structures, and in particular disruption of the external elastic lamina, which is the membrane betweenthe outermost layers of the artery, reduces the likelihood of restenosis, or re-narrowing, of the diseased artery. We have recently commencedcommercialization of Pantheris as part of our Lumivascular platform in the United States and in select European countries, after obtaining the requiredmarketing authorizations. We focus our direct sales force, marketing efforts and promotional activities on interventional cardiologists, vascular surgeons and interventionalradiologists. We also work on developing strong relationships with physicians and hospitals that we have identified as key opinion leaders. Although oursales and marketing efforts are directed at these physicians because they are the primary users of our technology, we consider the hospitals and medicalcenters where the procedure is performed to be our customers, as they typically are responsible for purchasing our products. We are designing future productsto be compatible with our Lumivascular platform, which we expect to enhance the value proposition for hospitals to invest in our technology. We alsobelieve that Pantheris will qualify for existing reimbursement codes currently utilized by other atherectomy products, further facilitating adoption of ourproducts. 48Table of Contents Prior to the introduction of our Lumivascular platform our non-imaging catheter products were manufactured by third parties. All of our products arenow manufactured in-house at our facilities in Redwood City, California using components and sub-assemblies manufactured both in-house and by outsidevendors. We expect our current manufacturing facility will be sufficient to meet our anticipated growth through at least 2017. We assemble all of ourproducts at our manufacturing facility, but certain critical processes such as coating and sterilization are done by outside vendors. We began commercializing our initial non-Lumivascular platform products in 2009 and introduced our Lumivascular platform products in theUnited States in late 2012. We generated revenues of $10.7 million in 2015, $11.2 million in 2014 and $13.0 million in 2013. During the years endedDecember 31, 2015, 2014 and 2013, our net loss was $47.3 million, $32.0 million and $39.9 million, respectively. We have not been profitable sinceinception and as of December 31, 2015, our accumulated deficit was $196.3 million. Since inception, we have financed our operations primarily throughprivate placements of our preferred securities and, to a lesser extent, debt financing arrangements. In January 2015, we completed an initial public offering, orIPO, of 5.0 million shares. As a result of our IPO, which closed in February 2015, we received net proceeds of approximately $56.9 million, after underwritingdiscounts and commissions of approximately $4.5 million and other expenses associated with our IPO of approximately $3.6 million. In September 2015, we entered into a Term Loan Agreement, or Loan Agreement, with CRG Partners III L.P. and certain of its affiliated funds,collectively CRG, under which we may borrow up to $50.0 million on or before March 29, 2017. We borrowed $30.0 million on September 22, 2015. UponFDA approval of our 510(k) for Pantheris we became eligible to borrow an additional $10.0 million, on or prior to June 30, 2016. We may also borrow anadditional $10.0 million, on or prior to March 29, 2017, contingent on achieving certain revenue milestones, among other conditions. Contemporaneouswith the execution of the Loan Agreement, we entered into a Securities Purchase Agreement with CRG, pursuant to which CRG purchased 348,262 shares ofcommon stock on September 22, 2015 at a price of $14.357 per share, which represents the 10-day average of closing prices of our common stock ending onSeptember 21, 2015. Pursuant to the securities purchase agreement, we were obligated to file a registration statement covering the resale of the shares sold toCRG and must comply with certain affirmative covenants during the time that such registration statement remains in effect. We used the proceeds from theCRG borrowing and securities purchase to retire our outstanding principal and accrued interest with PDL Biopharma, or PDL, and to retire the principal andaccrued interest underlying our outstanding promissory notes, or the notes. On February 3, 2016, we filed a universal shelf registration statement to offer up to $150.0 million of our securities and entered into a SalesAgreement with Cowen and Company, or Cowen, pursuant to which we may, from time to time, issue and sell shares of common stock having an aggregateoffering value of up to $50.0 million. The shelf registration statement also covers the resale of the shares sold to CRG. The registration statement has not yetbeen declared effective by the SEC and no shares of common stock have been sold under the agreement with Cowen to date. During the third and fourth quarters of 2013, we effected a reduction in force, lowering our total headcount from 168 employees at June 30, 2013 to115 employees at December 31, 2013. We implemented this reduction to better align resource utilization with our corporate strategy as we transitioned ourfocus from non-imaging products to Lumivascular platform products, including Pantheris. Components of Our Results of Operations Revenues All of our revenues are currently derived from sales of our Lightbox console and our various PAD catheters and related services in the United Statesand select European markets. We expect our revenues to increase as we continue to expand our sales and marketing infrastructure and introduce newLumivascular platform products including Pantheris. No single customer accounted for more than 10% of our revenues during 2015, 2014 or 2013. We expect our revenues to increase in 2016 as we commence sales of Pantheris in the United States. However, revenues may fluctuate from quarter-to-quarter due to a variety of factors including capital equipment purchasing patterns that are typically heavier towards the end of the calendar year andlighter in the first quarter. In addition, during the first quarter, our results can be harmed by adverse weather and by resetting of annual patient healthcareinsurance plan deductibles, both of which may cause patients to delay elective procedures. In the third quarter, the number of elective procedures nationwideis historically lower than other quarters throughout the year, which we believe is primarily attributable to the summer vacations of physicians and theirpatients. 49Table of Contents Cost of Revenues and Gross Profit Cost of revenues consists primarily of costs related to manufacturing overhead, materials and direct labor. A significant portion of our cost ofrevenues currently consists of manufacturing overhead costs. These overhead costs include the cost of quality assurance, material procurement, inventorycontrol, facilities, equipment and operations supervision and management. We expect overhead costs as a percentage of revenues to become less significantas our production volume increases. Cost of revenues also includes depreciation expense for production equipment, depreciation and related maintenanceexpense for leased equipment held by customers and certain direct costs such as those incurred for shipping our products. We expect cost of revenues toincrease in absolute dollars to the extent our revenues grow and as we continue to invest in our operational infrastructure to support anticipated growth. 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 and cost-reduction strategies. We expect our gross margin to increase over thelong term as our production volume increases and as we spread the fixed portion of our manufacturing overhead costs over a larger number of units produced,thereby reducing our per unit manufacturing costs. We intend to use our design, engineering and manufacturing capabilities to further advance and improvethe efficiency of our manufacturing processes, which we believe will reduce costs and increase our gross margin. In the future, we may seek to manufacturecertain of our products outside the United States to further reduce costs. Our gross margin will likely fluctuate from quarter to quarter as we continue tointroduce new products and sales channels, and as we adopt new manufacturing processes and technologies. Research and Development Expenses Research and development, or R&D, expenses consist primarily of engineering, product development, clinical and regulatory affairs, consultingservices, 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 andfacilities expenses. Clinical expenses include clinical trial design, clinical site reimbursement, data management, travel expenses and the cost ofmanufacturing products for clinical trials. In the future, we expect R&D expenses to increase in absolute dollars as we continue to develop new products andenhance existing products and technologies. However, we expect R&D expenses as a percentage of revenues to vary over time depending on the level andtiming of our new product development efforts, as well as our clinical development, clinical trial and other related activities. Selling, General and Administrative Expenses Our sales organization is divided into two primary roles, one focused on sale and use of our disposable catheters and the other focused on sale andservice of our Lightbox console. Our current sales efforts focus on establishing new Lumivascular platform sites by marketing our products to physicians andhospital administrators. Additionally, we seek to increase the use of our Lumivascular platform products by our current customers through case coverage,clinical training and other programs. Selling, general and administrative, or SG&A, expenses consist primarily of compensation for personnel, including stock-based compensation,related to selling and marketing functions, physician education programs, business development, finance, information technology and human resourcefunctions. Other SG&A expenses include commissions, training, travel expenses, educational and promotional activities, marketing initiatives, marketresearch and analysis, conferences and trade shows, professional services fees, including legal, audit and tax fees, insurance costs, a 2.3% tax on U.S. sales ofmedical devices, general corporate expenses and allocated facilities-related expenses. Effective January 1, 2016, the excise tax of 2.3% on U.S sales ofmedical devices has been suspended for two years. We expect to continue to grow our sales force in order to support current customers and attract new usersof our Lumivascular platform products. We believe that expanding our U.S. sales infrastructure and establishing distributor relationships in select regionsoutside the United States will drive further adoption of our Lumivascular platform. We expect SG&A expenses to continue to increase in absolute dollars butdecrease as a percentage of revenues through at least 2016, as we expand our infrastructure to drive and support anticipated growth in revenues. Interest Income (Expense), net Interest income (expense), net consists primarily of interest incurred on our outstanding indebtedness and non-cash interest related to theamortization of debt discount and issuance costs associated with our various debt agreements. Other Income (Expense), net Other income (expense), net primarily consisted of gains and losses resulting from the remeasurement of the fair value of our common stock warrantliability and the compound embedded derivative instrument associated with our convertible promissory notes, or the notes, which were repaid in full inSeptember 2015, and the loss on the extinguishment of the notes. We continued to record adjustments to the estimated fair value of the common stockwarrants until the Series E preferred stock issuance in September 2014, upon which the common stock warrant exercise price was fixed at $12.60 per share. Atthat time we re-evaluated the terms of the common stock warrants and determined that the common stock warrants issued with the convertible notes met therequirements for equity classification and the fair value of the warrant liability was reclassified to additional paid-in capital. We continued to recordadjustments to the estimated fair value of the compound embedded derivative instrument associated with the notes until the notes were repaid inSeptember 2015. Upon extinguishment of the notes, the associated current fair value of the embedded derivative asset was expensed to other income(expense), net. Additionally, for the year ended December 31, 2015, other income (expense), net includes charges to reflect the carrying value of our ongoingroyalty obligation to PDL Biopharma, or PDL. 50Table of Contents Results of Operations: Year Ended December 31, 2015 2014 2013 (in thousands) Revenues$10,713$11,213$12,964Cost of revenues6,4786,5138,205Gross profit4,2354,7004,759Gross margin40%42%37% Operating expenses:Research and development15,69411,22415,973Selling, general and administrative29,23118,50325,758Total operating expenses44,92529,72741,731Loss from operations(40,690)(25,027)(36,972) Interest income (expense), net(5,127)(6,014)(2,923)Other income (expense), net(1,527)(909)5Loss before provision for income taxes(47,344)(31,950)(39,890)Provision for income taxes—1411Net loss and comprehensive loss$(47,344)$(31,964)$(39,901) Comparison of Years Ended December 31, 2015 and 2014 Revenues. Revenues decreased $0.5 million, or 4%, to $10.7 million during the year ended December 31, 2015, compared to $11.2 million duringthe year ended December 31, 2014. For the year ended December 31, 2015, sales of our Lightbox imaging console increased by 6% to $4.1 million whilesales of our disposable catheters decreased by 10% to $6.6 million. The decrease in disposable catheter revenues in 2015 and changes in revenue mix relatedto our continuing commercial focus on our Lumivascular programs to broaden physician exposure to optical coherence tomography, or (OCT, imageinterpretation and building the installed base of the Lightbox imaging console prior to the commercial launch of Pantheris, which began in March 2016. Cost of Revenues and Gross Margin. Cost of revenues of $6.5 million during the year ended December 31, 2015, were unchanged compared to theyear ended December 31, 2014. Gross margin for the year ended December 31, 2015 was 40%, compared to 42% during the year ended December 31, 2014.This decrease was primarily attributable to increases in manufacturing overhead costs as we invested in operational infrastructure to support anticipatedgrowth and the commercial launch of Pantheris. Research and Development Expenses. R&D expenses increased $4.5 million, or 40%, to $15.7 million during the year ended December 31, 2015,compared to $11.2 million during the year ended December 31, 2014. This increase was primarily due to a $3.8 million increase in personnel-relatedexpenses and an increase of $1.0 million in outside services, partially offset by a decrease of $0.4 million in product development materials and related costs.Personnel-related expenses included stock-based compensation expense of $2.5 million compared to $0.2 million for the year ended December 31, 2015 and2014, respectively. The remaining increase in personnel-related expenses and increase in outside services were attributable to our VISION clinical trial. Selling, General and Administrative Expenses. SG&A expenses increased $10.7 million, or 58%, to $29.2 million during the year endedDecember 31, 2015, compared to $18.5 million during the year ended December 31, 2014. This increase was primarily due to a $7.7 million increase inpersonnel-related expenses and an increase of $3.0 million in consulting, legal and professional fees. Personnel-related expenses increased due to an increasein headcount and stock-based compensation expense. Personnel-related expenses included stock-based compensation expense of $3.1 million compared to$0.4 million for the year ended December 31, 2015 and 2014, respectively. Increases in our consulting, legal and professional fees were associated with theaudit and reviews of our financial statements and other costs associated with operating as a public company. Interest Income (Expense), Net. Interest income (expense), net decreased $0.9 million, or 15%, to an expense of $5.1 million during the year endedDecember 31, 2015, compared to an expense of $6.0 million during the year ended December 31, 2014. This decreased expense was attributable to theconversion of certain of our then-outstanding notes into shares of Series E preferred stock during the third and fourth quarter of 2014. 51Table of Contents Other Income (Expense), Net. Other income (expense), net increased $0.6 million, or 68%, to an expense of $1.5 million during the year endedDecember 31, 2015, compared to an expense of $0.9 million during the year ended December 31, 2014. Other expense for the year ended December 31, 2015,was primarily attributable to the reversal of the current fair value of the embedded derivative asset of $1.1 million upon the repayment of our notes inSeptember 2015, expense of $0.9 million to reflect the carrying value of our ongoing royalty obligation to PDL and non-cash charges related to theamortization of debt discount and issuance costs associated with the notes and the credit agreement upon their repayment in September 2015, partially offsetby the remeasurement of the fair value of the derivative instruments associated with our notes through the date of their repayment. During the year endedDecember 31, 2014, other expense was primarily attributable to the $1.2 million loss on the extinguishment of certain of our then-outstanding notes that wereconverted into Series E preferred stock in September 2014, partially offset by the remeasurement of the fair value of our common stock warrant liabilitythrough the issuance of the Series E preferred stock in September 2014, and the derivative instruments associated with such notes which were accounted foras a compound embedded derivative instrument and marked-to-market at each reporting date. Comparison of Years Ended December 31, 2014 and 2013 Revenues. Revenues decreased $1.8 million, or 14%, to $11.2 million during the year ended December 31, 2014, compared to $13.0 million duringthe year ended December 31, 2013. For the year ended December 31, 2014, sales of our Lightbox imaging console increased by $1.1 million, or 37%, to $3.9million while sales of our disposable catheters decreased by $2.8 million, or 28%, to $7.3 million. The decrease in total revenues in 2014 and changes inrevenue mix related to strategic decisions made in the fourth quarter of 2013 to focus commercial efforts on its Lumivascular programs to broaden physicianexposure to OCT image interpretation and build the installed base of the Lightbox imaging console. Cost of Revenues and Gross Margin. Cost of revenues decreased $1.7 million, or 21%, to $6.5 million during the year ended December 31, 2014,compared to $8.2 million during the year ended December 31, 2013. This decrease was attributable to the decrease in revenues from sales of our Wildcat andKittycat non-imaging catheters, as well as a decrease in personnel-related expenses associated with our headcount reduction during the third and fourthquarters of 2013. Gross margin for the year ended December 31, 2014 was 42%, up from 37% during the year ended December 31, 2013. This increase wasprimarily attributable to the growth in sales of our Lightbox imaging console. Research and Development Expenses. R&D expenses decreased $4.8 million, or 30%, to $11.2 million during the year ended December 31, 2014,compared to $16.0 million during the year ended December 31, 2013. This decrease was primarily due to a $2.2 million decrease in personnel-relatedexpenses associated with our headcount reduction during the third and fourth quarters of 2013, a decrease of $1.5 million in product development materialsand related costs and a reduction of $1.1 million in outside services and, as we focused our research and development efforts on our Lumivascular platformproducts, particularly Pantheris. Selling, General and Administrative Expenses. SG&A expenses decreased $7.3 million, or 28%, to $18.5 million during the year endedDecember 31, 2014, compared to $25.8 million during the year ended December 31, 2013. This decrease was primarily due to a $6.1 million decrease inpersonnel-related expenses associated with our headcount reduction during the third and fourth quarters of 2013 and a reduction of $1.4 million inconsulting, legal and professional fees, associated with our reduction in headcount and cost reduction actions taken in the second half of 2013 partially offsetby an increase of $0.3 million in tradeshow and travel-related expenses. Interest Income (Expense), Net. Interest income (expense), net increased $3.1 million, or 106%, to an expense of $6.0 million during the year endedDecember 31, 2014, compared to an expense of $2.9 million during the year ended December 31, 2013. This increased expense was attributable to interestexpense incurred on our credit agreement with PDL, entered into during the second quarter of 2013, and the notes issued during the fourth quarter of 2013,and non-cash interest related to the amortization of debt discount and issuance costs associated with the notes and the credit agreement. Other Income (Expense), Net. Other income (expense), net decreased to an expense of $0.9 million during the year ended December 31, 2014,compared to income of $5,000 during the year ended December 31, 2013. The increase in other expense was primarily attributable to the $1.2 million loss onthe extinguishment of our notes that were converted into Series E preferred stock in September 2014, partially offset by the remeasurement of the fair value ofour common stock warrant liability through the issuance of the Series E preferred stock in September 2014, and the derivative instruments associated with ournotes which are accounted for as a compound embedded derivative instrument and marked-to-market at each reporting date. 52Table of Contents Liquidity and Capital Resources As of December 31, 2015, we had cash and cash equivalents of $43.1 million and an accumulated deficit of $196.3 million, compared to cash andcash equivalents of $12.3 million and an accumulated deficit of $146.5 million as of December 31, 2014. We currently believe our existing cash and cashequivalents, expected revenues, debt financing currently available under our Loan Agreement with CRG and the net proceeds from the follow-on offering weintend to conduct whereby we may issue and sell shares of common stock having an aggregate value of up to $50.0 million, will be sufficient to meet ourcapital requirements and fund our operations for at least the next 12 months. If these sources are insufficient to satisfy our liquidity requirements, we mayseek to sell additional equity, through our follow-on offering or in separate financings, or sell additional debt securities or obtain an additional credit facility.Further, because of the risk and uncertainties associated with the commercialization of our existing products as well as products in development, we mayneed additional funds to meet our needs sooner than planned. To date, our primary sources of capital were private placements of preferred stock, debtfinancing agreements and our IPO. In September 2015, we entered into a Loan Agreement with CRG, under which we could borrow up to $50.0 million, ofwhich $30.0 million was immediately available and drawn down by us. Of the remaining $20.0 million, $10.0 million is currently available to us untilJune 30, 2016 and the remaining $10.0 million is contingent on the achievement of certain net revenue milestones prior to December 31, 2016, and if suchmilestones are achieved, the remaining amount may be drawn down until March 29, 2017. As of December 31, 2015, we had $29.6 million outstanding underthe Loan Agreement. See section titled “Contractual Obligations.” On February 3, 2016, we filed a universal shelf registration statement to offer up to $150.0 million of our securities and entered into a SalesAgreement with Cowen, as sales agent, pursuant to which we may, from time to time, issue and sell common stock with an aggregate value of up to $50.0million in an at-the-market offering. The shelf registration statement has not yet been declared effective by the Securities and Exchange Commission, orSEC. Cowen is acting as sole sales agent for any sales made under the Sales Agreement for a 3% commission on gross proceeds. The common stock will besold at prevailing market prices at the time of the sale, and, as a result, prices may vary. Unless otherwise terminated earlier, the Sales Agreement continuesuntil all shares available under the Sales Agreement have been sold. If we raise additional funds by issuing equity securities, our stockholders would experience dilution. Additional debt financing, if available, mayinvolve covenants restricting our operations or our ability to incur additional debt. Any additional debt financing or additional equity that we raise maycontain terms that are not favorable to us or our stockholders and require significant debt service payments, which diverts resources from other activities.Additional financing may not be available at all, or in amounts or on terms acceptable to us. If we are unable to obtain additional financing, we may berequired to delay the development, commercialization and marketing of our products and scale back our business and operations. Cash Flows Year EndedDecember 31,20152014 2013(in thousands)Net cash (used in) provided by:Operating activities$(40,883)$(21,801)$(40,655)Investing activities(322)(117)(496)Financing activities71,94822,01332,755Net (decrease) increase in cash and cash equivalents$30,743$95$(8,396) Net Cash Used in Operating Activities Net cash used in operating activities for 2015 was $40.9 million, consisting primarily of a net loss of $47.3 million and an increase in net operatingassets of $3.3 million, partially offset by non-cash charges of $9.7 million. The increase in net operating assets was primarily due to an increase in inventoriesand in prepaids and other current assets, decreases in accrued expenses and other current liabilities due to timing of payments relating to our IPO costs, anddecreases in other liabilities related to the repayment of accrued interest on our notes, partially offset by an increase in accrued compensation. The non-cashcharges primarily consisted of depreciation, stock-based compensation, non-cash interest expense and other charges related to our credit agreement with PDLand its repayment, and the reversal of the current fair value of the embedded derivative asset upon repayment of the notes, partially offset by the change infair value of the embedded compound derivative associated with the notes through the repayment date. 53Table of Contents Net cash used in operating activities for 2014 was $21.8 million, consisting primarily of a net loss of $32.0 million, partially offset by a decrease innet operating assets of $3.6 million and by non-cash charges of $6.6 million. The decrease in net operating assets was primarily due to decreases in inventory,and an increase in accrued expenses and other current liabilities related to interest payable to PDL and transaction fees related to our Series E financing. Thenon-cash charges primarily consisted of depreciation, stock-based compensation, non-cash interest expense related to our credit agreement with PDL, andlosses on the extinguishment of our notes. Net cash used in operating activities for 2013 was $40.7 million, consisting primarily of a net loss of $39.9 million and an increase in net operatingassets of $4.3 million, partially offset by non-cash charges of $3.6 million. The increase in net operating assets was primarily due to the expansion of our salesand marketing organizations to support the ongoing commercialization of our Lumivascular platform resulting in increases in accounts receivable andinventory as well as a decrease in accounts payable and accrued expenses and other current liabilities due to timing of payments. Non-cash charges consistedprimarily of depreciation, stock-based compensation, and non-cash interest expense related to our credit agreement with PDL. Net Cash Used in Investing Activities Net cash used in investing activities in 2015 was $0.3 million consisting of purchases of property and equipment of $0.6 million, partially offset by$0.3 million from the release of a restriction against our cash. Net cash used in investing activities in 2014 and 2013 was $0.1 million and $0.5 million,respectively, consisting of purchases of property and equipment. Net Cash Provided by Financing Activities Net cash provided by financing activities in 2015 was $71.9 million, consisting of net proceeds of $58.7 million from the issuance of common stockrelated to our IPO, net proceeds of $6.2 million from the issuance of our Series E preferred stock, net proceeds of $5.5 million from the issuance of ourcommon stock and net proceeds of $29.1 million from the debt financing under the Loan Agreement with CRG, partially offset by the payment of $27.6million to retire our debt with PDL and outstanding notes. As of December 31, 2014, cash paid for deferred IPO costs was $1.8 million. Net cash provided by financing activities in 2014 was $22.0 million, consisting of net proceeds of $4.7 million from the issuance of convertiblenotes and net proceeds of $19.2 million from the issuance of our Series E preferred stock. Cash paid for deferred IPO costs was $1.8 million. Net cash provided by financing activities in 2013 was $32.8 million, consisting primarily of net proceeds of $19.3 million under our creditagreement with PDL and net proceeds of $13.4 million from the issuance of convertible notes. Off-Balance Sheet Arrangements We currently have no off-balance sheet arrangements, such as structured finance, special purpose entities, or variable interest entities. 54Table of Contents Contractual Obligations Our principal obligations consist of the operating lease for our facilities, capital leases related to office equipment, our ongoing royalty obligationswith PDL, our Loan Agreement with CRG and non-cancellable purchase commitments. The following table sets out, as of December 31, 2015, our contractualobligations due by period (in thousands): Payments Due by Period Less Than 1Year 1 - 3 Years 3-5 Years More Than 5Years Total Operating lease obligations$1,060$—$—$—$1,060Capital lease obligations1922——41Ongoing royalty obligations with PDL1,2201,693——2,913CRG Loan——26,1998,73334,932Noncancellable purchase commitments4,347———4,347$6,646$1,715$26,199$8,733$43,293 In March 2016, we amended our facility operating lease to extend the lease term for a period of three years from December 1, 2016, untilNovember 30, 2019. Under the terms of the amended facility lease agreement, we are obligated to pay approximately $5.7 million in lease payments throughNovember 2019 over the term of the amended agreement. Our contractual obligations have not otherwise significantly changed from December 31, 2015. CRG In September 2015, we entered into a Loan Agreement with CRG, under which we may borrow up to $50.0 million in principal amount from CRG onor before December 31, 2016. We borrowed $30.0 million on September 22, 2015. Upon FDA approval of our 510(k) for Pantheris, we became eligible toborrow an additional $10.0 million in principal amount, on or prior to June 30, 2016. We may borrow the final $10.0 million, on or prior to March 29, 2017,upon achievement of certain revenue milestones, among other conditions. Under the Loan Agreement, the first sixteen quarterly payments are interest onlypayments, and the last eight quarterly payments will be equal installments in which interest and principal amounts are paid. Interest is calculated at a fixedrate of 12.5% per annum. We make quarterly payments of interest only in arrears commencing on September 30, 2015. During the interest only period, wemay elect to make the 12.5% interest payment by making a cash payment for 8.5% per annum of interest and making a payment-in-kind, or PIK, for theremaining amount, for which the 4.0% per annum of interest would be added to the outstanding principal amount of the loan. To date we have elected thePIK option to the extent available and have made a cash payment for the remaining amount. Principal is repayable in eight equal quarterly installmentsduring the final two years of the term. All unpaid principal, and accrued and unpaid interest, is due and payable in full on September 30, 2021. We may voluntarily prepay the loan in full, with a prepayment premium beginning at 5% and declining by 1% annually thereafter, with no premiumbeing payable if prepayment occurs after the fifth year of the loan. Each tranche of borrowing requires the payment, on the borrowing date, of a financing feeequal to 1.5% of the principal amount borrowed. In addition, a facility fee equal to 7.0% of loan principal borrowed plus any PIK is payable at the end of theterm or when the loan is repaid in full. The term loan is collateralized by a security interest in substantially all of our assets. The Loan Agreement requires that we adhere to certain affirmative and negative covenants, including financial reporting requirements, certainminimum financial covenants for pre-specified liquidity and revenue requirements and a prohibition against the incurrence of indebtedness, or creation ofadditional liens, other than as specifically permitted by the terms of the Loan Agreement. In particular, the covenants of the Loan Agreement include acovenant that we maintain a minimum of $5.0 million of cash and certain cash equivalents, and we must achieve minimum revenue of $7.0 million in 2015,with the target minimum revenue increasing in each year thereafter until reaching $70,000,000 in 2020 and in each year thereafter, as applicable. If we fail tomeet the applicable minimum revenue target in any calendar year, the Loan Agreement provides a cure right if we prepay a portion of the outstandingprincipal equal to 2.0 times the revenue shortfall. In addition, the Loan Agreement prohibits the payment of cash dividends on our capital stock and alsoplaces restrictions on mergers, sales of assets, investments, incurrence of liens, incurrence of indebtedness and transactions with affiliates. CRG mayaccelerate the payment terms of the Loan Agreement upon the occurrence of certain events of default set forth therein, which include our failure to maketimely payments of amounts due under the Loan Agreement, the failure to adhere to the covenants set forth in the Loan Agreement, our insolvency or uponthe occurrence of a material adverse change. We were in compliance with the covenants under the Loan Agreement as of December 31, 2015. We used the proceeds from the CRG borrowing and securities purchase to retire our outstanding debt with PDL and to retire the principal and accruedinterest underlying our outstanding notes, which are described below. 55Table of Contents Convertible Promissory Notes On October 29, 2013, we entered into a Note and Warrant Purchase Agreement, or the Convertible Note Agreement, with certain existing preferredstockholders, third-parties and employees for the issuance of convertible notes up to an aggregate principal amount of $25.0 million. Under the terms of theConvertible Note Agreement, we issued convertible notes, or the notes, in October and November 2013 for total proceeds of $13.5 million and in May andJuly 2014 for total proceeds of $4.7 million. We are required to pay interest under the notes at a rate equal to 30-day LIBOR, plus 6% per annum subject to aminimum internal rate of return of 20% per annum. The principal and accrued interest thereon was to mature on the earlier of: (i) October 29, 2018, (ii) anevent of default or (iii) a change of control event. In September 2015, in connection with the consummation of the Loan Agreement, we repaid all principal and accrued interest outstanding under thenotes. Lease Agreement We lease our headquarters in Redwood City, California pursuant to a lease agreement with HCP LS Redwood City dated July 30, 2010, as amendedby the First Amendment to Lease dated September 30, 2011 and the Second Amendment to Lease dated March 4, 2016, collectively, the Amended Lease. TheAmended Lease has a rental commencement date of December 1, 2011, a term of eight years and expires in November 2019. We have an additional option toextend the lease term for a period of three years. The option must be exercised no more than 12 months and no less than nine months prior to the expiration ofthe applicable term. The Amended Lease is for an aggregate of approximately 44,200 rentable square feet. PDL Credit and Security Agreements On April 18, 2013, we, as the borrower, entered into a credit agreement with PDL, as the lender and agent. The credit agreement provided for anaggregate term loan facility of up to $40.0 million, available in two tranches of up to $20.0 million each. We borrowed $20.0 million as a term loan undertranche one of the credit agreement on April 18, 2013. We also paid closing fees to PDL of approximately $200,000, which were deducted from the trancheone funds we received, plus legal and brokerage fees. Tranche two of the credit agreement, the availability of which was conditioned on our satisfaction ofcertain milestones, never became available to us as we did not reach those milestones. The proceeds from tranche one were used for working capital, capitalexpenditures and general corporate purposes. In September 2015, in connection with the consummation of the Loan Agreement with CRG, we repaid all amounts outstanding under the creditagreement with PDL. The payoff amount of $21.4 million included accrued interest through the repayment date of $0.6 million and $0.2 million as an end-of-term final payment fee. Following the retirement of the PDL debt, our royalty obligations under the PDL credit agreement continue and are payable through the maturitydate at the higher of a reduced rate of 0.9% of our quarterly revenues or certain minimum amounts, starting at $65,000 per quarter in 2013 and increasingannually to $310,000 per quarter in 2018. Additionally, until there are no further obligations to periodically pay to PDL a percentage of our net revenue, wemust comply with certain affirmative covenants and negative covenants limiting our ability to, among other things, undergo a change in control or dispose ofassets, in each case subject to certain exceptions. We were in compliance with the covenants under the credit agreement as of December 31, 2015. 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 beenprepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates andassumptions for the reported amounts of assets, liabilities, revenues, expenses and related disclosures. Our estimates are based on our historical experienceand on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about thecarrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under differentassumptions or conditions and any such differences may be material. While our significant accounting policies are more fully described in Note 2 of our financial statements included in this Annual Report on Form 10-K, we believe the following discussion addresses our most critical accounting policies, which are those that are most important to our financial condition andresults of operations and require our most difficult, subjective and complex judgments. 56Table of Contents Revenue Recognition All of our revenues are currently derived from sales of our Lumivascular platform products, various non-imaging PAD catheters and related servicesin the United States and select European markets. We recognize revenues when the following revenue recognition criteria are met: · Persuasive evidence of an arrangement exists. We consider this criterion satisfied when we have an agreement or contract in place with thecustomer. · Delivery has occurred or services have been rendered. We principally determine this criterion to be satisfied as follows: · Lightbox console: upon our receipt of a form executed by the customer acknowledging that the training and installation process iscomplete. · PAD catheters: when the product has been shipped and risk of loss and title has passed to the customer. · Service: recognized ratably over the term of the service period. To date service revenues have been insignificant. · The fee is fixed or determinable and collectability is reasonably assured. We determine the satisfaction of these criteria based on ourjudgment regarding the nature of the fee charged for products, contractual agreements entered into, and the collectability of those feesunder any contract or agreement. We offer our customers the ability to purchase or lease our Lightbox. When a customer leases the Lightbox, we recover the cost of providing thesystem by charging that customer a premium on sales of the Ocelot family of catheters. When a Lightbox is leased, we retain title to the equipment and itremains capitalized on our balance sheet under property and equipment. The costs to maintain these leased Lightboxes held by customers are charged to costof revenues as incurred. We evaluate our lease agreements and account for these contracts under the guidance pertaining to accounting for leases and for revenuearrangements with multiple deliverables. The guidance requires arrangement consideration to be allocated between a lease deliverable and a non-leasedeliverable based upon the relative selling prices of the deliverables, using a specific hierarchy. The hierarchy is as follows: vendor-specific objectiveevidence of fair value of the respective elements, third-party evidence of selling price, or best estimate of selling price, or BESP. We allocate arrangementconsideration using BESP. We assessed whether the embedded lease is an operating lease or sales-type lease and determined that collectability of the minimum lease paymentsis not reasonably predictable given that any payments under the lease agreements are dependent upon contingent future Ocelot catheter sales. We concluded,therefore, that the embedded lease did not meet the criteria of a sales-type lease and we account for it as an operating lease. We recognize revenue allocated tothe lease as the Ocelot catheters are delivered. We must make significant assumptions regarding the future collectability of accounts receivable from customers to determine whether revenuerecognition criteria have been met. If collectability is not assured at the time of shipment, we defer revenues until such criterion has been met. We estimatereductions in revenue for potential returns of products by customers. In making such estimates, we analyze historical returns, current economic trends andchanges in customer demand and acceptance of our products. Stock-Based Compensation We maintain an equity incentive plan to provide long-term incentive for employees, consultants and members of our board of directors. The planallows for the issuance of non-statutory and incentive stock options to employees and non-statutory stock options to consultants and non-employeedirectors. We are required to determine the fair value of equity incentive awards and recognize compensation expense for all equity incentive awards,including employee stock options. We recognize this expense over the requisite service period. In addition, we recognize stock-based compensation expensein the statements of operations and comprehensive loss based on awards expected to vest and, therefore, the amount of expense has been reduced forestimated forfeitures. We use the straight-line method for expense attribution. The valuation model we used for calculating the fair value of awards for stock-based compensation expense is the Black-Scholes option-pricingmodel, or the Black-Scholes model. The Black-Scholes model requires us to make assumptions and judgments about the variables used in the calculation,including the weighted average period of time that the options granted are expected to be outstanding, the volatility of common stock, an assumed risk-freeinterest rate and an estimated forfeiture rate. 57Table of Contents The following table summarizes the weighted average assumptions we used to determine the fair value of stock options: Year Ended December 31, 2015 2014 2013 Expected term (years)6.36.36.9Expected volatility49.8%59.1%52.1%Risk-free interest rate1.8%1.8%1.4%Dividend rate——— Fair Value of Common Stock. Prior to completion of our IPO in January 2015, the fair value of the shares of our common stock underlying the stockoptions has historically been determined by our board of directors after considering independent third-party valuation reports. Because there had previouslybeen no public market for our common stock, our board of directors determined the fair value of our common stock at the time of grant of the option byconsidering a number of objective and subjective factors, including valuations of comparable companies, sales of our preferred stock, our operating andfinancial performance and the general and industry-specific economic outlook. Following the closing of our IPO in January 2015, the fair value of ourcommon stock is determined based on the closing price of our common stock on The NASDAQ Global Market. Expected Term. We do not believe we are able to rely on our historical exercise and post-vesting termination activity to provide accurate data forestimating the expected term for use in determining the fair value-based measurement of our options. Therefore, we have opted to use the “simplifiedmethod” for estimating the expected term of options, which is the average of the weighted average vesting period and contractual term of the option. Expected Volatility. Since there had previously been no public market for our common stock and lack of company specific historical volatility, wehad determined the share price volatility for options granted based on an analysis of the volatility of a peer group of publicly traded companies. In evaluatingsimilarity, we considered factors such as stage of development, risk profile, enterprise value and position within the industry. Following the closing of ourIPO in January 2015, we supplement our available company historical volatility with the volatility of a peer group of publicly traded companies. Risk-free Interest Rate. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of the grant for zero-coupon U.S. Treasurynotes with remaining terms similar to the expected term of the options. Dividend Rate. We assumed the expected dividend to be zero as we have never paid dividends and have no current plans to do so. Expected Forfeiture Rate. We are required to estimate forfeitures at the time of grant, and revise those estimates in subsequent periods if actualforfeitures differ from those estimates. We use historical data to estimate pre-vesting option forfeitures and record share-based compensation expense only forthose awards that are expected to vest. To the extent actual forfeitures differ from the estimates, we record the difference as a cumulative adjustment in theperiod that the estimates are revised. Service period. We amortize all stock-based compensation over the requisite service period of the awards, which is generally the same as the vestingperiod of the awards. We amortize the stock-based compensation cost on a straight-line basis over the expected service periods. If factors change and we employ different assumptions, stock-based compensation expense may differ significantly from what we have recorded inthe past. If there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate, increase or cancel anyremaining unearned stock-based compensation expense. To the extent that our assumptions are incorrect, the amount of stock-based compensation recordedwill change. Compound Embedded Derivative We have derivative instruments related to redemption features embedded within the notes. The compound embedded derivatives were accounted foras a liability at the inception of the obligation and are remeasured to fair value as of each balance sheet date, with the related remeasurement adjustmentrecognized as other income (expense), net in the statement of operations and comprehensive loss. The fair value of the compound embedded derivative isdetermined based on an income approach that identified the cash flows using a “with-and-without” valuation methodology. The inputs used to determineestimated fair value of the derivative instruments include the probabilities of the underlying events triggering the embedded derivative and their timing. Wecontinued to record adjustments to the estimated fair value of the compound embedded derivative associated with the notes until the notes were repaid inSeptember 2015. The associated current fair value of the embedded derivative asset was expensed as a component of other income (expense), net in thestatements of operations and comprehensive loss at that time. 58Table of Contents JOBS Act Accounting Election As an emerging growth company under the Jumpstart Our Business Startups Act of 2012, we are eligible to take advantage of certain exemptionsfrom various reporting requirements that are applicable to other public companies that are not emerging growth companies. We have irrevocably elected notto avail ourselves of this exemption from new or revised accounting standards and, therefore, are subject to the same new or revised accounting standards asother public companies that are not emerging growth companies. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk The risk associated with fluctuating interest rates is primarily limited to our cash equivalents, which are carried at quoted market prices. Due to theshort-term maturities and low risk profile of our cash equivalents, an immediate 100 basis point change in interest rates would not have a material effect onthe fair value of our cash equivalents. We do not currently use or plan to use financial derivatives in our investment portfolio. Credit Risk As of December 31, 2015, our cash and cash equivalents were maintained with one financial institution in the United States, and our current depositsare likely in excess of insured limits. We have reviewed the financial statements of this institution and believe it has sufficient assets and liquidity to conductits operations in the ordinary course of business with little or no credit risk to us. Our accounts receivable primarily relate to revenues from the sale of our Lumivascular platform products to hospitals and medical centers in theUnited States. One and none of our customers represented more than 10% of our accounts receivable as of December 31, 2015 and 2014, respectively. Foreign Currency Risk Our business is primarily conducted in U.S. dollars. Any transactions that may be conducted in foreign currencies are not expected to have a materialeffect on our results of operations, financial position or cash flows. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item appears in a separate section of this Annual Report on Form 10-K beginning on page 86 and is incorporatedherein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the SecuritiesExchange Act of 1934, as amended, or the Exchange Act, and the rules and regulations thereunder, is recorded, processed, summarized and reported withinthe time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including ourprincipal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing andevaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As required by Rule 13a-15(b) under the Exchange Act, our management, under the supervision and with the participation of our principal executiveofficer and principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term isdefined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2015. Based on such evaluation, our principal executive officer andprincipal financial officer have concluded that, as of December 31, 2015, our disclosure controls and procedures were effective. 59Table of Contents Management’s Annual Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of theExchange Act. Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework inInternal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on thisevaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2015. This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm on our internal control over financialreporting due to an exemption established by the JOBS Act for “emerging growth companies.” Changes in Internal Control Over Financial Reporting There were no changes in our internal controls over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the fourth quarter of 2015 that materially affected, or are reasonably likely to materially affect, our internalcontrol over financial reporting. Inherent Limitations on Effectiveness of Controls Our management, including our chief executive officer and chief financial officer, believes that our disclosure controls and procedures and internalcontrol over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level.However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errorsand all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of thecontrol system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must beconsidered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that allcontrol issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can befaulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of somepersons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part uponcertain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under allpotential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies orprocedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not bedetected. ITEM 9B. OTHER INFORMATION Lease Amendment On March 4, 2016, we entered into the Second Amendment to Lease with HCP LS Redwood City, or the Second Amendment, which amended ourfacility lease agreement for our headquarters and manufacturing facility. The Second Amendment extends the lease term for a period of three years and has arental commencement date of December 1, 2011, a term of eight years and expires in November 2019. Under the terms of the Second Amendment, we areobligated to pay approximately $5.7 million in base rent payments through November 2019. Modification of Compensation Arrangements The Compensation Committee of our Board of Directors, approved the modification of cash compensation arrangements, each effective January 1,2016, for Matthew B. Ferguson, our Chief Business Officer and Chief Financial Officer, on March 3, 2016, and for John B. Simpson, our Executive Chairman,and Jeffrey M. Soinski, our Chief Executive Officer, on March 7, 2016. The cash compensation arrangement for each individual was modified as follows:· Mr. Ferguson’s base salary was increased from $275,000 to $300,000 and his target bonus percentage was increased from 30% to 40%; · Dr. Simpson’s base salary was increased from $335,000 to $390,000 and his target bonus percentage was increased from 40% to 50%; and · Mr. Soinski’s base salary was increased from $375,000 to $390,000 and his target bonus percentage was increased from 40% to 50%. The annual cash compensation of Mr. Ferguson, Dr. Simpson and Mr. Soinski, each as modified, will now be as follows: Name Position Salary Cash BonusTarget Target CashCompensationMatthew B. Ferguson Chief Business Officer and ChiefFinancial Officer$300,000$120,000$420,000John B. SimpsonExecutive Chairman$390,000$195,000$585,000Jeffrey M. SoinskiChief Executive Officer$390,000$195,000$585,000 60Table of Contents PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Executive Officers, Directors and Key Employees The following table sets forth information, as of February 29, 2016, regarding our executive officers, directors and key employees. Name AgeTitleJeffrey M. Soinski54President, Chief Executive Officer and DirectorJohn B. Simpson, Ph.D., M.D.72Director and Executive Chairman of the Board of DirectorsMatthew B. Ferguson48Chief Business Officer and Chief Financial OfficerSougata Banerjee49Senior Vice President, Operations and QualityBart C. Beasley47Vice President, MarketingArjun M. Desai, M.D.34Chief Medical OfficerDaniel V. George46Vice President, FinancePatricia A. Hevey50Vice President, Clinical, Quality & Regulatory AffairsHimanshu N. Patel56Chief Technology OfficerPhilip R. Preuss38Vice President, Strategy and Business OperationsJoseph Rafferty58Vice President, SalesJohn D. Simpson37Vice President, Business DevelopmentJames G. Cullen73DirectorThomas J. Fogarty82DirectorDonald A. Lucas53DirectorJames B. McElwee63Director (1) Member of the audit committee.(2) Member of the compensation committee.(3) Member of the nominating and governance committee. Jeffrey M. Soinski has served as our President, Chief Executive Officer and a member of our Board of Directors since December 2014. From itsformation in September 2009 until the acquisition of its Unisyn business by GE Healthcare in May 2013, Mr. Soinski served as Chief Executive Officer ofMedical Imaging Holdings and its primary operating company Unisyn Medical Technologies, a national provider of technology-enabled products andservices to the medical imaging industry. Mr. Soinski remains a Director of Medical Imaging Holdings and its remaining operating company ConsensysImaging Service. Mr. Soinski is also a director of Merriman Holdings, a capital market advisory and research, corporate and investment banking servicescompany, since 2008. From July 2008 to June 2013, Mr. Soinski served periodically as a Special Venture Partner for Galen Partners, a leading healthcare-focused private equity firm, which has Medical Imaging Holdings as one of its portfolio companies. From 2001 until its acquisition by C.R. Bard in 2008,Mr. Soinski was President and CEO of Specialized Health Products International, a publicly-traded manufacturer and marketer of proprietary safety medicalproducts. Mr. Soinski served as a consultant to BLOXR Corporation, a venture-backed medical device company, from October 2013 until September 2014. He has served on the board of directors of Merriman Holdings, parent of Merriman Capital, a San Francisco-based investment banking and brokerage firm,since 2008. Mr. Soinski holds a B.A. degree from Dartmouth College. We believe Mr. Soinski is qualified to serve as a member of our board of directors because of his extensive corporate finance and business strategyexperience as well as his experience with public companies. John B. Simpson, Ph.D., M.D. founded our company in March 2007 and has served as a member of our board of directors since March 2007. FromMarch 2007 to December 2014, Dr. Simpson served as our Chief Executive Officer. Since March 2000 Dr. Simpson has served in various positions at DeNovo Ventures, a venture capital fund, including managing director and clinical director. Since 1983, Dr. Simpson has been a partner at CardiovascularMedicine and Coronary Interventions, a cardiology physician group. Prior to founding our company, 61(1)(2)(3)(3)(1)(2)(3)(1)(2)(3)Table of Contents Dr. Simpson founded several other interventional cardiology companies, including Perclose, a manufacturer of femoral artery access site closure devices,Devices for Vascular Intervention, a manufacturer of atherectomy devices, Advanced Cardiovascular Systems, a manufacturer of balloon angioplasty devicesand FoxHollow Technologies, a manufacturer of atherectomy devices. Dr. Simpson holds a B.S. in Agriculture from Ohio State University, an M.D. from theDuke University School of Medicine and an M.S. and a Ph.D. in Biomedical Science from the University of Texas. We believe Dr. Simpson is qualified to serve as a member of our board of directors because of his medical background, extensive knowledge ofmedical device company operations, and his experience working with companies, regulators and other stakeholders in the medical device industry. Matthew B. Ferguson has served as our Chief Business Officer and Chief Financial Officer since January 2011, and also as our Co-President fromAugust 2012 to October 2013. From December 2009 to December 2010, Mr. Ferguson served as the Chief Financial Officer at Tethys Bioscience, a providerof molecular diagnostic tests for cardiometabolic conditions. From January 2008 to April 2009 he served as the Chief Financial Officer at Proteolix, adeveloper of novel drugs for the treatment of cancer and autoimmune diseases. Mr. Ferguson also served as the Chief Financial Officer and as Vice Presidentof Finance and Business Development at FoxHollow Technologies. Mr. Ferguson holds a B.S. in Civil Engineering from Stanford University, an M.S. inMechanical Engineering from the University of Pennsylvania and an M.B.A. from the University of California at Berkeley. Sougata (Bunty) Banerjee joined out company in January 2012 and has served as our Senior Vice President of Operations and Quality sinceFebruary 2015 and served as our Senior Vice President of Operations from January 2012 to January 2015. From November 2009 to January 2012,Mr. Banerjee was Vice President of Operations and Quality at Evalve where he oversaw the acquisition of Evalve by Abbott Laboratories in 2009 and led thepost-acquisition integration and business expansion as Head of Operations at Abbott Vascular, Structural Heart. Prior to Evalve, Mr. Banerjee served as PlantManager at Epicor, holding general management responsibilities including operations, quality, product development, finance, human resources, andproviding leadership in product commercialization and new product introductions. Prior to Epicor, Mr. Banerjee held several operations leadership positionsat several business units of Boston Scientific. Earlier in his career, Mr. Banerjee held various engineering positions at Crompton-Greaves, Caterpillar, andLarsen-Toubro. Mr. Banerjee received a B.S. in Electrical Engineering from Jadavpur University, India and an M.S. in Industrial Management from ClemsonUniversity. Bart C. Beasley has been our Vice President of Marketing since January 2013. From January 2009 to January 2013, he served as the Senior Directorof Marketing at Transcend Medical. From January 2007 to January 2009, Mr. Beasley worked as an independent consultant providing consulting on salesand marketing strategy matters within the medical device industry. Mr. Beasley holds a B.S. in Economics from Santa Clara University and an M.B.A. fromIESE, University of Navarra in Spain. Arjun M. Desai, M.D. joined our company in January 2012 and has served as our Chief Medical Officer since November 2013. From July 2010 toDecember 2011, Dr. Desai served as a consultant and advisor for Incline Therapeutics, developing the IONSYS transdermal fentanyl delivery system and forother companies. From 2008 to December 2011, Dr. Desai was a Staff Physician at Stanford University in the Department of Anesthesia where he completedhis advanced anesthesia residency training. Dr. Desai continues to be affiliated with Stanford University. Dr. Desai has also served as a fellow in the UnitedStates House Policy Committee, advising members of Congress on healthcare legislation. Additionally, Dr. Desai represented the United States StateDepartment and Rotary International as an Ambassador of Goodwill to Singapore where he led vaccine prophylaxis campaigns and lectured in thedepartment of health economics at the National University of Singapore. Dr. Desai holds an M.D. from the University of Miami Miller School of Medicineand a B.A. in Economics from the University of Oklahoma. Daniel V. George has served as our Vice President, Finance since August 2014. From June 2012 to August 2014, Mr. George served as a consultantand Vice President of Finance for ApniCure, a medical device company specializing in the treatment of sleep apnea. From March 2009 to June 2012,Mr. George worked for Avantis Medical Systems, a manufacturer of colonoscopy visualization technology, where he was both a consultant and ChiefFinancial Officer. Mr. George was also the Sr. Director of Finance at FoxHollow Technologies and 62Table of Contents worked for PricewaterhouseCoopers in the assurance and business advisory practice. Mr. George holds B.S. degrees in both Accounting and Finance fromCalifornia State University, Long Beach. Patricia A. Hevey has served as our Vice President of Clinical, Regulatory and Quality Affairs since September 2014. From April 2014 toSeptember 2014, Ms. Hevey was our Vice President of Clinical and Regulatory Affairs and from February 2011 to February 2014, she served as our Directorof Clinical and Regulatory Affairs. From July 2010 until February 2011, Ms. Hevey was the President of Hevey Clinical Consulting and from October 2008to July 2010, she was the Director of Clinical and Regulatory Affairs at Baxano. Ms. Hevey holds a B.S. in Clinical Research Administration from GeorgeWashington University Medical School and an associate of science in Radiology Science from Canada College. Himanshu N. Patel served as our Chief Technology Officer from January 2011 to November 2011 and since October 2013. From September 1999 toFebruary 2007, Mr. Patel led research and development activities as the Director of Advanced Technologies at FoxHollow Technologies. Mr. Patel holds aB.S. in Mechanical Engineering from M.S. University of Baroda, India, and an M.S. in Mechanical Engineering from the University of Florida. Philip R. Preuss joined our company in August 2009 and has served as our Vice President, Strategy and Business Operations since April 2015. FromSeptember 2014 to March 2015 Mr. Preuss was our Vice President, Corporate Development and from September 2012 to August 2014, Mr. Preuss served asour Vice President, Finance and Corporate Development. Prior to joining our company, Mr. Preuss was a Manager of Business Development at anothermedical device company founded by Dr. Simpson. Mr. Preuss was also a Senior Associate of Corporate Development at FoxHollow Technologies, where heworked on internal strategic priorities and the exploration of external business opportunities. Before entering the medical device industry, Mr. Preuss heldvarious roles in the financial services sector, and specifically within the field of equity research. Mr. Preuss holds an M.B.A. from the Kellogg School ofManagement and a B.A. in both Economics and History from Stanford University. Joseph Rafferty has served as our Vice President, Sales since January 2016. Mr. Rafferty has more than 30 years of medical technology sales andmarketing experience, primarily with peripheral vascular and coronary products and procedures. From June 2009 to December 2015, Mr. Rafferty served asPresident and Chief Executive Officer of National Medical Sales, an organization providing third-party commercialization services to emerging medicaltechnology companies, primarily in the fields of peripheral and coronary interventional devices. From July 2007 to May 2009, Mr. Rafferty held the positionof Vice President of Sales and later Vice President of Global Sales at Pathway Medical Technologies, Inc., a manufacturer of atherectomy systems to treatarterial disease. Mr. Rafferty holds a B.S. in Journalism from Temple University. John D. Simpson joined our company in August 2009 and has served as our Vice President, Business Development since April 2015. Prior to that,Mr. Simpson served as our Vice President, Sales from March 2014 to March 2015. He was also our Co-President from August 2012 to October 2013, our ChiefMarketing Officer from August 2011 to July 2012 and our Vice President, Commercial Operations from August 2009 to July 2011. He also served as amember of our board of directors from December 2009 to January 2015. From 2001 to 2005, Mr. Simpson worked at FoxHollow Technologies in a ClinicalAffairs, Sales and Marketing role. From 2005 to 2006, Mr. Simpson worked at Palo Alto Investors, an independent, privately held investment advisor.Mr. Simpson rejoined FoxHollow Technologies in 2006 where he worked in Corporate Development. Mr. Simpson is a Founder and the former ChiefExecutive Officer of Recreation, which is a full service creative, digital and media agency focused on brand strategy and implementation for life changinginnovations. Mr. Simpson holds a B.A. in Sociology from Duke University. James G. Cullen has served as a member of our board of directors since December 2014. During the last five years, Mr. Cullen has held board andcommittee positions with various companies. Mr. Cullen is currently the non-executive Chairman of the board of Neustar, Inc., a neutral provider of real-timeinformation services and analytics, a director and member of the investment and finance committees of Prudential Financial, non-executive Chairman of theBoard of Agilent Technologies, and a director of Keysight Technologies. Mr. Cullen previously served as a director and chairman of the audit committee ofJohnson & Johnson. From 1993 to 2000, Mr. Cullen was President, Vice Chairman and Chief Operating Officer of Bell Atlantic Corporation (now Verizon).From 1989 to 1993, he was President and Chief Executive Officer of Bell Atlantic-New Jersey. Mr. Cullen holds a B.A. in 63Table of Contents Economics from Rutgers University and an M.S. in Management Science from the Massachusetts Institute of Technology. We believe Mr. Cullen is qualified to serve as a member of our board of directors because of his extensive experience serving on the boards of publiccompanies as well as his financial and business expertise. Thomas J. Fogarty, M.D. has served as a member of our board of directors since December 2014. Dr. Fogarty is a managing director of EmergentMedical Partners, an investment firm focused on private medical device companies, which he founded in 2007. Prior to Emergent Medical Partners,Dr. Fogarty held various positions at Stanford University where he performed both cardiac and peripheral vascular surgery. His positions at StanfordUniversity included Professor of Cardiovascular Surgery and President of the Medical Staff. Dr. Fogarty holds a B.S. degree in Biology from XavierUniversity and an M.D. from Cincinnati College of Medicine. We believe Dr. Fogarty is qualified to serve as a member of our board of directors because of his medical background and extensive knowledge ofmedical device company operations. Donald A. Lucas has served as a member of our board of directors since 2013 and has been an investor in our company since 2011. Mr. Lucas hasbeen a venture capitalist since 1985, having invested in companies such as Oracle, Macromedia and Cadence Design alongside his father Donald L. Lucas.Mr. Lucas has sourced or led investments in companies such as Intuitive Surgical, Coulter Pharmaceutical, Dexcom, Infinera, Signifyd, Obalon Therapeutics,MD Insider, Palantir and Theranos. Mr. Lucas has served on the boards of Dexcom and the Silicon Valley Chapter of the JDRF and is a member of the UCSFDiabetes Center Leadership Council. Mr. Lucas holds a B.A. from Santa Clara University. We believe Mr. Lucas is qualified to serve as a member of our board of directors because of his substantial corporate finance, business strategy andcorporate development expertise gained from his significant experience in the venture capital industry, analyzing, investing in, serving on the boards of, andproviding guidance to various technology companies. James B. McElwee has served as a member of our board of directors since March 2011. Mr. McElwee serves as an independent venture capitalinvestor since 2010. Mr. McElwee served as general partner of Weston Presidio, a private equity and venture capital firm, from 1992 to 2010. During histenure as a general partner and member of the investment committee, Weston Presidio led the start up financing of JetBlue Airways and made investments inFender Musical Instruments, The Coffee Connection, Guitar Center, Mapquest, Party City, Petzazz, RE/MAX, and others. Prior to Weston Presidio,Mr. McElwee was Senior Vice President of the Security Pacific Venture Capital Group and the founding Managing Director of its Menlo Park office where hewas responsible for early private investments in Costco, Universal Health Services, Cypress Semiconductor, Aspect Telecommunications, Xilinx, MIPSComputer Systems, Harmonic, Microchip, Vitesse and others. Prior to entering the venture capital industry in 1979, Mr. McElwee was a Senior Consultantwith Accenture working on a variety of clients in the retailing, healthcare and technology industries. Mr. McElwee holds a B.A. in Economics fromClaremont McKenna College and an M.B.A. from the Wharton Graduate School of Business. We believe Mr. McElwee is qualified to serve as a member of our board of directors because of his substantial corporate development and businessstrategy expertise gained in the venture capital industry. Executive Officers Each of our executive officers serves at the discretion of our board of directors and holds office until his or her successor is duly elected andqualified or until his or her earlier resignation or removal. John B. Simpson, the Executive Chairman of our board of directors, is the father of John D.Simpson, our Vice President, Business Development. Board of Directors Our business is managed under the direction of our board of directors, which consists of six directors. Our directors hold office until the earlier oftheir death, resignation, removal or disqualification, or until their successors 64Table of Contents have been elected and qualified. We are actively searching for qualified candidates to add to our board of directors or to replace current members. Our boardof directors does not have a formal policy on whether the roles of Chief Executive Officer and Chairman of our board of directors should be separate. Prior toour initial public offering, the members of our board of directors were elected in compliance with the provisions of our amended and restated certificate ofincorporation and a voting agreement among certain of our stockholders. The voting agreement terminated upon the closing of our initial public offering, onFebruary 5, 2015, and none of our stockholders have any special rights regarding the election or designation of members of our board of directors. Our amended and restated certificate of incorporation provides that the authorized number of directors may be changed only by resolution of theboard of directors. Our board of directors is divided into three classes with staggered three-year terms. Our first annual meeting of stockholders will be in2016. At each annual meeting of stockholders, the successors to directors whose terms then expire will be elected to serve from the time of election andqualification until the third annual meeting following election or until their earlier death, resignation or removal. Our directors have been divided among thethree classes as follows: · The Class I directors are Jeffrey M. Soinski and John B. Simpson, and their terms will expire at our annual meeting of stockholders to be held in2016· The Class II directors are Donald A. Lucas and James B. McElwee, and their terms will expire at our annual meeting of stockholders to be heldin 2017; and· The Class III directors are James G. Cullen and Thomas J. Fogarty and their terms will expire at our annual meeting of stockholders to be held in2018. This classification of the board of directors, together with the ability of the stockholders to remove our directors only for cause and the inability ofstockholders to call special meetings, may have the effect of delaying or preventing a change in control or management. Director Independence Under the rules of The NASDAQ Stock Market, independent directors must comprise a majority of a listed company’s board of directors within aspecified period of time after listing on The NASDAQ Stock Market. In addition, the rules of The NASDAQ Stock Market require that, subject to specifiedexceptions, each member of a listed company’s audit, compensation, and nominating and governance committees be independent. Our board of directors hasreviewed the independence of each director and determined that Messrs. Cullen, Fogarty, Lucas and McElwee are independent under the rules of TheNASDAQ Stock Market. Our board of directors will review the independence of each director at least annually. During these reviews, the board of directorswill consider current and prior relationships that each non-employee director has with our company and all other facts and circumstances our board ofdirectors deemed relevant in determining their independence, including the beneficial ownership of our common stock by each non-employee director andthe transactions involving them described in the section titled “Certain Relationships and Related Transactions.” We believe that the composition of our board of directors meets the requirements for independence under the current requirements of The NASDAQStock Market. As required by The NASDAQ Stock Market, our independent directors meet in regularly scheduled executive sessions at which onlyindependent directors are present. We intend to comply with future governance requirements to the extent they become applicable to us. 65Table of Contents Corporate Governance We believe that good corporate governance is important to ensure that, as a public company, we will be managed for the long-term benefit of ourstockholders. We and our board of directors have been reviewing the corporate governance policies and practices of other public companies, as well as thosesuggested by various authorities in corporate governance. We have also considered the provisions of the Sarbanes-Oxley Act and the rules of the SEC andThe NASDAQ Stock Market. Based on this review, our board of directors has taken steps to implement many of these provisions and rules. In particular, we have establishedcharters for the audit committee, compensation committee and nominating and governance committee, as well as a code of business conduct and ethicsapplicable to all of our directors, officers and employees. Board Committees Our board of directors has established a standing audit committee, a compensation committee, and a nominating and governance committee. Ourboard of directors has assessed the independence of the members of each of these standing committees as defined under the rules of The NASDAQ StockMarket and, in the case of the audit committee, the independence requirements of Rule 10A-3 under the Securities Exchange Act of 1934, as amended. Audit Committee. Messrs. Lucas, McElwee and Cullen serve on our audit committee. Mr. Lucas serves as the chair of the audit committee. Our boardof directors has assessed whether all members of the audit committee meet the composition requirements of The NASDAQ Stock Market, including therequirements regarding financial literacy and financial sophistication. Our board of directors found that Messrs. Lucas, McElwee and Cullen have met thefinancial literacy and financial sophistication requirements and that Messrs. Lucas, McElwee and Cullen are independent under SEC and The NASDAQStock Market rules. Our board of directors expects to make a determination of whether at least one of the members of the audit committee meets therequirements of an audit committee financial expert prior to the filing of a proxy statement relating to our 2016 annual meeting of stockholders. The auditcommittee’s primary responsibilities include: · appointing, approving the compensation of, and assessing the qualifications and independence of our independent registered publicaccounting firm, which currently is Ernst & Young LLP;· reviewing and discussing with management and our independent registered public accounting firm our annual and quarterly financialstatements and related disclosures;· preparing the audit committee report required by SEC rules to be included in our annual proxy statements;· monitoring our internal control over financial reporting, disclosure controls and procedures;· reviewing our risk management status;· establishing policies regarding hiring employees from our independent registered public accounting firm and procedures for the receipt andretention of accounting related complaints and concerns;· meeting independently with our independent registered public accounting firm and management; and· monitoring compliance with the code of business conduct and ethics for financial management. All audit and non-audit services must be approved in advance by the audit committee. Our board of directors has adopted a written charter for theaudit committee which will be available on our website at www.avinger.com. Compensation Committee. Messrs. Lucas, Cullen and McElwee serve on our compensation committee. Mr. McElwee serves as the chair of thecompensation committee. The compensation committee’s responsibilities include: · annually reviewing and approving corporate goals and objectives relevant to compensation of our chief executive officer and our otherexecutive officers;· determining the compensation of our chief executive officer and our other executive officers;· reviewing and making recommendations to our board of directors with respect to director compensation; and· overseeing and administering our equity incentive plans. 66Table of Contents Our chief executive officer and chief financial officer make compensation recommendations for our other executive officers and initially propose thecorporate and departmental performance objectives under our Executive Bonus Plan to the compensation committee. From time to time, the compensationcommittee may use outside compensation consultants to assist it in analyzing our compensation programs and in determining appropriate levels ofcompensation and benefits. For example, we have periodically engaged Radford Consulting to help develop our compensation philosophy, select a group ofpeer companies to use for compensation benchmarking purposes and cash and equity compensation levels for our directors, executives and other employeesbased on current market practices. Our board of directors has adopted a written charter for the compensation committee which is available on our website atwww.avinger.com. Nominating and Governance Committee. Messrs. Lucas, Cullen, McElwee and Dr. Fogarty serve on our nominating and governance committee.Mr. Cullen serves as the chair of the nominating and governance committee. The nominating and governance committee’s responsibilities include: · identifying individuals qualified to become members of our board of directors;· recommending to our board of directors the persons to be nominated for election as directors and to each of our board’s committees;· reviewing and making recommendations to our board of directors with respect to management succession planning;· developing, updating and recommending to our board of directors corporate governance principles and policies; and· overseeing the evaluation of our board of directors and committees. Our board of directors has adopted a written charter for the nominating and governance committee which is available on our website atwww.avinger.com. Lead Independent Director Our board of directors has appointed James G. Cullen to serve as our lead independent director. As lead independent director, Mr. Cullen is expectedto preside over periodic meetings of our independent directors, to serve as a liaison between our Executive Chairman and the independent directors, and toperform such additional duties as our Board may otherwise determine and delegate. At the end of each board meeting, the independent directors are expectedto meet without Mr. Soinski and Dr. Simpson present. Following each meeting, Mr. Cullen is expected to provide feedback to Mr. Soinski and Dr. Simpsonon their performance and the performance of our employees during the meeting and to recommend new agenda items for the next meeting. Code of Business Conduct and Ethics We have adopted a code of business conduct and ethics that applies to all of our employees, officers and directors, including those officersresponsible for financial reporting. The code of business conduct and ethics is available on our website at www.avinger.com. We will post amendments to ourcode of business conduct and ethics or waivers of our code of business conduct and ethics for directors and executive officers on the same website. Limitation on Liability and Indemnification Matters Our amended and restated certificate of incorporation contains provisions that limit the liability of our directors for monetary damages to the fullestextent permitted by Delaware law. Consequently, our directors will not be personally liable to us or our stockholders for monetary damages for any breach offiduciary duties as directors, except liability for: · any breach of the director’s duty of loyalty to us or our stockholders;· any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;· unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General CorporationLaw; and· any transaction from which the director derived an improper personal benefit. 67Table of Contents Our amended and restated certificate of incorporation and amended and restated bylaws provide that we are required to indemnify our directors andofficers, in each case to the fullest extent permitted by Delaware law. Our amended and restated bylaws also provide that we are obligated to advanceexpenses incurred by a director or officer in advance of the final disposition of any action or proceeding, and permit us to secure insurance on behalf of anyofficer, director, employee or other agent for any liability arising out of his or her actions in that capacity regardless of whether we would otherwise bepermitted to indemnify him or her under Delaware law. We have entered, and expect to continue to enter, into agreements to indemnify our directors,executive officers and other employees as determined by our board of directors. With specified exceptions, these agreements provide for indemnification forrelated expenses including, among other things, attorneys’ fees, judgments, fines and settlement amounts incurred by any of these individuals in any actionor proceeding. We believe that these bylaw provisions and indemnification agreements are necessary to attract and retain qualified persons as directors andofficers. We also maintain directors’ and officers’ liability insurance. The limitation of liability and indemnification provisions in our amended and restated certificate of incorporation and amended and restated bylawsmay discourage stockholders from bringing a lawsuit against our directors and officers for breach of their fiduciary duty. They may also reduce the likelihoodof derivative litigation against our directors and officers, even though an action, if successful, might benefit us and our stockholders. Further, a stockholder’sinvestment may be adversely affected to the extent that we pay the costs of settlement and damages. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, requires our directors and executive officers, and personswho own more than 10% of a registered class of our equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership ofour common stock and other equity securities. Executive officers, directors and greater than 10% stockholders are required by SEC regulations to furnish theCompany with copies of all Section 16(a) forms they file. To our knowledge, based solely on a review of the copies of such reports furnished to us and written representations that no other reports wererequired, during the year ended December 31, 2015, all of our officers, directors and greater than 10% beneficial owners have complied withSection 16(a) filing requirements. ITEM 11. EXECUTIVE COMPENSATION Summary Compensation Table This discussion contains forward looking statements that are based on our current plans, considerations, expectations and determinations regardingfuture compensation programs. Actual compensation programs that we adopt may differ materially from currently planned programs as summarized in thisdiscussion. As an “emerging growth company” as defined in the JOBS Act we are not required to include a Compensation Discussion and Analysis sectionand have elected to comply with the scaled disclosure requirements applicable to emerging growth companies. The following table provides information regarding the total compensation for services rendered in all capacities that was earned by each individualwho served as our principal executive officer at any time in 2015, and our two other most highly compensated executive officers who were serving asexecutive officers as of December 31, 2015. These individuals were our named executive officers for 2015. 68Table of Contents Name and Principal Position YearSalary ($) Bonus ($) Stock Awards ($) Option Awards ($) Non-EquityIncentive PlanCompensation ($)Non-Qualified Deferred Compensation Earnings ($)All Other Compensation ($) Total ($)John B. Simpson, Ph.D., M.D. 2015335,000———141,841——476,841Executive Chairman2014362,917——1,994,872———2,357,7892013340,58463,410—301,061———705,055 Jeffrey M. Soinski 2015375,000———114,000—46,663535,663President and Chief Executive Officer20144,327——1,474,016———1,478,343 Matthew B. Ferguson2015275,000———62,699—3,000340,699Chief Financial Officer and ChiefBusiness Officer2014300,917——227,229———528,1462013282,58444,618—72,543———399,745 (1) The amounts reported include salary paid and 200% of salary deferred in each of the fiscal years. No more than 10% of a named executive officer’s salary was deferred in each fiscal year.(2) The 2013 bonus amounts were paid pursuant to an executive bonus plan based on quarterly performance in five areas: Pantheris development, sales, cash burn, Lightbox placements and Ocelotdevelopment.(3) The amounts reported represent the aggregate grant-date fair value of the stock options awarded to the named executive officer in 2014, calculated in accordance with ASC Topic 718. Such grant-date fair value does not take into account any estimated forfeitures related to service-vesting conditions. The assumptions used in calculating the grant-date fair value of the options reported in thiscolumn are set forth in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Stock-BasedCompensation.”(4) Mr. Soinski was appointed our President and Chief Executive Officer on December 29, 2014, succeeding our founder and then-Chief Executive Officer, Dr. John B. Simpson. Dr. Simpson becameour Executive Chairman upon Mr. Soinski’s appointment.(5) The amounts reported for Mr. Soinski represent reimbursed relocation expenses, of $43,663, pursuant to his employment offer letter and funds contributed to his health savings account of $3,000.The amount reported for Mr. Ferguson represents funds contributed to his health savings account. Executive Officer Employment Letters John B. Simpson We entered into an employment offer letter in November 2014 with John B. Simpson. The letter has no specific term and provides for at-willemployment. The letter does not provide for any bonus. Effective November 1, 2014, Dr. Simpson’s annual base salary is $335,000. Jeffrey M. Soinski We entered into an employment offer letter in December 2014 with Jeffrey M. Soinski, our President and Chief Executive Officer. The letter has nospecific term and provides for at-will employment. The letter also provides that, in 2015, Mr. Soinski is eligible to receive an annual performance bonus of upto 40% of his annual salary based on the achievement of certain goals mutually agreed upon by him and our board of directors. Effective December 29, 2014,Mr. Soinski’s annual base salary is $375,000. Pursuant to Mr. Soinski’s employment offer letter, if, within the 12 month period following a “change in control,” we terminate Mr. Soinski’semployment without “cause,” or Mr. Soinski resigns for “good reason” (as such terms are defined in Mr. Soinski’s employment offer letter), Mr. Soinski willreceive accelerated vesting as to 69(1)(2)(3)(3)(5)(4)(4)Table of Contents 100% of his outstanding unvested stock options. If we experience a change in control, and Mr. Soinski remains our employee through such date, Mr. Soinskiwill receive accelerated vesting as to 50% of his outstanding unvested stock options and/or restricted stock. If we terminate Mr. Soinski without cause at any time, he will be entitled to receive 12 months of base salary and COBRA medical and dentalinsurance coverage, in each case payable in substantially equal installments in accordance with our payroll practices, as severance, in exchange for signingand not revoking a severance agreement and general release against us and our affiliates within 60 days following his termination of employment. The letter provides that Mr. Soinski may receive payments or reimbursements from us for up to $30,000 of reasonable and documented expensesrelated to temporary lodging, travel, and commuting costs incurred by Mr. Soinski prior to August 2015 in connection with his transition from Utah toRedwood City, California, and reimbursements of up to $100,000 related to the sale of Mr. Soinski’s home in Utah and relocation to California. Matthew B. Ferguson We entered into an employment offer letter in December 2010 with Matt Ferguson, our Chief Financial Officer and Chief Business Officer. The letterhas no specific term and provides for at-will employment. The letter did not provide for any bonus. Effective November 1, 2014, Mr. Ferguson’s annual basesalary is $275,000. Pension Benefits and Nonqualified Deferred Compensation We do not provide a pension plan for our employees, and none of our named executive officers participated in a nonqualified deferred compensationplan in 2015. 70Table of Contents Outstanding Equity Awards at 2015 Year-End The following table sets forth information regarding outstanding stock options and stock awards held by our named executive officers as ofDecember 31, 2015: Option Awards Stock AwardsNameGrant Date Number ofSecuritiesUnderlyingUnexercisedOptions (#)ExercisableNumber ofSecuritiesUnderlyingUnexercisedOptions (#)Unexercisable OptionExercisePrice ($) OptionExpirationDate Number ofShares orUnits ofStock ThatHave NotVested (#) MarketValue ofShares orUnits ofStock ThatHave NotVested($)John B. Simpson5/1/201328,888—22.505/1/2018——12/31/2014838,250—4.9512/31/2024——Jeffrey M. Soinski12/31/2014619,385—4.5012/31/2024——Matthew B. Ferguson7/29/201133,965—12.607/29/2021——5/1/20136,815—20.255/1/2023——12/31/201495,482—4.5012/31/2024—— (1) Each of the outstanding equity awards was granted pursuant to our 2009 Stock Plan. Effective as of January 29, 2015, no additional awardswill be granted under the 2009 Stock Plan, and all awards granted under the 2009 Stock Plan that are repurchased, forfeited, expire, arecancelled or otherwise not issued will become available for grant under the 2015 Plan in accordance with its terms.(2) All of our options are early exercisable subject to the Company’s right to repurchase any unvested shares.(3) This column represents the fair value of a share of our common stock on the date of grant, as determined by our board of directors.(4) 25% of the shares of our common stock subject to this option vested on January 1, 2014, and the balance vests in 36 successive equalmonthly installments, subject to continued service through each such vesting date.(5) 25% of the shares of our common stock subject to this option vested on December 31, 2015, and the balance vests in 36 successive equalmonthly installments, subject to continued service through each such vesting date.(6) 25% of the shares of our common stock subject to this option vested on December 31, 2011, and the balance vested in 36 successive equalmonthly installments, subject to continued service through each such vesting date. 71(1)(2)(3)(4)(5)(5)(6)(4)(5)Table of Contents Executive Officer Change in Control Severance Agreements In March 2012, we entered into change of control and severance agreements with each of John B. Simpson, and Matt Ferguson that superseded allprevious severance and change of control arrangements we had entered into with these employees. Under each of these agreements, if, within the 18 monthperiod following a “change of control,” we terminate the employment of the applicable employee other than for “cause,” death or disability, or the employeeresigns for “good reason” (as such terms are defined in the employee’s employment agreement) and, within 60 days following the employee’s termination, theemployee executes an irrevocable separation agreement and release of claims, the employee is entitled to receive (i) continuing payments of severance pay ata rate equal to the employee’s base salary and target bonus, as then in effect, for 12 months for Dr. Simpson and Mr. Ferguson, (ii) reimbursement of premiumsto maintain group health insurance continuation benefits pursuant to “COBRA” for employee and employee’s dependents for up to 12 months forDr. Simpson and Mr. Ferguson, (iii) accelerated vesting as to 100% of the employee’s outstanding unvested stock options and/or restricted stock, and (iv) theextension of the post-termination exercise period of any options held by the employee for a period of 1 year. Additionally, if we experience a change incontrol, 50% of the employee’s outstanding unvested stock options and/or restricted stock will vest. Employee Benefit and Stock Plans 2015 Equity Incentive Plan Our board of directors adopted, and our stockholders approved, our 2015 Equity Incentive Plan, or the 2015 Plan, in January 2015. Our 2015 Planpermits the grant of incentive stock options, within the meaning of Section 422 of the Code, to our employees and any parent and subsidiary corporations’employees, and for the grant of nonstatutory stock options, restricted stock, restricted stock units, stock appreciation rights, performance units andperformance shares to our employees, directors and consultants and our parent and subsidiary corporations’ employees and consultants. Authorized shares. A total of 1,320,000 shares of our common stock were reserved for issuance pursuant to the 2015 Plan. In addition, the sharesreserved for issuance under our 2015 Plan will also include shares reserved but not issued under the 2009 Stock Plan, as amended, or the 2009 Plan, andshares subject to stock options or similar awards granted under the 2009 Plan that expire or terminate without having been exercised in full and shares issuedpursuant to awards granted under the 2009 Plan that are forfeited to or repurchased by us (provided that the maximum number of shares that may be added tothe 2015 Plan pursuant to this sentence is 3,000,000 shares). In addition, shares may become available under the 2015 Plan as described below. The number of shares available for issuance under the 2015 Plan includes an annual increase on the first day of each fiscal year beginning in fiscal2016, equal to the lesser of: · 1,690,000 shares;· 5.0% of the outstanding shares of common stock as of the last day of our immediately preceding fiscal year; or· such other amount as our board of directors may determine. If an award expires or becomes unexercisable without having been exercised in full, is surrendered pursuant to an exchange program, or, with respectto restricted stock, restricted stock units, performance units or performance shares, is forfeited or repurchased due to failure to vest, the unpurchased shares (orfor awards other than stock options or stock appreciation rights, the forfeited or repurchased shares) will become available for future grant or sale under our2015 Plan. With respect to stock appreciation rights, the net shares issued will cease to be available under the 2015 Plan and all remaining shares will remainavailable for future grant or sale under the 2015 Plan. Shares used to pay the exercise price of an award or satisfy the tax withholding obligations related to anaward will become available for future grant or sale under our 2015 Plan. To the extent an award is paid out in cash rather than shares, such cash payment willnot result in reducing the number of shares available for issuance under our 2015 Plan. Plan administration. Our board of directors or one or more committees appointed by our board of directors will administer our 2015 Plan. In thecase of awards intended to qualify as “performance-based compensation” within the meaning of Section 162(m) of the Code, the committee will consist oftwo or more “outside directors” within the meaning of Section 162(m). In addition, if we determine it is desirable to qualify transactions under the 2015 Planas exempt under Rule 16b-3 of the Securities Exchange Act of 1934, as amended, or Rule 16b-3, such 72Table of Contents transactions will be structured to satisfy the requirements for exemption under Rule 16b-3. Subject to the provisions of our 2015 Plan, the administrator hasthe power to administer the plan, including but not limited to, the power to interpret the terms of our 2015 Plan and awards granted under it, to create, amendand revoke rules relating to our 2015 Plan, including creating sub-plans, and to determine the terms of the awards, including the exercise price, the number ofshares subject to each such award, the exercisability of the awards and the form of consideration, if any, payable upon exercise. The administrator also has theauthority to amend existing awards to reduce or increase their exercise price, to allow participants the opportunity to transfer outstanding awards to afinancial institution or other person or entity selected by the administrator and to institute an exchange program by which outstanding awards may besurrendered in exchange for awards of the same type which may have a higher or lower exercise price or different terms, awards of a different type and/or cash. Stock options. Stock options may be granted under our 2015 Plan. The exercise price of options granted under our 2015 Plan must at least be equalto the fair market value of our common stock on the date of grant. The term of an incentive stock option may not exceed 10 years, except that with respect toany participant who owns more than 10% of the voting power of all classes of our outstanding stock, the term must not exceed five years and the exerciseprice must equal at least 110% of the fair market value on the grant date. The administrator will determine the methods of payment of the exercise price of anoption, which may include cash, shares or other property acceptable to the administrator, as well as other types of consideration permitted by applicable law.After the termination of service of an employee, director or consultant, he or she may exercise his or her option for the period of time stated in his or heroption agreement. Generally, if termination is due to death or disability, the option will remain exercisable for 12 months. In all other cases, the option willgenerally remain exercisable for three months following the termination of service. However, in no event may an option be exercised later than the expirationof its term. Subject to the provisions of our 2015 Plan, the administrator determines the other terms of options. Stock appreciation rights. Stock appreciation rights may be granted under our 2015 Plan. Stock appreciation rights allow the recipient to receivethe appreciation in the fair market value of our common stock between the exercise date and the date of grant. Stock appreciation rights may not have a termexceeding 10 years. After the termination of service of an employee, director or consultant, he or she may exercise his or her stock appreciation right for theperiod of time stated in his or her option agreement. However, in no event may a stock appreciation right be exercised later than the expiration of its term.Subject to the provisions of our 2015 Plan, the administrator determines the other terms of stock appreciation rights, including when such rights becomeexercisable and whether to pay any increased appreciation in cash or with shares of our common stock, or a combination thereof, except that the per shareexercise price for the shares to be issued pursuant to the exercise of a stock appreciation right will be no less than 100% of the fair market value per share onthe date of grant. Restricted stock. Restricted stock may be granted under our 2015 Plan. Restricted stock awards are grants of shares of our common stock that vest inaccordance with terms and conditions established by the administrator. The administrator will determine the number of shares of restricted stock granted toany employee, director or consultant and, subject to the provisions of our 2015 Plan, will determine the terms and conditions of such awards. Theadministrator may impose whatever conditions for lapse of the restriction on the shares it determines to be appropriate (for example, the administrator may setrestrictions based on the achievement of specific performance goals or continued service to us); provided, however, that the administrator, in its solediscretion, may accelerate the time at which any restrictions will lapse or be removed. Recipients of restricted stock awards generally will have voting anddividend rights with respect to such shares upon grant without regard to the restriction, unless the administrator provides otherwise. Shares of restricted stockas to which the restrictions have not lapsed are subject to our right of repurchase or forfeiture. Restricted stock units. Restricted stock units may be granted under our 2015 Plan. Restricted stock units are bookkeeping entries representing anamount equal to the fair market value of one share of our common stock. Subject to the provisions of our 2015 Plan, the administrator will determine theterms and conditions of restricted stock units, including the vesting criteria (which may include accomplishing specified performance criteria or continuedservice to us) and the form and timing of payment. Notwithstanding the foregoing, the administrator, in its sole discretion, may accelerate the time at whichany restricted stock units will vest. 73Table of Contents Performance units and performance shares. Performance units and performance shares may be granted under our 2015 Plan. Performance units andperformance shares are awards that will result in a payment to a participant only if performance goals established by the administrator are achieved or theawards otherwise vest. The administrator will establish organizational or individual performance goals or other vesting criteria in its discretion, which,depending on the extent to which they are met, will determine the number and/or the value of performance units and performance shares to be paid out toparticipants. After the grant of a performance unit or performance share, the administrator, in its sole discretion, may reduce or waive any performance criteriaor other vesting provisions for such performance units or performance shares. Performance units shall have an initial dollar value established by theadministrator prior to the grant date. Performance shares shall have an initial value equal to the fair market value of our common stock on the grant date. Theadministrator, in its sole discretion, may pay earned performance units or performance shares in the form of cash, in shares or in some combination Outside directors. Our 2015 Plan provides that all non-employee directors are eligible to receive all types of awards (except for incentive stockoptions) under the 2015 Plan. Our 2015 Plan provides that in any given fiscal year, a non-employee director may not receive under the 2015 Plan awardshaving a grant date fair value greater than $500,000 increased to $1,500,000 in connection with his or her initial service, as grant fair value is determinedunder generally accepted accounting principles. Our 2015 Plan further provides that, in the event of a merger or change in control, as defined in our 2015Plan, each outstanding equity award granted under our 2015 Plan that is held by a non-employee director will fully vest, all restrictions on the shares subjectto such award will lapse, and with respect to awards with performance-based vesting, all performance goals or other vesting criteria will be deemed achievedat 100% of target levels, and all of the shares subject to such award will become fully exercisable, if applicable. Non-transferability of awards. Unless the administrator provides otherwise, our 2015 Plan generally does not allow for the transfer of awards andonly the recipient of an award may exercise an award during his or her lifetime. Certain adjustments. In the event of certain changes in our capitalization, to prevent diminution or enlargement of the benefits or potential benefitsavailable under our 2015 Plan, the administrator will adjust the number and class of shares that may be delivered under our 2015 Plan and/or the number,class and price of shares covered by each outstanding award and the numerical share limits set forth in our 2015 Plan. In the event of our proposed liquidationor dissolution, the administrator will notify participants as soon as practicable and all awards will terminate immediately prior to the consummation of suchproposed transaction. Merger or change in control. Our 2015 Plan provides that in the event of a merger or change in control, as defined under the 2015 Plan, eachoutstanding award will be treated as the administrator determines, except that if a successor corporation or its parent or subsidiary does not assume orsubstitute an equivalent award for any outstanding award, then such award will fully vest, all restrictions on the shares subject to such award will lapse, allperformance goals or other vesting criteria applicable to the shares subject to such award will be deemed achieved at 100% of target levels and all of theshares subject to such award will become fully exercisable, if applicable, for a specified period prior to the transaction. The award will then terminate uponthe expiration of the specified period of time. Amendment, termination. The administrator will have the authority to amend, suspend or terminate the 2015 Plan provided such action will notimpair the existing rights of any participant. Our 2015 Plan will automatically terminate in 2025, unless we terminate it sooner. 2015 Employee Stock Purchase Plan Our board of directors adopted, and our stockholders approved, our 2015 Employee Stock Purchase Plan, or ESPP, in January 2015. The ESPPbecame effective upon our initial public offering. The ESPP includes a component that is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Codeof 1986, as amended, or the 423 Component, and a component that does not comply with Section 423, or the Non-423 Component. For purposes of thisdisclosure, a reference to the “ESPP” 74Table of Contents will mean the 423 Component. Unless determined otherwise by the administrator, each of our future non-U.S. subsidiaries, if any, will participate in a separateoffering under the Non-423 Component. Authorized shares. A total of 500,000 shares of our common stock were reserved for issuance under the ESPP. In addition, our ESPP provides forannual increases in the number of shares available for issuance under the ESPP on the first day of each fiscal year beginning in fiscal year 2016, equal to thelesser of: · 1.5% of the outstanding shares of our common stock on the last day of the previous fiscal year;· 493,000 shares; or· such other amount as may be determined by our board of directors. During the year ended December 31, 2015, 32,469 shares of our common stock have been purchased under the ESPP. Plan administration. Our board of directors or a committee appointed by our board of directors will administer the ESPP. The administrator hasauthority to administer the plan, including but not limited to, full and exclusive authority to interpret the terms of the ESPP, determine eligibility toparticipate subject to the conditions of our ESPP as described below, and to establish procedures for plan administration necessary for the administration ofthe Plan, including creating sub-plans. Eligibility. Generally, all of our employees are eligible to participate if they are employed by us, or any participating subsidiary, for at least20 hours per week and more than five months in any calendar year. However, an employee may not be granted an option to purchase stock under the ESPP ifsuch employee: · immediately after the grant would own stock constituting 5% or more of the total combined voting power or value of all classes of our capitalstock; or· holds rights to purchase stock under all of our employee stock purchase plans that accrue at a rate that exceeds $25,000 worth of stock for eachcalendar year in which the option is outstanding. Offering periods. Our ESPP is intended to qualify under Section 423 of the Code, and provides for 6 month offering periods. The offering periodsgenerally start on the first trading day on or after March 1 and September 1 of each year, except for our first offering period which commenced on January 30,2015, our first trading day following the effective date of our initial public offering. The administrator may, in its discretion, modify the terms of futureoffering periods. Payroll deductions. Our ESPP permits participants to purchase common stock through payroll deductions of up to 20% of their eligiblecompensation, which includes a participant’s base straight time gross earnings, but exclusive of payments for incentive compensation, bonuses, payments forovertime and shift premium, equity compensation income and other similar compensation. A participant may purchase a maximum of 2,500 shares during anoffering period. Exercise of purchase right. Amounts deducted and accumulated by the participant are used to purchase shares of our common stock at the end ofeach six-month offering period. The purchase price of the shares will be 85% of the lower of the fair market value of our common stock on the first tradingday of each offering period or on the exercise date. Participants may end their participation at any time during an offering period, and will be paid theiraccrued payroll deductions that have not yet been used to purchase shares of common stock. Participation ends automatically upon termination ofemployment with us. Non-transferability. A participant may not transfer rights granted under our ESPP other than by will, the laws of descent and distribution, or asotherwise provided under our ESPP. Merger or change in control. In the event of our merger or change in control, as defined under the ESPP, a successor corporation may assume orsubstitute for each outstanding option. If the successor corporation refuses to assume or substitute for the option, the offering period then in progress will beshortened, and a new exercise date will be set. The administrator will notify each participant that the exercise date has been changed and that the 75Table of Contents participant’s option will be exercised automatically on the new exercise date unless prior to such date the participant has withdrawn from the offering period. Amendment, termination. Our ESPP will automatically terminate in 2035, unless we terminate it sooner. The administrator has the authority toamend, suspend or terminate our ESPP at any time. 2009 Stock Plan, as Amended Our board of directors adopted, and our stockholders approved, our 2009 Stock Plan, or the 2009 Plan, in March 2009. Our 2009 Plan was mostrecently amended in December 2014. Effective as of January 29, 2015, the 2009 Plan was terminated, and accordingly, no additional awards will be grantedunder the 2009 Stock Plan. All awards granted under the 2009 Stock Plan that are repurchased, forfeited, expire, are cancelled or otherwise not issued willbecome available for grant under the 2015 Plan in accordance with its terms. Our 2009 Plan allowed for the grant of incentive stock options, within themeaning of Section 422 of the Internal Revenue Code of 1986, as amended, to our employees and our parent and subsidiary corporations’ employees, and forthe grant of nonstatutory stock options and shares of common stock to our employees, directors and consultants and our parent and subsidiary corporations’employees, directors and consultants. Authorized Shares. The 2009 Plan was terminated, and accordingly, no additional awards will be granted under the 2009 Stock Plan. Our 2009 Planwill continue to govern outstanding awards granted thereunder. As of December 31, 2015, options to purchase 2,876,640 shares of our common stockremained outstanding under our 2009 Plan. In the event that an outstanding option or other right for any reason expires or is canceled, the shares allocable tothe unexercised portion of such option or other right shall be added to the number of shares then available for issuance under the 2015 Plan. Plan Administration. Our board of directors or a committee of our board (the administrator) administers our 2009 Plan. Subject to the provisions ofthe 2009 Plan, the administrator has the full authority and discretion to take any actions it deems necessary or advisable for the administration of the 2009Plan. All decisions, interpretations and other actions of the administrator are final and binding on all participants in the 2009 Plan. Options. The 2009 Plan was terminated, and accordingly, no additional awards will be granted under the 2009 Stock Plan. For stock optionspreviously granted under our 2009 Plan, the exercise price per share of all options must equal at least 100% of the fair market value per share of our commonstock on the date of grant, as determined by the administrator. The term of a stock option may not exceed 10 years. With respect to any participant who owns10% of the voting power of all classes of our outstanding stock as of the grant date, the term of an incentive stock option granted to such participant must notexceed five years and the exercise price per share of such incentive stock option must equal at least 110% of the fair market value per share of our commonstock on the date of grant, as determined by the administrator. The 2009 Plan administrator determines the terms and conditions of options. After termination of an employee, director or consultant, he or she may exercise his or her option for the period of time as specified in the 2009 Plan.If termination is due to death, it is expected that the option will remain exercisable for 12 months, and if termination is due to disability, it is expected thatthe option will remain exercisable for 6 months. In all other cases, it is expected that the option will remain exercisable for three months. However, an optiongenerally may not be exercised later than the expiration of its term. Shares of Common Stock. Prior to the termination of the 2009 Plan shares of our common stock may be granted under our 2009 Plan, either as apurchasable award or as a direct grant. The administrator determined the purchase price and the number of shares granted to the award recipient. Stockpurchase rights must be exercised within 30 days of grant. Transferability of Awards. Our 2009 Plan generally does not allow for the transfer or assignment of options, except by will or by the laws of descentand distribution. Shares issued upon exercise of an option will be subject to such special forfeiture conditions, rights of repurchase, rights of first refusal, andother transfer restrictions as the administrator may determine. 76Table of Contents Certain Adjustments. In the event of a subdivision of our outstanding stock, a declaration of a dividend payable in shares, a combination orconsolidation of our outstanding stock into a lesser number of shares, a reclassification, or any other increase or decrease in the number of issued shares ofstock effected without receipt of consideration by us, the 2009 Plan will be appropriately adjusted by the administrator as to the class and maximum numberof securities subject to the 2009 Plan and the class, number of securities and price per share of common stock subject to outstanding awards under the 2009Plan, provided that our administrator will make any adjustments as may be required by Section 25102(o) of the California Corporations Code. Merger or Change in Control. Our 2009 Plan provides that, in the event of a merger or consolidation, all shares acquired under the 2009 Plan andall options shall be subject to the agreement of merger or consolidation. Such agreement need not treat all options in an identical manner, and it shall providefor one or more of the following with respect to each option: · the continuation of the option by us (if we are the surviving corporation);· the assumption of the option by the surviving corporation or its parent in a manner that complies with Section 424(a) of the Internal RevenueCode of 1986, as amended;· the substitution by the surviving corporation or its parent of a new option in a manner that complies with Section 424(a) of the Internal RevenueCode of 1986, as amended.· full acceleration of vesting of the option, followed by cancellation of the option if it is not exercised prior to the merger or consolidation,provided that option holders shall be able to exercise the option during a period of at least 5 days, subject to the terms of the 2009 Plan; or· the cancellation of the option and the payment to the option holder of an amount equal to the excess of (A) the fair market value of the sharessubject to the option (whether or not the option is then exercisable or such shares are then vested) as of the closing date of the merger orconsolidation over (B) the exercise price of the option. Amendment; Termination. Our board of directors terminated the 2009 Plan in January 2015. All outstanding awards will continue to be governed bytheir existing terms. Executive Incentive Compensation Plan Our board of directors has adopted an Executive Incentive Compensation Plan, or the Bonus Plan, that is administered by our compensationcommittee. The Bonus Plan allows our compensation committee to provide cash incentive awards to selected employees, including our named executiveofficers, based upon performance goals established by our compensation committee. Under the Bonus Plan, our compensation committee determines the performance goals applicable to any award, which goals may include, withoutlimitation: attainment of research and development milestones, sales bookings, business divestitures and acquisitions, cash flow, cash position, earnings(which may include any calculation of earnings, including but not limited to earnings before interest and taxes, earnings before taxes, earnings beforeinterest, taxes, depreciation and amortization and net earnings), earnings per share, net income, net profit, net sales, operating cash flow, operating expenses,operating income, operating margin, overhead or other expense reduction, product defect measures, product release timelines, productivity, profit, return onassets, return on capital, return on equity, return on investment, return on sales, revenue, revenue growth, sales results, sales growth, stock price, time tomarket, total stockholder return, working capital, and individual objectives such as peer reviews or other subjective or objective criteria. Performance goalsthat include our financial results may be determined in accordance with GAAP or such financial results may consist of non-GAAP financial measures and anyactual results may be adjusted by the compensation committee for one-time items or unbudgeted or unexpected items when performance goals that includeour financial results may be determined in accordance with GAAP, or such financial results may consist of non-GAAP financial measures, and any actualresults may be adjusted by the compensation committee for one-time items or unbudgeted or unexpected items when determining whether the performancegoals have been met. The goals may be on the basis of any factors the compensation committee determines relevant, and may be adjusted on an individual,divisional, business unit or company-wide basis. The performance goals may differ from participant to participant and from award to award. 77Table of Contents Our compensation committee may, in its sole discretion and at any time, increase, reduce or eliminate a participant’s actual award, and/or increase,reduce or eliminate the amount allocated to the bonus pool for a particular performance period. The actual award may be below, at or above a participant’starget award, in the compensation committee’s discretion. Our compensation committee may determine the amount of any reduction on the basis of suchfactors as it deems relevant, and it is not required to establish any allocation or weighting with respect to the factors it considers. Actual awards are paid in cash only after they are earned, which usually requires continued employment through the date a bonus is paid. Ourcompensation committee has the authority to amend, alter, suspend or terminate the Bonus Plan provided such action does not impair the existing rights ofany participant with respect to any earned bonus. 78Table of Contents 401(k) Plan We maintain a tax-qualified retirement plan that provides eligible employees with an opportunity to save for retirement on a tax advantaged basis.We may make a discretionary matching contribution to the 401(k) plan, and may make a discretionary employer contribution to each eligible employee eachyear. To date, we have not made any matching or profits sharing contributions into the 401(k) plan. All participants’ interests in our matching and profitsharing contributions, if any, vest pursuant to a four-year graded vesting schedule from the time of contribution. Pre-tax contributions are allocated to eachparticipant’s individual account and are then invested in selected investment alternatives according to the participants’ directions. The 401(k) plan isintended to qualify under Sections 401(a) and 501(a) of the Code. As a tax-qualified retirement plan, contributions to the 401(k) plan and earnings on thosecontributions are not taxable to the employees until distributed from the 401(k) plan, and all contributions are deductible by us when made. Director Compensation Our Board of Directors approved our Outside Director Compensation Policy in January 2015 to compensate each non-employee director for his orher service. Our board of directors will have the discretion to revise non-employee director compensation as it deems necessary or appropriate. Under ourOutside Director Compensation Policy, non-employee directors will receive compensation in the form of equity and cash, as described below: Cash Compensation. All non-employee directors will be entitled to receive the following cash compensation for their services following thecompletion of this offering: · $35,000 per year for service as a board member;· $20,000 per year additionally for service as chairman of the audit committee;· $10,000 per year additionally for service as an audit committee member;· $15,000 per year additionally for service as chairman of the compensation committee;· $7,500 per year additionally for service as a compensation committee member;· $10,000 per year additionally for service as chairman of the nominating and corporate governance committee; and· $5,000 per year additionally for service as a nominating and corporate governance committee member. All cash payments to non-employee directors, or the Retainer Cash Payments, will be paid biannually with the first biannual installment payable onthe date of our annual meeting of stockholders or, if no annual meeting occurs in a given year, May 1, and the second biannual installment payable onNovember 1 of each year. Election to Receive Stock Options in Lieu of Cash Payments. All non-employee directors may elect to convert a Retainer Cash Payment into anonstatutory stock option, or a Retainer Option, with a grant date fair value equal to the applicable Retainer Cash Payment. Each Retainer Option will begranted on the date that the applicable Retainer Cash Payment was scheduled to be paid, and all of the shares underlying the Retention Option will vest andbecome exercisable one year from the date of grant, subject to continued service as a director through the applicable vesting date. The Retainer Option willbe subject to certain terms and conditions as described below under the section titled “Equity Compensation.” Elections to convert a Retainer Cash Payment into a Retainer Option must generally be made on or prior to December 31 of the year prior to the yearin which the Retainer Cash Payment is scheduled to be paid, or such earlier deadline as established by our board of directors or compensation committee. Anewly appointed non-employee director will be permitted to elect to convert Retainer Cash Payments payable in the same calendar year into RetainerOptions, provided that such election is made prior to the date the individual becomes a non-employee director. Equity Compensation. Nondiscretionary, automatic grants of nonstatutory stock options will be made to our non-employee directors. · Initial option. Each person who first becomes a non-employee director will be granted an option to purchase shares having a grant date fairvalue equal to $115,000, or the Initial Option. The Initial 79Table of Contents Option will be granted on the date of the first meeting of our board of directors or compensation committee occurring on or after the date onwhich the individual first became a non-employee director. The shares underlying the Initial Option will vest and become exercisable as to onethirty-sixth (1/36th) of the shares subject to such Initial Option on each monthly anniversary of the commencement of the non-employeedirector’s service as a director, subject to the continued service as a director through the applicable vesting date. · Annual Option. On the date occurring once each calendar year on the same date that our board of directors grants annual equity awards to oursenior executives, each non-employee director will be granted an option to purchase shares having a grant date fair value equal to $75,000, orthe Annual Option. All of the shares underlying the Annual Option will vest and become exercisable one year from the date of grant, subject tocontinued service as a director through the applicable vesting date. The exercise price per share of each stock option granted under our outside director compensation policy, including Retainer Options, InitialOptions and Annual Options, will be the fair market value of a share of our common stock, as determined in accordance with our 2015 Plan on the date of theoption grant. The grant date fair value is computed in accordance with the Black-Scholes option valuation methodology or such other methodology ourboard of directors or compensation committee may determine. Any stock option granted under our outside director compensation policy will fully vest and become exercisable in the event of a change in control,as defined in our 2015 Plan, provided that the optionee remains a director through such change in control. Further, our 2015 Plan, provides that in the eventof a merger or change in control, as defined in our 2015 Plan, each outstanding equity award granted under our 2015 Plan that is held by a non-employeedirector will fully vest, all restrictions on the shares subject to such award will lapse, and with respect to awards with performance-based vesting, allperformance goals or other vesting criteria will be deemed achieved at 100% of target levels, and all of the shares subject to such award will become fullyexercisable, if applicable, provided such optionee remains a director through such merger or change in control. 2015 Director Compensation Table The following table sets forth a summary of the compensation received by our non-employee directors who received compensation during our fiscalyear ended December 31, 2015: Name Cash Compensation Option Awards TotalJames G. Cullen$57,500$—$57,500Thomas J. Fogarty$40,000$—$40,000Donald A. Lucas$67,500$—$67,500James B. McElwee$65,000$—$65,000 (1) No option awards were granted during 2015.(2) As of December 31, 2015, Messrs. Cullen, Lucas, McElwee and Dr. Fogarty had outstanding options to purchase a total of 24,444,28,888, 31,110 and 24,444 shares of our common stock, respectively. Directors who are also our employees receive no additional compensation for their service as directors. During 2015, John B. Simpson and Jeffrey M.Soinski, two of our directors, were also our employees. See “Executive Compensation—Summary Compensation Table” for additional information about thecompensation for Dr. Simpson and Mr. Soinski. 80(1) (2)Table of Contents Compensation Committee Interlocks and Insider Participation None of our executive officers serves as a member of the board of directors or compensation committee, or other committee serving an equivalentfunction, of any other entity that has one or more of its executive officers serving as a member of our board of directors or its compensation committee. Noneof the current members of the compensation committee of our board of directors has ever been one of our employees. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table provides information concerning beneficial ownership of our common stock as of February 29, 2016, by: · each stockholder, or group of affiliated stockholders, that we know owns more than 5% of our outstanding common stock;· each of our named executive officers;· each of our directors and director nominees; and· all of our executive officers, directors and director nominees as a group. The percentage of shares beneficially owned is computed on the basis of 12,659,567 shares of our common stock outstanding as of February 29,2016. Beneficial ownership is determined in accordance with the rules of the SEC, and generally includes voting power and/or investment power withrespect to the securities held. In addition, the rules include shares of common stock issuable pursuant to the exercise of stock options or warrants that areeither immediately exercisable or exercisable on or before April 29, 2016, which is 60 days after February 29, 2016. These shares are deemed to beoutstanding and beneficially owned by the person holding those options or warrants for the purpose of computing the percentage ownership of that person,but they are not treated as outstanding for the purpose of computing the percentage ownership of any other person. Except as indicated in the footnotes to this table, the persons or entities named have sole voting and investment power with respect to all shares ofour common stock shown as beneficially owned by them. Except as indicated in the footnotes to this table, the address for each beneficial owner isc/o Avinger, Inc., 400 Chesapeake Drive, Redwood City, CA 94063. Shares Beneficially Owned Name of Beneficial Owner Number of Shares Percentage 5% and Greater Stockholders:Waddell and Reed Financial, Inc. 2,576,73120.4%Entities affiliated with John B. Simpson 2,459,39517.8% Named Executive Officers and Directors:Jeffrey M. Soinski 620,6714.7%John B. Simpson, Ph.D., M.D. 2,459,39517.8%Matthew B. Ferguson 161,6661.3%Donald A. Lucas 321,8262.5%James B. McElwee 51,721*James G. Cullen 136,2421.1%Thomas Fogarty 496,6653.9%All executive officers, directors and director nominees as a group (10 individuals) 4,746,99030.5% 81(1)(2)(3)(2)(4)(7)(8)(5)(6)(9)Table of Contents * Represents ownership of less than 1% (1) As of December 31, 2015, the reporting date of Waddell and Reed Financial, Inc.’s most recent Schedule 13G/A filed with the SEC onFebruary 12, 2016, Waddell and Reed Financial, Inc., or WDR, has indirect sole dispositive and voting power with respect to 2,576,731shares reported as beneficially owned. The securities are beneficially owned by one or more open-end investment companies or othermanaged accounts which are advised or sub-advised by Ivy Investment Management Company, or IICO, an investment advisory subsidiaryof WDR or Waddell & Reed Investment Management Company, or WRIMCO, an investment advisory subsidiary of Waddell & Reed, Inc.,or WRI, which has indirect sole dispositive and voting power with respect to 1,036,747 shares reported as beneficially owned. WRI is abroker-dealer and underwriting subsidiary of Waddell & Reed Financial Services, Inc., a parent holding company, or WRFSI, which hasindirect sole dispositive and voting power with respect to 1,036,747 shares reported as beneficially owned. In turn, WRFSI is a subsidiary ofWDR, a publicly traded company. The investment advisory contracts grant IICO and WRIMCO all investment and/or voting power oversecurities owned by such advisory clients. The investment sub-advisory contracts grant IICO and WRIMCO investment power oversecurities owned by such sub-advisory clients and, in most cases, voting power. Any investment restriction of a sub-advisory contract doesnot restrict investment discretion or power in a material manner. Therefore, IICO and/or WRIMCO may be deemed the beneficial owner ofthe securities under Rule 13d-3 of the Securities Exchange Act of 1934. IICO has direct sole dispositive and voting power with respect to1,539,984 shares reported as beneficially owned and WRIMCO has direct sole dispositive and voting power with respect to 1,036,747shares reported as beneficially owned. The address for WDR is PO BOX 29217, Shawnee Mission, KS 66201-9217.(2) Includes (i) 41 shares of common stock held of record by Dr. Simpson, (ii) 867,138 shares subject to options to purchase common stock thatwere fully exercisable within 60 days of February 29, 2016 held of record by Dr. Simpson, (iii) 1,164,289 shares of common stock held ofrecord by the Simpson Family Trust Dated 1/12/90, for which Dr. Simpson and his spouse serve as trustees, (iv) 222,220 shares subject towarrants to purchase common stock held of record by the Simpson Family Trust Dated 1/12/90, for which Dr. Simpson and his spouse serveas trustees, (v) 47,618 shares of common stock held of record by Dr. Simpson’s spouse, (vi) 33,332 shares subject to warrants to purchasecommon stock held of record by Dr. Simpson’s spouse and (vii) 124,757 shares of common stock held of record by Foxhollow ACLP, forwhich Dr. Simpson serves as a General Partner. Dr. Simpson has shared voting and dispositive power with respect to shares held by theSimpson Family Trust Dated 1/12/90, Dr. Simpson’s spouse and FoxHollow ACLP. Dr. Simpson disclaims beneficial ownership inFoxHollow ACLP, except to the extent of his pecuniary interest therein.(3) Includes 619,385 shares issuable upon exercise of options exercisable within 60 days of February 29, 2016.(4) Includes warrants to purchase 9,653 shares of common stock and 136,263 shares issuable upon exercise of options exercisable within60 days of February 29, 2016.(5) Includes 73,835 shares and warrants to purchase 24,862 shares of common stock held by Gilbert Investments, LLC, 13,102 shares held by2000 James Cullen Generation Skipping Family Trust and 24,444 shares of common stock issuable upon exercise of options exercisablewithin 60 days of February 98, 2016. Mr. Cullen has sole voting and dispositive power with respect to shares held by Gilbert Investments,LLC and James Cullen Generation Skipping Family Trust. Mr. Cullen does not have a pecuniary interest in the James Cullen GenerationSkipping Family Trust and disclaims beneficial ownership in Gilbert Investments, LLC except to the extent of his pecuniary interesttherein.(6) Includes 277,777 shares and warrants to purchase 194,444 shares of common stock held by Emergent Medical Partners II, L.P. and 24,444shares issuable upon exercise of options exercisable within 60 days of February 29, 2016. Dr. Fogarty shares voting and dispositive powerwith respect to shares held by Emergent Medical Partners II, L.P. with John Kirtland and Robert Brownell. Dr. Fogarty disclaims beneficialownership in Emergent Medical Partners II, L.P. except to the extent of his pecuniary interest therein.(7) Includes 9,317 shares and warrants to purchase 260,392 shares of common stock held by Lucas Ventures Group IX, LLC and 23,229 sharesheld by Lucas Venture Group III, LP and 28,888 shares issuable upon exercise of options exercisable within 60 days of February 29, 2016.(8) Includes warrants to purchase 5,521 shares of common stock and 31,110 shares issuable upon exercise of options and warrants exercisablewithin 60 days of February 29, 2016.(9) Includes warrants to purchase 735,413 shares of common stock and 2,113,098 shares issuable upon exercise of options exercisable within60 days of February 29, 2016. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE We describe below transactions and series of similar transactions, since January 1, 2015, to which we were a party or will be a party, in which: · the amounts involved exceeded or will exceed $120,000; and · any of our directors, executive officers, or holders of more than 5% of our common stock, or any member of the immediate family of theforegoing persons, had or will have a direct or indirect material interest. 82Table of Contents Master Consulting Agreement We entered into a Master Consulting Agreement in November 2013 with Recreation, Inc., a brand strategy and design agency, for marketingservices. John D. Simpson is the founder and was the Chief Executive Officer of Recreation at the time we entered into the Master Consulting Agreement andis also our Vice President, Business Development. Pursuant to this Consulting Agreement and the current Statement of Work in effect from March 2015through February 2016, Recreation provides marketing services to us at a $20,000 per month retainer with an aggregate cap of $240,000 for the contractperiod. The Master Consulting Agreement has no specific term. Periodically Recreation may also provide marketing services to us not covered by themonthly retainer at reasonable and customary rates. The amounts we paid to Recreation in 2015 was $1,016,000. Series E Preferred Stock Financing From September 2014 to January 2015, the Company issued a total of 3,162,098 shares of Series E convertible preferred stock at $12.60 per share forcash proceeds of $26,217,933, and pursuant to the conversion of outstanding convertible promissory notes in the amount of $11,582,000, at 85% of theissuance price, or $10.71 per share. Investors received warrants to purchase up to the number of shares of common stock equal to seventy percent (70%) of thenumber of shares of Series E preferred stock purchased by such investor. The table below sets forth the number of shares of Series E preferred stock sold to ourdirectors, executive officers and holders of more than 5% of our capital stock: NameNumber ofWarrants Number ofShares AggregatePurchasePricePersons and entities associated with John B.Simpson, Ph.D., M.D.255,552365,076$4,599,970Lucas Venture Group IX, LLC290,417371,990$4,222,870Matthew Ferguson10,84313,791$155,205 Employment of Related Persons We employ John D. Simpson as our Vice President, Business Development, who is the son of John B. Simpson, our Executive Chairman.Mr. Simpson became an employee in August 2009, and in this capacity Mr. Simpson’s compensation totaled $278,000 in 2015. His current annual basesalary is $225,000. We believe that Mr. Simpson’s compensation is comparable with compensation paid to other employees with similar levels ofresponsibility and years of experience. Other Transactions We have entered into employment arrangements with certain current and former executive officers. See “Executive Compensation—ExecutiveOfficer Employment Letters.” We have entered into indemnification agreements with our directors and executive officers. The indemnification agreements and our certificate ofincorporation and bylaws require us to indemnify our directors and executive officers to the fullest extent permitted by Delaware law. Policies and Procedures for Related Party Transactions Our board of directors has adopted a policy that our executive officers, directors, nominees for election as a director, beneficial owners of more than5% of any class of our common stock and any members of the immediate family of any of the foregoing persons are not permitted to enter into a relatedperson transaction with us without the prior consent of our audit committee. Any request for us to enter into a transaction with an executive officer, director,nominee for election as a director, beneficial owner of more than 5% of any class of our common stock or any member of the immediate family of any of theforegoing persons in which the amount involved exceeds $120,000 and such person would have a direct or indirect interest must first be presented to ouraudit committee for review, consideration and approval. In approving or rejecting any such proposal, our audit committee is to consider the material facts ofthe transaction, including, but not limited to, whether the transaction is on terms no less favorable than terms generally available to an unaffiliated third-partyunder the same or similar circumstances and 83Table of Contents the extent of the related person’s interest in the transaction. We did not have a formal review and approval policy for related party transactions at the time ofany of the transactions described above. However, all of the transactions described above were entered into after presentation, consideration and approval byour board of directors and/or our audit committee. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The following table represents aggregate fees billed to us for the years ended December 31, 2015 and 2014 by Ernst & Young LLP. All fees belowwere approved by our Audit Committee. Year ending December 31,2015 2014 Audit fees $990,778$1,475,000Audit related fees——Tax fees——All other fees 1,805—Total$992,583$1,475,000 (1) Audit fees consist of fees incurred for professional services rendered for the audit of our annual financial statements and review of the quarterlyfinancial statements, assistance with registration statements filed with the SEC, and services that are normally provided by Ernst & Young LLPin connection with regulatory filings or engagements. For the year ended December 31, 2015 and 2014, audit fees also includes fees related toour initial public offering and review of documents filed with the SEC of $185,000 and $770,000, respectively. (2) This category consists of fees for EY’s online research database Pre-approval Policies and Procedures Our Audit Committee has responsibility for establishing policies and procedures for the pre-approval of audit and non-audit services rendered by ourindependent registered public accounting firm, Ernst & Young LLP. The policy generally pre-approves specified services in the defined categories of auditservices, audit-related services, and tax services up to specified amounts. Pre-approval may also be given as part of the Audit Committee’s approval of thescope of the engagement of the independent registered public accounting firm or on an individual explicit case-by-case basis before the independentregistered public accounting firm is engaged to provide each service. The pre-approval of services may be delegated to one or more of the Audit Committee’smembers, but the decision must be reported to the full Audit Committee at its next scheduled meeting. The Audit Committee has determined that the rendering of the above services by Ernst & Young LLP is compatible with the SEC’s policies onauditor independence. 84(1)(2)Table of Contents PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a)(1) Financial Statements The following Financial Statements are filed as part of this Annual Report on Form 10-K: Report of Independent Registered Public Accounting Firm87Financial StatementsBalance Sheets88Statements of Operations and Comprehensive Loss89Statements of Convertible Preferred Stock and Stockholders’ Deficit90Statements of Cash Flows91Notes to Financial Statements92 (a)(2) Financial Statement Schedules All other schedules have been omitted because the information required to be set forth therein is not applicable or is shown in the financialstatements or notes thereto. DescriptionBalance atBeginningof YearCharged to costsand expensesWrite offsBalanceat End ofYear Allowance for doubtful accounts receivable:Fiscal year ended 2013$54$45$79$20Fiscal year ended 2014$20$—$—$20Fiscal year ended 2015$20$—$—$20 Balance atBeginningof YearCharged to costsand expenses Write offs Balanceat End ofYear Allowance for sales returns:Fiscal year ended 2013$235$310$457$88Fiscal year ended 2014$88$135$146$77Fiscal year ended 2015$77$37$55$59 (a)(3) Exhibits The exhibits listed in the accompanying index to exhibits are filed as part of, or incorporated by reference into, this Annual Report on Form 10-K. 85Table of Contents AVINGER, INC.INDEX TO FINANCIAL STATEMENTSAs of December 31, 2015 and 2014, and theYears Ended December 31, 2015, 2014 and 2013 Report of Independent Registered Public Accounting Firm87Financial Statements:Balance Sheets88Statements of Operations and Comprehensive Loss89Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)90Statements of Cash Flows91Notes to Financial Statements92 86Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders of Avinger, Inc. We have audited the accompanying balance sheets of Avinger, Inc. as of December 31, 2015 and 2014, and the related statements of operations andcomprehensive loss, convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the three years in the period endedDecember 31, 2015. Our audits also included the financial statement schedule included in the Index at Item 15(a). These financial statements and scheduleare the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on ouraudits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We werenot engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control overfinancial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on atest basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Avinger, Inc. atDecember 31, 2015 and 2014, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2015, inconformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation tothe basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Redwood City, CaliforniaMarch 7, 2016 87Table of Contents AVINGER, INC.BALANCE SHEETS(In thousands, except share and per share data) As of December 31,2015 2014AssetsCurrent assets:Cash and cash equivalents$43,059$12,316Accounts receivable, net of allowance for doubtful accounts of $20 at December 31, 2015 and 20142,0602,068Inventories5,4053,991Prepaid expenses and other current assets533425Total current assets51,05718,800 Property and equipment, net2,8222,608Other assets2253,029Total assets$54,104$24,437 Liabilities, convertible preferred stock and stockholders’ equity (deficit)Current liabilities:Accounts payable$1,113$1,013Accrued compensation3,0831,147Accrued expenses and other current liabilities3,2854,850Borrowings, current portion—1,873Total current liabilities7,4818,883 Borrowings, net of current portion29,56518,228Convertible notes and accrued interest—8,609Other long-term liablities1,469325Total liabilities38,51536,045 Commitments and contingencies (Note 10) Convertible preferred stock issuable in series, par value of $0.001Shares authorized: none at December 31, 2015 and 6,819,197 at December 31, 2014Shares issued and outstanding: none at December 31, 2015 and 5,262,728 at December 31, 2014Liquidation preference: none at December 31, 2015 and $231,836 at December 31, 2014—132,260Stockholders’ equity (deficit):Preferred stock issuable in series, par value of $0.001Shares authorized: 5,000,000 at December 31, 2015 and none at December 31, 2014Shares issued and outstanding: none at December 31, 2015 and December 31, 2014——Common stock, par value of $0.001Shares authorized: 100,000,000 at December 31, 2015 and 15,555,555 at December 31, 2014Shares issued and outstanding: 12,643,538 at December 31, 2015 and 243,260 at December 31, 201413—Additional paid-in capital211,8372,665Accumulated deficit(196,261)(146,533)Total stockholders’ equity (deficit)15,589(143,868)Total liabilities, convertible preferred stock, and stockholders’ equity (deficit)$54,104$24,437 See accompanying notes. 88Table of Contents AVINGER, INC.STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS(In thousands, except per share data) Year EndedDecember 31,20152014 2013Revenues$10,713$11,213$12,964Cost of revenues6,4786,5138,205Gross profit4,2354,7004,759 Operating expenses:Research and development15,69411,22415,973Selling, general and administrative29,23118,50325,758Total operating expenses44,92529,72741,731Loss from operations(40,690)(25,027)(36,972) Interest income40211Interest expense(5,167)(6,016)(2,934)Other income (expense), net(1,527)(909)5Loss before provision for income taxes(47,344)(31,950)(39,890)Provision for income taxes—1411Net loss and comprehensive loss(47,344)(31,964)(39,901)Adjustment to net loss resulting from convertible preferred stock modification(2,384)——Net loss and comprehensive loss attributable to common stockholders$(49,728)$(31,964)$(39,901) Net loss attributable to common stockholders per share, basic and diluted$(4.38)$(132.63)$(170.52) Weighted average common shares used to compute net loss per share, basic and diluted11,362241234 See accompanying notes. 89Table of Contents AVINGER, INC.STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)(In thousands, except share data) Additional Series A ConvertiblePreferred Stock Series A-1 ConvertiblePreferred Stock Series B ConvertiblePreferred StockSeries C ConvertiblePreferred StockSeries D ConvertiblePreferred StockSeries E ConvertiblePreferred Stock Common StockPaid-InAccumulatedTotalStockholders’ Shares Amount Shares Amount SharesAmountSharesAmountSharesAmountSharesAmount SharesAmountCapitalDeficitEquity (Deficit)Balance atDecember 31,2012326,591$6,183225,235$6,649755,486$27,272561,423$22,397722,367$37,158—$—231,102$—$1,024$(74,668)$(73,644)Issuance ofcommon stock,net ofrepurchases————————————9,590—109—109Employee stock-basedcompensation——————————————654—654Series DConvertiblePreferred Stockissuance costs—————————(5)——————Net andcomprehensiveloss———————————————(39,901)(39,901)Balance atDecember 31,2013326,5916,183225,2356,649755,48627,272561,42322,397722,36737,153——240,692—1,787(114,569)(112,782)Issuance ofcommon stock————————————2,568—28—28Employee stock-basedcompensation——————————————641—641Issuance ofSeries EConvertiblePreferredstock, net ofissuance costs——————————2,671,62632,606—————Issuance ofcommon stockwarrants——————————————175—175Reclass of warrantliability toadditionalpaid-in capital——————————————34—34Net andcomprehensiveloss———————————————(31,964)(31,964)Balance atDecember 31,2014326,5916,183225,2356,649755,48627,272561,42322,397722,36737,1532,671,62632,606243,260—2,665(146,533)(143,868)Issuance ofcommon stock————————————49,621—432—432Employee stock-basedcompensation——————————————5,899—5,899Vesting ofrestrictedstock subjectto repurchase——————————————18—18Issuance ofSeries EConvertiblePreferredstock, net ofissuance costs——————————490,4725,372—————Issuance ofcommon stockwarrants——————————————804—804Exercise ofcommon stockwarrants————————————34,470—323—323Conversion ofpreferred stockto commonstock inconnectionwith the IPO(326,591)(6,183)(225,235)(6,649)(755,486)(27,272)(561,423)(22,397)(722,367)(37,153)(3,162,098)(37,978)5,753,2006137,626—137,632Additional sharesof commonstock issuedupon theconversion ofpreferred stockinto commonstock due toanti-dilutionprovisions1,214,7251(1)——Issuance ofcommon stockin IPO, net ofunderwritingdiscount,commissionsand issuancecosts————————————5,000,000556,893—56,898Issuance ofcommon stockrelated to CRGLoan, net ofissuance costs348,26214,794—4,795Convertiblepreferred stockmodification——————————————2,384(2,384)—Net andcomprehensiveloss———————————————(47,344)(47,344)Balance atDecember 31,2015—$——$——$——$——$——$—12,643,538$13$211,837$(196,261)$15,589 See accompanying notes. 90Table of Contents AVINGER, INC.STATEMENTS OF CASH FLOWS(In thousands) Year EndedDecember 31,20152014 2013Cash flows from operating activitiesNet loss$(47,344)$(31,964)$(39,901)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization1,3001,4511,501Amortization of debt issuance costs and debt discount199212133Stock-based compensation5,899641654Remeasurement of warrant liability and embedded derivatives(835)(378)1Write off of embedded derivatives1,066——Noncash interest expense and other charges2,0743,4851,221Loss on extinguishment of convertible notes861,234—Provision for doubtful accounts receivable——45Provision for excess and obsolete inventories(26)(48)15Changes in operating assets and liabilities:Accounts receivable7(441)(443)Inventories(2,307)1,714(3,069)Prepaid expenses and other current assets(363)444(230)Other assets(35)2139Accounts payable8417(275)Accrued compensation1,936(128)281Accrued expenses and other current liabilities(962)2,080(523)Other long-term liabilities and accrued interest(1,662)(122)(204)Net cash used in operating activities(40,883)(21,801)(40,655) Cash flows from investing activitiesPurchase of property and equipment(577)(117)(496)Restricted cash255——Net cash used in investing activities(322)(117)(496) Cash flows from financing activitiesPrincipal paydown of capital lease obligations(22)(17)(18)Payments on borrowing(27,625)——Proceeds from convertible notes, net of issuance costs—4,70013,399Proceeds from borrowing, net of issuance costs29,124—19,281Proceeds from the issuance of convertible preferred stock, net of issuance costs6,17619,155(5)Proceeds from the issuance of common stock related to CRG loan, net of issuancecosts4,794——Proceeds from initial public offering, net of issuance costs58,746——Proceeds from the exercise of common stock warrants323——Payments for deferred initial public offering costs—(1,848)—Proceeds from the issuance of common stock4322398Net cash provided by financing activities71,94822,01332,755 Net change in cash and cash equivalents30,74395(8,396)Cash and cash equivalents, beginning of period12,31612,22120,617Cash and cash equivalents, end of period$43,059$12,316$12,221 Supplemental disclosure of cash flow informationCash paid for interest$5,934$2,281$1,587 Noncash investing and financing activities:Conversion of convertible preferred stock to common stock upon initial publicoffering$137,632$—$—Accounts payable for purchases of property and equipment16—20Capital lease obligations for property and equipment——23Modification of convertible preferred stock2,384——Reclass of warrant liability to additional paid-in capital—34—Vesting of common stock subject to repurchase18510Embedded derivatives associated with convertible notes——179Issuance of common stock warrants8041751Transfer between inventory and property and equipment921(916)1,829Conversion of convertible notes and accrued interest into Series E convertiblepreferred stock—11,582— See accompanying notes. 91Table of Contents AVINGER, INC. Notes to Financial Statements 1. Organization Organization, Nature of Business Avinger, Inc. (the “Company”), a Delaware corporation, was founded in March 2007 by cardiologist and medical device entrepreneur Dr. John B.Simpson. The Company designs, manufactures and sells image-guided, catheter-based systems that are used by physicians to treat patients with peripheralartery 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 andlegs. The Company manufactures and sells a suite of products in the United States (“U.S.”) and in select European markets. The Company has developed itsLumivascular platform, which integrates optical coherence tomography (“OCT”) visualization with interventional catheters and is the industry’s only systemthat provides real-time intravascular imaging during the treatment portion of PAD procedures. The Company’s Lumivascular platform consists of a capitalcomponent, Lightbox, as well as a variety of disposable catheter products. The Company’s current products include its non-imaging catheters, Wildcat andKittycat, as well as its Lumivascular platform products, Ocelot, Ocelot PIXL and Ocelot MVRX, all of which are designed to allow physicians to penetrate atotal blockage in an artery, known as a chronic total occlusion (“CTO”). In March 2016, the Company also received 510(k) clearance from the U.S. Food andDrug Administration (“FDA”) for commercialization of Pantheris, the Company’s image-guided atherectomy system, designed to allow physicians toprecisely remove arterial plaque in PAD patients. The Company commenced sales of Pantheris in the U.S. and select European markets promptly thereafter.The Company is located in Redwood City, California. Liquidity Matters In the course of its activities, the Company has incurred losses and negative cash flows from operations since its inception. As of December 31, 2015,the Company had an accumulated deficit of $196,261,000. The Company expects to incur losses for the foreseeable future. The Company believes that itscash and cash equivalents of $43,059,000 at December 31, 2015, expected revenues and additional $10,000,000 available under the loan agreement withCRG Partners III L.P. and certain of its affiliated funds (collectively “CRG”) will be sufficient to allow the Company to fund its current operations until atleast December 31, 2016. The Company is eligible to borrow the additional $10,000,000 in principal amount from CRG, on or prior to June 30, 2016. Consistent with its 2016 operating plan, the Company will need to acquire additional funding in the form of debt financing or equity issuances to makestrategic investments in its business, however, there can be no assurance that such efforts will be successful or that, in the event that they are successful, theterms and conditions of such financing will be favorable. If the Company’s revenue levels from its products are not sufficient or if the Company is unable tosecure additional funding when desired, the Company may need to delay the development, commercialization and marketing of its products and scale backits business and operations. The Company’s ultimate success will largely depend on its ability to successfully commercialize its products and its ability toraise additional funding. Initial Public Offering In January 2015, the Company issued and sold 5,000,000 shares of its common stock in its initial public offering (“IPO”) at a public offering price of$13.00 per share, for net proceeds of approximately $56,897,000 after deducting underwriting discounts and commissions of approximately $4,550,000 andexpenses of approximately $3,553,000. Upon the closing of the IPO, all shares of convertible preferred stock then outstanding converted into an aggregate of6,967,925 shares of common stock resulting in the reclassification of $137,626,000 from outside of stockholders’ equity (deficit) to additional paid-incapital. 2. Summary of Significant Accounting Policies Basis of Presentation On January 14, 2015, the Company’s Board of Directors approved an amendment to the Company’s amended and restated certificate ofincorporation to effect a 1-for-45 reverse stock split of the Company’s common stock and convertible preferred stock. The par value of the common stock andconvertible preferred stock was not adjusted as a result of the reverse stock split. All common stock, convertible preferred stock, stock options and warrants,and per share amounts in the financial statements have been retroactively adjusted for all periods presented to give effect to the reverse stock split. Thereverse stock split was effected on January 28, 2015. 92Table of Contents The financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) and pursuantto the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect theamounts and disclosures reported in the financial statements. Management uses significant judgment when making estimates related to its common stockvaluation and related stock-based compensation, the valuation of the common stock warrants, the valuation of compound embedded derivatives, provisionsfor doubtful accounts receivable and excess and obsolete inventories, clinical trial accruals, and its reserves for sales returns and warranty costs. Managementbases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of whichform the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Although theseestimates are based on the Company’s knowledge of current events and actions it may undertake in the future, actual results may ultimately materially differfrom these estimates and assumptions. Fair Value of Financial Instruments The Company has evaluated the estimated fair value of its financial instruments as of December 31, 2015 and 2014. Financial instruments consist ofcash and cash equivalents, accounts receivable and payable, and other current liabilities, borrowings, convertible notes and embedded derivatives. Thecarrying amounts of cash and cash equivalents, accounts receivable and payable, and other current liabilities approximate their respective fair values becauseof the short-term nature of those instruments. Based upon the borrowing terms and conditions currently available to the Company, the carrying values of theborrowings approximate their fair value. Fair value accounting is applied to the warrant liabilities and embedded derivatives. No warrant liabilities orembedded derivatives were outstanding as of December 31, 2015. Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less at the time of purchase to be cashequivalents. Cash equivalents are considered available-for-sale marketable securities and are recorded at fair value, based on quoted market prices. As ofDecember 31, 2015 and 2014, the Company’s cash equivalents are entirely comprised of investments in money market funds. Any related unrealized gainsand losses are recorded in other comprehensive income (loss) and included as a separate component of stockholders’ deficit. There were no unrealized gainsand losses as of December 31, 2015 and 2014. Any realized gains and losses and interest and dividends on available-for-sale securities are included ininterest income or expense and computed using the specific identification cost method. Restricted Cash At December 31, 2014, a deposit of $255,000 was restricted from withdrawal. The restricted cash secured obligations of the Company associatedwith its corporate credit card. The restricted deposit account was included in prepaid expenses and other current assets. During 2015, the Company was nolonger required to secure its corporate card obligations; accordingly the $255,000 is included within cash and cash equivalents as of December 31, 2015. The release of the restriction against the Company’s cash was included within investing activities on its statement of cash flows for the year endedDecember 31, 2015. 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 extentof 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 inCompany accounts at one financial institution. The counterparties to the agreements relating to the Company’s investments consist of financial institutionsof high credit standing. The Company provides for uncollectible amounts when specific credit problems arise. Management’s estimates for uncollectible amounts have beenadequate, and management believes that all significant credit risks have been identified at December 31, 2015 and 2014. The Company’s accounts receivable are due from a variety of health care organizations in the United States and select European markets. AtDecember 31, 2015 and 2014, there were one and none, respectively, of the Company’s customers that represented 10% or more of the Company’s accountsreceivable. For the years ended December 31, 2015, 2014 and 2013, there were no customers that represented 10% or more of revenues. Disruption of salesorders or a deterioration of financial condition of its customers would have a negative impact on the Company’s financial position and results of operations. 93Table of Contents The Company manufactures certain of its commercial products in-house, including the production of the Ocelot family of catheters. Certain of theCompany’s product components and sub-assemblies continue to be manufactured by sole suppliers. Disruption in component or sub-assembly supply fromthese manufacturers or from in-house production would have a negative impact on the Company’s financial position and results of operations. The Company is subject to certain risks, including that its devices may not be approved or cleared for marketing by governmental authorities or besuccessfully marketed. There can be no assurance that the Company’s products will continue to be accepted in the marketplace, nor can there be anyassurance that any future devices can be developed or manufactured at an acceptable cost and with appropriate performance characteristics. The Company isalso subject to risks common to companies in the medical device industry, including, but not limited to, new technological innovations, dependence uponthird-party payors to provide adequate coverage and reimbursement, dependence on key personnel and suppliers, protection of proprietary technology,product liability claims, and compliance with government regulations. Existing or future devices developed by the Company may require approvals or clearances from the FDA or international regulatory agencies. Inaddition, in order to continue the Company’s operations, compliance with various federal and state laws is required. If the Company were denied or delayedin receiving such approvals or clearances, it may be necessary to adjust operations to align with the Company’s currently approved portfolio. If clearance forthe products in the current portfolio were withdrawn by the FDA, this may have a material adverse impact on the Company. Accounts Receivable Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s bestestimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines the allowance for doubtfulaccounts based upon an aging of accounts receivable, historical experience, and management judgment. Accounts receivable balances are reviewedindividually for collectability. To date, the Company has not experienced significant credit-related losses. Inventories Inventories are valued at the lower of cost or market. Cost is determined using the first-in, first-out method for all inventories. The Company’s policyis to write down inventory that has expired or become obsolete, inventory that has a cost basis in excess of its expected net realizable value, and inventory inexcess of expected requirements. The estimate of excess quantities is subjective and primarily dependent on the estimates of future demand for a particularproduct. If the estimate of future demand is too high, the Company may have to increase the reserve for excess inventory for that product and record a chargeto the cost of revenues. Inventory used in clinical trials is expensed at the time of production and recorded as research and development expense. Property and equipment Property and equipment are recorded at cost. Repairs and maintenance costs are expensed as incurred. Depreciation and amortization are calculatedusing the straight-line method over the estimated useful lives of the assets of three to five years. Depreciation expense includes the amortization of assetsacquired under capital leases and equipment located at customer sites. Equipment held by customers is comprised of the Lightboxes located at customer sitesunder a lease agreement and are recorded at cost. Upon execution of a lease agreement, the related equipment is reclassified from inventory to the propertyand equipment account. Depreciation expense for equipment held by customers is recorded as a component of cost of revenues. Leasehold improvements andassets recorded under capital leases are amortized using the straight-line method over the shorter of the lease term or estimated useful economic life of theasset. Deferred Offering Costs Deferred offering costs, which primarily consist of direct incremental legal and accounting fees relating to an offering of equity securities, werecapitalized. As of December 31, 2014, $2,608,000 of deferred offering costs were capitalized in other assets on the balance sheet, of which $1,848,000 hadbeen paid. The Company incurred $3,553,000 in offering costs and in January 2015, these IPO costs were offset against the proceeds obtained from theCompany’s IPO. Deferred offering costs of $29,000 were capitalized as of December 31, 2015. 94Table of Contents Impairment of Long-Lived Assets The Company reviews long-lived assets, including property and equipment, for impairment whenever events or changes in business circumstancesindicate that the carrying amount of the assets may not be fully recoverable. If indicators of impairment exist, an impairment loss would be recognized whenestimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount.Impairment, if any, is measured as the amount by which the carrying amount of the long-lived asset exceeds its fair value. The Company has not recorded anyimpairment of long-lived assets since inception through December 31, 2015. Convertible Preferred Stock Prior to its IPO the Company recorded its convertible preferred stock at fair value on the dates of issuance, net of issuance costs and classified theconvertible preferred stock outside of stockholders’ equity (deficit) on the balance sheets as events triggering the liquidation preferences were not solelywithin the Company’s control. Upon the closing of the IPO, all shares of convertible preferred stock then outstanding converted into an aggregate of6,967,925 shares of common stock resulting in the reclassification of $137,626,000 from outside of stockholders’ equity (deficit) to additional paid-incapital. Warrant Liability and Embedded Derivative Instruments The Company accounts for its warrants for shares of common stock in accordance with the accounting guidance for derivatives. The accountingguidance provides a two-step model to be applied in determining whether a financial instrument is indexed to an entity’s own stock and, therefore, qualifiesfor a scope exception. The two-step model requires a contract for a financial instrument to be both (1) indexed to the entity’s own stock and (2) classified inthe stockholders’ equity (deficit) section of the balance sheet. If a financial instrument qualifies for a scope exception, it would not be considered a derivativefinancial instrument. As the price per share of the common stock warrants issued with the convertible notes was not fixed until the issuance of the Series E ConvertiblePreferred Stock in September 2014, these warrants were initially classified as a derivative liability. As a derivative liability, the warrants were initiallyrecorded at fair value and were subject to remeasurement at each balance sheet date until September 2014. Any change in fair value as a result of aremeasurement was recognized as a component of other income (expense), net in the statements of operations and comprehensive loss. The Company re-evaluated the terms of the common stock warrants issued with the convertible notes after the issuance of the Series E Convertible Preferred Stock inSeptember 2014 and determined that they then met the first criterion of the two-step model. Accordingly, the associated current fair value of the warrantliability was reclassified to additional paid-in capital in the stockholders’ equity (deficit) section of the balance sheet at that time, thus satisfying the secondcriterion of the two-step model. The convertible notes issued in 2013 and 2014 included features which were determined to be embedded derivatives requiring bifurcation andseparate accounting. Prior to their extinguishment in September 2015, the Company recorded a compound derivative asset or liability related to redemptionfeatures embedded within its outstanding convertible notes. The embedded derivatives were initially recorded at fair value and are subject to remeasurementas of each balance sheet date. Any change in fair value is recognized as a component of other income (expense), net in the statements of operations andcomprehensive loss. In September 2015, the Company repaid the outstanding convertible notes and accrued interest obligations in their entirety. Accordingly, the associated current fair value of the embedded derivative asset as remeasured at the date of extinguishment was expensed as a component ofother income (expense), net in the statements of operations and comprehensive loss for the year ended December 31, 2015. Revenue Recognition The Company’s revenues are derived from (1) sale of its Lightbox (2) sale of disposables, which consist of catheters and accessories, and (3) sale ofcustomer service contracts. The Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) 605-10, Revenue Recognition,when persuasive evidence of an arrangement exists, the fee is fixed or determinable, collection of the fee is probable and delivery has occurred. For all sales,the Company uses either a signed agreement or a binding purchase order as evidence of an arrangement. The Company’s revenue recognition policies generally result in revenue recognition at the following points: 1. Lightbox sales: The Company sells its products directly to hospitals and medical centers. Provided all other criteria for revenue recognitionhave been met, the Company recognizes revenue for Lightbox sales directly to end customers when delivery and acceptance occurs, whichis defined as receipt by the Company of an executed form by the customer acknowledging that the training and installation process iscomplete. 95Table of Contents 2. Sales of disposables: Disposable revenues consist of sales of the Company’s catheters and accessories and are recognized when the producthas shipped, risk of loss and title has passed to the customer and collectability is reasonably assured. 3. Service revenue: Service revenue is recognized ratably over the term of the service period. To date service revenue has been insignificant. The Company offers its customers the ability to purchase or lease its Lightbox. The Company recovers the cost of providing the leased Lightboxthrough a premium in the amount charged for its disposable products in comparison to a standalone purchase. When a Lightbox is placed under a leaseagreement, the Company retains title to the equipment and it remains capitalized on its balance sheet under property and equipment. Depreciation expenseon these leased Lightboxes is recorded to cost of revenues on a straight-line basis. The costs to maintain these leased Lightboxes are charged to cost ofrevenues as incurred. The Company evaluates its lease agreements and accounts for these contracts under the guidance in ASC 840, Leases and ASC 605-25, RevenueRecognition—Multiple Element Arrangements. The guidance requires arrangement consideration to be allocated between a lease deliverable and a non-leasedeliverable based upon the relative selling-price of the deliverables, using a specific hierarchy. The hierarchy is as follows: vendor- specific objectiveevidence of fair value of the respective elements, third-party evidence of selling price, or best estimate of selling price (“BESP”). The Company allocatesarrangement consideration using BESP. The Company assessed whether the embedded lease is an operating lease or sales-type lease. Based on the Company’s assessment of the guidanceand given that any payments under the lease agreements are dependent upon contingent future sales, it was determined that collectability of the minimumlease payments is not reasonably predictable. Accordingly, the Company concluded the embedded lease did not meet the criteria of a sales-type lease andaccounts for it as an operating lease. The Company recognizes revenue allocated to the lease as the contingent disposable product purchases are deliveredand are included in revenues within the statement of operations and comprehensive loss. The Company estimates reductions in revenue for potential returns of products by customers. In making such estimates, management analyzeshistorical returns, current economic trends and changes in customer demand and acceptance of its products. The Company expenses shipping and handlingcosts as incurred and includes them in the cost of revenues. In those cases where the Company bills shipping and handling costs to customers, it will classifythe amounts billed as a component of revenue. Cost of Revenues Cost of revenues consists primarily of manufacturing overhead costs, material costs and direct labor. A significant portion of the Company’s cost ofrevenues currently consists of manufacturing overhead costs. These overhead costs include the cost of quality assurance, material procurement, inventorycontrol, facilities, equipment and operations supervision and management. Cost of revenues also includes depreciation expense for the Lightboxes underlease agreements and certain direct costs such as shipping costs. Product Warranty Costs The Company typically offers a one-year warranty for parts and labor on its products commencing upon the transfer of title and risk of loss to thecustomer. The Company accrues for the estimated cost of product warranties upon invoicing its customers, based on historical results. The warrantyobligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failurerates, material usage or service delivery costs differ from these estimates, revisions to the estimated warranty liability would be required. Periodically theCompany assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. Warranty provisions and claims are summarized asfollows (in thousands): Year Ended December 31,2015 2014 2013Balance beginning of year$167$105$11Warranty provision70140230Usage/Release(167)(78)(136)Balance end of year$70$167$105 Research and Development The Company expenses research and development costs as incurred. Research and development expenses include personnel and personnel-relatedcosts, costs associated with pre-clinical and clinical development activities, and costs for prototype products that are manufactured prior to market approvalfor that prototype product; internal and external costs associated with the Company’s regulatory compliance and quality assurance functions, including thecosts of outside consultants and contractors that assist in the process of submitting and maintaining regulatory filings; and overhead costs, includingallocated facility and related expenses. 96Table of Contents Clinical Trials The Company accrues and expenses costs for its clinical trial activities performed by third parties, including clinical research organizations andother service providers, based upon estimates of the work completed over the life of the individual study in accordance with associated agreements. TheCompany determines these estimates through discussion with internal personnel and outside service providers as to progress or stage of completion of trialsor services pursuant to contracts with clinical research organizations and other service providers and the agreed-upon fee to be paid for such services. Advertising Costs The Company expenses advertising costs as incurred. Advertising costs include design and production costs, including website development,physician and patient testimonial videos, written media campaigns, and other items. Advertising costs of approximately $515,000, $720,000 and $321,000were expensed during the years ended December 31, 2015, 2014 and 2013, respectively. Common Stock Valuation and Stock-Based Compensation Stock-based compensation for the Company includes amortization related to all stock options, restricted stock units and shares issued under theemployee stock purchase plan, based on the grant-date estimated fair value. The fair value of stock options is estimated on the date of grant using the Black-Scholes option pricing model and recognized as expense on a straight-line basis over the vesting period of the award. The Company measures the fair valueof restricted stock units (“RSUs”) using the closing stock price of a share of the Company’s common stock on the grant date and is recognized as expense ona straight-line basis over the vesting period of the award. Because noncash stock-based compensation expense is based on awards ultimately expected to vest,it is reduced by an estimate for future forfeitures. The Company estimates a forfeiture rate for its stock options and RSUs based on an analysis of its actualforfeitures based on actual forfeiture experience and other factors. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequentperiods if actual forfeitures differ from estimates. Prior to the closing of the Company’s IPO in January 2015, the fair value of the Company’s common stock was determined by its Board of Directorswith assistance from management and third-party valuation specialists. Management’s approach to estimate the fair value of the Company’s common stock isconsistent with the methods outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held Company EquitySecurities Issued as Compensation. Management considered several factors to estimate enterprise value, including significant milestones that wouldgenerally contribute to increases in the value of the Company’s common stock. Following the closing of the Company’s IPO, the fair value of its commonstock is determined based on the closing price of its common stock on The NASDAQ Global Market. Foreign Currency The Company records net gains and losses resulting from foreign exchange transactions as a component of foreign currency exchange losses in otherincome (expense), net. During the years ended December 31, 2015 and 2014, the Company recorded $18,000 and $21,000 of foreign currency exchange netlosses, respectively, and $11,000 of net gains during the year ended December 31, 2013. Income Taxes The Company utilizes the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determinedbased on differences between financial reporting and tax reporting bases of assets and liabilities and are measured using enacted tax rates and laws that areexpected to be in effect when the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to theamounts expected to be realized. The Company’s policy is to record interest and penalties on uncertain tax positions as income tax expense when they occur.During the years ended December 31, 2015, 2014 and 2013, the Company did not recognize accrued interest or penalties related to unrecognized taxbenefits. Net Loss per Share Attributable to Common Stockholders Basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by theweighted average number of shares of common stock outstanding during the period, without consideration for potential dilutive common shares. Diluted netloss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted averagenumber of shares of common stock and dilutive potential shares of common stock outstanding during the period. Common stock shares subject to repurchaseare excluded from the calculations as the continued vesting of such shares is contingent upon the holders’ continued service to the Company. For thecomputation of net loss per share attributable to common stockholders, common stock shares subject to repurchase of none, 583 and 1,249 were excludedfrom the calculations as of December 31, 2015, 2014 and 2013, respectively. Since the Company was in a loss position for all periods presented, basic netloss per share attributable to common stockholders is the same as diluted net loss per share attributable to common stockholders as the inclusion of allpotentially dilutive common shares would have been anti-dilutive. 97Table of Contents The Company allocates no loss to participating securities because they have no contractual obligation to share in the losses of the Company. Theshares of the Company’s convertible preferred stock participate in any dividends declared by the Company and are therefore considered to be participatingsecurities.Net loss per share attributable to common stockholders was determined as follows (in thousands, except per share data): Year EndedDecember 31,20152014 2013Net loss$(47,344)$(31,964)$(39,901)Adjustment to net loss resulting from convertiblepreferred stock modification(2,384)——Net loss attributable to common stockholders$(49,728)$(31,964)$(39,901)Weighted average common stock outstanding11,362241234Net loss attributable to common stockholders per share,basic and diluted$(4.38)$(132.63)$(170.52) In addition to the outstanding convertible notes as of December 31, 2014 and 2013 (Note 8), the following potentially dilutive securitiesoutstanding have been excluded from the computations of diluted weighted average shares outstanding because such securities have an antidilutive impactdue to losses reported: December 31,2015 2014 2013 Convertible preferred stock outstanding—5,262,7282,591,102Common stock options3,356,9813,010,373398,740Unvested restricted stock units92,946——Common stock warrants2,193,5071,552,32751,6015,643,4349,825,4283,041,443 Comprehensive Loss For the years ended December 31, 2015, 2014 and 2013, there was no difference between comprehensive loss and the Company’s net loss. 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 chiefoperating 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 are based in the United States. Long-lived assets are comprised of property and equipment. For the yearsended December 31, 2015, 2014 and 2013, 98%, 99% and 98%, respectively, of the Company’s revenues, were in the United States, based on the shippinglocation of the external customer. Change in Accounting Principle In April 2015, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update that requires debt issuance costs related toa recognized debt liability to be presented on the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debtdiscounts. The updated standard requires retrospective adoption and is effective for financial statements issued for fiscal years beginning after December 15,2015 and interim periods within those fiscal years. Early adoption is permitted. During the third quarter of 2015, the Company elected early adoption of this accounting standard. The balance sheet as of December 31, 2014 hasbeen adjusted to reflect the retrospective application of the new method of presentation. Deferred debt issuance costs totaling $343,000 that were included inthe Company’s assets as of December 31, 2014 were reclassified as a discount on borrowings. The Company has reflected these costs as a reduction of thedebt on the balance sheet as of December 31, 2015 and will continue to do so in future periods. The adoption of this accounting standard had no impact onthe Company’s statements of operations, stockholders’ equity (deficit) or cash flows. Recent Accounting Pronouncements In May 2014, the FASB, jointly with the International Accounting Standards Board, issued a comprehensive new standard on recognition fromcontracts with customers. The standard’s core principle is that a reporting entity will recognize revenue when it 98Table of Contents transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for thosegoods or services. On July 9, 2015, FASB voted to delay the effective date of the new standard by one year. As such the standard will become effective for theCompany beginning in the first quarter of 2018. Early application would be permitted in 2017. Entities would have the option of using either a fullretrospective or a modified retrospective approach to adopt this new guidance. The Company is currently evaluating the impact of its adoption and transitionapproach of this standard on its financial statements. In August 2014, the FASB issued ASU No. 2014-15—Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern underASC Subtopic 205-40, Presentation of Financial Statements—Going Concern. ASU No. 2014-15 provides guidance about management’s responsibility toevaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15is effective for the Company’s annual reporting period ending December 31, 2016 and all annual and interim reporting periods thereafter, with early adoptionpermitted. The Company has not elected to early adopt this standard. When adopted, ASU 2014-15 will require Management’s evaluation to be based onrelevant conditions and events that are known or reasonably knowable at the date that the financial statements are issued (or at the date that the financialstatements are available to be issued when applicable). Under AS 2014-15 substantial doubt about an entity’s ability to continue as a going concern existswhen relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as theybecome due within one year after the date that the financial statements are issued (or available to be issued). The Company’s liquidity matters are discussedin the Note 1 to the financial statements. In April 2015, the FASB issued an accounting standard which provides guidance to customers about whether a cloud computing arrangementincludes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of thearrangement consistent with the acquisition of other software licenses. If the arrangement does not include a software license, the customer should account fora cloud computing arrangement as a service contract. It is effective for annual periods beginning after December 15, 2015. Early adoption is permitted. Theamendment may be adopted either prospectively to all arrangements entered into or materially modified after the effective date or retrospectively. TheCompany expects to adopt the standard on a prospective basis and does not expect its adoption to have a material effect on its financial statements. In July 2015, the FASB issued an accounting standard which applies to all inventory that is measured using methods other than last-in, first-out orthe retail inventory method, including inventory that is measured using first-in, first-out or average cost. The standard requires entities to measure inventoryat the lower of cost and net realizable value, defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs ofcompletion, disposal, and transportation. The guidance is effective for public entities for fiscal years beginning after December 15, 2016, and interim periodswith fiscal years beginning after December 15, 2017. The amendments in the standard should be applied prospectively with earlier application permitted asof the beginning of an interim or annual reporting period. The Company does not expect the adoption of this standard to have a material effect on itsfinancial statements. 3. Fair Value Measurements The Company measures certain financial assets and liabilities at fair value on a recurring basis. Fair value is an exit price, representing the amountthat would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-basedmeasurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. A three-tier fair valuehierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value: Level 1—Quoted prices in active markets for identical assets or liabilities. Level 2—Inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly, such as quoted prices for similarassets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data forsubstantially the full term of the assets or liabilities. Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. As of December 31, 2015 and 2014, cash equivalents and restricted cash were all categorized as Level 1 and consisted of money market funds. Inconnection with the convertible notes issuances in 2013 and 2014 (Note 8), the Company issued warrants to purchase shares of its common stock. As theprice per share of the common stock warrants was not fixed until the issuance of the Series E Convertible Preferred Stock in September 2014, they wereclassified as a derivative liability and were subject to remeasurement at each balance sheet date until September 2014. The convertible notes also containedredemption features which were determined to be a compound embedded derivative which, prior to their extinguishment in September 2015, required fairvalue 99Table of Contents accounting. The common stock warrant liability and embedded derivatives in the convertible notes were categorized as Level 3. When a determination ismade to classify a financial instrument within Level 3, the determination is based upon the significance of the unobservable inputs to the overall fair valuemeasurement. However, Level 3 financial instruments typically include, in addition to the unobservable inputs, observable inputs (that is, components thatare actively quoted and can be validated to external sources). Any change in fair value is recognized as a component of other income (expense), net, on thestatements of operations and comprehensive loss. There were no transfers between fair value hierarchy levels during the years ended December 31, 2015, 2014 and 2013. Common Stock Warrant Liability As the price per share of the common stock warrants was not fixed until the issuance of the Series E Convertible Preferred Stock in September 2014,they were classified as a derivative liability and were subject to remeasurement at each balance sheet date. Contemporaneous with the Series E ConvertiblePreferred Stock issuance, the Company determined that these common stock warrants met the requirements for equity classification and the current fair valueof the common stock warrant liability was reclassified to additional paid-in capital. Subsequent to September 2014, there were no changes in fair value. Thefollowing table sets forth a summary of the changes in the estimated fair value of the Company’s common stock warrant liability, which represents a financialinstrument classified as Level 3. Accordingly, the expense in the table below includes changes in fair value due in part to observable factors that are part ofthe Level 3 methodology (in thousands): Year Ended December 31, 2015 2014 2013Fair value - beginning of year$—$(6)$—Issuance of warrants——(1)Change in fair value recorded in other income (expense), net—(28)(5)Reclass of warrant liability to additional paid-in capital—34—Fair value - end of year$—$—$(6) The fair value of the common stock warrants liability was determined by using an option pricing model to allocate the total enterprise value to thevarious securities within the Company’s capital structure. The model’s inputs reflect assumptions that market participants would use in pricing the instrumentin a current period transaction. The following table summarizes these various assumptions as of September 2, 2014, the date the price per share of thecommon stock warrants was fixed, and as of December 31, 2013: September 2, 2014 December 31, 2013 Time to liquidity (years)0.72.0Expected volatility45%55%Discounted cash flow rate23%25%Risk-free interest rate0.07%0.38%Marketability discount rate17%23% The time to liquidity input was based on the Company’s estimate of when potential liquidity could be provided to stockholders. The volatilityfactor was based on the average historic price volatility for publicly-traded industry peers. The discounted cash flow rate takes into consideration a companyspecific risk premium, market risk premium and an assumed risk free rate of return. The risk-free interest rate was based on the yields of U.S. Treasurysecurities with maturities similar to the time to liquidity. The marketability discount is used to reflect that private company securities are generally less liquidthan the securities of a public company. These assumptions are inherently subjective and involve significant management judgment. Generally, increases(decreases) in the fair value of the underlying common stock would result in a directionally similar impact to the fair value measurement. Subsequent toSeptember 2014, there were no changes in fair value. 100Table of Contents Embedded Derivatives in Convertible Notes The following table sets forth a summary of the changes in the estimated fair value of the Company’s compound embedded derivative associatedwith its convertible notes, which represent a financial instrument classified as Level 3. Upon the extinguishment of the convertible notes in September 2015,the fair value of the compound embedded derivatives at the date of extinguishment was expensed to other income (expense), net. The income (expense) inthe table below includes changes in fair value due in part to observable factors that are part of the Level 3 methodology (in thousands): Year Ended December 31,2015 2014 2013Fair value of asset (liability) - beginning of year$231$(175)$—Issuance of convertible notes——(179)Change in fair value recorded in other income (expense), net8354064Reversal of fair value recorded in other income (expense), net(1,066)——Fair value of asset (liability) - end of year$—$231$(175) Through December 31, 2014, the Company determined the value of the compound derivative utilizing a Monte Carlo Simulation model. The inputsused to determine the estimated fair value of the derivative instrument include the probability of an underlying event triggering the embedded derivativeoccurring and its timing. The fair value measurement is based upon significant inputs not observable in the market. The inputs included the probability thatthe Company would need to raise additional equity in 2014, as well as various financing and exit events in 2015. These assumptions are inherentlysubjective and involve significant management judgment. The following table summarizes these various assumptions as of December 31, 2014 and 2013: Year Ended December 31, 2014 2013 Equity financing in 2014100.0%100.0%Equity financing in 201514.3%58.2%Liquidation0.1%1.5%Initial public offering79.5%16.7%Change of control6.2%25.1% Subsequent to the Company’s IPO and through the extinguishment of the convertible notes on September 22, 2015, the value of the compoundderivative was determined utilizing a Black-Derman-Toy model. The inputs used to determine the estimated fair value of the derivative instrument includethe term structure of yields which are observed in the market, the credit spread, which was estimated by the Company, and the volatility, which was estimatedusing an analysis of comparable bonds in the market. The fair value measurement is based upon significant inputs not observable in the market. Theseassumptions are inherently subjective and involve significant management judgment. The following table summarizes these various assumptions as ofSeptember 22, 2015, the date of extinguishment: September 22, 2015 Time to first call option (years)—Credit spread17.6%Expected volatility40.0% The compound embedded derivative asset is included in other long-term assets as of December 31, 2014, on the balance sheet. 101Table of Contents 4. Inventories Inventories consisted of the following (in thousands): December 31, 2015 2014Raw materials$2,662$2,265Work-in-process37261Finished products2,3711,665Total inventories$5,405$3,991 5. Property and Equipment, Net Property and equipment, net, consisted of the following (in thousands): December 31,2015 2014Computer software$436$320Computer equipment1,096867Machinery and equipment3,3722,993Furniture and fixtures578542Leasehold improvements655655Equipment held by customers1,7181,0457,8556,422Less: Accumulated depreciation and amortization(5,044)(3,827)Add: Construction-in-progress1113$2,822$2,608 Depreciation expense for the years ended December 31, 2015, 2014 and 2013, was $1,300,000, $1,451,000 and $1,501,000, respectively.Amortization of capital leased assets included in depreciation for the years ended December 31, 2015, 2014 and 2013, was $17,000, $17,000 and $16,000,respectively. Property and equipment includes certain equipment that is leased to customers and located at customer premises. The Company retains theownership of the leased equipment and has the right to remove the equipment if it is not being utilized according to expectations. Depreciation expenserelating to the leased equipment held by customers of $260,000, $378,000 and $425,000, was recorded in cost of revenues during the years endedDecember 31, 2015, 2014 and 2013, respectively. The net book value of this equipment was $1,236,000 and $760,000 at December 31, 2015 and 2014,respectively. 6. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consisted of the following (in thousands): December 31,2015 2014Accrued interest payable$1,220$1,150Accrued professional services5631,917Accrued travel expenses550464Accrued sales, use and other taxes82112Accrued warranty70167Sales return allowance5977Accrued clinical trial costs55359Other accrued liabilities686604$3,285$4,850 102Table of Contents 7. Borrowings CRG On September 22, 2015, the Company entered into a Term Loan Agreement (the “Loan Agreement”) with CRG under which, subject to certainconditions, the Company may borrow up to $50,000,000 in principal amount from CRG on or before December 31, 2016. The Company borrowed$30,000,000 on September 22, 2015. Upon FDA approval of the 510(k) for Pantheris the Company became eligible to borrow an additional $10,000,000 inprincipal amount, on or prior to June 30, 2016. The Company may borrow an additional $10,000,000 in principal amount, on or prior to March 29, 2017,upon achievement of certain revenue milestones, among other conditions. Under the Loan Agreement, the first sixteen quarterly payments are interest onlypayments, and the last eight quarterly payments will be equal installments in which interest and principal amounts are paid. Interest is calculated at a fixedrate of 12.5% per annum. The Company makes quarterly payments of interest only in arrears commencing on September 30, 2015. During the interest onlyperiod, the Company may elect to make the 12.5% interest payment by making a cash payment for 8.5% per annum of interest and making a payment-in-kind(“PIK”) for the remaining amount, for which the 4.0% per annum of interest would be added to the outstanding principal amount of the loan. To date theCompany have elected the PIK option to the extent available and have made a cash payment for the remaining amount. Principal is repayable in eight equalquarterly installments during the final two years of the term. All unpaid principal, and accrued and unpaid interest, is due and payable in full onSeptember 30, 2021. The Company may voluntarily prepay the loan in full, with a prepayment premium beginning at 5.0% and declining by 1.0% annually thereafter, withno premium being payable if prepayment occurs after the fifth year of the loan. Each tranche of borrowing requires the payment, on the borrowing date, of afinancing 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 7.0% of the amountborrowed plus any PIK is payable at the end of the term or when the loan is repaid in full. A long-term liability is being accreted using the effective interestmethod for the facility fee over the term of the Loan Agreement with a corresponding discount to the debt. The term loan is collateralized by a securityinterest 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, orcreation of additional liens, other than as specifically permitted by the terms of the Loan Agreement. In particular, the covenants of the Loan Agreementinclude a covenant that the Company maintains a minimum of $5,000,000 of cash and certain cash equivalents, and the Company must achieve minimumrevenue of $7,000,000 in 2015, with the target minimum revenue increasing in each year thereafter until reaching $70,000,000 in 2020 and in each yearthereafter, as applicable. If the Company fails to meet the applicable minimum revenue target in any calendar year, the Loan Agreement provides theCompany a cure right if it prepays a portion of the outstanding principal equal to 2.0 times the revenue shortfall. In addition, the Loan Agreement prohibitsthe payment of cash dividends on the Company’s capital stock and also places restrictions on mergers, sales of assets, investments, incurrence of liens,incurrence of indebtedness and transactions with affiliates. CRG may accelerate the payment terms of the Loan Agreement upon the occurrence of certainevents of default set forth therein, which include the failure of the Company to make timely payments of amounts due under the Loan Agreement, the failureof the Company to adhere to the covenants set forth in the Loan Agreement, the insolvency of the Company or upon the occurrence of a material adversechange. As of December 31, 2015, the Company was in compliance with all applicable covenants. As of December 31, 2015, principal and PIK payments under the Loan Agreement follows (in thousands): Period Ending December 31, Principal and PIKLoan Repayments2016$—2017—2018—20197,5002020 and thereafter22,50030,000Add: Accretion of closing fees65Add: PIK33430,399Less: Amount representing debt financing costs(834)Borrowings, net of current portion$29,565 103Table of Contents Contemporaneous with the execution of the Loan Agreement, the Company entered into a Securities Purchase Agreement (the “Securities PurchaseAgreement”) with CRG allowing it to purchase up to $5,000,000 of the Company’s common stock. CRG purchased 348,262 shares of common stock onSeptember 22, 2015 at a price of $14.357 per share, which is the 10-day average of closing prices of the Company’s common stock ending on September 21,2015. The closing price on September 22, 2015 was $13.97 yielding a $0.387 per share premium. Both the premium and the issuance costs were allocated tothe borrowings under Loan Agreement and the common stock purchase under the Security Purchase Agreement based on the relative fair values of eachsecurity. The portion of the premium allocated to the borrowings is being amortized over the term of the Loan Agreement. Pursuant to the Securities PurchaseAgreement, the Company must file a registration statement covering the resale of the shares sold to CRG (see Note 17) and must comply with certainaffirmative covenants during the time that such registration statement remains in effect. In connection with the Loan Agreement, the Company recorded a debt discount of $876,000. The debt discount comprised financing fees of$450,000, paid directly to CRG, and an allocation of the other costs directly attributable to the Loan Agreement and Security Purchase Agreement with CRGof $541,000 net of the common stock premium of $115,000 based on the relative fair values of each security. The debt discount is being amortized as non-cash interest expense using the effective interest method over the term of the Loan Agreement. As of December 31, 2015, the balance of the debt discount was$834,000. PDL BioPharma On April 18, 2013, the Company entered into a Credit Agreement (“Agreement”) with PDL BioPharma, Inc. (“PDL”) whereby PDL agreed to loan upto $40,000,000. Contemporaneous with the execution of the Agreement the Company borrowed an initial $20,000,000 (“Term Note”). Under the terms of theAgreement, if the Company achieved certain net revenue milestones prior to June 30, 2014, the Company would be eligible to borrow an additional amountbetween $10,000,000 and $20,000,000 (net of fees) at the Company’s election. The Company did not achieve the net revenue milestones and accordingly,there were no additional available funds to borrow under the Agreement. The Term Note was scheduled to mature April 18, 2018, had a stated interest rate of 12.0% per annum and could be prepaid by the Company at anytime. The Company paid interest-only through the first ten quarters and, thereafter, repayment of principal in equal installments including accrued andunpaid interest, payable each quarter. As provided under the terms of the Agreement, for the first eight quarterly interest payments, or through 2015, on theTerm Note the Company elected to convert an amount of interest, up to 1.5% per annum, into additional loans, referred to as PIK loans. The PIK loansaccrued interest and were added to the aggregate principal balance of the Term Note. In September 2015, in connection with the consummation of the Loan Agreement with CRG, the Company repaid all amounts outstanding under theAgreement. The payoff amount of $21,363,000 included accrued interest through the repayment date of $563,000 and $200,000 as an end-of-term finalpayment fee recorded in other income (expense), net on the statement of loss and comprehensive loss. For the years ended December 31, 2015, 2014 and2013, the Company incurred interest expense of $2,785,000, $3,380,000 and $2,492,000, respectively. In addition to the interest and principal payments, the Company also paid a royalty, referred to as Assigned Interests, equal to 1.8% of theCompany’s quarterly net revenues. Upon the prepayment of the Term Note, the Company’s obligations relating to Assigned Interests continue, and arepayable through the maturity date at a reduced rate of 0.9% of the quarterly net revenues, subject to certain quarterly minimum mandatory amounts, whichare payable monthly. The ongoing obligation was determined to be an embedded element of the Agreement and cannot be bifurcated from the Term Note foraccounting purposes. Accordingly, the 104Table of Contents Company continued to account for the Assigned Interests obligation relating to future royalties as a debt instrument by applying the retrospective approach.Under the retrospective method, the Company computes a new effective interest rate based on the original carrying amount, actual cash flows to date, andremaining estimated cash flows over the maturity date. The new effective interest rate, 20.4% as of December 31, 2015, was used to adjust the carryingamount to the present value of the revised estimated cash flows, discounted at the new effective interest rate. At the time of the repayment the resultingincrease in the carrying value of the Assigned Interests, of $942,000, was recognized as a component of other income (expense), net, on the statements ofoperations and comprehensive loss. The Company has an aggregate accrual for its Assigned Interests obligations of $2,303,000, representing the net presentvalue of the future minimum royalty obligation as of December 31, 2015. The Assigned Interest liability was included within accrued expenses and othercurrent liabilities and within other long-term liabilities as of December 31, 2015, on the balance sheet. Prior to the repayment of the Term Note, the AssignedInterests liability was included within borrowings and borrowings, net of current portion as of December 31, 2014, on the balance sheet. Additionally, until there are no further obligations to periodically pay PDL a percentage of its net revenues, the Company must comply with certainaffirmative covenants and negative covenants limiting its ability to, among other things, undergo a change in control or dispose of assets, in each casesubject to certain exceptions. The Company was in compliance with the covenants under the Agreement as of December 31, 2015. 8. Convertible Notes On October 29, 2013, the Company entered into a Note and Warrant Purchase Agreement (the “Convertible Note Agreement”), as amended inMay 2014, with certain existing convertible preferred stockholders, third-parties and employees for the issuance of convertible notes for up to an aggregateprincipal amount of $25,000,000. Under the terms of the Convertible Note Agreement, the Company issued convertible notes in October and November 2013for total proceeds of $13,472,000, and in May and July 2014 for additional total proceeds of $4,720,000. The Company was required to pay interest on theseconvertible notes at a rate of 30-day LIBOR, plus 6% per annum subject to a minimum internal rate of return of 20%. The notes were due to mature and theaccrued interest thereon would have become payable upon the earlier of: (i) October 29, 2018, (ii) an event of default, or (iii) a change of control event. The principal and accrued interest on the notes were convertible, at the option of the holder, upon a future issuance of the Company’s convertiblepreferred stock or common stock (the “Equity Financing”) into that same stock at a conversion price equal to 85% of the price paid by other investors in thefinancing event. For holders who elected not to convert their notes upon the closing of the Company’s Series E Preferred Stock financing or upon its IPO, theCompany may repay the holder, at its sole election, a payment equal to the greater of (i) 125% of the outstanding principal and accrued and unpaid interest,or (ii) the amount providing the investor with a 20% minimum internal rate of return, at any time prior to their maturity date. In conjunction with the issuance of the convertible notes, the Company issued warrants to purchase up to the number of shares of common stockequal to 15% of the principal amount of the convertible notes divided by an exercise price per share equal to the lesser of $39.15 per share, or the price pershare paid by the investors in the first bona fide preferred stock financing subsequent to the date of the convertible notes. Upon the Series E ConvertiblePreferred Stock issuance in September 2014, the exercise price per share was fixed at $12.60 per share and the Company issued warrants to purchase a total of216,547 shares of common stock. The warrants, which were immediately exercisable, expired upon the closing of the Company’s IPO. The estimated fairvalue of the warrants upon issuance, of $1,000, was based on an option pricing model. The Company recorded the fair value of the warrants at issuance as adebt discount and as a warrant liability. The debt discount was accreted using the effective interest method as additional interest expense over the term of theconvertible notes. Immediately prior to the closing of the Company’s IPO, 149,288 of the warrants to purchase common stock were net exercised, 24,403 ofthe warrants to purchase common stock were exercised and the remaining balance of 42,856 warrants to purchase common stock expired. The convertible notes have redemption features that were determined to be compound embedded derivatives requiring bifurcation and separateaccounting. The fair value of the compound embedded derivative upon issuance was determined to be a liability of $179,000. The fair value of thesederivative instruments was recognized as an additional discount and as a derivative liability on the balance sheets upon issuance of the convertible notes.The compound embedded derivative associated with the convertible notes required periodic re-measurements to fair value while the instruments are stilloutstanding. In September and November 2014, in connection with the issuance of the Series E Convertible Preferred Stock, $11,582,000 of the outstandingconvertible notes and accrued interest thereon was converted into shares of Series E Convertible Preferred Stock (Note 11). Upon the conversion of theconvertible notes, the Company recorded a net loss from the extinguishment of the debt in the amount of $1,234,000 which is reflected in other income(expense), net in the statement of operations and comprehensive loss. 105Table of Contents In September 2015, in connection with the consummation of the Loan Agreement, the Company repaid all amounts outstanding under theconvertible notes. The carrying value of the convertible notes and accrued interest was $9,867,000 prior to payoff. The Company recorded a loss onextinguishment of the convertible notes of $86,000 as a component of other income (expense), net, on the statements of operations and comprehensive loss. The Company’s interest expense associated with the convertible notes amounted to $1,230,000, $2,633,000 and $433,000 during the years endedDecember 31, 2015, 2014 and 2013, respectively, based on the minimum internal rate of return of 20%. 9. Capital Leases Capital lease obligations consist of leased office equipment. As of December 31, 2015 and 2014, the aggregate amount of capital leases recordedwithin property and equipment, net, on the accompanying balance sheet is $39,000 and $12,000, respectively. The current portion of the capital leaseobligations is included in accrued liabilities and the balance included within other long-term liabilities represents the long-term portion. The future minimum lease payments as of December 31, 2015, are as follows (in thousands): Future MinimumYear ending December 31, Lease Payments20161920171820184Total minimum payments41Less: Amount representing future interest2Present value of minimum lease payments$39 10. Commitments and Contingencies Lease Commitments The Company’s operating lease obligations primarily consist of leased office, laboratory, and manufacturing space under a non-cancelable operatinglease that expires in November 2016. The lease agreement includes two renewal provisions allowing the Company to extend this lease for additional periodsof three years each. 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 isrecognized using the straight-line method over the term of the lease. The Company records deferred rent calculated as the difference between rent expenseand the cash rental payments. In connection with the facility lease, the landlord also provided incentives of $369,000 to the Company in the form ofleasehold improvements. These amounts have been reflected as deferred rent and are being amortized as a reduction to rent expense over the term of theCompany’s operating lease. Rent expense was $938,000, $922,000 and $922,000 for the years ended December 31, 2015, 2014 and 2013, respectively. The future minimum lease payments as of December 31, 2015, are as follows (in thousands): Future MinimumYear ending December 31, Lease Payments2016$1,060 Total minimum lease payments$1,060 Purchase Obligations Purchase obligations consist of agreements to purchase goods and services entered into in the ordinary course of business. The Company hadnoncancellable commitments to suppliers for purchases totaling $4,347,000 and $1,334,000 as of December 31, 2015 and 2014, respectively. The Companyexpects its outstanding purchase obligations to be settled within one year. 106Table of Contents Indemnification In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and mayprovide for indemnification of the counterparty. The Company’s exposure under these agreements is unknown because it involves claims that may be madeagainst it in the future, but have not yet been made. To date, the Company has not been subject to any claims or been required to defend any action related toits indemnification obligations. In accordance with the Company’s amended and restated certificate of incorporation and its amended and restated bylaws, the Company hasindemnification obligations to its officers and directors, subject to some limits, with respect to their service in such capacities. The Company has also enteredinto indemnification agreements with its directors and certain of its officers. To date, the Company has not been subject to any claims, and it maintainsdirector and officer insurance that may enable it to recover a portion of any amounts paid for future potential claims. The Company’s exposure under theseagreements is unknown because it involves claims that may be made against it in the future, but have not yet been made. The Company believes that the fairvalue of these indemnification obligations is minimal, and accordingly, it has not recognized any liabilities relating to these obligations for any periodpresented. Legal Proceedings The Company was not party to any legal proceedings at December 31, 2015 and 2014. The Company assesses, in conjunction with its legal counsel,the need to record a liability for litigation and contingencies. Reserve estimates are recorded when and if it is determined that a loss-related matter is bothprobable and reasonably estimable. On February 15, 2014, the Company entered into an engagement letter with a financial advisor which provided for such firm to serve as itsplacement agent and for the Company to make certain payments to them in connection with its Series E Convertible Preferred Stock financing. After the entryinto such engagement letter, the financial advisor did not provide the level of service the Company was expecting and was not responsible for introducingthe Company to any of the Series E Convertible Preferred Stock investors. In December 2014, the Company and its former financial advisor agreed to amendand to terminate their engagement letter, effective immediately. Pursuant to the terms of the amended engagement letter, the Company agreed to pay theformer financial advisor a transaction fee of $650,000, to be paid in four equal quarterly installments starting on December 31, 2014, and ending onSeptember 30, 2015 and $35,000 for reimbursement of the former financial advisor’s out-of-pocket expenses, which were due upon execution of theamendment. The transaction fee and out-of-pocket expenses were reflected as additional Series E Convertible Preferred Stock issuance costs during the yearended December 31, 2014. 11. Convertible Preferred Stock At December 31, 2014, convertible preferred stock authorized and outstanding consisted of the following (in thousands except share amounts): Shares PreferentialSharesIssued and Carrying LiquidationSeriesAuthorizedOutstanding Value Value Series A326,595326,591$6,183$6,212Series A-1225,235225,2356,6493,243Series B755,516755,48627,27227,538Series C561,448561,42322,39722,485Series D800,000722,36737,15337,708Series E4,150,4032,671,62632,606134,6506,819,1975,262,728$132,260$231,836 107Table of Contents On January 9, 2015, the Company issued a total of 490,472 shares of Series E Convertible Preferred Stock at $12.60 per share for net cash proceedsof $6,176,000. Upon the closing of the IPO, all shares of convertible preferred stock then outstanding converted into an aggregate of 6,967,925 shares ofcommon stock. As of December 31, 2015, the Company does not have any convertible preferred stock issued or outstanding. 2012 Preferred Stock Plan The 2012 Preferred Stock Plan (the “2012 Plan”) was adopted on July 19, 2012. The 2012 Plan was established to allow employees the opportunityto participate in the Series D Convertible Preferred Stock issuance. Under the 2012 Plan, 126,435 shares were authorized for issuance. In September 2012, theCompany granted 19,952 fully vested options to purchase shares of Series D Convertible Preferred Stock at $52.20 per share. In September 2012, 10,267 ofthe options were exercised, the remaining options to purchase 9,685 shares expired unexercised at that time and were returned to the 2012 Plan. As ofDecember 31, 2013, there were 116,168 shares available for grant and no options were outstanding under the 2012 Plan. On November 3, 2014, the Company’s Board of Directors approved the termination of the 2012 Plan effective immediately. 2014 Preferred Stock Plan In August 2014, the Company’s Board of Directors adopted the 2014 Preferred Stock Plan (the “2014 Plan”). The 2014 Plan was established to allowemployees the opportunity to participate in the Series E Convertible Preferred Stock issuance. Under the 2014 Plan, 88,888 shares were authorized forissuance. In August through December 2014, the Company granted 59,230 fully vested options to purchase shares of Series E Convertible Preferred Stock at$12.60 per share. In September through December 2014, 53,744 of the options were exercised and the remaining options expired. As of December 31, 2014,there were 35,144 shares available for grant and no options were outstanding under the 2014 Plan. On January 14, 2015, the Company’s Board of Directors approved the termination of the 2014 Preferred Stock Plan effective immediately prior toconsummation of the Company’s IPO. 12. Stockholders’ Equity (Deficit) Preferred Stock At December 31, 2015, the Company’s certificate of incorporation, as amended and restated, authorizes the Company to issue up to 5,000,000 sharesof preferred stock with $0.001 par value per share, of which no shares were issued and outstanding. Common Stock At December 31, 2015, the Company’s certificate of incorporation, as amended and restated, authorizes the Company to issue up to 100,000,000shares of common stock with $0.001 par value per share, of which 12,643,538 shares were issued and outstanding. Restricted Stock In May 2012, the Company entered into two Restricted Stock Purchase Agreements with two individuals in return for certain intellectual property(“IP”) and ongoing consulting services. 1,666 shares of common stock were issued under each Restricted Stock Purchase Agreement for a total of 3,332 sharesat a fair market value of $14.85 per share for a total purchase price of $49,500. The shares are subject to repurchase at cost, or $14.85 per share, with 20%being released from the repurchase option at the date of assignment of the IP and 1/48th of the remaining 80% being released monthly thereafter. Stockcompensation expense of $49,500, representing the intrinsic value of the shares was recorded to consulting expense in 2012. Since it was not possible tovalue the IP, this non-cash compensation expense was calculated at the fair market value of the shares of $14.85 per share. 108Table of Contents As of December 31, 2015 and 2014, a total of none and 583 shares, respectively, were subject to repurchase, at cost, under the Restricted StockPurchase Agreements. Common Stock Warrants In connection with the issuance of the Company’s Series E Convertible Preferred Stock in September 2014 through January 2015, the Companyissued, to each investor who purchased shares of Series E Convertible Preferred Stock, warrants to purchase up to the number of shares of common stock equalto 50% of the number of shares of the Company’s Series E Convertible Preferred Stock purchased. The warrants are immediately exercisable, at an exercise price per share of $12.60, and expire upon the earlier of September 2, 2019 or upon theconsummation of a change of control of the Company. The Company determined that these common stock warrants meet the requirements for equityclassification. In connection with the issuance of its Series E Convertible Preferred Stock in September through December 2014, the Company issued warrantsto purchase an aggregate of 1,335,779 shares of common stock. The common stock warrants were recorded at their allocated fair value of $175,000 withinstockholders’ equity (deficit). In connection with the issuance of the Company’s Series E Convertible Preferred Stock in January 2015, the Company issued warrants to purchasean aggregate of 245,235 shares of common stock. The common stock warrants were recorded at their allocated fair value of $804,000 within stockholders’equity (deficit). On January 14, 2015, the Company amended its Series E Convertible Preferred Stock Purchase Agreement to provide for the issuance of commonstock warrants to each investor who purchased shares of Series E Convertible Preferred Stock equal to 70% of the number of shares of the Company’s Series EConvertible Preferred Stock purchased by such investor. As with the common stock warrants previously issued, any new common stock warrants wereimmediately exercisable, at an exercise price of $12.60 per share, and expire upon the earlier of September 2, 2019 or upon consummation of a change incontrol of the Company. As a result of this amendment to the Series E Convertible Preferred Stock Purchase Agreement, the Company issued additionalwarrants to purchase 632,381 shares of common stock to investors who previously acquired shares of Series E Convertible Preferred Stock fromSeptember 2014 through January 2015. As of December 31, 2015, warrants to purchase an aggregate of 2,193,507 shares of common stock were outstanding. The Company determined that the amendment to the Series E Convertible Preferred Stock Purchase Agreement should be accounted for as amodification. Accordingly, the incremental fair value from the modification, the additional warrants to purchase 632,381 shares of common stock warrants,of $2,384,000, was recorded as an increase to stockholders’ equity (deficit) and as an adjustment to net loss attributable to common stockholders in theCompany’s statement of operations and comprehensive loss for the year ended December 31, 2015. This amount represents a return to the preferredstockholders and is treated in a manner similar to the treatment of dividends paid to holders of preferred stock in the computation of earnings per share. As aresult, the “deemed dividend” is subtracted from net loss available to common stockholders in reconciling net loss to net loss available for commonstockholders. Stock Plans In January 2015, the Company’s Board of Directors adopted and the Company’s stockholders approved the 2015 Equity Incentive Plan (“2015Plan”). The 2015 Plan replaced the 2009 Stock Plan (the “2009 Plan”) which was terminated immediately prior to consummation of the Company’s IPO,collectively the “Plans” and provides for the grant of incentive stock options (“ISOs”) and nonstatutory stock options (“NSOs”) to purchase common shares.The 2015 Plan provides for the grant of ISOs to employees and for the grant of NSOs, restricted stock, RSUs, stock appreciation rights, performance units andperformance shares to employees, directors and consultants. A total of 1,320,000 shares of common stock were reserved for issuance pursuant to the 2015Plan. In addition, the shares reserved for issuance under the 2015 Plan includes shares reserved but not issued under the 2009 Plan, plus any share awardsgranted under the 2009 Plan that expire or terminate without having been exercised in full or that are forfeited or repurchased. In addition, the number ofshares available for issuance under the 2015 Plan will also include an annual increase on the first day of each fiscal year beginning in fiscal 2016, equal tothe lesser of 1,690,000 shares, 5.0% of the outstanding shares of common stock as of the last day of the immediately preceding fiscal year or an amount asdetermined by the Board of Directors. 109Table of Contents Pursuant to the Plans ISOs and NSOs may be granted with exercise prices at not less than 100% of the fair value of the common stock on the date ofgrant and the exercise price of ISOs granted to a stockholder, who, at the time of grant, owns stock representing more than 10% of the voting power of allclasses of the stock of the Company, shall be not less than 110% of the fair market value per share of common stock on the date of grant. The Company’sBoard of Directors determines the vesting schedule of the options. Options granted generally vest over four years, include a one-year cliff period, and expireten years from the date of grant. Activity under the Plans is set forth below: Options Outstanding Shares Weighted Aggregate Available for Number of Average Intrinsic Value Grant Shares Exercise Price (in thousands) Balance at December 31, 2012156,288313,153$13.45$2,226Options granted(272,308)272,308$20.49Options exercised—(12,183)$7.89Options cancelled174,538(174,538)$14.13Shares repuchased2,593—$14.85Balance at December 31, 201361,111398,740$16.15$—Additional shares reserved2,574,795—Options granted(2,720,174)2,720,174$4.68Options exercised—(2,568)$8.85Options cancelled105,973(105,973)$16.62Balance at December 31, 201421,7053,010,373$5.78$13,188Additional shares reserved1,320,000—Options granted(614,363)614,363$16.73RSUs granted(92,946)—Options exercised—(17,642)$4.50Options cancelled250,113(250,113)$9.33Balance at December 31, 2015884,5093,356,981$7.53$50,970 In December 2015, the Board of Directors of the Company approved grants under the 2015 Plan for an aggregate of 92,946 RSUs to certainemployees of the Company with a grant date fair value of $19.61 per share. The RSUs vest annually over four years in equal increments. No RSUs vested orwere forfeited during the year ended December 31, 2015. 110Table of Contents Additional information related to the status of options as of December 31, 2015 is summarized as follows: Options Outstanding and Vested as of December 31, 2015 Options Outstanding Options Vested Weighted Weighted Weighted Average Average Average Exercise Options Remaining Exercise Number Exercise Price Outstanding Contractual Life Price Exercisable Price $ 4.054,6393.44$4.054,639$4.05$ 4.501,762,2799.01$4.50436,947$4.50$ 4.95862,9998.87$4.95234,311$4.95$ 10.9125,2229.18$10.91—$10.91$ 10.984,0009.34$10.98—$10.98$ 12.6068,1505.55$12.6068,150$12.60$ 14.8544,8516.04$14.8544,052$14.85$ 15.2198,0449.59$15.21—$15.21$ 19.61353,0759.97$19.61—$19.61$ 20.2596,9057.53$20.2563,150$20.25$ 22.057,9296.76$22.056,635$22.05$ 22.5028,8886.57$22.5021,064$22.503,356,9818.91$7.53878,948$7.46 Additional information related to the status of options as of December 31, 2014 is summarized as follows: Options Outstanding and Vested as of December 31, 2014Options Outstanding Options Vested Weighted Weighted Weighted Average Average AverageExercise Options Remaining Exercise Number ExercisePrice Outstanding Contractual Life Price Exercisable Price $ 4.054,9284.44$4.053,961$4.05$ 4.501,874,15010.00$4.50—$4.50$ 4.95863,2219.87$4.9524,971$4.95$ 12.6072,5936.53$12.6070,026$12.60$ 14.8551,5497.06$14.8538,609$14.85$ 20.25105,8798.53$20.2544,254$20.25$ 22.059,1657.77$22.055,355$22.05$ 22.5028,8888.34$22.5013,842$22.503,010,3739.75$5.78201,018$5.38 The weighted-average grant date fair value of stock options granted during the years ended December 31, 2015, 2014 and 2013 was $8.24, $6.60and $7.20 per share, respectively. As of December 31, 2015, the weighted average remaining contractual life of options outstanding and vested was 8.24years. As of December 31, 2015, the aggregate intrinsic value of options outstanding and vested was $13,404,000. The aggregate intrinsic value of optionsexercised was $236,000, none and $153,000 during the years ended December 31, 2015, 2014 and 2013, respectively. The aggregate intrinsic value wascalculated as the difference between the exercise prices of the underlying options and the estimated fair value of the common stock on the date of exercise.Because of the Company’s net operating losses, the Company did not realize any tax benefits from share-based payment arrangements for the years endedDecember 31, 2015, 2014 and 2013. 2015 Employee Stock Purchase Plan In January 2015, the Company’s Board of Directors adopted and the Company’s stockholders approved the 2015 Employee Stock Purchase Plan(“ESPP”) under which eligible employees are permitted to purchase common stock at a discount through payroll deductions of up to 20% of their eligiblecompensation, subject to certain restrictions, at semi-annual intervals. 500,000 shares of common stock were reserved for issuance and will be increased onthe first day of each fiscal year, commencing in 2016, by an amount equal to the lesser of (i) 493,000 shares (ii) 1.5% of the outstanding shares of commonstock as of the last day of the immediately preceding fiscal year; or (iii) an amount as determined by the Board of Directors. The price of the common stockpurchased under the ESPP is the lower of 85% of the fair market value of the common stock at the beginning of an offering period or at the end of a purchaseperiod. The ESPP is intended to qualify as an “employee stock purchase plan” within the meaning of Section 423 of the Internal Revenue Code of 1986, asamended. The first offering under the ESPP began in February 2015. As of December 31, 2015, the Company issued approximately 32,000 shares under theESPP and approximately 468,000 shares of common stock remained reserved for issuance under the ESPP. The Company incurred $217,000 in stock-basedcompensation expense related to the ESPP for the year ended December 31, 2015, respectively. 111Table of Contents 13. Stock-Based Compensation Stock-based compensation for the Company includes amortization related to all stock options, restricted stock units and shares issued under theemployee stock purchase plan, based on the grant-date estimated fair value. The Company estimates the fair value of stock options and shares issued underthe ESPP on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes model determines the fair value of stock-based paymentawards based on the fair market value of the Company’s common stock on the date of grant and is affected by assumptions regarding a number of complexand subjective variables. These variables include, but are not limited to, the fair value of the Company’s common stock, and the volatility over the expectedterm of the awards. The Company has opted to use the “simplified method” for estimating the expected term of options, whereby the expected term equals thearithmetic average of the vesting term and the original contractual term of the option. Prior to the Company’s IPO in January 2015, due to the Company’slimited operating history and a lack of company specific historical and implied volatility data, the Company based its estimate of expected volatility on thehistorical volatility of a group of similar companies that are publicly traded. When selecting these public companies on which it has based its expected stockprice volatility, the Company selected companies with comparable characteristics to it, including enterprise value, stage of development, risk profile, andposition within the industry as well as selecting companies with historical share price information sufficient to meet the expected life of the stock-basedawards. The historical volatility data was computed using the daily closing prices for the selected companies’ shares during the equivalent period of thecalculated expected term of the share-based payments. Following the closing of the Company’s IPO it supplements its own available company specifichistorical volatility with the volatility of the previously selected peer group of publicly traded companies. The Company will continue to analyze thehistorical stock price volatility and expected term assumptions as more historical data for the Company’s common stock becomes available. The risk-free rateassumption is based on the U.S. Treasury instruments with maturities similar to the expected term of the Company’s stock options. The expected dividendassumption is based on the Company’s history of not paying dividends and its expectation that it will not declare dividends for the foreseeable future. As noncash stock-based compensation expense recognized in the financial statements is based on awards ultimately expected to vest, it has beenreduced for estimated forfeitures. The Company estimates a forfeiture rate for its stock options and RSUs based on an analysis of its actual forfeitures based onactual forfeiture experience and other factors. Forfeitures are estimated at the time of grant and revised, if necessary, over the service period to the extent thatactual forfeitures differ, or are expected to differ, from prior estimates. Forfeitures are estimated based on estimated future employee turnover and historicalexperience. The fair value for the Company’s employee stock options was estimated at the date of grant using the Black-Scholes valuation model with thefollowing average assumptions: Year Ended December 31, 2015 2014 2013 Expected term (years)6.36.36.9Expected volatility49.8%59.1%52.1%Risk-free interest rate1.8%1.8%1.4%Dividend rate——— As of December 31, 2015 and 2014, the total unamortized compensation expense related to stock options granted to employees and directors was$16,871,000 and $18,938,000, which is expected to be amortized over the next 3.15 and 3.92 years, respectively. The fair value of the shares to be issued under the Company’s ESPP was estimated using the Black-Scholes valuation model with the followingaverage assumptions for the year ended December 31, 2015: Year Ended December 31, 2015Expected term (years)0.5Expected volatility46.2%Risk-free interest rate0.17%Dividend rate— The Company measures the fair value of RSUs using the closing stock price of a share of the Company’s common stock on the grant date and isrecognized as expense on a straight-line basis over the vesting period of the award. The total fair value of shares vested pursuant to RSUs in the year endedDecember 31, 2015 was zero. As of December 31, 2015, total unamortized stock-based compensation expense related to unvested RSUs was $1,806,000, witha weighted-average remaining recognition period of 3.88 years. Total noncash stock-based compensation expense relating to the Company’s stock options, ESPP and RSUs recognized, before taxes, during theyears ended December 31, 2015, 2014 and 2013, is as follows (in thousands): Year Ended December 31, 2015 2014 2013Cost of revenues$346$55$62Research and development expenses2,489155165Selling, general and administrative expenses3,064431427$5,899$641$654 112Table of Contents 14. Income Taxes For the years ended December 31, 2015, 2014 and 2013, the Company’s provision for income taxes consisted of state income tax expense of none,$14,000 and $11,000, respectively. A reconciliation of the statutory U.S. federal rate to the Company’s effective tax rate is as follows (in thousands): Year Ended December 31, 2015 2014 2013 Tax at federal statutory rate$(16,905)$(10,863)$(13,563)State taxes, net of federal benefit—1411Permanent differences1,722730298Change in valuation allowance15,25010,31613,450Research credits(218)(219)(179)Other15136(6) Provision for taxes$—$14$11 Significant components of the Company’s net deferred tax assets as of December 31, 2015 and 2014 consist of the following (in thousands): As of December 31, 2015 2014 Deferred tax assets:Federal, state, and foreign net operating losses$64,739$52,433Research and other credits2,5212,157Fixed assets21558Interest899255Accruals and other2,8101,205Total deferred tax assets71,18456,108Less: Valuation allowance(71,184)(56,108)Net deferred tax assets$—$— The valuation allowance increased by $15,076,000, $12,193,000 and $15,927,000 during the years ended December 31, 2015, 2014 and 2013,respectively. As of December 31, 2015, the Company had federal net operating loss carryforwards of approximately $171,199,000, which begin to expire in 2027,and state net operating loss carryforwards of approximately $161,235,000, which begin to expire in 2015. As of December 31, 2015, the Company had federal research and development credit carryforwards of approximately $2,118,000, which expire inthe years 2027 through 2035, and state research and development credit carryforwards of approximately $2,247,000. The state research and developmentcredit can be carried forward indefinitely. Federal and state tax laws impose substantial restrictions on the utilization of the net operating loss, and credit carryforwards in the event of anownership change as defined in Section 382 of the Internal Revenue Code. Accordingly, the Company’s ability to utilize these carryforwards may be limitedas a result of such ownership change. Such a limitation could result in the expiration of carryforwards before they are utilized. The Company had unrecognized tax benefits of approximately $3,902,000 and $1,121,000, as of December 31, 2015 and 2014, of which$2,792,000 and $924,000, respectively, would affect the effective tax rate if recognized, before consideration of the valuation allowance. 113Table of Contents A reconciliation of the unrecognized tax benefits from January 1, 2013 through December 31, 2015 is as follows (in thousands): As of December 31,20152014 2013 Balance at beginning of year$1,121$919$592Additions based on tax positions related to current year2,593202165Additions for tax positions of prior years188—162Balance at end of year$3,902$1,121$919 The Company does not expect a significant change to its unrecognized tax benefits over the next twelve months. The unrecognized tax benefits mayincrease or change during the next twelve months for items that arise in the ordinary course of business. The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. In the normal course of business, the Companyis subject to examination by taxing authorities throughout the nation. The Company is not currently under audit by the Internal Revenue Service or othersimilar state and local authorities. All tax years remain open to examination by major taxing jurisdictions to which the Company is subject. 15. Related-Party Transactions The Company entered into an agreement with JBS Consulting, LLC (“JBS Consulting”) regarding the use of a private aircraft owned by JBSConsulting for company business-related travel by the Company’s directors, officers and employees. Dr. John B. Simpson, the Company’s founder and theExecutive Chairman of the Board of Directors, is the president and managing officer of JBS Consulting. Pursuant to the agreement, JBS Consulting will bereimbursed for the cost of first class airfare for all flights in connection with company business-related travel by Dr. John B. Simpson and the cost of coachairfare for all flights in connection with company business-related travel by other directors, officers, and employees. For the years ended December 31, 2015,2014 and 2013, JBS Consulting provided private plane service to the Company totaling approximately none, none and $568,000, respectively. During the years ended December 31, 2015, 2014 and 2013, the Company purchased marketing services from Recreation, Inc., a brand strategy anddesign agency headquartered in San Francisco, California for $1,016,000, $984,000 and $107,000, respectively. John D. Simpson, the Company’s VicePresident of Business Development, was the Chief Executive Officer of Recreation, Inc. until March 2015 and is the son of Dr. John B. Simpson, theCompany’s founder and the Executive Chairman of the Board of Directors. As of December 31, 2015 and 2014, amounts due to Recreation, Inc., included inaccounts payable and accrued liabilities, were $76,000 and $298,000, respectively. During the years ended December 31, 2015, 2014 and 2013, Baysinger Search & Associates, Inc., a company whose management includes the wifeof the Company’s then-Vice President of Sales, provided recruiting services to the Company totaling approximately none, none and $146,000. From October 2013 through July 2014, the Company entered into convertible notes with certain investors, including existing stockholders, somemembers of the Board of Directors and their affiliated companies and some members of management for a total aggregate principal amount of $18,192,000(Note 8) and issued warrants to purchase shares of the Company’s common stock at an exercise price of $12.60 per share. The issuance of $5,122,000 of thetotal aggregate principal amount of the convertible notes was considered a related-party transaction. In September 2015, the Company repaid all amountsoutstanding under the convertible notes. As of December 31, 2015 and 2014, the carrying value of the related-party convertible notes was none and$2,793,000, respectively. For the years ended December 31, 2015, 2014 and 2013, the Company recognized $388,000, $1,021,000 and $140,000,respectively, of interest expense related to the related-party convertible notes within interest expense in the Company’s statements of operations andcomprehensive loss. In April 2015, the Company entered into an agreement with Chansu Consulting, LLC (“Chansu”) to provide consulting services related toregulatory affairs. The General Partner of Chansu is the son-in-law of Dr. John B. Simpson, the Company’s founder and the Executive Chairman of the Boardof Directors. For the year ended December 31, 2015, Chansu provided regulatory consulting services of $17,000. As of December 31, 2015 there were noamounts due to Chansu included in accounts payable and accrued liabilities. 114Table of Contents 16. 401(k) Plan The Company has a qualified retirement plan under section 401(k) of the Internal Revenue Code (“IRC”) under which participants may contributeup to 90% of their eligible compensation, subject to maximum deferral limits specified by the IRC. The Company may make a discretionary matchingcontribution to the 401(k) plan, and may make a discretionary employer contribution to each eligible employee each year. Eligible employees vest in theCompany’s contributions over a graded four year schedule. To date, the Company has made no contributions to the 401(k) plan. 17. Subsequent Events 2015 Equity Incentive Plan In January 2016, the number of shares of common stock authorized for issuance under the 2015 Plan was automatically increased by 632,176 shares,which was ratified by the Company’s Board of Directors. 2015 Employee Stock Purchase Plan In January 2016, the number of shares of common stock authorized for issuance under the 2015 ESPP was automatically increased by 189,653shares, which was ratified by the Company’s Board of Directors. Entry into Sales Agreement On February 3, 2016, the Company entered into a Sales Agreement with Cowen, as sales agent, pursuant to which it may, at its discretion, issue andsell common stock from time to time with an aggregate value of up to $50,000,000 in an at-the-market offering. All sales of shares will be made pursuant to ashelf registration statement that was filed on February 3, 2016, which has not yet been declared effective by the SEC. Cowen is acting as sole sales agent forany sales made under the Sales Agreement for a 3% commission on gross proceeds. The common stock will be sold at prevailing market prices at the time ofthe sale, and, as a result, prices may vary. Unless otherwise terminated earlier, the Sales Agreement continues until all shares available under the SalesAgreement have been sold. Pursuant to the Securities Purchase Agreement, the shelf registration statement also covers the resale of the shares sold to CRG. Facility Lease Commitments In March 2016, the Company amended its facility operating lease to extend the lease term for a period of three years from December 1, 2016, untilNovember 30, 2019. Under the terms of the amended facility lease agreement, the Company is obligated to pay approximately $5,738,000 in lease paymentsthrough November 2019 over the term of the amended agreement. 18. Selected Quarterly Financial Information (Unaudited) The following table represents certain unaudited quarterly information for the eight quarters ended December 31, 2015. This data has been derivedfrom unaudited financial statements that, in the opinion of the Company’s management, include all adjustments, consisting only of normal recurringadjustments, necessary for a fair presentation of such information when read in conjunction with the Company’s annual audited financial statements andnotes thereto appearing elsewhere in this report. These operating results are not necessarily indicative of results for any future period. Net loss per share forall periods presented has been retroactively adjusted to reflect the 1-for-45 reverse stock split effected on January 28, 2015 (in thousands, except per sharedata): Three Months EndedThree Months Ended Mar 31,Jun 30,Sep 30,Dec 31,Mar 31,Jun 30,Sep 30,Dec 31, 20152015201520152014201420142014 Revenues$2,088$3,047$2,721$2,857$2,119$3,389$2,632$3,073Gross profit8001,4139711,0516161,4211,1611,502Operating expenses10,22510,49610,84713,3576,9956,9497,3068,477Net loss(12,801)(10,220)(13,250)(13,456)(7,971)(7,078)(8,780)(8,135)Net loss per share, basicand diluted$(1.53)$(0.83)$(1.08)$(1.07)$(33.21)$(29.37)$(36.43)$(33.62) 115Table of Contents SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signedon its behalf by the undersigned thereunto duly authorized. Avinger, Inc.(Registrant) Date: March 7, 2016/s/ JEFFERY M. SOINSKIJeffrey M. SoinskiChief Executive Officer(Principal Executive Officer) Date: March 7, 2016/s/ MATTHEW B. FERGUSONMatthew B. FergusonChief Financial Officer(Principal Financial and Accounting Officer) KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jeffrey Soinski andMatthew Ferguson, jointly and severally, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for himor her, and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file thesame, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises herebyratifying and confirming all that said attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed below by thefollowing persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ JEFFREY M. SOINSKIChief Executive Officer (Principal Executive Officer); DirectorMarch 7, 2016Jeffrey M. Soinski /s/ MATTHEW B. FERGUSONChief Financial Officer and Chief Business Officer (Principal Financial andAccounting Officer)March 7, 2016Matthew B. Ferguson /s/ DONALD A. LUCASDirectorMarch 7, 2016Donald A. Lucas /s/ JOHN B. SIMPSONExecutive Chairman of the Board of Directors; DirectorMarch 7, 2016John B. Simpson, Ph.D., M.D. /s/ JAMES B. MCELWEEDirectorMarch 7, 2016James B. McElwee /s/ JAMES G. CULLENDirectorMarch 7, 2016James G. Cullen /s/ THOMAS J. FOGARTYDirectorMarch 7, 2016Thomas J. Fogarty 116POWER OF ATTORNEYTable of Contents EXHIBIT INDEX ExhibitNumber Exhibit Title3.1 Amended and Restated Certificate of Incorporation of the registrant.3.2 Bylaws of the registrant.4.1 Specimen Common Stock certificate of the registrant.10.1 Form of Indemnification Agreement for directors and executive officers.10.2 2009 Stock Plan and Form of Option Agreement thereunder.10.3 2014 Preferred Stock Plan.10.4 2015 Equity Incentive Plan.10.5 Form of Restricted Stock Unit Award Agreement.10.6 Form of Stock Option Agreement.10.7 2015 Employee Stock Purchase Plan.10.8 Executive Incentive Compensation Plan.10.9 Amended and Restated Investors’ Rights Agreement dated September 2, 2014 by and among the registrant and certain stockholders.10.10 Lease Agreement, dated July 30, 2010, by and between the registrant and HCP LS Redwood City, LLC for office space located at 400and 600 Chesapeake Drive, Redwood City, California.10.11 First Amendment to Lease Agreement dated September 30, 2011 by and between registrant and HCP LS Redwood City, LLC.10.12Second Amendment to Lease Agreement dated March 4, 2016 by and between registrant and HCP LS Redwood City, LLC.10.13 Credit Agreement dated April 18, 2013 by and between registrant and PDL Biopharma.10.14 Security Agreement dated April 18, 2013 by and between registrant and PDL BioPharma.10.15 Employment Letter dated November 5, 2014 by and between registrant and John B. Simpson.10.16 Employment Letter dated April 2, 2014 by and between registrant and John D. Simpson.10.17 Employment Letter dated December 29, 2010 by and between registrant and Matthew B. Ferguson.10.18 Employment Letter dated November 28, 2011 by and between registrant and Sougata Banerjee.10.19 Change of Control and Severance Agreement dated March 1, 2012 by and between registrant and John B. Simpson.10.20 Change of Control and Severance Agreement dated March 1, 2012 by and between registrant and Matthew B. Ferguson.10.21 Change of Control and Severance Agreement dated March 1, 2012 by and between registrant and Sougata Banerjee.10.22 Employment Letter dated December 17, 2014 by and between registrant and Jeffrey M. Soinski.10.23 Note and Warrant Purchase Agreement dated October 29, 2013 by and between registrant and holders of convertible promissory notes.10.24 Amendment No. 1 to the Note and Warrant Purchase Agreement dated May 6, 2014 by and between registrant and holders ofconvertible promissory notes.10.25 Term Loan Agreement, dated as of September 22, 2015, by and among Avinger, Inc., certain of its subsidiaries from time to time partythereto as guarantors and CRG Partners III L.P. and certain of its affiliated funds, as lenders.10.26 Securities Purchase Agreement, dated as of September 22, 2015, by and among Avinger, Inc., and CRG Partners III L.P. and certain of itsaffiliated funds, as purchasers.10.27Sales Agreement dated as of February 3, 2016, between the Registrant and Cowen and Company, LLC12.1Statement re Computation of Ratio of Earnings to Fixed Charges and Preference Dividends.23.1Consent of Independent Registered Public Accounting Firm.24.1Power of Attorney (included on signature page).31.1Certification of the Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as 117(1)(1)(2)(3)(4)(4)(3)(3)(3)(3)(3)(4)(4)(4)(4)(4)(4)(4)(4)(4)(4)(4)(4)(4)(3)(3)(5)(5)(6)Table of Contents 118adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2Certification of the Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant toSection 302 of the Sarbanes-Oxley Act of 2002.32.1Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002.101.INSXBRL Instance Document101.SCHXBRL Taxonomy Extension Schema Document101.CALXBRL Taxonomy Extension Calculation Linkbase Document101.DEFXBRL Taxonomy Extension Definition Linkbase Document101.LABXBRL Taxonomy Extension Label Linkbase Document101.PREXBRL Taxonomy Extension Presentation Linkbase Document(1)Previously filed an Exhibit to the Current Report on Form 8-K filed with the Securities and Exchange Commission on February 6,2015, and incorporated by reference herein.(2)Previously filed as an Exhibit to Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-201322)filed with the Securities and Exchange Commission on January 28, 2015, and incorporated by reference herein.(3)Previously filed as an Exhibit to Amendment No. 1 to the Registrant’s Registration Statement on Form S-1 (File No. 333-201322)filed with the Securities and Exchange Commission on January 20, 2015, and incorporated by reference herein.(4)Previously filed as an Exhibit to the Registrant’s Registration Statement on Form S-1 (File No. 333-201322), filed with theSecurities and Exchange Commission on December 30, 2014, and incorporated by reference herein.(5)Previously filed as an Exhibit to the Current Report on Form 8-K filed with the Securities and Exchange Commission onNovember 12, 2015, and incorporated by reference herein.(6)Previously filed as an Exhibit to the Registrant’s Registration Statement on Form S-3 (File No. 333-209368), filed with theSecurities and Exchange Commission on February 3, 2016, and incorporated by reference herein.Exhibit 10.12 SECOND AMENDMENT TO LEASE This SECOND AMENDMENT TO LEASE (“Second Amendment”) is made and entered into as of the 4th day of March, 2016, by and between HCPLS REDWOOD CITY, LLC, a Delaware limited partnership (“Landlord”), and AVINGER, INC., a Delaware corporation (“Tenant”). R E C I T A L S : A. Landlord and Tenant entered into that certain Lease dated July 30, 2010 (the “Original Lease”), as amended by that certain FirstAmendment to Lease dated September 30, 2011 (the “First Amendment”), pursuant to which Tenant currently leases approximately 44,200 rentable squarefeet of space comprised of (i) that certain space containing approximately 19,600 rentable square feet of space comprising the entire building located at 400Chesapeake Drive, Redwood City, California 94063 (the “400 Building”) and (ii) that certain space containing approximately 24,600 rentable square feet ofspace comprising the entire building located at 600 Chesapeake Drive, Redwood City, California 94063 (the “600 Building”). The Original Lease and theFirst Amendment are collectively, the “Lease.” B. The parties desire to extend the Lease Term and otherwise amend the Lease on the terms and conditions set forth in this SecondAmendment. A G R E E M E N T : NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants contained herein, and for other good and valuableconsideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Terms. All capitalized terms when used herein shall have the same respective meanings as are given such terms in the Lease unlessexpressly provided otherwise in this Second Amendment. 2. Condition of the Premises. Landlord and Tenant acknowledge that Tenant has been occupying the Premises pursuant to the Lease, andtherefore Tenant continues to accept the Premises in its presently existing, “as is” condition. Landlord shall not be obligated to provide or pay for anyimprovement work or services related to the improvement of the Premises. 3. Extended Lease Term. Pursuant to the Lease, the Lease Term is scheduled to expire on November 30, 2016. Landlord and Tenant herebyagree to extend the Lease Term for a period of three (3) years, from December 1, 2016, until November 30, 2019, on the terms and conditions set forth in theLease, as hereby amended by this Second Amendment, unless BRITTANIA SEAPORT CENTRE[Second Amendment][Avinger, Inc.] 1 sooner terminated as provided in the Lease. The period of time commencing on December 1, 2016, and ending on November 30, 2019, shall be referred toherein as the “Extended Term.” 3.1 Option to Extend Lease Term. Landlord and Tenant acknowledge and agree that the Extended Term provided herein shall bedeemed to represent the first of Tenant’s two (2) options to extend the Lease Term as provided in Section 2.2 of the Original Lease, and that effective as of thedate of this Second Amendment, Tenant shall continue to have only one (1) option to extend the Lease Term for a period of three (3) years in accordancewith, and pursuant to the terms of, Section 2.2 of the Original Lease. 4. Rent. 4.1 Base Rent. Prior to December 1, 2016, Tenant shall continue to pay monthly installments of Base Rent for the Premises inaccordance with the terms of the Lease. During the Extended Term, Tenant shall pay monthly installments of Base Rent for the Premises as follows: Period DuringExtended Term AnnualBase Rent MonthlyInstallmentof Base Rent Monthly Rental Rateper Square FootDecember 1, 2016 – November 30, 2017$1,856,400.00$154,700.00$3.50December 1, 2017 – November 30, 2018$1,912,092.00$159,341.00$3.61December 1, 2018 – November 30, 2019$1,969,454.76$164,121.23$3.71 4.2 Direct Expenses. Prior to and during the Extended Term, Tenant shall continue to be obligated to pay Tenant’s Share of theannual Direct Expenses in connection with the Premises which arise or accrue during such periods in accordance with the terms of the Lease. 5. Broker. Landlord and Tenant hereby warrant to each other that they have had no dealings with any real estate broker or agent inconnection with the negotiation of this Second Amendment other than Jones Lang LaSalle (the “Broker”), and that they know of no other real estate brokeror agent who is entitled to a commission in connection with this Second Amendment. Each party agrees to indemnify and defend the other party against andhold the other party harmless from any and all claims, demands, losses, liabilities, lawsuits, judgments, costs and expenses (including without limitationreasonable attorneys’ fees) with respect to any leasing commission or equivalent compensation alleged to be owing on account of any dealings with any realestate broker or agent, other than the Broker, occurring by, through, or under the indemnifying party. The terms of this Section 5 shall survive the expirationor earlier termination of the term of the Lease, as hereby amended. 2 6. California Accessibility Disclosure. For purposes of Section 1938 of the California Civil Code, Landlord hereby discloses to Tenant, andTenant hereby acknowledges that the Common Areas and the Premises have not undergone inspection by a Certified Access Specialist (CASp). 7. No Further Modification. Except as specifically set forth in this Second Amendment, all of the terms and provisions of the Lease shallremain unmodified and in full force and effect. IN WITNESS WHEREOF, this Second Amendment has been executed as of the day and year first above written. “LANDLORD”“TENANT” HCP LS REDWOOD CITY, LLC,AVINGER, INC.,a Delaware limited liability companya Delaware corporation By:/s/ Jonathan BergschneiderBy:/s/ Matthew FergusonJonathan BergschneiderExecutive Vice PresidentName: Matthew Ferguson Its: CFO By:/s/ Jeffrey M. Soinski Name: Jeffrey M. Soinski Its: CEO 3Exhibit 12.1 Statement re Computation of Ratio to Fixed Charges and Preference Dividends For the Year Ended December 31,2012 2013 2014 2015(in thousands)Earnings:Loss before income taxes$(33,855)$(39,890)$(31,950)$(47,344)Add: Fixed charges3403,2416,3235,480Deficiency of earnings to fixed charges$(33,515)$(36,649)$(25,627)$(41,864) Fixed Charges:Interest expense$6$2,934$6,016$5,167Estimated interest portion of rent expense 334307307313Total fixed charges$340$3,241$6,323$5,480 Ratio of earnings to fixed chargesn/an/an/an/a (1) Represents the estimated portion of operating lease rental expense that is considered by us to be representative of interest, which approximates one-thirdof the related total operating lease expense. Earnings were insufficient to cover combined fixed charges by $33.5 million, $36.6 million, $25.6 million, and $41.9 million for the years endedDecember 31, 2012, 2013, 2014 and 2015, respectively. For the periods indicated above, we had no outstanding shares of preferred stock with required dividend payments. Therefore, the ratio of earnings to fixedcharges for preferred stock dividends are identical to the ratios presented in the tables above. (1)Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in the following Registration Statements: (1) Registration Statement (Form S-3 No. 333-209368) of Avinger, Inc. (2) Registration Statement (Form S-8 No. 333-201928) pertaining to the 2009 Stock Plan, the 2015 Equity Incentive Plan, the 2015 Employee StockPurchase Plan of Avinger, Inc., and (3) Registration Statement (Form S-8 No. 333-209364) pertaining to the 2015 Equity Incentive Plan and the 2015 Employee Stock Purchase Plan ofAvinger, Inc. of our report dated March 7, 2016 with respect to the financial statements and schedule of Avinger, Inc., included in this Annual Report (Form 10-K) for theyear ended December 31, 2015. /s/ Ernst & Young LLP Redwood City, CaliforniaMarch 7, 2016 Exhibit 31.1 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICERPursuant toSecurities Exchange Act Rules 13a-14(a) and 15d-14(a),As Adopted Pursuant toSection 302 of the Sarbanes-Oxley Act of 2002 I, Jeffrey Soinski, hereby certify that: 1. I have reviewed this Annual Report on Form 10-K of Avinger, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this Annual Report on Form 10-K, fairly present inall material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this Annual Report on Form 10-K based on suchevaluation; and d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during registrant’s most recentfiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’s internal control over financial reporting; 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weakness in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting. Dated: March 7, 2016 /s/ JEFFREY M. SOINSKIJeffrey M. SoinskiChief Executive Officer(Principal Executive Officer) Exhibit 31.2 CERTIFICATION OF THE CHIEF FINANCIAL OFFICERPursuant toSecurities Exchange Act Rules 13a-14(a) and 15d-14(a),As Adopted Pursuant toSection 302 of the Sarbanes-Oxley Act of 2002 I, Matthew Ferguson, hereby certify that: 1. I have reviewed this Annual Report on Form 10-K of Avinger, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report; and d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,the registrant’s internal control over financial reporting; 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting. Dated: March 7, 2016 /s/ MATTHEW B. FERGUSONMatthew B. FergusonChief Financial Officer(Principal Financial and Accounting Officer) Exhibit 32.1 CERTIFICATIONS OF CHIEF EXECUTIVE OFFICERAND CHIEF FINANCIAL OFFICERPURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Avinger, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2015, as filed with the Securitiesand Exchange Commission (the “Report”), Jeffrey Soinski, as Chief Executive Officer of the Company, and Matthew Ferguson, Chief Financial Officer of theCompany, each hereby certifies, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), to his knowledge: 1. The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. IN WITNESS WHEREOF, the undersigned have set their hands hereto as of the 7 day of March, 2016. /s/ JEFFREY M. SOINSKI/s/ MATTHEW B. FERGUSONJeffrey M. SoinskiMatthew B. FergusonChief Executive OfficerChief Financial Officer(Principal Executive Officer)(Principal Financial and Accounting Officer) This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to beincorporated by reference into any filing of the Registrant under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended(whether made before or after the date of the Form 10-K), irrespective of any general incorporation language contained in such filing. 

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