Avinger Inc Annual Report 2017

Plain-text annual report

Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549 FORM 10-K (Mark One) xx ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2016 or oo 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, 2016 as reported by the NASDAQ Global Market on such date, was approximately $73.6 million. Thiscalculation does not reflect a determination that certain persons are affiliates of the registrant for any other purpose. As of March 13, 2017, the number of outstanding shares of the registrant’s common stock, par value $0.001 per share, was 23,913,359. DOCUMENTS INCORPORATED BY REFERENCE Portions of the information called for by Part III of this Form 10-K is hereby incorporated by reference to the definitive proxy statement for theregistrant’s 2017 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal yearended December 31, 2016. Table of Contents AVINGER, INC.ANNUAL REPORT ON FORM 10-KFOR THE FISCAL YEAR ENDED DECEMBER 31, 2016TABLE OF CONTENTS PagePart IItem 1.Business2Item 1A.Risk Factors15Item 1B.Unresolved Staff Comments38Item 2.Properties38Item 3.Legal Proceedings38Item 4.Mine Safety Disclosures38 Part IIItem 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities39Item 6.Selected Financial Data41Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations42Item 7A.Quantitative and Qualitative Disclosures About Market Risk53Item 8.Financial Statements and Supplementary Data53Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure53Item 9A.Controls and Procedures53Item 9B.Other Information54 Part IIIItem 10.Directors, Executive Officers and Corporate Governance55Item 11.Executive Compensation55Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters55Item 13.Certain Relationships and Related Transactions, and Director Independence55Item 14.Principal Accountant Fees and Services55 Part IVItem 15.Exhibits and Financial Statement Schedules56Signatures86Exhibit Index87 “Avinger,” “Pantheris,” and “Lumivascular” are trademarks of our company. Our logo and our other trade names, trademarks and service marksappearing 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. 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 and expectations regarding our clinical studies, including our VISION trial and plans to conduct further clinical studies; · our plans to modify our current products, or develop new products, to address additional indications; · our ability to obtain additional financing through our “at-the-market” program and future equity or debt financings; · 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, including the ability of Pantheris to qualify forreimbursement codes used by other atherectomy products; · our ability to continue as a going concern; · 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 revenue, cost of revenue, gross margins, and expenses, including research and development and selling, general andadministrative expenses; · 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. 1Table 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 international 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 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. 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 for PAD include stents, angioplasty, and atherectomy, which is the use ofa catheter-based device for the removal of plaque. These treatments also have limitations in their safety or efficacy profiles and frequently result in recurrenceof the disease, 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 though the useof optical coherence tomography, or OCT, a high resolution, light-based, radiation-free intravascular imaging technology. Our Lumivascular platformprovides physicians with real-time OCT images from the inside of an artery, and we believe Ocelot and Pantheris are the first products to offer intravascularvisualization during CTO crossing and atherectomy, respectively. We believe this approach will significantly improve patient outcomes by providingphysicians with a clearer picture of the artery using radiation-free image guidance during treatment, enabling them to better differentiate between plaque andhealthy arterial structures. Our Lumivascular platform is designed to improve patient safety 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 commenced commercialization of Pantheris as part of our Lumivascular platform in the United States and in select internationalmarkets in March 2016 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. In addition to the commercialization of Pantheris in the United States and select international markets in March 2016, we began commercializingour initial non-Lumivascular platform products in 2009 and introduced our Lumivascular platform products in the United States in late 2012. We generatedrevenues of $19.2 million in 2016, $10.7 million in 2015 and $11.2 million in 2014. 2Table of Contents Our Products Our current products include our Lightbox console and our various catheters used in PAD treatment. All of our revenues are currently derived fromsales of our Lightbox console and our various PAD catheters and related services in the United States and select international markets. Each of our currentproducts is, and our future products will be, designed to address significant unmet clinical needs in the treatment of vascular disease. LUMIVASCULAR PRODUCTS NameClinicalIndication Size (Length, Diameter) Regulatory Status OriginalClearance DateLightboxOCT ImagingN/AFDA ClearedCE MarkNovember 2012September 2011Pantheris 8FAtherectomy110cm, 8 French (F)FDA ClearedCE MarkOctober 2015June 2015Pantheris 7FAtherectomy110cm, 7FFDA ClearedCE MarkMarch 2016June 2015OcelotCTO Crossing110cm, 6FFDA ClearedCE MarkNovember 2012September 2011Ocelot MVRXCTO Crossing110cm, 6FFDA ClearedDecember 2012Ocelot PIXLCTO Crossing135/150cm, 5FFDA ClearedCE MarkDecember 2012October 2012 Lightbox is cleared for use with compatible Avinger products. The Ocelot system is intended to facilitate the intra-luminal placement of conventional guidewires beyond stenotic lesions includingsubtotal and chronic total occlusions in the peripheral vasculature prior to further percutaneous interventions using OCT-assistedorientation and imaging. The system is an adjunct to fluoroscopy and provides images of vessel lumen, plaques and wall structures. TheOcelot system is contraindicated for use in the iliac, coronary, cerebral, renal and carotid vasculature. NON-IMAGING PRODUCTS NameIndication Size (Length, Diameter) Regulatory Status OriginalClearance DateWildcatGuidewire SupportCTO Crossing110cm, 6F110cm, 6FFDA ClearedFDA ClearedCE MarkFebruary 2009August 2011May 2011Kittycat 2CTO Crossing150cm, 5FFDA ClearedCE MarkOctober 2011September 2011 The Wildcat catheter is intended to facilitate the intraluminal placement of conventional guidewires beyond stenotic lesions (includingsubtotal and 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. The Kittycat 2 catheter is intended to facilitate the intraluminal placement of conventional guidewires beyond stenotic lesions (includingsubtotal 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. This original clearance date is for the 7F version of Wildcat. The commercially available version of Wildcat is listed and was cleared inAugust 2010. 3(1)(2)(2)(2)(1)(2)(1)(3)(2)(1)(2)(3)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 vessel to the physician on a highdefinition monitor during the procedure. Lightbox is configured with two monitors, one for the physicians, and one for the Lightbox technician. 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 theEEL 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 enables physicians to specifically target the portion of the artery where the plaque resides while minimizing disruption to healthy arterialstructures. The excised plaque is deposited in the nosecone of the device and removed from the artery within the device. In October 2015, we received 510(k) clearance from the FDA for commercialization of Pantheris. We made minor modifications to Pantheris after thecompletion of the VISION trial and commenced sales in the United States and select international markets following receipt of FDA approval for thisenhanced version of Pantheris 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 CTO crossing catheter to incorporate real-time OCT imaging, which allows physicians to see the inside of an artery during a CTOcrossing procedure. Physicians have traditionally relied solely on fluoroscopy and tactile feedback to guide catheters through complicated blockages. Ocelotallows 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. We received CE Mark for Ocelot in September 2011 and received FDA 510(k) clearance inNovember 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 forperipheral arteries above the knee. We received CE Mark for Ocelot PIXL in October 2012 and received FDA 510(k) clearance in December 2012. Wereceived FDA 510(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. 4Table of Contents 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. 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. 5Table of Contents 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% Although the original VISION study protocol was not designed to follow patients beyond six months, we recently began working with 18 of theVISION sites to re-consent patients in order for them to be evaluated for patient outcomes through 12 and 24 months following initial treatment. Theselonger-term outcomes were presented for an interim subset of 55 patients at a major medical conference in January 2016. The key metrics reported for thisgroup were freedom from target lesion revascularization, or TLR, and freedom from amputation at 12 months and 24 months, which were 86% and 82%,respectively, based on Kaplan-Meier curve assessments. Data collection for the remaining patients from participating sites is ongoing, and we expect to receive 12 and 24-month results for a total ofapproximately 125 patients by May 2017 and to release this data at a major medical conference shortly thereafter. 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 currently consists of two area Vice Presidents, Regional and Territory Sales managers, Lumivascular Account specialists, and oneDirector of International Sales. Territory Sales managers are responsible for all product sales, which include disposable catheters and sale and service of ourLightbox console, while Lumivascular account specialists are primarily responsible for case coverage and account support. We have an extensive hands-onsales training program, focused on our technologies, Lumivascular image interpretation, case management, sales processes, sales tools and implementing oursales and marketing programs and compliance with applicable federal and state laws and regulations. Our sales team is supported by a highly specializedmarketing team, which is divided into three areas of focus: clinical training and education, marketing communications and product development. We alsohave a small team of field engineers responsible for installation, service and maintenance of our Lightbox consoles. As of December 31, 2016, we had 70 employees focused on sales and marketing. Our sales, general and administrative expenses for the years endedDecember 31, 2016, 2015 and 2014 were $40.0 million, $29.2 million and $18.5 million, respectively. No single customer accounted for more than 10% ofour revenues during 2016, 2015 or 2014. 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 6Table of Contents Medtronic. Competitors in the atherectomy market include Boston Scientific, Cardiovascular Systems, Medtronic, Philips and Spectranetics. Somecompetitors have attempted to combine intravascular imaging with atherectomy and may have current programs underway to do so. These and othercompanies may attempt to incorporate on-board visualization into their products in the future. 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 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. 7Table 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, 2016, we held 11 issued U.S. patents and had 23 U.S. utility patent applications and 2 PCT applications pending. As ofDecember 31, 2016, we also had 17 issued patents from outside of the United States. As of December 31, 2016, we had 41 pending patent applicationsoutside of the United States, including in Australia, Canada, China, Europe, India and Japan. As we continue to research and develop our products andtechnology, we intend to file additional U.S. and foreign patent applications related to the design, manufacture and therapeutic uses of our devices. Ourissued 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, 2016, we held four registered U.S. trademarks and one pending U.S. trademark application. In Europe, we hold three registeredtrademarks. 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 have developedversions of Pantheris with enhanced cutting capability. We are also developing a next-generation CTO crossing device to target both theperipheral 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, 2016, we had 29 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, 2016, 2015 and 2014were $15.5 million, $15.7 million and $11.2 million, respectively. 8Table of Contents 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 assemble all of our products at our manufacturing facility but certain critical processes such as coating and sterilization are done byoutside vendors. We expect our current manufacturing facility will be sufficient to meet our anticipated growth through at least 2018. 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 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 single vendors for our laser and data acquisition card that are keycomponents of our Lightbox. These components are critical to our products and there are relatively few alternative sources of supply for them. We do notcarry a significant inventory of these components. Identifying and qualifying additional or replacement suppliers for any of the components used in ourproducts could involve significant time and cost. Any supply interruption from our vendors or failure to obtain additional vendors for any of the componentsused to manufacture our products would limit our ability to manufacture our products and could therefore harm our business, financial condition and resultsof operations. 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 ourproducts 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 CDHS. 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. Our Quality System has undergone 20 external audits by third-parties and regulatory authorities since 2009, the latest ofwhich occurred in January 2017 and resulted in zero observations of 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. 9Table of Contents Government Regulation In general, medical device companies must navigate a challenging regulatory environment. In the United States the FDA regulates the medicaldevice market to ensure the safety and efficacy of these products. The FDA allows for two primary pathways for a medical device to gain approval forcommercialization: a successful pre-market approval, or PMA application or 510(k) premarket notification submission. A completely novel product must gothrough the more rigorous premarket approval, or PMA, if it cannot receive authorization through a 510(k). The FDA has established three different classes ofmedical devices that indicate the level of risk associated with using a device and consequent degree of regulatory controls needed to govern its safety andefficacy. Class I and Class II devices are considered lower risk and often can gain approval for commercial distribution by submitting an application to theFDA, generally known as the 510(k) process. The devices regarded as the highest risk by the FDA are designated Class III status and generally require thesubmission of a PMA application for approval to commercialize a product. These generally include life-sustaining, life-supporting, or implantable devices ordevices without a known predicate technology already approved by the FDA. The 510(k) clearance path can be significantly less time-consuming and arduous than PMA approval, making this route generally preferable for amedical device company. A 510(k) application must include documentation that its device is substantially equivalent to a technology already clearedthrough a 510(k) or in distribution before May 28, 1976 for which the FDA has not required a PMA submission. The FDA has 90 days from the date of thepremarket equivalence acceptance to authorize or decline commercial distribution of the device. However, similar to the PMA process, clearance 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, and a PMA must be approved before the device can be commercialized. All of our currentlymarketed products have received commercial clearance and associated indications for use through the 510(k) regulatory pathway with the FDA, some withthe support of clinical data. After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a changein its intended use, will require a new 510(k) submission and clearance before the modified device can be commercialized. The FDA requires eachmanufacturer to make this determination initially, but the FDA can review any such decision and can disagree with the manufacturer’s determination. If theFDA disagrees with the determination not to seek a new 510(k) clearance or PMA the FDA may retroactively require a new 510(k) clearance or premarketapproval. The FDA could also require a manufacturer to cease marketing and distribution of the modified device and/or recall the modified device until510(k) clearance or PMA approval is obtained. Also, in these circumstances, a manufacturer may be subject to significant regulatory fines, penalties, andenforcement actions. A PMA application must include reasonable scientific and clinical data that demonstrates the device is safe and effective for the intended uses andindications being sought. The application must also include preclinical testing, technical, manufacturing and labeling information. If the FDA determines theapplication can undergo substantive review, it has 180 days to review the submission, but it can typically take longer (up to several years) as this regulatorybody can request additional information or clarifications. The FDA may also impose additional regulatory hurdles for a PMA, including the institution of anadvisory panel of experts to assess the application or provide recommendations as to whether to approve the device. Although the FDA in the end approvesor disapproves the device, in nearly all cases the FDA follows the recommendation from the advisory panel. As part of this process, the FDA will usuallyinspect the manufacturing facilities and operations prior to approval to verify compliance with quality control regulations. Significant changes in themanufacturing of a device, or changes in the intended use, indications and labeling or design of a product require new PMA applications or PMAsupplements for a 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. 10Table of Contents 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. 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. Inthe latest FDA audit in 2013, there were no observations that involved a material violation of regulatory requirements, and no non-conformances were noted.Our responses to the observations noted in 2009 and 2011 were accepted by the FDA, and we believe that we are in substantial compliance with the QSR.BSI, our European Notified Body, inspected our facility several times between 2010 and 2015 and found zero non-conformances. BSI conducted fourexternal audits in 2016 and zero non-conformances were found in all except for one audit, for which four minor non-conformances were found. The BSI auditperformed in January 2017 resulted in zero non-conformances. Failure to comply with applicable regulatory requirements can result in enforcement action by FDA, which may include any of the followingsanctions: · warning letters, adverse publicity, 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 28 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. 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 11Table of Contents resources and tools for the government to police healthcare fraud, with expanded subpoena power for HHS, additional funding to investigate fraud and abuseacross the healthcare 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. 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. 12Table of Contents 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. Failure to comply with the reporting requirements can result in significant 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 per annual report of $150,000) and from $10,000 to $100,000 foreach knowing failure to report (up to a maximum per annual report of $1.0 million). Additionally, there are criminal penalties if an entity intentionally makesfalse statements in such reports. We are subject to the Sunshine Act and the information we disclose may lead to greater scrutiny, which may result inmodifications to established practices and additional costs. Additionally, similar reporting requirements have also been enacted on the state leveldomestically, and an increasing number of countries worldwide either have adopted or are considering similar laws requiring transparency of interactionswith healthcare professionals. 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 criminalpenalties and/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.Furthermore, the current presidential administration and Congress are also expected to attempt broad sweeping changes to the current health care laws. Weface uncertainties that might result from modification or repeal of any of the provisions of the Affordable Care Act, including as a result of current and futureexecutive orders and legislative actions. The impact of those changes on us and potential effect on the medical device industry as a whole is currentlyunknown. But, any changes to the Affordable Care Act are likely to have an impact on our results of operations, and may have a material adverse effect on ourresults of operations. We cannot predict what other health care programs and regulations will ultimately be implemented at the federal or state level or theeffect any future legislation or regulation in the United States may have on our business. 13Table of Contents 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. 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 2017 went into effect as of October 1, 2016. National average Medicare payment rates for PADprocedures for fiscal year 2017 are $10,593 - $19,754 for inpatient procedures and, $4,800 - $14,511 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, 2016, we had 197 employees, including 54 in manufacturing and operations, 70 in sales and marketing, 21 in research anddevelopment, 25 in clinical affairs, regulatory affairs, and quality assurance and 27 in finance, general administrative and executive administration. All197 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. 14Table of Contents Item 1A. Risk Factors Investing in our common stock involves a high degree of risk. We have identified the following risks and uncertainties that may have a materialadverse effect on our business, financial condition, results of operations and future growth prospects. Our business could be harmed by any of these risks.The risks and uncertainties described below are not the only ones we face. If any of the risks actually occur, our business, financial condition, results ofoperations, cash flows and prospects could be materially and adversely affected. The trading price of our common stock could decline due to any of theserisks, and you may lose all or part of your investment. In assessing these risks, you should also refer to the other information contained in this Annual Reporton Form 10-K, including our financial statements and related notes. Please also see “Cautionary Notes Regarding Forward-Looking Statements.” 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; · market acceptance of our Lumivascular platform and products, including Pantheris; · 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, political, industry and market conditions, including economic and political uncertainty caused by the recent U.S.presidential election; · 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 $56.1 million in 2016, $47.3 million in2015 and $32.0 million in 2014. As of December 31, 2016, we had an accumulated deficit of approximately $252.4 million. These losses and ouraccumulated deficit reflect the substantial investments we have made to develop our Lumivascular platform and acquire customers. 15Table of Contents We expect our losses to continue for the foreseeable future as we continue to make significant future expenditures to develop and expand ourbusiness. In addition, as a public company, we will continue to incur significant legal, accounting and other expenses. Accordingly, we cannot assure youthat we will achieve profitability in the future or that, if we do become profitable, we will sustain profitability. Our failure to achieve and sustain profitabilitywould negatively impact the market price of our common stock. Our limited commercialization experience and number of approved products makes it difficult to evaluate our current business, predict our futureprospects, assess the long-term performance of our products, 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. In October 2015, we received 510(k) clearance from the FDA, for commercialization ofPantheris, and we received an additional 510(k) clearance for an enhanced version of Pantheris in March 2016 and commenced sales of Pantheris in the U.S.and select international markets promptly thereafter. Our limited commercialization experience and number of approved products make it difficult toevaluate our current business and predict our future prospects. We have encountered and will continue to encounter risks and difficulties frequentlyexperienced by companies in rapidly-changing industries. These risks and uncertainties include the risks inherent in clinical trials, market acceptance of ourproducts, and increasing and unforeseen expenses as we continue to attempt to grow our business. In addition, we have in the past, and may in the future, become aware of performance issues with our products. For example, prior to becomingcommercially available on March 1, 2016, Pantheris had been used in clinical trials mainly in controlled situations. Since its commercialization and as morephysicians have used Pantheris, we have received additional feedback on its performance, both positive and negative. We have addressed certain of theseconcerns and plan to make additional product changes and improvements as a result of this feedback. However, there can be no assurance that the changesand improvements will fully address the performance issues that have been raised. Even if these issues are resolved and physician concerns addressed, futureproduct performance issues may occur and our reputation could suffer, which could lead to decreased sales of our products. In 2016, our revenue wasadversely impacted by these product performance issues. We also had to incur additional expenses to make product changes and improvements, includingimprovements to the Pantheris imaging fiber connection, and to replace products in accordance with our warranty policy. This additional expense, and anyfuture expense that we may incur as a result of future product performance issues, will negatively impact our financial performance and results of operations.If we are unable to improve the performance of our products to meet the concerns of the physicians our revenue may decline further or fail to increase. 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 and use 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, and Pantheris became commercially available in the United States and select international markets promptly thereafter. As such,increased acceptance among physicians of these products may not occur. Our ability to successfully market Pantheris will also be limited due to a number offactors including regulatory restrictions in our labeling. We cannot assure you that demand for Pantheris and our other Lumivascular platform products willcontinue to grow and our products may not significantly penetrate current or new markets. Market demand for Pantheris and physician adoption of thisproduct also may be negatively impacted by product performance issues that we have experienced and the need to replace certain products in accordancewith our warranty policy. In some cases utilization of our products has been less than we anticipated historically. If demand for Pantheris and our otherLumivascular platform products does not increase and we cannot sell our products as planned, our financial results will be harmed. In addition, marketacceptance may be hindered if physicians are not presented with compelling data 16Table of Contents from long-term studies of the safety and efficacy of our Lumivascular platform products compared to alternative procedures, such as angioplasty, stenting,bypass surgery or other atherectomy procedures. For example, if patients undergoing treatment with our Lumivascular platform products have retreatmentrates higher than or comparable with the retreatment rates of alternative procedures, it will be difficult to demonstrate the value of our Lumivascular platformproducts. Any studies we may conduct comparing our Lumivascular platform with alternative procedures will be expensive, time consuming and may notyield positive results. Physicians will also need to appreciate the value of real-time imaging in improving patient outcomes in order to change currentmethods for treating PAD patients. In addition, demand for our Lumivascular platform products may decline or may not increase as quickly as we expect.Failure of our Lumivascular platform products to significantly penetrate current or new markets, or our failure to successfully commercialize Pantheris, wouldharm our business, financial condition and results 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 the current model of Pantheris, some physicians may prefer to have a technician or second physician assisting with the operation of thecatheter as well as a separate technician to operate the Lightbox, potentially making it less financially attractive for physicians and their hospitals andmedical facilities. It may take significant time and expense to modify our products to allow a single physician to operate the entire system and we canprovide no guarantee that we will be able to make such modifications, or obtain any additional and necessary regulatory clearances for such modifications.Also, although the OCT images created by our Lightbox may make it possible for physicians to reduce the degree to which fluoroscopy and contrast dye areused when using our Lumivascular platform products compared to competing endovascular products, physicians are still using both fluoroscopy and contrastdye, particularly with Pantheris. As a result, risks of complications from radiation and contrast dye are still present and may limit the commercial success ofour products. Finally, it will require training for technicians and physicians to effectively operate our Lumivascular platform products, including interpretingthe OCT images created by our Lightbox, which may affect adoption of our products by physicians. These or other characteristics and features of ourLumivascular platform may cause our products not to be widely adopted and harm our business, financial condition and results of operation. 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 our “at-the-market” program, whereby we may issue and sell shares of common stock, together with our cashand cash equivalents at December 31, 2016 and expected revenues from operations, will be sufficient to satisfy our capital requirements and fund ouroperations until at least September 30, 2017. We will need to raise additional funds through future equity or debt financings within the next nine months tomeet our operational needs and capital requirements for product development, clinical trials and commercialization. We can provide no assurance that wewill be successful in raising funds pursuant to additional equity or debt financings or that such funds will be raised at prices that do not create substantialdilution for our existing stockholders. Given the recent decline in our stock price, any financing that we undertake in the next nine months could causesubstantial dilution to our existing stockholders. 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, our “at-the-market” program, our initial public offering, or IPO, and our follow-on public offering in August 2016. We do not know when or if ouroperations will generate sufficient cash to fund our ongoing operations. We cannot be certain that additional capital will be available as needed onacceptable terms, or at all. In the future, we may require additional capital in order to (i) continue to conduct research and development activities, (ii) conductpost-market clinical studies, as well as clinical trials to obtain regulatory clearances and approvals necessary to commercialize our Lumivascular platformproducts, (iii) expand our sales and marketing infrastructure and (iv) acquire complementary businesses technologies or products; or (v) respond to businessopportunities, challenges, a decline in sales, increased regulatory obligations or unforeseen circumstances. Our future capital requirements will depend onmany factors, including: · the degree of success we experience in commercializing our Lumivascular platform products, particularly Pantheris; · 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 extent to which our Lumivascular platform is adopted by hospitals for use by interventional cardiologists, vascular surgeons and interventionalradiologists in the treatment of PAD; 17Table of Contents · 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, delay establishment of sales and marketing capabilities orother activities necessary to commercialize our products, and significantly scale back our operations. If this were to occur, our ability to continue to grow andsupport our business and to respond to business challenges could be significantly limited. We rely heavily on our sales professionals to market and sell our products. If we are unable to hire, effectively train, manage, improve the productivity of,and retain our sales professionals, our business will be harmed, which would impair our future revenue and profitability. Our success largely depends on our ability to hire, train, manage and improve the productivity levels of our sales professionals. We haveexperienced direct sales employee and sales management turnover in the past. For example, in February 2017, John D. Simpson, our Senior Vice President,Sales and Marketing resigned. The loss of any of senior management in our sales team could weaken our sales expertise and harm our business, and we maynot be able to find adequate replacements on a timely basis, or at all. The changes in senior management that have occurred over the past several years maycontinue to create instability in our sales force leading to attrition in sales representatives in the future. Competition for sales professionals who are familiar with and trained to sell our products continues to be strong. We train our existing and recentlyrecruited sales professionals to better understand our existing and new product technologies and how they can be positioned against our competitors’products. These initiatives are intended to improve the productivity of our sales professionals and our revenue and profitability. It takes time for the salesprofessionals to become productive following their hiring and training and there can be no assurance that sales representatives will reach adequate levels ofproductivity, or that we will not experience significant levels of attrition in the future. Measures we implement to improve the productivity may not besuccessful and may instead contribute to instability in our operations, additional departures from our sales organization, or further reduce our revenue,profitability, and harm our business and our stock price may be adversely impacted as a result. If our revenue does not improve, or if our cost of revenue and/or operating expenses increase by a greater percentage than our revenue, our gross marginsand operating margins may be adversely impacted, our loss from operations will increase, and our cash used in operating activities will increase, whichcould reduce our assets and have a material adverse effect on our stock price. Our gross margin decreased to 25% for the year ended December 31, 2016 compared to 40% for the year ended December 31, 2015. This decreasewas primarily attributable to costs associated with our expanded manufacturing infrastructure related to the introduction of Pantheris against lower thananticipated volumes, and lower manufacturing yields as we implemented our improvement to the Pantheris imaging fiber connection. Gross margin was alsonegatively impacted by an increase of $1.0 million related to warranty expense and a $0.8 million charge in the year ended December 31, 2016,predominantly related to excess and obsolete Pantheris inventories. 18Table of Contents Our gross margin is impacted by the revenue that we generate and the costs incurred to generate the revenue. To the extent that our revenue does notgrow as quickly as expected or declines, it is difficult to improve our gross margins as our fixed costs must be spread over a lower revenue base. Our futurerevenue may be adversely affected by a number of factors including the competitive market environment in which we operate, which may result in a decreasein the number of products sold or a decrease in the average selling prices achieved for our product sales. If our revenue does not improve, or if our cost ofrevenue increases by a greater percentage than our revenue, or if we are not able to reduce expenses in the event of a decline in revenue, we may continue togenerate losses from operations and use cash, which could reduce our cash faster than budgeted, cause us to need to obtain additional financing and have amaterial adverse effect on our operations and stock price. 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, 2016, we had $41.3 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. In particular, the covenants of the Loan Agreement include a covenant that we maintain a minimum of $5.0 million of cash and certaincash equivalents, and we had to achieve minimum revenue of $7.0 million in 2015 and $23.0 million in 2016, and will have to achieve minimum revenue of$40.0 million in 2017, $50.0 million in 2018, $60.0 million in 2019 and $70.0 million in 2020 and in each year thereafter, as applicable. On October 28,2016, we amended the terms of the Loan Agreement, to reduce the minimum revenue that we must achieve in 2016 to $18.0 million. If we fail to meet theapplicable minimum revenue target in any calendar year, the Loan Agreement provides a cure right if we prepay a portion of the outstanding principal equalto 2.0 times the revenue shortfall. We are also subject to standard event of default provisions under the Loan Agreement that, if triggered, would allow thedebt to be accelerated, which could significantly deplete our cash resources, cause us to raise additional capital at unfavorable terms, require us to sellportions of our business or result in us becoming insolvent. We used the initial net proceeds under the Loan Agreement to repay and terminate our creditfacility with PDL Biopharma, Inc., or PDL, however, our obligation to continue to make royalty payments to PDL out of our quarterly revenues throughApril 18, 2018 remain in effect. Additionally, until there are no further obligations to periodically pay to PDL a percentage of our net revenue, we mustcomply 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. The existing collateral pledged under the Loan Agreement, the covenants to which we are bound and theobligation to pay a certain percentage of our future revenues to PDL, even though the PDL debt has been repaid, may prevent us from being able to secureadditional debt or equity 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 thebenefits of our Lumivascular platform. If physicians do not value the benefits of on-board imaging and the enhanced visualization enabled by our productsduring an endovascular intervention as compared to our competitor’s products, or do not believe that such benefits improve clinical outcomes, ourLumivascular platform products may not be widely adopted. 19Table of Contents 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. 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. 20Table of Contents 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. 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; 21Table of Contents · 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 obtain 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. 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 limited 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. 22Table of Contents 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 other applications for which we do not currently have clearance, such as the coronary arteries,we will need to make modifications to these products, conduct further clinical trials and obtain new clearances or approvals from the FDA. There can be noassurance that we will successfully develop these modifications, that future clinical studies will be successful or that the expense of these activities will beoffset by additional revenues. 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 Office of Inspector General, or OIG, the Department of Justice, or DOJ, state attorneys general, and other foreign and domestic governmentagencies. Our failure to comply with laws, rules and regulations governing our relationships with physicians, or an investigation into our compliance by theOIG, DOJ, state attorneys general and 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. 23Table of Contents 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; · 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. 24Table of Contents 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; · 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 single vendors for our laser and data acquisition card that are keycomponents of our Lightbox. These components are critical to our products and there are relatively few alternative sources of supply. We do not carry asignificant inventory of these components. Identifying and qualifying additional or replacement suppliers for any of the components or sub-assemblies usedin our products could involve significant time and cost. Any supply interruption from our vendors or failure to obtain additional vendors for any of thecomponents or sub-assemblies incorporated into our products would limit our ability to manufacture our products and could therefore harm our business,financial condition and results of operations. 25Table of Contents 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. For example, in February 2017, John D. Simpson, our Senior Vice President of Sales and Marketing, resigned. Changes in our executive managementteam resulting from the hiring or departure of executives could disrupt our business. In particular, our founder and Executive Chairman, Dr. John B. Simpson,is the visionary behind many of our product development activities and he actively supports our clinical trials and physician education and training efforts. IfDr. Simpson was no longer working at our company, our industry credibility, product development efforts and physician relationships would be harmed. Wedo 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 professionals. We have, from time to time, experienced,and we 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. 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 international 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, 2016, we had federal and state net operating loss carryforwards, or NOLs, due to prior period losses of $219.1 million and$161.8 million, respectively, which if not utilized will begin to expire in 2027 for federal purposes and 2017 for state purposes. Generally, NOLs can be usedto offset taxable income for U.S. federal income tax purposes. However, Section 382 of the Internal Revenue Code of 1986, as amended, may limit the NOLswe 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 “ownership change”generally occurs if one or more stockholders or groups of stockholders who own at least 5% of our stock increase their ownership by more than 50 percentagepoints 26Table of Contents over their lowest ownership percentage within a rolling three-year period. Similar rules may apply under state tax laws. It is possible that prior transactionswith respect to our stock may have caused, and that future issuances or sales of our stock (including certain transactions involving our stock that are outsideof 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 use to reduce our taxable income, potentially increasing and accelerating our liability for incometaxes, and also potentially causing those tax attributes to expire unused. Any limitation on using NOLs could (depending on the extent of such limitationand the NOLs previously used) result in our retaining less cash after payment 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 NOLs were available as an offset against such income for U.S. federal income tax reportingpurposes, which could harm our profitability. We may acquire other companies or technologies or be the target of strategic transactions, which could divert our management’s attention, result inadditional dilution to our stockholders and otherwise 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. In addition, we sometimes receive inquiries relating to potential strategic transactions, including from third parties who may seek to acquire us. Wewill continue to consider and discuss such transactions as we deem appropriate. Such potential transactions may divert the attention of management, andcause us to incur various costs and expenses in investigating and evaluating such transactions, whether or not they are consummated. 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. They may devote substantial resources towards obtaining claims that cover the design of our atherectomy products to prevent the marketingand selling of competitive products. We may become a party to patent or trademark infringement or trade secret claims and litigation as a result of these andother third-party intellectual property rights being asserted against us. The defense and prosecution of these matters are both costly and time consuming.Vendors from whom we 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 or trademark 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 productsto avoid infringement. 27Table of Contents 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. 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, 2016, we held 11 issued U.S. patents and had 23 U.S. utility patent applications and 2 PCT applications pending. As of December 31, 2016, wealso had 17 issued patents outside of the United States. As of December 31, 2016, we had 41 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 requiresignificant additional research and development resources, and we may not be able to complete it successfully. These risks could be difficult to eliminate ormanage, and, if not addressed, could harm our business, financial condition and operating results. 28Table of Contents 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; · 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. Weplan to apply for 510(k) clearance for improvements to our Pantheris device mid-2017, and we intend to file for FDA clearance of a lower-profile device forbelow-the-knee peripheral vascular applications in the second half of 2017. Delays in obtaining clearance or approval could increase our costs and harm ourrevenues 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 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 a publiclyavailable Correction and Removal report to the FDA and in many cases, similar reports to other regulatory agencies. This report could be classified by theFDA as a device recall which could lead to increased scrutiny by the FDA, other international regulatory agencies and our customers regarding the qualityand safety of our devices. Furthermore, the submission of these reports has been and could be used by competitors against us in competitive situations andcause customers to delay purchase decisions or cancel orders and would harm our reputation. 29Table of Contents 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 scientific data to substantiate the claims and that our promotionallabeling and advertising is neither false nor misleading in any respect. If the FDA or FTC determines that any of our advertising or promotional claims aremisleading, not substantiated or not permissible, we may be subject to enforcement actions, including Warning Letters, adverse publicity, and we may berequired to revise our promotional claims 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 or approvals 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 determination of whether or not a modification requires a newapproval, supplement or clearance; however, the FDA can review a manufacturer’s decision. Any modification to an FDA-cleared device that wouldsignificantly affect its safety or efficacy or that would constitute a major change in its intended use would require a new 510(k) clearance or possibly apremarket approval. We may not be able to obtain additional 510(k) clearances or premarket approvals for new products or for modifications to, or additionalindications for, our Lumivascular platform products in a timely fashion, or at all. Delays in obtaining required future clearances would harm our ability tointroduce new or enhanced products in a timely manner, which in turn would harm our future growth. We have made modifications to our Lumivascularplatform products in the past and will make additional modifications in the future that we believe do not or will not require additional clearances orapprovals. If the FDA disagrees and requires new clearances or approvals for the modifications, we may be required to recall and to stop selling or marketingour Lumivascular platform products as modified, which could harm our operating results and require us to redesign our Lumivascular platform products. Inthese circumstances, we may be subject to significant enforcement actions. We plan to make further modifications to the design of Pantheris to enhancecutting efficiency and access smaller vessels. Future versions of Pantheris incorporating these enhancements may require additional regulatory clearances orapprovals. 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 products and cause our revenues to decline. 30Table of Contents 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 2014 and 2015 and found zero non-conformances. BSI conducted four external audits in 2016 and zeronon-conformances were found in all except for one audit, for which four minor non-conformances were found. The BSI audit performed in January 2017resulted in zero non-conformances. We can provide no assurance that we will continue to remain in substantial compliance with the QSR. If the FDA, CDHSor BSI inspect our facility and discover compliance problems, we may have to shut down our facility and cease manufacturing until we can take theappropriate remedial steps to correct the audit findings. Taking corrective action may be expensive, time consuming and a distraction for management and ifwe experience a shutdown or delay at our manufacturing facility we may be unable to produce our Lumivascular platform products, which would harm ourbusiness. 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. 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. The current presidential administration and Congress are also expected to attempt broad sweeping changes to the current health care laws. We faceuncertainties that might result from modifications or repeal of any of the provisions of the Affordable Care Act, including as a result of current and futureexecutive orders and legislative actions. The impact of those changes on us and potential effect on the medical device industry as a whole is currentlyunknown. But, any changes to the Affordable Care Act are likely to have an impact on our results of operations, and may have a material adverse effect on ourresults of operations. We cannot predict what other health care programs and regulations will ultimately be implemented at the federal or state level or theeffect of any future legislation or regulation in the United States may have on our business. 31Table of Contents The continuing efforts of the government, insurance companies, managed care organizations and other payors of healthcare services to contain orreduce 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; · HIPAA, as amended by the HITECH Act, which protects the security and privacy 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. 32Table of Contents 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 party 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. We have incurred and expect to incur additional costs to comply with these disclosurerequirements, including costs related to determining the source of any of the relevant minerals and metals used in our products. Additional costs couldinclude the cost of remediation and other changes to products, processes, or sources of supply as a consequence of such verification activities. In addition,our implementation of these rules could adversely affect the sourcing, supply, and pricing of materials used in our products. We may face reputational harm ifwe determine that certain of our components contain minerals not determined to be conflict free or if we are unable to alter our processes or sources of supplyto avoid using such materials. Reputational harm could adversely affect our business, financial condition or results of operations. 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 significantly since our IPO and is likely to continue to fluctuate substantially. As a result of this price fluctuation,investors may experience losses on their investments in our stock. In addition, the development stage of our operations may make it difficult for investors toevaluate the success 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: · sales of stock by our existing stockholders, including our affiliates; · market acceptance of our Lumivascular platform and products, including Pantheris; · the results of our clinical trials; · changes in analysts’ estimates, investors’ perceptions, recommendations by securities analysts or our failure to achieve analysts’ and our ownestimates; · the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections; · actual or anticipated fluctuations in our financial condition and operating results; · quarterly variations in our or our competitors’ results of operations; 33Table of Contents · 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 device industry inparticular; · 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. From time to time, our affiliates may sell stock for reasons due to their personal financial circumstances. These sales may be interpreted by otherstockholders as an indication of our performance and result in subsequent sales of our stock that have the effect of creating downward pressure on the marketprice of our common stock. In addition, the stock prices of many companies in the medical device industry have experienced wide fluctuations that haveoften been unrelated to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation followingperiods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attentionof management from our business and harm our business, results of operations, financial condition, reputation and cash flows. These factors may materiallyand adversely affect the market price of our common stock. We may fail to meet our publicly announced guidance or other expectations about our business and future operating results, which would cause our stockprice to decline. We have provided and may continue to provide guidance about our business and future operating results. In developing this guidance, ourmanagement must make certain assumptions and judgments about our future performance, including projected revenues and the timing of regulatoryapprovals. Furthermore, analysts and investors may develop and publish their own projections of our business, which may form a consensus about our futureperformance. Our business results may vary significantly from such guidance or that consensus due to a number of factors, many of which are outside of ourcontrol, and which could adversely affect our operations and operating results. Furthermore, if we make downward revisions of our previously announcedguidance, or if our publicly announced guidance of future operating results fails to meet expectations of securities analysts, investors or other interestedparties, the price of our common stock would decline. 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. 34Table of Contents We will need to raise additional funds through future equity or debt financings within the next 12 months to meet our operational needs and capitalrequirements for product development, clinical trials and commercialization. We can provide no assurance that we will be successful in raising fundspursuant to additional equity or debt financings or that such funds will be raised at prices that do not create substantial dilution for our existing stockholders.Given the recent decline in our stock price, any financing that we undertake in the next 12 months could cause substantial dilution to our existingstockholders. 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. TheRegistration Statement was declared effective by the SEC on March 8, 2016. In August 2016, we issued and sold 9,857,800 shares of our common stock inour follow-on public offering at a public offering price of $3.50 per share, for net proceeds of approximately $31.5 million after deducting underwritingdiscounts and commissions of approximately $2.4 million and other expenses of approximately $0.6 million. We have also established, and may in the futureestablish, “at-the-market” programs pursuant to which we may offer and sell shares of our common stock pursuant to the Registration Statement. During theyear ended December 31, 2016, we sold 1,095,378 shares of common stock under our “at-the-market” program with Cowen at an average price of $4.87 andraised net proceeds of $5.2 million, after payment of $160,000 in commissions and fees to Cowen. In addition, pursuant to our Securities Purchase Agreementwith CRG, the Registration Statement also registers for resale 348,262 shares of common stock held by CRG, which may be sold freely in the public market. Ifthese additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline. Sales ofnewly issued securities under the Registration Statement will result 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 March 1, 2017, our directors, officers and their affiliates collectively control approximately 19.2% 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. Our 2016 financial statements contain disclosure that there is substantial doubt about our ability to continue as a going concern, and we will needadditional financing to execute our business plan, to fund our operations and to continue as a going concern. Since inception, we have experienced recurring operating losses and negative cash flows and we expect to continue to generate operating losses andconsume significant cash resources for the foreseeable future. There is substantial doubt regarding our ability to continue as a going concern within one yearfrom the date the financial statements are issued. Our independent registered public accounting firm has expressed in its auditors’ report on our financialstatements, included in this Annual Report on Form 10-K, a “going concern” opinion, meaning that we have recurring losses from operations and negativecash flows from operations that raise substantial doubt regarding our ability to continue as a going concern. We have prepared our financial statements on agoing concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. Our2016 financial statements do not include any adjustment to reflect the possible future effects on the recoverability and classification of assets or the amountsand classification of liabilities that may result from the outcome of this uncertainty. 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 reporting. In order to maintainand, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources andmanagement oversight may be required. Our management and other 35Table of Contents personnel now need to devote a substantial amount of time to these compliance initiatives. As a result, management’s attention may be diverted from otherbusiness concerns and our costs and expenses will increase, which could harm our business and operating results. We may need to hire more employees in thefuture or engage outside consultants to comply with 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; 36Table of Contents · 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; · 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. 37Table 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. In February 2016, we entered into an additional non-cancelable operating lease for 6,600square feet of warehouse and storage space in Redwood City, California, the lease agreement expires in November 2019. We believe that our current facilitiesare adequate for our current and anticipated future needs through at least 2018. 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. 38Table 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 tablesets forth for the periods indicated the high and low sales prices per share of our common stock as reported on The NASDAQ Global Market: Low High Fiscal 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$24.75Fiscal Year ending December 31, 2016First Quarter$8.51$20.46Second Quarter$9.92$13.72Third Quarter$3.66$11.99Fourth Quarter$3.50$5.05 HOLDERS OF RECORD As of March 13, 2016, there were 23,913,359 shares of our common stock held by 196 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, 2016. 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. 39Table of Contents 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. In addition, our Loan Agreement with CRG prohibits usfrom paying any 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, 2016, with respect to theshares of our common stock that may be issued under our existing equity compensation plans. Plan Category (a) Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights(b) Weighted Average Exercise Price of Outstanding Options, Warrants and Rights (c) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securites Reflected in Column (a))Equity compensationplans approved bystockholders 6,074,304$9.601,183,937 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 Equity Incentive 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 aggregatenumber of shares of common stock outstanding on the last day of the preceding fiscal year, or (iii) such number of shares that may be determined by ourboard of directors. Our 2015 Employee Stock Purchase Plan provides that on the first day of each fiscal year commencing in fiscal year 2016 the numberof shares authorized for issuance under our 2015 Employee Stock Purchase Plan is automatically increased by a number equal to the lesser of (i) 493,000shares of common stock, (ii) 1.5% of the aggregate number of shares of common stock outstanding on such date, or (iii) an amount determined by ourboard of directors or a duly authorized committee of our board of directors. 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 2016 other than those transactions previously reported to the SEC on a Quarterly Report onForm 10-Q or Current Report on Form 8-K. 40(2)(1)(1)(2)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, 2016, 2015 and 2014 and the balance sheet data as of December 31, 2016 and 2015 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 Ended December 31, 2016 2015 201420132012 (in thousands, except per share data)Revenues$19,214$10,713$11,213$12,964$8,560Cost of revenues14,4456,4786,5138,2054,151Gross profit4,7694,2354,7004,7594,409 Operating expenses:Research and development15,53615,69411,22415,97315,416Selling, general and administrative39,95029,23118,50325,75822,848Total operating expenses55,48644,92529,72741,73138,264Loss from operations(50,717)(40,690)(25,027)(36,972)(33,855) Interest income (expense), net(5,399)(5,127)(6,014)(2,923)19Other income (expense), net(12)(1,527)(909)5(19)Loss before provision for income taxes(56,128)(47,344)(31,950)(39,890)(33,855)Provision for income taxes——14119Net loss and comprehensive loss(56,128)(47,344)(31,964)(39,901)(33,864)Adjustment to net loss resulting from convertiblepreferred stock modification—(2,384)———Net loss and comprehensive loss attributable tocommon stockholders$(56,128)$(49,728)$(31,964)$(39,901)$(33,864) Net loss attributable to common stockholders per share,basic and diluted$(3.39)$(4.38)$(132.63)$(170.52)$(162.03) Weighted average common shares used to compute netloss per share, basic and diluted16,57411,362241234209 Balance Sheets Data: As of December 31,2016 20152014 2013 2012(in thousands)Cash and cash equivalents$36,096$43,059$12,316$12,221$20,617Working capital2043,5769,91715,73422,462Total assets53,55754,10424,43724,50830,324Long-term borrowings—29,56518,22819,622—Convertible notes and accrued interest——8,60913,661—Convertible preferred stock——132,26099,65499,659Accumulated deficit(252,389)(196,261)(146,533)(114,569)(74,668)Total stockholders’ equity (deficit)4,24115,589(143,868)(112,782)(73,644) 41Table 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, that are based on the beliefs of our management, as well as assumptions made by,and information currently available to, our management. Our actual results could differ materially from those discussed in these forward-lookingstatements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section of this Annual Report onForm 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 international markets. Our current products include our Lightbox imaging console, as well as our Wildcat, Kittycat 2, 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. 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 allow us todemonstrate 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. Although the original VISION study protocolwas not designed to follow patients beyond six months, we recently began working with 18 of the VISION sites to re-consent patients in order for them to beevaluated for patient outcomes through 12 and 24 months following initial treatment. Data collection for the remaining patients from participating sites isongoing, and we expect to receive 12 and 24-month results for a total of approximately 125 patients by May 2017 and to release this data shortly thereafter.We commenced commercialization of Pantheris as part of our Lumivascular platform in the United States and in select international markets in March 2016,after obtaining the required marketing 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. 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 assemble all of our products at our manufacturing facility, but certain critical processes such as coating and sterilization are done by outsidevendors. We expect our current manufacturing facility will be sufficient to meet our anticipated growth through at least 2018. 42Table of Contents In addition to commercialization of Pantheris in the United States and select international markets in March 2016, we began commercializing ourinitial non-Lumivascular platform products in 2009 and introduced our Lumivascular platform products in the United States in late 2012. We generatedrevenues of $19.2 million in 2016, $10.7 million in 2015 and $11.2 million in 2014. During the years ended December 31, 2016, 2015 and 2014, our net losswas $56.1 million, $47.3 million and $32.0 million, respectively. We have not been profitable since inception, and as of December 31, 2016, ouraccumulated deficit was $252.4 million. Since inception, we have financed our operations primarily through private placements of our preferred securitiesand, to a lesser extent, debt financing arrangements. In January 2015, we completed an initial public offering, or IPO, of 5.0 million shares. As a result of ourIPO, which closed in February 2015, we received net proceeds of approximately $56.9 million, after underwriting discounts and commissions ofapproximately $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 and anadditional $10.0 million on June 15, 2016 under the Loan Agreement. Contingent on achievement of certain revenue milestones, among other conditions, wewould have been eligible to borrow an additional $10.0 million, on or prior to March 29, 2017; however, we did not achieve the level of revenues required toborrow the final $10.0 million. Contemporaneous with the execution of the Loan Agreement, we entered into a Securities Purchase Agreement with CRG,pursuant to which CRG purchased 348,262 shares of common stock on September 22, 2015 at a price of $14.357 per share, which represents the 10-dayaverage of closing prices of our common stock ending on September 21, 2015. Pursuant to the Securities Purchase Agreement, we filed a registrationstatement covering the resale of the shares sold to CRG and must comply with certain affirmative covenants during the time that such registration statementremains in effect. We used the proceeds from the CRG borrowing and securities purchase to retire our outstanding principal and accrued interest with PDLBiopharma, or PDL, and to retire the principal and accrued 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 an “at-the-market” program pursuant to a Sales Agreement with Cowen and Company, or Cowen, through which we may, from time to time, issue and sell shares ofcommon stock having an aggregate offering value of up to $50.0 million. The shelf registration statement also covers the resale of the shares sold toCRG. The registration statement was declared effective by the SEC on March 8, 2016. During the year ended December 31, 2016, we sold 1,095,378 shares ofcommon stock under the “at-the-market” program at an average price of $4.87 and raised net proceeds of $5.2 million, after payment of $160,000 incommissions and fees to Cowen. In addition, in August 2016, we completed a follow-on public offering of 9,857,800 shares of our common stock for netproceeds of approximately $31.5 million after deducting underwriting discounts and commissions of approximately $2.4 million and other expenses ofapproximately $0.6 million. The 9,857,800 shares include the exercise in full by the underwriters of their option to purchase an additional 1,285,800 sharesof our common stock. Components of our Results of Operations Revenues All of our revenues are currently derived from sales of our Lightbox console and sales of our various PAD catheters, as well as related services in theUnited States and select international markets. We expect our revenues to increase as we introduce new Lumivascular platform products including newversions of Pantheris. No single customer accounted for more than 10% of our revenues during 2016, 2015 or 2014. Revenues may fluctuate from quarter-to-quarter due to a variety of factors including capital equipment purchasing patterns that are typically heaviertowards the end of the calendar year and lighter in the first quarter. In addition, during the first quarter, our results can be harmed by adverse weather and byresetting of annual patient healthcare insurance plan deductibles, both of which may cause patients to delay elective procedures. In the third quarter, thenumber of elective procedures nationwide is historically lower than other quarters throughout the year, which we believe is primarily attributable to thesummer vacations of physicians and their patients. 43Table of Contents Cost of Revenues and Gross Margin Cost of revenues consists primarily of costs related to manufacturing overhead, materials and direct labor. We expense all warranty costs andinventory provisions as cost of revenues. We record adjustments to our inventory valuation for estimated excess, obsolete and non-sellable inventories basedon assumptions about future demand, past usage, changes to manufacturing processes and overall market conditions. 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 placed Lightboxes held by customers and certain direct costs such as those incurred for shipping our products. We calculate gross margin as gross profit divided by revenues. Our gross margin has been and will continue to be affected by a variety of factors,primarily production volumes, manufacturing costs, product yields, headcount 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. We expect R&D expenses as a percentage of revenues to vary over time depending on the level and timing of ournew product development efforts, as well as our clinical development, clinical trial and other related activities. Selling, General and Administrative Expenses Our current sales efforts focus on establishing new Lumivascular platform sites by marketing our products to physicians and hospital administrators.Additionally, we seek to support and increase the use of our Lumivascular platform products by our current customers through case coverage, clinicaltraining 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 believe that our U.S. sales infrastructure and establishing distributor relationships in select regionsoutside the United States will drive further adoption of our Lumivascular platform. 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. 44Table of Contents 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. Results of Operations: Year Ended December 31, 2016 2015 2014(in thousands)Revenues$19,214$10,713$11,213Cost of revenues14,4456,4786,513Gross profit4,7694,2354,700Gross margin25%40%42% Operating expenses:Research and development15,53615,69411,224Selling, general and administrative39,95029,23118,503Total operating expenses55,48644,92529,727Loss from operations(50,717)(40,690)(25,027) Interest income (expense), net(5,399)(5,127)(6,014)Other income (expense), net(12)(1,527)(909)Loss before provision for income taxes(56,128)(47,344)(31,950)Provision for income taxes——14Net loss and comprehensive loss$(56,128)$(47,344)$(31,964) Comparison of Years Ended December 31, 2016 and 2015 Revenues. Revenues increased $8.5 million, or 79%, to $19.2 million during the year ended December 31, 2016, compared to $10.7 million duringthe year ended December 31, 2015. For the year ended December 31, 2016, sales of our Lightbox imaging consoles increased by 15% to $4.7 million andsales of our disposable catheters increased by 119% to $14.5 million. The increased revenues in 2016 reflects the commercial launch of Pantheris inMarch 2016 and our continuing focus on Lumivascular programs to educate physicians on the benefits of OCT, training related to image interpretation andbuilding the installed base of the Lightbox imaging consoles. Cost of Revenues and Gross Margin. Cost of revenues increased $7.9 million, or 123%, to $14.4 million during the year ended December 31, 2016,compared to $6.5 million during the year ended December 31, 2015. This increase was attributable to the increase in revenues from sales and manufacturingoverhead costs as we invested significantly in operational infrastructure to support anticipated growth and the commercial launch of Pantheris. Gross marginfor the year ended December 31, 2016 decreased to 25%, compared to 40% in the year ended December 31, 2015. This decrease was primarily attributable tocosts associated with our expanded manufacturing infrastructure related to the introduction of Pantheris against lower than anticipated volumes, and lowermanufacturing yields as we implemented our improvement to the Pantheris imaging fiber connection and the proportion of revenues attributable to ourproducts sold under agreements with international distributors. Gross margin was also negatively impacted by an increase of $1.0 million related to warrantyexpense and a $0.8 million charge in the year ended December 31, 2016 predominantly related to excess and obsolete Pantheris inventories. Research and Development Expenses. R&D expenses decreased $0.2 million, or 1%, to $15.5 million during the year ended December 31, 2016,compared to $15.7 million during the year ended December 31, 2015. This decrease was primarily due to a $0.7 million decrease in outside services anddepreciation. These decreases were partially offset by a $0.2 million increase in personnel-related expenses and an increase of $0.3 million in productdevelopment materials and related costs. Personnel-related expenses included stock-based compensation expense of $2.7 million compared to $2.5 millionfor the year ended December 31, 2016 and 2015, respectively. 45Table of Contents Selling, General and Administrative Expenses. SG&A expenses increased $10.8 million, or 37%, to $40.0 million during the year endedDecember 31, 2016, compared to $29.2 million during the year ended December 31, 2015. This increase was primarily due to a $8.4 million increase inpersonnel-related expenses, an increase of $2.0 million in marketing costs and an increase of $0.4 million relating to the allocation of facilities expense.Personnel-related expenses increased due to an increase in headcount and stock-based compensation expense. Personnel-related expenses included stock-based compensation expense of $4.1 million and $3.1 million for the years ended December 31, 2016 and 2015, respectively. Increases in our marketingcosts were associated with pre-commercial preparation expenses primarily relating to $1.1 million of Pantheris devices being designated as training anddemonstration units for use by our sales and marketing personnel. Interest Income (Expense), Net. Interest income (expense), net increased $0.3 million, or 5%, to an expense of $5.4 million during the year endedDecember 31, 2016, compared to an expense of $5.1 million during the year ended December 31, 2015. This increased expense was attributable to theadditional interest expense associated with the $10.0 million of borrowings on June 15, 2016 under our Loan Agreement with CRG, partially offset by theretirement of our outstanding principal and accrued interest with PDL, and extinguishment of the principal and accrued interest underlying our notes usingthe proceeds from the CRG borrowing and securities purchase in September 2015. Other Income (Expense), Net. Other income (expense), net decreased to an expense of $12,000 during the year ended December 31, 2016, comparedto expense of $1.5 million during the year ended September 30, 2015. Other expense for the year ended December 31, 2015, was primarily attributable to thereversal of the current fair value of the embedded derivative asset of $1.1 million upon the repayment of our notes in September 2015, expense of $0.9million to reflect the carrying value of our ongoing royalty obligation to PDL and non-cash charges related to the amortization of debt discount and issuancecosts associated with the notes and the credit agreement upon their repayment in September 2015, partially offset by the remeasurement of the fair value ofthe derivative instruments associated with our notes through the date of their repayment. 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 wasrelated to our commercial focus on our Lumivascular programs to broaden physician exposure to OCT, image interpretation and building the installed base ofthe Lightbox imaging console prior to the commercial launch of Pantheris, 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. 46Table 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. Liquidity and Capital Resources As of December 31, 2016, we had cash and cash equivalents of $36.1 million and an accumulated deficit of $252.4 million, compared to cash andcash equivalents of $43.1 million and an accumulated deficit of $196.3 million as of December 31, 2015. We currently believe our existing cash and cashequivalents, expected revenues and the net proceeds from our “at-the-market” program, will be sufficient to meet our capital requirements and fund ouroperations until at least September 30, 2017. We will need to raise additional funds through future equity or debt financings within the next nine months tomeet our operational needs and capital requirements for product development, clinical trials and commercialization. We can provide no assurance that wewill be successful in raising funds pursuant to additional equity or debt financings or that such funds will be raised at prices that do not create substantialdilution for our existing stockholders. Given the recent decline in our stock price, any financing that we undertake in the next 12 months could causesubstantial dilution to our existing stockholders. Additional debt financing, if available, may involve covenants restricting our operations or our ability toincur additional debt. Any additional debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders andrequire significant debt service payments, which diverts resources from other activities. Additional financing may not be available at all, or in amounts or onterms acceptable to us. If we are unable to obtain additional financing, we may be required to delay the development, commercialization and marketing ofour products and significantly scale back our business and operations. To date, our primary sources of capital have been private placements of preferredstock, debt financing agreements, our “at-the-market” program, our IPO and our follow-on public offering in August 2016. In September 2015, we entered into a Loan Agreement with CRG, under which we could borrow up to $50.0 million, of which $30.0 million wasimmediately available and drawn down by us. Of the remaining $20.0 million, $10.0 million was drawn down on June 15, 2016 and the remaining $10.0million was contingent on the achievement of certain net revenue milestones prior to December 31, 2016,which were not met as of this date. As ofDecember 31, 2016, we had $41.3 million outstanding under the Loan Agreement. See section titled “Contractual Obligations.” 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 had to achieve minimum revenue of $7.0 million in 2015and $23.0 million in 2016, and must achieve minimum revenue of $40.0 million in 2017, $50.0 million in 2018, $60.0 million in 2019 and $70.0 million in2020 and in each year thereafter, as applicable. On October 28, 2016, we amended the terms of the Loan Agreement, to reduce the minimum revenue that wemust achieve in 2016 to $18.0 million. If we fail to meet the applicable minimum revenue target in any calendar year, the Loan Agreement provides a cureright if we prepay a portion of the outstanding principal equal to 2.0 times the revenue shortfall. In addition, the Loan Agreement prohibits the payment ofcash dividends on our capital stock and also places restrictions on mergers, sales of assets, investments, incurrence of liens, incurrence of indebtedness andtransactions with affiliates. CRG may accelerate the payment terms of the Loan Agreement upon the occurrence of certain events of default set forth therein,which include our failure to make timely payments of amounts due under the Loan Agreement, the failure to adhere to the covenants set forth in the LoanAgreement, our insolvency or upon the occurrence of a material adverse change. We were in compliance with the covenants under the Loan Agreement as ofDecember 31, 2016. On February 3, 2016, we filed a universal shelf registration statement to offer up to $150.0 million of our securities and entered into an “at-the-market” program pursuant to a Sales Agreement with Cowen, as sales agent, through which we may, from time to time, issue and sell common stock with anaggregate value of up to $50.0 million. The shelf registration statement was declared effective by the Securities and Exchange Commission, or SEC, onMarch 8, 2016. Cowen is acting as sole sales agent for any sales 47Table of Contents made under the Sales Agreement for a 3% commission on gross proceeds. Common stock sold in the “at-the-market” program is sold at prevailing marketprices at the time of the sale, and, as a result, prices vary. Unless otherwise terminated earlier, the Sales Agreement continues until all shares available underthe Sales Agreement have been sold. During the year ended December 31, 2016, we sold 1,095,378 shares of common stock under the “at-the-market”program at an average price of $4.87 and raised net proceeds of $5.2 million, after payment of $160,000 in commissions and fees to Cowen. In addition, inAugust 2016, we issued and sold 9,857,800 shares of our common stock in a follow-on public offering at a public offering price of $3.50 per share, for netproceeds of approximately $31.5 million after deducting underwriting discounts and commissions of approximately $2.4 million and other expenses ofapproximately $0.6 million. The 9,857,800 shares include the exercise in full by the underwriters of their option to purchase an additional 1,285,800 sharesof our common stock. Cash Flows Year Ended December 31, 2016 2015 2014(in thousands)Net cash (used in) provided by:Operating activities$(53,069)$(40,883)$(21,801)Investing activities(971)(322)(117)Financing activities47,07771,94822,013Net increase in cash and cash equivalents$(6,963)$30,743$95 Net Cash Used in Operating Activities Net cash used in operating activities for the year ended December 31, 2016 was $53.1 million, consisting primarily of a net loss of $56.1 million andan increase in net operating assets of $8.7 million, offset by non-cash charges of $11.7 million. The increase in net operating assets was primarily due to thecommercial launch of Pantheris in March 2016 resulting in an increase in accounts receivable and inventories. The increase in net operating assets was alsoattributable to an increase in prepaids and other current assets, and decreases in accrued expenses and other current liabilities, due to timing of payments,decreases in other liabilities related to the repayment of assigned interest to PDL and a decrease in accrued compensation. The non-cash charges primarilyconsisted of depreciation, stock-based compensation, non-cash interest expense and other charges related to our credit agreement with CRG, and an increasedreserve for excess and obsolescence in inventories. 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. 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 Investing Activities Net cash used in investing activities in the year ended December 31, 2016 was $1.0 million consisting of purchases of property and equipment. Netcash 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 millionfrom the release of a restriction against our cash. Net cash used in investing activities in 2014 was $0.1 million consisting of purchases of property andequipment. Net Cash Provided by Financing Activities Net cash provided by financing activities in the year ended December 31, 2016 of $47.1 million primarily relates to net proceeds of $36.6 millionfrom the issuance of common stock pursuant to our follow-on public offering and under the Sales Agreement with Cowen, net proceeds of $9.7 million fromthe debt financing under the Loan Agreement with CRG, and $0.8 million proceeds from purchases under our employee stock purchase plan and from theexercise of stock options. 48Table of Contents 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. Off-Balance Sheet Arrangements We currently have no off-balance sheet arrangements, such as structured finance, special purpose entities, or variable interest entities. 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, 2016, our contractualobligations due by period (in thousands): Payments Due by PeriodLess Than 1 Year1 - 3 Years 3-5 Years More Than 5Years TotalOperating lease obligations$1,974$3,948$—$—$5,922Capital lease obligations2613——39Ongoing royalty obligations withPDL1,220474——1,694CRG Loan—14,32941,761—56,090Noncancellable purchasecommitments3,542———3,542$6,762$18,764$41,761$—$67,287 Our contractual obligations have not otherwise significantly changed from December 31, 2016. 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 and an additional $10.0 million on June 15, 2016. We did not achieve thelevel of revenues required to be eligible to borrow the final $10.0 million. 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. 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. 49Table 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 were required to pay interest under the notes at a rate equal to 30-day LIBOR, plus 6% per annum subject toa minimum 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. 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 April 2018 atthe 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 increasing annually 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, we must complywith certain affirmative covenants and negative covenants limiting our ability to, among other things, undergo a change in control or dispose of assets, ineach case subject to certain exceptions. We were in compliance with the covenants under the credit agreement as of December 31, 2016. Lease Agreements 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. In February 2016, we entered into an additionalnon-cancelable operating lease for warehouse and storage space in Redwood City, California, that expires in November 2019. 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. 50Table of Contents Revenue Recognition All of our revenues are currently derived from sales of our Lumivascular platform products, sales of various non-imaging PAD catheters and relatedservices in the United States and select international 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. In addition, we provide our Lightbox under a limited commercial evaluationprogram to allow certain strategic accounts to install and utilize the Lightbox for a limited trial period of three to six months. When a Lightbox is placed, weretain title to the equipment and it remains capitalized on our balance sheet under property and equipment. The costs to maintain these placed Lightboxesheld by customers are charged to cost of revenues as incurred. We evaluate our lease and commercial evaluation program agreements and account for these contracts under the guidance pertaining to accountingfor leases and for revenue arrangements with multiple deliverables. The guidance requires arrangement consideration to be allocated between a leasedeliverable and a non-lease deliverable based upon the relative selling prices of the deliverables, using a specific hierarchy. The hierarchy is asfollows: (i) vendor-specific objective evidence of fair value of the respective elements, (ii) third-party evidence of selling price, and (iii) best estimate ofselling price, or BESP. We allocate arrangement consideration 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 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 contingent disposable products are delivered. For sales through distributors, we recognize revenue when title to the product and the risk of loss transfers from us to the distributor. The distributorsare responsible for all marketing, sales, training and warranty in their respective territories. The standard terms and conditions contained in our distributionagreements do not provide price protection or stock rotation rights to any of its distributors. In addition, its distributor agreements do not allow thedistributor to return or exchange products, and the distributor is obligated to pay us upon invoice regardless of its ability to resell the product. 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. Inventories Inventories, which includes material, labor and overhead costs, are stated at standard cost, which approximates actual cost, determined on a first-in,first-out basis, and not in excess of net realizable value. The cost basis of our inventory is reduced for any products that are considered excessive or obsoletebased upon assumptions about future demand and market conditions. If actual future demand or market conditions are less favorable than those projected bymanagement, additional inventory write-downs may be required, which could have a material impact on our gross profit and inventory balances. 51Table of Contents 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. The following table summarizes the weighted average assumptions we used to determine the fair value of stock options: Year Ended December 31, 2016 2015 2014Expected term (years)6.16.36.3Expected volatility49.7%49.8%59.1%Risk-free interest rate1.5%1.8%1.8%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 our IPO in January 2015, the fair value of our common stock isdetermined 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 our IPO inJanuary 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 estimate forfeitures at the time of grant, and revise those estimates in subsequent periods if actual forfeitures differfrom those estimates. We use historical data to estimate pre-vesting option forfeitures and record share-based compensation expense only for those awardsthat are expected to vest. To the extent actual forfeitures differ from the estimates, we record the difference as a cumulative adjustment in the period that theestimates 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. 52Table of Contents 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. 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 the 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, 2016, 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. None and one of our customers represented more than 10% of our accounts receivable as of December 31, 2016 and 2015, 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 57 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. 53Table of Contents 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, 2016. Based on such evaluation, our principal executive officer andprincipal financial officer have concluded that, as of December 31, 2016, our disclosure controls and procedures were effective. 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, 2016. 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 2016 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 None. 54Table of Contents PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information required by this item will be contained in our definitive proxy statement to be filed with the SEC in connection with our 2017annual meeting of stockholders, or the 2017 Proxy Statement, which is expected to be filed not later than 120 days after the end of our fiscal year endedDecember 31, 2016, and is incorporated by reference in this report. 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. Changes to or waivers of thecode will be disclosed on the same website. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding any amendment to, orwaiver of, any provision of the code in the future by disclosing such information on our website. ITEM 11. EXECUTIVE COMPENSATION The information required by this item will be set forth in the 2017 Proxy Statement and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by this item will be set forth in the 2017 Proxy Statement and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by this item will be set forth in the 2017 Proxy Statement and is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this item will be set forth in the 2017 Proxy Statement and is incorporated herein by reference. 55Table 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 Firm58Financial StatementsBalance Sheets59Statements of Operations and Comprehensive Loss60Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)61Statements of Cash Flows62Notes to Financial Statements63 (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. Financial statement schedules relating to the allowance for doubtful accounts receivable and for sales returns follows (inthousands): DescriptionBalance atBeginningof YearCharged tocosts andexpensesWrite offsBalance atEnd ofYear Allowance for doubtful accountsreceivable:Fiscal year ended 2014$20$—$—$20Fiscal year ended 2015$20$—$—$20Fiscal year ended 2016$20$3$2$21 Balance atBeginningof YearCharged tocosts andexpensesWrite offs Balance atEnd ofYearAllowance for sales returns:Fiscal year ended 2014$88$135$146$77Fiscal year ended 2015$77$37$55$59Fiscal year ended 2016$59$114$130$43 (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. 56Table of Contents AVINGER, INC.INDEX TO FINANCIAL STATEMENTSAs of December 31, 2016 and 2015, and theYears Ended December 31, 2016, 2015 and 2014 Report of Independent Registered Public Accounting Firm58Financial Statements:Balance Sheets59Statements of Operations and Comprehensive Loss60Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)61Statements of Cash Flows62Notes to Financial Statements63 57Table 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, 2016 and 2015, 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, 2016. 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, 2016 and 2015, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, 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. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 tothe financial statements, the Company’s recurring losses from operations and its need for additional capital raise substantial doubt about its ability tocontinue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include anyadjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that mayresult from the outcome of this uncertainty. /s/ Ernst & Young LLP Redwood City, CaliforniaMarch 14, 2017 58Table of Contents AVINGER, INC.BALANCE SHEETS(In thousands, except share and per share data) December 31, December 31,2016 2015AssetsCurrent assets:Cash and cash equivalents$36,096$43,059Accounts receivable, net of allowance for doubtful accounts of $21 at December 31, 2016 and $20 atDecember 31, 20153,5702,060Inventories8,4625,405Prepaid expenses and other current assets662533Total current assets48,79051,057 Property and equipment, net4,5552,822Other assets212225Total assets$53,557$54,104 Liabilities and stockholders’ equityCurrent liabilities:Accounts payable$1,607$1,113Accrued compensation2,8073,083Accrued expenses and other current liabilities3,0673,285Borrowings, current portion41,289—Total current liabilities48,7707,481 Borrowings, net of current portion—29,565Other long-term liablities5461,469Total liabilities49,31638,515 Commitments and contingencies (Note 10) Stockholders’ equity:Preferred stock issuable in series, par value of $0.001Shares authorized: 5,000,000 at December 31, 2016 and December 31, 2015Shares issued and outstanding: none at December 31, 2016 and December 31, 2015——Common stock, par value of $0.001Shares authorized: 100,000,000 at December 31, 2016 and December 31, 2015Shares issued and outstanding: 23,776,033 at December 31, 2016 and 12,643,538 at December 31, 20152413Additional paid-in capital256,606211,837Accumulated deficit(252,389)(196,261)Total stockholders’ equity4,24115,589Total liabilities and stockholders’ equity$53,557$54,104 See accompanying notes. 59Table of Contents AVINGER, INC.STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS(In thousands, except per share data) Year Ended December 31,20162015 2014Revenues$19,214$10,713$11,213Cost of revenues14,4456,4786,513Gross profit4,7694,2354,700 Operating expenses:Research and development15,53615,69411,224Selling, general and administrative39,95029,23118,503Total operating expenses55,48644,92529,727Loss from operations(50,717)(40,690)(25,027) Interest income125402Interest expense(5,524)(5,167)(6,016)Other income (expense), net(12)(1,527)(909)Loss before provision for income taxes(56,128)(47,344)(31,950)Provision for income taxes——14Net loss and comprehensive loss(56,128)(47,344)(31,964)Adjustment to net loss resulting from convertible preferred stock modification—(2,384)—Net loss and comprehensive loss attributable to common stockholders$(56,128)$(49,728)$(31,964) Net loss attributable to common stockholders per share, basic and diluted$(3.39)$(4.38)$(132.63) Weighted average common shares used to compute net loss per share, basic and diluted16,57411,362241 See accompanying notes. 60Table of Contents AVINGER, INC.STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)(In thousands, except share data) Series A ConvertiblePreferred Stock Series A-1 ConvertiblePreferred Stock Series B ConvertiblePreferred Stock Series C ConvertiblePreferred Stock Series D ConvertiblePreferred Stock Series EConvertiblePreferredStock Common Stock AdditionalPaid-InAccumulatedTotal Stockholders’ Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount CapitalDeficitEquity (Deficit) Balance atDecember 31,2013326,591$6,183225,235$6,649755,486$27,272561,423$22,397722,367$37,153—$—240,692$—$1,787$(114,569)$(112,782)Issuance ofcommon stock————————————2,568—28—28Employee stock-basedcompensation——————————————641—641Issuance ofSeries EConvertiblePreferredstock, net ofissuance costs——————————2,671,62632,606—————Issuance ofcommon stockwarrants——————————————175—175Reclass of warrantliability toadditionalpaid-in capital——————————————34—34Net andcomprehensiveloss———————————————(31,964)(31,964)Balance atDecember 31,2014326,5916,183225,2356,649755,48627,272561,42322,397722,36737,1532,671,62632,606243,260—2,665(146,533)(143,868)Issuance ofcommon stock————————————49,621—432—432Employee stock-basedcompensation——————————————5,899—5,899Vesting ofrestrictedstock subjectto repurchase——————————————18—18Issuance ofSeries EConvertiblePreferredstock, net ofissuance costs——————————490,4725,372—————Issuance ofcommon stockwarrants——————————————804—804Exercise ofcommon stockwarrants————————————34,470—323—323Conversion ofpreferred stockto commonstock inconnectionwith the IPO(326,591)(6,183)(225,235)(6,649)(755,486)(27,272)(561,423)(22,397)(722,367)(37,153)(3,162,098)(37,978)5,753,2006137,626—137,632Additional sharesof commonstock issuedupon theconversion ofpreferred stockinto commonstock due toanti-dilutionprovisions1,214,7251(1)——Issuance ofcommon stockin IPO, net ofunderwritingdiscount,commissionsand issuancecosts————————————5,000,000556,893—56,898Issuance ofcommon stockrelated to CRGLoan, net ofissuance costs348,26214,794—4,795Convertiblepreferred stockmodification——————————————2,384(2,384)—Net andcomprehensiveloss———————————————(47,344)(47,344)Balance atDecember 31,2015————————————12,643,53813211,837(196,261)15,589Issuance ofcommon stock————————————163,936—805—805Employee stock-basedcompensation——————————————7,392—7,392Exercise ofcommon stockwarrants————————————15,381————Issuance ofcommon stockin PublicOfferings, netofunderwritingdiscount,commissionsand issuancecosts————————————10,953,1781136,57236,583Net andcomprehensiveloss———————————————(56,128)(56,128)Balance atDecember 31,2016—$——$——$——$——$——$—23,776,033$24$256,606$(252,389)$4,241 See accompanying notes. 61Table of Contents AVINGER, INC.STATEMENTS OF CASH FLOWS(In thousands) Year Ended December 31, 2016 2015 2014 Cash flows from operating activitiesNet loss$(56,128)$(47,344)$(31,964)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization1,5061,3001,451Amortization of debt issuance costs and debt discount222199212Stock-based compensation7,3925,899641Remeasurement of embedded derivatives—(835)(378)Write off of embedded derivatives—1,066—Noncash interest expense and other charges1,8122,0743,485Loss on extinguishment of convertible notes—861,234Provision for doubtful accounts receivable3——Provision for excess and obsolete inventories797(26)(48)Changes in operating assets and liabilities:Accounts receivable(1,512)7(441)Inventories(6,099)(2,307)1,714Prepaid expenses and other current assets(130)(363)444Other assets13(35)2Accounts payable4708417Accrued compensation(275)1,936(128)Accrued expenses and other current liabilities(191)(962)2,080Other long-term liabilities and accrued interest(949)(1,662)(122)Net cash used in operating activities(53,069)(40,883)(21,801) Cash flows from investing activitiesPurchase of property and equipment(971)(577)(117)Restricted cash—255—Net cash used in investing activities(971)(322)(117) Cash flows from financing activitiesPrincipal paydown of capital lease obligations(27)(22)(17)Payments on borrowing—(27,625)—Proceeds from convertible notes, net of issuance costs——4,700Proceeds from borrowings, net of issuance costs9,71629,124—Proceeds from the issuance of convertible preferred stock, net of issuance costs—6,17619,155Proceeds from the issuance of common stock related to CRG loan, net of issuance costs—4,794—Proceeds from public offerings, net of issuance costs36,58358,746—Proceeds from the exercise of common stock warrants—323—Payments for deferred initial public offering costs——(1,848)Proceeds from the issuance of common stock80543223Net cash provided by financing activities47,07771,94822,013 Net change in cash and cash equivalents(6,963)30,74395Cash and cash equivalents, beginning of period43,05912,31612,221Cash and cash equivalents, end of period$36,096$43,059$12,316 Supplemental disclosure of cash flow informationCash paid for interest$4,354$5,934$2,281 Noncash investing and financing activities:Conversion of convertible preferred stock to common stock upon initial public offering$—$137,632$—Accounts payable for purchases of property and equipment2416—Modification of convertible preferred stock—2,384—Reclass of warrant liability to additional paid-in capital——34Vesting of common stock subject to repurchase—185Issuance of common stock warrants—804175Transfer between inventory and property and equipment2,245921(916)Conversion of convertible notes and accrued interest into Series E convertible preferredstock——11,582 See accompanying notes. 62Table 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 international markets. The Company has developedits Lumivascular platform, which integrates optical coherence tomography (“OCT”) visualization with interventional catheters and is the industry’s onlysystem that provides real-time intravascular imaging during the treatment portion of PAD procedures. The Company’s Lumivascular platform consists of acapital component, Lightbox, as well as a variety of disposable catheter products. The Company’s current products include its non-imaging catheters,Wildcat and Kittycat, as well as its Lumivascular platform products, Ocelot, Ocelot PIXL and Ocelot MVRX, all of which are designed to allow physicians topenetrate a total blockage in an artery, known as a chronic total occlusion (“CTO”). In March 2016, the Company also received 510(k) clearance from theU.S. Food and Drug Administration (“FDA”) for commercialization of Pantheris, the Company’s image-guided atherectomy system, designed to allowphysicians to precisely remove arterial plaque in PAD patients. The Company commenced sales of Pantheris in the U.S. and select international marketspromptly thereafter. The Company is located in Redwood City, California. Liquidity Matters The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates therealization of assets and the satisfaction of liabilities in the normal course of business. The Company adopted FASB issued ASU No. 2014-15, Presentation ofFinancial Statements - Going Concern (Subtopic 205-40) effective December 31, 2016, which requires the Company to make certain disclosures if itconcludes that there is substantial doubt about the entity’s ability to continue as a going concern within one year from the date of the issuance of thesefinancial statements. In the course of its activities, the Company has incurred losses and negative cash flows from operations since its inception. As ofDecember 31, 2016, the Company had an accumulated deficit of $252,389,000. The Company expects to incur losses for the foreseeable future. TheCompany believes that its cash and cash equivalents of $36,096,000 at December 31, 2016, expected revenues and the net proceeds from its “at-the-market”program will be sufficient to allow the Company to fund its current operations until approximately September 30, 2017. The Company will seek additionalsources of funding in the form of debt financing or equity issuances. However, there can be no assurance that the Company will be successful in acquiringadditional funding at levels sufficient to fund its operations. These conditions raise substantial doubt about the Company’s ability to continue as a goingconcern within one year from the date of the issuance of these financial statements. If the Company is unable to raise additional capital in sufficient amountsor on terms acceptable to it, the Company may have to significantly reduce its operations or delay, scale back or discontinue the development of one or moreof its products. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company’s ultimatesuccess will largely depend on its continued development of innovative medical technologies, its ability to successfully commercialize its products and itsability to raise significant additional funding. Additionally, due to the substantial doubt about the Company’s ability to continue operating as a goingconcern and the material adverse change clause in the Term Loan Agreement with CRG Partners III L.P. and certain of its affiliated funds (collectively“CRG”), the entire amount of borrowings at December 31, 2016 has been classified as current in these financial statements. CRG has not invoked the materialadverse change clause. Public Offerings 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. On February 3, 2016, the Company filed a universal shelf registration statement to offer up to $150,000,000 of its securities and entered into an “at-the-market” program pursuant to a Sales Agreement with Cowen and Company (“Cowen”), through which it may, from time to time, issue and sell shares ofcommon stock having an aggregate offering value of up to $50,000,000. The shelf registration statement also covers the resale of the shares sold to CRG inSeptember 2015. The registration statement was declared 63Table of Contents effective by the SEC on March 8, 2016. During the year ended December 31, 2016, the Company sold 1,095,378 shares of common stock under the “at-the-market” program at an average price of $4.87 and raised net proceeds of $5,171,000, after payment of $160,000 in commissions and fees to Cowen. InAugust 2016, the Company issued and sold 9,857,800 shares of its common stock in its follow-on public offering, which includes the exercise in full by theunderwriters of their option to purchase 1,285,800 shares of common stock, at a public offering price of $3.50 per share. Net proceeds from the follow-onpublic offering were approximately $31,549,000 after deducting underwriting discounts and commissions of approximately $2,415,000 and expenses ofapproximately $538,000. 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. 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, 2016 and 2015. Financial instruments consist ofcash and cash equivalents, accounts receivable and payable, and other current liabilities and borrowings. The carrying amounts of cash and cash equivalents,accounts receivable and payable, and other current liabilities approximate their respective fair values because of the short-term nature of those instruments.Based upon the borrowing terms and conditions currently available to the Company, the carrying values of the borrowings approximate their fair value. Fairvalue accounting was applied to the warrant liabilities and embedded derivatives. No warrant liabilities or embedded derivatives were outstanding as ofDecember 31, 2016 and 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, 2016 and 2015, 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’ equity (deficit). There were nounrealized gains and losses as of December 31, 2016 and 2015. Any realized gains and losses and interest and dividends on available-for-sale securities areincluded in interest 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 64Table of Contents assets. During 2015, the Company was no longer required to secure its corporate card obligations. The release of the restriction against the Company’s cashwas included within investing activities on its statement of cash flows for the year ended December 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, 2016 and 2015. The Company’s accounts receivable are due from a variety of health care organizations in the United States and select international markets. AtDecember 31, 2016 and 2015, there were none and one, respectively, of the Company’s customers that represented 10% or more of the Company’s accountsreceivable. For the years ended December 31, 2016, 2015 and 2014, 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. The Company manufactures its commercial products in-house, including Pantheris and the Ocelot family of catheters. Certain of the Company’sproduct components and sub-assemblies continue to be manufactured by sole suppliers. Disruption in component or sub-assembly supply from thesemanufacturers 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 achieve widespread adoption in the marketplace, nor can there be anyassurance that existing devices or any future devices can be developed or manufactured at an acceptable cost and with appropriate performancecharacteristics. The Company is also subject to risks common to companies in the medical device industry, including, but not limited to, new technologicalinnovations, dependence upon third-party payors to provide adequate coverage and reimbursement, dependence on key personnel and suppliers, protectionof 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. 65Table of Contents 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 or placement agreement and are recorded at cost. Upon execution of a lease or placement agreement, the related equipment is reclassified frominventory to the property and equipment account. Depreciation expense for equipment held by customers is recorded as a component of cost of revenues.Leasehold improvements and assets recorded under capital leases are amortized using the straight-line method over the shorter of the lease term or estimateduseful economic life of the asset. 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, 2016, there we no deferred offering costs capitalized in other assets on the balance sheet. Deferred offering costs of $29,000were capitalized as of December 31, 2015. 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, 2016. 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 Company issued convertible notes in 2013 and 2014 that included features which were determined to be embedded derivatives requiringbifurcation and separate accounting. Prior to their extinguishment in September 2015, the Company recorded a compound derivative asset or liability relatedto redemption features embedded within its outstanding convertible notes. The embedded derivatives were initially recorded at fair value and are subject toremeasurement as of each balance sheet date. Any change in fair value is recognized as a component of other income (expense), net in the statements ofoperations and comprehensive loss. In September 2015, the Company repaid the outstanding convertible notes and accrued interest obligations in theirentirety. Accordingly, 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 66Table of Contents 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 sells its products directly to hospitals and medical centers as well as through distributors. The Company recognizesrevenue 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 abinding 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. 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. In addition, the Company provides a Lightbox under a limitedcommercial evaluation program to allow certain strategic accounts to install and utilize the Lightbox for a limited trial period of three to six months. When aLightbox is placed under a lease agreement or under a commercial evaluation program, the Company retains title to the equipment and it remains capitalizedon its balance sheet under property and equipment. Depreciation expense on these placed Lightboxes is recorded to cost of revenues on a straight-line basis.The costs to maintain these placed Lightboxes are charged to cost of revenues as incurred. The Company evaluates its lease and commercial evaluation program agreements and accounts for these contracts under the guidance in ASC 840,Leases and ASC 605-25, Revenue Recognition—Multiple Element Arrangements. The guidance requires arrangement consideration to be allocated between alease deliverable and a non-lease deliverable based upon the relative selling-price of the deliverables, using a specific hierarchy. The hierarchy is as follows:vendor-specific objective evidence of fair value of the respective elements, third-party evidence of selling price, or best estimate of selling price (“BESP”).The Company allocates arrangement 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. For sales through distributors, the Company recognizes revenue when title to the product and the risk of loss transfers from the Company to thedistributor. The distributors are responsible for all marketing, sales, training and warranty in their respective territories. The standard terms and conditionscontained in the Company’s distribution agreements do not provide price protection or stock rotation rights to any of its distributors. In addition, itsdistributor agreements do not allow the distributor to return or exchange products, and the distributor is obligated to pay the Company upon invoiceregardless of its ability to resell the product. 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 67Table of Contents assurance, material procurement, inventory control, facilities, equipment and operations supervision and management. Cost of revenues also includesdepreciation expense for the Lightboxes under lease 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. Warranty costs arereflected in the statement of operations and comprehensive loss as a cost of revenues. The warranty obligation is affected by product failure rates, materialusage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differfrom these estimates, revisions to the estimated warranty liability would be required. Periodically the Company assesses the adequacy of its recorded warrantyliabilities and adjusts the amounts as necessary. Warranty provisions and claims are summarized as follows (in thousands): Year Ended December 31, 20162015 2014 Balance beginning of year$70$167$105Warranty provision1,04870140Usage/Release(609)(167)(78) Balance end of year$509$70$167 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. 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 $526,000, $515,000 and $720,000were expensed during the years ended December 31, 2016, 2015 and 2014, respectively. Common Stock Valuation and Stock-Based Compensation Stock-based compensation for the Company includes amortization related to all stock options, restricted stock units (“RSUs”) and shares issuedunder the employee stock purchase plan, based on the grant-date estimated fair value. The fair value of stock options is estimated on the date of grant usingthe Black-Scholes option pricing model and recognized as expense on a straight-line basis over the vesting period of the award. The Company measures thefair value of RSUs using the closing stock price of a share of the Company’s common stock on the grant date and is recognized as expense on a straight-linebasis over the vesting period of the award. Because noncash stock-based compensation expense is based on awards ultimately expected to vest, it is reducedby an estimate for future forfeitures. The Company estimates a forfeiture rate for its stock options and RSUs based on an analysis of its actual forfeiture experience and other factors. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ fromestimates. 68Table of Contents Prior to the Company’s IPO in January 2015, the fair value of the Company’s common stock was determined by its Board of Directors with assistancefrom management and third-party valuation specialists. Management’s approach to estimate the fair value of the Company’s common stock is consistent withthe methods outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held Company Equity Securities Issuedas Compensation. Management considered several factors to estimate enterprise value, including significant milestones that would generally contribute toincreases in the value of the Company’s common stock. Following the closing of the Company’s IPO, the fair value of its common stock is determined basedon 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, 2016, 2015 and 2014, the Company recorded $12,000, $18,000 and $21,000 of foreign currencyexchange net losses, respectively. 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, 2016, 2015 and 2014, 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. Any common stock shares subject torepurchase are excluded from the calculations as the continued vesting of such shares is contingent upon the holders’ continued service to the Company. Forthe computation of net loss per share attributable to common stockholders, common stock shares subject to repurchase of none, none and 583 were excludedfrom the calculations as of December 31, 2016, 2015 and 2014, 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. Prior to its IPO in January 2015, the Company calculated its basic and diluted net loss per share attributable to common stockholders in conformitywith the two-class method required for companies with participating securities. The shares of the Company’s convertible preferred stock participated in anydividends declared by the Company and were therefore considered to be participating securities. The Company allocates no loss to participating securitiesbecause they have no contractual obligation to share in the losses of the Company. Net loss per share attributable to common stockholders was determined as follows (in thousands, except per share data): Year Ended December 31,2016 2015 2014Net loss$(56,128)$(47,344)$(31,964)Adjustment to net loss resulting from convertiblepreferred stock modification—(2,384)—Net loss attributable to common stockholders$(56,128)$(49,728)$(31,964)Weighted average common stock outstanding16,57411,362241Net loss attributable to common stockholders pershare, basic and diluted$(3.39)$(4.38)$(132.63) 69Table of Contents In addition to the outstanding convertible notes as of December 31, 2014 (Note 8), the following potentially dilutive securities outstanding havebeen excluded from the computations of diluted weighted average shares outstanding because such securities have an antidilutive impact due to lossesreported: December 31,2016 2015 2014 Convertible preferred stock outstanding——5,262,728Common stock options3,708,0113,356,9813,010,373Unvested restricted stock units214,17692,946—Common stock warrants2,152,1172,193,5071,552,3276,074,3045,643,4349,825,428 Comprehensive Loss For the years ended December 31, 2016, 2015 and 2014, 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, 2016, 2015 and 2014, 96%, 98% and 99%, respectively, of the Company’s revenues, were in the United States, based on the shippinglocation of the external customer. Recent Accounting Pronouncements In May 2014, the Financial Accounting Standards Board (“FASB”), jointly with the International Accounting Standards Board, issued acomprehensive new standard on recognition from contracts with customers. The standard’s core principle is that a reporting entity will recognize revenuewhen it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchangefor those goods or services. The standard will become effective for the Company beginning in the first quarter of 2018. Early application would be permittedin 2017. Entities would have the option of using either a full retrospective or a modified retrospective approach to adopt this new guidance. The Companycurrently plans to adopt this accounting standard in the first quarter of fiscal year 2018 using the modified retrospective approach, with the cumulative effectbeing recorded within retained earnings on January 1, 2018. The guidance requires an entity to recognize revenue in an amount that reflects theconsideration to which an entity expects to be entitled in exchange for the transfer of goods or services. The guidance also requires expanded disclosuresrelating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative andquantitative disclosures are required about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs toobtain or fulfill a contract. The Company has not completed its assessment of the adoption 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. In February 2016, the FASB issued ASU No. 2016-02, “Leases” (ASU 2016-02), which increases transparency and comparability amongorganizations by recognizing all lease transactions (with terms in excess of 12 months) on the balance sheet as a lease liability and a right-of-use asset (asdefined). This guidance is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those annual periods, using amodified retrospective approach, and early adoption is permitted. The Company is evaluating the impact of the adoption of this standard on its financialstatements. The Company does expect that the adoption will increase its lease assets and correspondingly increase its lease liabilities. In March 2016, the FASB issued ASU No. 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-BasedPayment Accounting, which simplifies several aspects of the accounting for employee share-based payments, including income tax consequences,application of award forfeitures to expense, classification on the statement of cash flows, and classification of awards as either equity or liabilities. Thisguidance is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those annual periods. The Company plansto adopt this new standard on January 1, 2017 and do not expect a material impact on its financial statements given the full valuation allowance position onits deferred tax assets. 70Table of Contents 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, 2016 and 2015, cash equivalents were all categorized as Level 1 and consisted of money market funds. In connection with theconvertible notes issuances in 2013 and 2014 (Note 8), the Company issued warrants to purchase shares of its common stock. As the price per share of thecommon stock warrants was not fixed until the issuance of the Series E Convertible Preferred Stock in September 2014, they were classified as a derivativeliability and were subject to remeasurement at each balance sheet date until September 2014. The convertible notes also contained redemption features whichwere determined to be a compound embedded derivative which, prior to their extinguishment in September 2015, required fair value accounting. Thecommon stock warrant liability and embedded derivatives in the convertible notes were categorized as Level 3. When a determination is made to classify afinancial instrument within Level 3, the determination is based upon the significance of the unobservable inputs to the overall fair value measurement.However, Level 3 financial instruments typically include, in addition to the unobservable inputs, observable inputs (that is, components that are activelyquoted and can be validated to external sources). Any change in fair value is recognized as a component of other income (expense), net, on the statements ofoperations and comprehensive loss. There were no transfers between fair value hierarchy levels during the years ended December 31, 2016, 2015 and 2014. 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, 2016 2015 2014 Fair value - beginning of year$—$—$(6)Issuance of warrants———Change in fair value recorded in otherincome (expense), net——(28)Reclass of warrant liability to additionalpaid-in capital——34Fair value - end of year$—$—$— 71Table of Contents 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: September 2, 2014 Time to liquidity (years)0.7Expected volatility45%Discounted cash flow rate23%Risk-free interest rate0.07%Marketability discount rate17% 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. 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 31,2016 2015 2014Fair value of asset (liability) - beginning of year$—$231$(175)Issuance of convertible notes———Change in fair value recorded in other income (expense),net—835406Reversal of fair value recorded in other income (expense),net—(1,066)—Fair value of asset (liability) - end of year$—$—$231 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: Year EndedDecember 31, 2014Equity financing in 2014100.0%Equity financing in 201514.3%Liquidation0.1%Initial public offering79.5%Change of control6.2% 72Table of Contents 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, 2015Time to first call option (years)—Credit spread17.6%Expected volatility40.0% Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis The Company measures certain non-financial assets (including property, plant and equipment) at fair value on a non-recurring basis in periods afterinitial measurement in circumstances when the fair value of such asset is impaired below its recorded cost. 4. Inventories Inventories consisted of the following (in thousands): December 31,2016 2015Raw materials$5,706$2,662Work-in-process—372Finished products2,7562,371Total inventories$8,462$5,405 5. Property and Equipment, Net Property and equipment, net, consisted of the following (in thousands): December 31, 2016 2015 Computer software$456$436Computer equipment1,2681,096Machinery and equipment4,3133,372Furniture and fixtures636578Leasehold improvements679655Equipment held by customers3,4751,71810,8277,855Less: Accumulated depreciation and amortization(6,389)(5,044)Add: Construction-in-progress11711$4,555$2,822 Depreciation expense for the years ended December 31, 2016, 2015 and 2014, was $1,506,000, $1,300,000 and $1,451,000, respectively.Amortization of capital leased assets included in depreciation for the years ended December 31, 2016, 2015 and 2014, was $11,000, $17,000 and $17,000,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 $539,000, $260,000 and $378,000, was recorded in cost of revenues during the years endedDecember 31, 2016, 2015 and 2014, respectively. The net book value of this equipment was $2,587,000 and $1,236,000 at December 31, 2016 and 2015,respectively. 73Table of Contents 6. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consisted of the following (in thousands): December 31,2016 2015Accrued interest payable$1,220$1,220Accrued professional services43563Accrued travel expenses429550Accrued sales, use and other taxes4082Accrued warranty50970Sales return allowance4359Accrued clinical trial costs13455Other accrued liabilities649686$3,067$3,285 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 March 29, 2017. The Company borrowed $30,000,000on September 22, 2015. The Company borrowed an additional $10,000,000 on June 15, 2016 under the Loan Agreement. The Company would have beeneligible to borrow an additional $10,000,000, on or prior to March 29, 2017, upon achievement of certain revenue milestones, among other conditions, butthose milestones were not achieved. Under the Loan Agreement, the first sixteen quarterly payments are interest only payments, and the last eight quarterlypayments will be equal installments in which interest and principal amounts are paid. Interest is calculated at a fixed rate of 12.5% per annum. The Companymakes quarterly payments of interest only in arrears commencing on September 30, 2015. During the interest only period, the Company may elect to makethe 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, forwhich the 4.0% per annum of interest would be added to the outstanding principal amount of the borrowings. To date, the Company has elected the PIKinterest option to the extent available and has 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. The Company may voluntarily prepay the borrowings in full, with a prepayment premium beginning at 5.0% and declining by 1.0% annuallythereafter, with no premium being payable if prepayment occurs after the fifth year of the loan. Each tranche of borrowing requires the payment, on theborrowing date, of a financing fee equal to 1.5% of the borrowed loan principal, which is recorded as a discount to the debt. In addition, a facility fee equal to7.0% of the amounts borrowed plus any PIK is payable at the end of the term or when the borrowings are repaid in full. A long-term liability is being accretedusing the effective interest method for the facility fee over the term of the Loan Agreement with a corresponding discount to the debt. The borrowings arecollateralized by a security interest in substantially all of the Company’s assets. The Loan Agreement requires that the Company adheres to certainaffirmative and negative covenants, including financial reporting requirements, certain minimum financial covenants for pre-specified liquidity and revenuerequirements and a prohibition against the incurrence of indebtedness, or creation of additional liens, other than as specifically permitted by the terms of theLoan Agreement. In particular, the covenants of the Loan Agreement include a covenant that the Company maintain a minimum of $5,000,000 of cash andcertain cash equivalents, and the Company had to achieve minimum revenue of $7,000,000 in 2015, and must achieve minimum revenue of $23,000,000 in2016, $40,000,000 in 2017, $50,000,000 in 2018, $60,000,000 in 2019 and $70,000,000 in 2020 and in each year thereafter, as applicable. On October 28,2016, the Company amended the terms of the Loan Agreement, to reduce the minimum revenue that the Company must achieve in 2016 to $18,000,000. Ifthe Company fails to meet the applicable minimum revenue target in any calendar year, the Loan Agreement provides the Company with a cure right if itprepays a portion of the outstanding principal equal to 2.0 times the revenue shortfall. In addition, the Loan Agreement prohibits the payment of cashdividends on the Company’s capital stock and also places restrictions on mergers, sales of assets, investments, incurrence of liens, incurrence of indebtednessand transactions with affiliates. CRG may accelerate the payment terms of the Loan Agreement upon the occurrence of certain events of default set forththerein, which include the failure of the Company to make timely payments of amounts due under the Loan Agreement, the failure of the Company to adhereto the covenants set forth in the Loan Agreement, the insolvency of the Company or upon the occurrence of a material adverse change. As of December 31,2016, the Company was in compliance with all applicable covenants. 74Table of Contents As of December 31, 2016, principal and PIK payments under the Loan Agreement follows (in thousands): Period Ending December 31, Principal and PIKLoan Repayments2017 $ —2018 —2019 10,000202020,000202110,00040,000Add: Accretion of closing fees399Add: PIK1,80942,208Less: Amount representing debt financing costs(919)Borrowings$41,289 Contemporaneous with the execution of the Loan Agreement, the Company entered into a Securities Purchase Agreement (the “Securities PurchaseAgreement”) with CRG which allowed 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 Securities 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 filed a shelf registration statement covering, among other things, the resale of the shares sold to CRG and must comply with certainaffirmative covenants during the time that such registration statement remains in effect. In connection with the initial drawdown under the Loan Agreement, the Company recorded a debt discount of $876,000. The debt discountcomprised financing fees of $450,000, paid directly to CRG, and an allocation of the other costs directly attributable to the Loan Agreement and SecuritiesPurchase Agreement with CRG of $541,000 net of the common stock premium of $115,000 based on the relative fair values of each security. In connectionwith the June 2016 drawdown under the Loan Agreement, the Company recorded a debt discount of $275,000 which comprised financing fees of $150,000,paid directly to CRG, and other costs directly attributable to the Loan Agreement with CRG of $125,000. The debt discount is being amortized as non-cashinterest expense using the effective interest method over the term of the Loan Agreement. As of December 31, 2016 and 2015, the balance of the aggregatedebt discount was $919,000 and $834,000, respectively. As noted in Note 1 to these financial statements, due to the substantial doubt about the Company’s ability to continue operating as a going concernand the material adverse change clause in the CRG Loan Agreement, the entire amount of borrowings at December 31, 2016 has been classified as current inthese financial statements. CRG has not invoked the material adverse change clause. 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”). 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, 2016, 2015 and2014, the Company incurred interest expense of $380,000, $2,785,000 and $3,380,000, respectively. 75Table of Contents 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 Company continued to account for the Assigned Interests obligation relating to future royalties as a debt instrumentby applying the retrospective approach and reviews its estimate of forecasted Assigned Interests payable annually. Under the retrospective method, theCompany computes a new effective interest rate based on the original carrying amount, actual cash flows to date, and remaining estimated cash flows over thematurity date. The new effective interest rate, 20.4% as of December 31, 2016, was used to adjust the carrying amount to the present value of the revisedestimated cash flows, discounted at the new effective interest rate. At the time of the repayment the resulting increase in the carrying value of the AssignedInterests, of $942,000, was recognized as a component of other income (expense), net, on the statements of operations and comprehensive loss. The Companyhas an aggregate accrual for its Assigned Interests obligations of $1,463,000 and $2,303,000, representing the net present value of the future minimumroyalty obligation as of December 31, 2016 and 2015, respectively. The Assigned Interest liability was included within accrued expenses and other currentliabilities and within other long-term liabilities as of December 31, 2016 and 2015, on the balance sheet. Prior to the repayment of the Term Note, theAssigned Interests liability was included within borrowings and borrowings, net of current portion on the balance sheet. Additionally, until April 2018, the Company must periodically pay PDL a percentage of its net revenue and comply with certain affirmativecovenants and negative covenants limiting its ability to, among other things, undergo a change in control or dispose of assets, in each case subject to certainexceptions. The Company was in compliance with the covenants under the Agreement as of December 31, 2016. 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 will mature and the accruedinterest 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 76Table of Contents November 2014, in connection with the issuance of the Series E Convertible Preferred Stock, $11,582,000 of the outstanding convertible notes and accruedinterest thereon was converted into shares of Series E Convertible Preferred Stock (Note 11). Upon the conversion of the convertible notes, the Companyrecorded 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 ofoperations and comprehensive loss. 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 none, $1,230,000 and $2,633,000 during the years endedDecember 31, 2016, 2015 and 2014, 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, 2016 and 2015, the aggregate amount of capital leases recordedwithin property and equipment, net, on the accompanying balance sheet is $39,000 and $39,000, 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, 2016, are as follows (in thousands): Future MinimumPeriod ending December 31,Lease Payments2017$2620181320191Total minimum payments40Less: Amount representing future interest1Present 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 2019. The lease agreement includes a renewal provision allowing the Company to extend this lease for an additional period ofthree years. 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 were reflected as deferred rent and were amortized as a reduction to rent expense over the original term of theCompany’s operating lease. In February 2016, the Company entered into an additional non-cancelable operating lease for warehouse and storage space thatexpires in November 2019. Rent expense was $1,098,000, $938,000 and $922,000 for the years ended December 31, 2016, 2015 and 2014, respectively. The future aggregate minimum lease payments as of December 31, 2016, are as follows (in thousands): Future MinimumYear ending December 31,Lease Payments2017$1,97420182,03320191,915Total minimum lease payments$5,922 77Table of Contents 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 $3,542,000 and $4,347,000 as of December 31, 2016 and 2015, respectively 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. The Company indemnifies each of its directors and officers for certain events or occurrences, subject to certain limits, while the director is or wasserving at the Company’s request in such capacity, as permitted under Delaware law and in accordance with its certificate of incorporation and bylaws. Theterm of the indemnification period lasts as long as a director may be subject to any proceeding arising out of acts or omissions of such director in suchcapacity. The maximum amount of potential future indemnification is unlimited; however, the Company currently holds director liability insurance. Thisinsurance allows the transfer of risk associated with the Company’s exposure and may enable it to recover a portion of any future amounts paid. TheCompany believes that the fair value of these indemnification obligations is minimal. Accordingly, it has not recognized any liabilities relating to theseobligations for any period presented. Legal Proceedings The Company was not party to any legal proceedings at December 31, 2016 and 2015. 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 Upon the closing of the Company’s IPO in February 2015, all shares of convertible preferred stock then outstanding converted into an aggregate of6,967,925 shares of common stock. As of December 31, 2016 and 2015, the Company does not have any convertible preferred stock issued or outstanding. 12. Stockholders’ Equity (Deficit) Preferred Stock At December 31, 2016, 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, 2016, 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 23,776,033 shares were issued and outstanding. 78Table of Contents 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, 2016 and 2015, warrants to purchase an aggregate of 2,152,117 and 2,193,507 shares of common stock were outstanding,respectively. 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 Board of Directors adopted and the Company’s stockholders approved the 2015 Equity Incentive Plan (“2015 Plan”). The 2015Plan replaced the 2009 Stock Plan (the “2009 Plan”) which was terminated immediately prior to consummation of the Company’s IPO, collectively the“Plans.” The 2015 Plan provides for the grant of incentive stock options (“ISOs”) to employees and for the grant of nonstatutory stock options (“NSOs”),restricted stock, RSUs, stock appreciation rights, performance units and performance shares to employees, directors and consultants. Initially a total of1,320,000 shares of common stock were reserved for issuance pursuant to the 2015 Plan. The shares reserved for issuance under the 2015 Plan included sharesreserved but not issued under the 2009 Plan, plus any share awards granted under the 2009 Plan that expire or terminate without having been exercised in fullor that are forfeited or repurchased. In addition, the number of shares available for issuance under the 2015 Plan includes an automatic annual increase on thefirst day of each fiscal year beginning in fiscal 2016, equal to the lesser of 1,690,000 shares, 5.0% of the outstanding shares of common stock as of the lastday of the immediately preceding fiscal year or an amount as determined by the Board of Directors. For fiscal 2016, the common stock available for issuanceunder the 2015 Plan was increased by 632,176 shares of common stock. As of December 31, 2016, 1,183,937 shares were available for grant under the 2015Plan. 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 and expire ten years from the date of grant. 79Table of Contents Stock option activity under the Plans is set forth below: Options Outstanding Weighted Aggregate Number of Average Intrinsic Value Shares Exercise Price (in thousands)Balance at December 31, 2013398,740$16.15$—Options granted2,720,174$4.68Options exercised(2,568)$8.85Options cancelled(105,973)$16.62Balance at December 31, 20143,010,373$5.78$13,188Options granted614,363$16.73Options exercised(17,642)$4.50Options cancelled(250,113)$9.33Balance at December 31, 20153,356,981$7.53$50,970Options granted701,612$11.69Options exercised(23,230)$4.50Options cancelled(327,352)$12.89Balance at December 31, 20163,708,011$7.86$5 Additional information related to the status of options as of December 31, 2016 is summarized as follows: Options Outstanding and Vested as of December 31, 2016 Options Outstanding Options Vested Weighted Weighted Weighted Average Average Average Exercise Options Remaining Exercise Number Exercise Price Outstanding Contractual Life Price Exercisable Price $ 3.5527,5599.84$3.55—$3.55$ 3.6837,0569.83$3.68—$3.68$ 4.054,3502.44$4.054,350$4.05$ 4.501,659,9138.01$4.50831,258$4.50$ 4.95862,7777.87$4.95443,651$4.95$ 5.1229,6009.57$5.12—$5.12$ 6.261,5115.06$6.261,511$6.26$ 10.9125,2228.18$10.9111,786$10.91$ 10.984,0008.33$10.981,666$10.98$ 11.019,3859.44$11.01—$11.01$ 12.3864,2009.33$12.38—$12.38$ 12.6066,4844.54$12.6066,484$12.60$ 12.96120,0009.19$12.96—$12.96$ 12.99297,8209.18$12.997,228$12.99$ 14.8540,5865.05$14.8540,586$14.85$ 15.2153,0448.58$15.2119,949$15.21$ 17.722,0008.83$17.72583$17.72$ 19.61272,3488.97$19.6181,736$19.61$ 20.2593,9496.53$20.2584,524$20.25$ 22.057,3195.75$22.057,319$22.05$ 22.5028,8885.56$22.5028,286$22.503,708,0118.10$7.861,630,917$7.40 80Table of Contents The weighted-average grant date fair value of stock options granted during the years ended December 31, 2016, 2015 and 2014 was $5.51, $8.24and $6.60 per share, respectively. As of December 31, 2016, the weighted average remaining contractual life of options outstanding and vested was 7.63years. As of December 31, 2016, the aggregate intrinsic value of options outstanding and vested was $0. The aggregate intrinsic value of options exercisedwas $135,000, $236,000 and none during the years ended December 31, 2016, 2015 and 2014, respectively. The aggregate intrinsic value was calculated asthe difference between the exercise prices of the underlying options and the closing market price of the common stock on the date of exercise. Because of theCompany’s net operating losses, the Company did not realize any tax benefits from share-based payment arrangements for the years ended December 31,2016, 2015 and 2014. The Company’s RSUs vest annually over four years in equal increments. A summary of all RSU activity is presented below: Weighted AverageWeighted AverageAggregateNumber ofGrant DateRemainingIntrinsic ValueSharesFair ValueContractual Term(in thousands)Awards outstanding atDecember 31, 2014—$——$—Awarded92,946$19.61Awards outstanding atDecember 31, 201592,946$19.613.88$2,111Awarded185,500$12.98Released(26,911)$18.04Forfeited(37,359)$14.96Awards outstanding atDecember 31, 2016214,176$14.883.09$792 As of December 31, 2016, $2,780,000 of total unrecognized compensation expense related to employee RSUs was expected to be recognized over aweighted-average period of 3.05 years. The Company used the closing market price of $3.70 per share at December 31, 2016, to determine the aggregateintrinsic value. 2015 Employee Stock Purchase Plan In January 2015, the 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. Initially 500,000 shares of common stockwere reserved for issuance, which is subject to an automatic increase on the first day of each fiscal year, commencing in 2016, by an amount equal to thelesser of (i) 493,000 shares (ii) 1.5% of the outstanding shares of common stock as of the last day of the immediately preceding fiscal year; or (iii) an amountas determined by the Board of Directors. For fiscal 2016, the common stock available for issuance under the ESPP was increased by 189,653 shares ofcommon stock. The price of the common stock purchased will be the lower of 85% of the fair market value of the common stock at the beginning of anoffering period or at the end of a purchase period. The ESPP is intended to qualify as an “employee stock purchase plan” within the meaning of Section 423of the Internal Revenue Code of 1986, as amended. The first offering under the ESPP began in February 2015. As of December 31, 2016, approximately543,879 shares of common stock remained reserved for issuance under the ESPP. The Company incurred $372,000 and $217,000 in stock-basedcompensation expense related to the ESPP for the year ended December 31, 2016 and 2015, respectively. 13. Stock-Based Compensation Stock-based compensation for the Company includes amortization related to all stock options, RSUs and shares issued under the ESPP, based on thegrant-date estimated fair value. The Company estimates the fair value of stock options and shares issued under the ESPP on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes model determines the fair value of stock-based payment awards based on the fair market value of theCompany’s common stock on the date of grant and is affected by assumptions regarding a number of complex and subjective variables. These variablesinclude, but are not limited to, the fair value of the Company’s common stock, and the volatility over the expected term of the awards. The Company hasopted to use the “simplified method” for estimating the expected term of options, whereby the expected term equals the arithmetic average of the vestingterm and the original contractual term of the option. Prior to the Company’s IPO in January 2015, due to the Company’s limited operating history and a lackof company specific historical and implied volatility data, the Company based its estimate of expected volatility on the historical volatility of a group ofsimilar companies that are publicly traded. When selecting these public companies on which it has based its expected stock price volatility, the Companyselected companies with comparable characteristics to it, including enterprise value, stage of development, risk profile, and position within the industry aswell as selecting companies with historical share price information sufficient to meet the expected life of the stock-based awards. The historical volatilitydata was computed using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of the share-based payments. Following the closing of the Company’s IPO, the Company supplements its own available company specific historical volatility with thevolatility of the previously selected peer group of publicly traded companies. The Company will continue 81Table of Contents to analyze the historical stock price volatility and expected term assumptions as more historical data for the Company’s common stock becomes available.The risk-free rate assumption is based on the U.S. Treasury instruments with maturities similar to the expected term of the Company’s stock options. Theexpected dividend assumption is based on the Company’s history of not paying dividends and its expectation that it will not declare dividends for theforeseeable 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, 2016 2015 2014 Expected term (years)6.16.36.3Expected volatility49.7%49.8%59.1%Risk-free interest rate1.5%1.8%1.8%Dividend rate——— As of December 31, 2016 and 2015, the total unamortized compensation expense related to stock options granted to employees and directors was$12,312,000 and $16,871,000, which is expected to be amortized over the next 2.33 and 3.15 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 followingassumptions: Year Ended December 31, 2016 2015 Expected term (years)0.50.5Expected volatility72.1%46.2%Risk-free interest rate0.41%0.17%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, 2016 and 2015 was $486,000 and zero, respectively. As of December 31, 2016, total unamortized stock-based compensation expense related tounvested RSUs was $2,780,000, with a weighted-average remaining recognition period of 3.05 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, 2016, 2015 and 2014, is as follows (in thousands): Year Ended December 31,2016 2015 2014Cost of revenues$608$346$55Research and development expenses2,7322,489155Selling, general and administrative expenses4,0523,064431$7,392$5,899$641 82Table of Contents 14. Income Taxes For the years ended December 31, 2016, 2015 and 2014, the Company’s provision for income taxes consisted of state income tax expense of none,none and $14,000, respectively. A reconciliation of the statutory U.S. federal rate to the Company’s effective tax rate is as follows (in thousands): Year Ended December 31, 2016 2015 2014 Tax at federal statutory rate$(19,077)$(16,905)$(10,863)State taxes, net of federal benefit——14Permanent differences1,0231,722730Change in valuation allowance18,32115,25010,316Research credits(245)(218)(219)Other(22)15136 Provision for taxes$—$—$14 Significant components of the Company’s net deferred tax assets as of December 31, 2016 and 2015 consist of the following (in thousands): As of December 31,2016 2015 Deferred tax assets:Federal, state, and foreign net operating losses$82,353$64,739Research and other credits2,9532,521Fixed assets623215Interest581899Accruals and other4,9062,810Total deferred tax assets91,41671,184Less: Valuation allowance(91,416)(71,184)Net deferred tax assets$—$— The valuation allowance increased by $20,232,000, 15,076,000 and $12,193,000 during the years ended December 31, 2016, 2015 and 2014,respectively. As of December 31, 2016, the Company had federal net operating loss carryforwards of approximately $219,087,000, which begin to expire in 2027,and state net operating loss carryforwards of approximately $161,812,000, which begin to expire in 2017. As of December 31, 2016, the Company had federal research and development credit carryforwards of approximately $2,469,000, which expire inthe years 2027 through 2035, and state research and development credit carryforwards of approximately $2,651,000. 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 $1,536,000 and $3,902,000, as of December 31, 2016 and 2015, of which$1,266,000 and $2,792,000, respectively, would affect the effective tax rate if recognized, before consideration of the valuation allowance. A reconciliation of the unrecognized tax benefits from January 1, 2014 through December 31, 2016 is as follows (in thousands): As of December 31,2016 2015 2014 Balance at beginning of year$3,902$1,121$919Increase/decrease based on the tax positions in the current year(2,593)2,593202Additions for tax positions of prior years227188—Balance at end of year$1,536$3,902$1,121 83Table of Contents 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 Company is subject to examination by taxing authorities throughoutthe nation. The Company is not currently under audit by the Internal Revenue Service or other similar state and local authorities. All tax years remain open toexamination by major taxing jurisdictions to which the Company is subject. 15. Related-Party Transactions During the years ended December 31, 2016, 2015 and 2014, the Company purchased marketing services from Recreation, Inc., a brand strategy anddesign agency headquartered in San Francisco, California for $697,000, $1,016,000 and $984,000, respectively. John D. Simpson, the Company’s SeniorVice President of Sales, was the Chief Executive Officer of Recreation, Inc. until March 2015 and is the son of Dr. John B. Simpson, the Company’s founderand the Executive Chairman of the Board of Directors. As of December 31, 2016 and 2015, amounts due to Recreation, Inc., included in accounts payableand accrued liabilities, were $6,000 and $76,000, respectively. 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, 2016 and 2015, the carrying value of the related-party convertible notes was none. For the yearsended December 31, 2016, 2015 and 2014, the Company recognized none, $388,000 and $1,021,000, respectively, of interest expense related to the related-party convertible notes within interest expense in the Company’s statements of operations and comprehensive 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, 2016 and 2015, Chansu provided regulatory consulting services of $3,000 and $17,000, respectively. As ofDecember 31, 2016 and 2015, there were no amounts due to Chansu included in accounts payable and accrued liabilities. In October 2015, the Company entered into an agreement with Consensys Imaging Service (“Consensys”) to provide field engineers to assist theCompany with the installation, service and maintenance of its Lightbox consoles. Jeffrey M. Soinski, the Company’s President, Chief Executive Officer and amember of its Board of Directors is also a member of the Board of Directors of Consensys. For the year ended December 31, 2016 and 2015, Consensysprovided services of $123,000 and none, respectively. As of December 31, 2016 and 2015, amounts due to Consensys included in accounts payable andaccrued liabilities, were $20,000 and none, respectively. 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 2017, the number of shares of common stock authorized for issuance under the 2015 Plan was automatically increased by1,188,801shares, which was ratified by the Company’s Board of Directors. 2015 Employee Stock Purchase Plan In January 2017, the number of shares of common stock authorized for issuance under the 2015 ESPP was automatically increased by 356,640shares, which was ratified by the Company’s Board of Directors. 84Table of Contents 18. Selected Quarterly Financial Information (Unaudited) The following table represents certain unaudited quarterly information for the eight quarters ended December 31, 2016. 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 (in thousands, exceptper share data): Three Months Ended Three Months Ended Mar 31, Jun 30, Sep 30, Dec 31, Mar 31,Jun 30,Sep 30,Dec 31, 2016 2016 2016 2016 2015201520152015 Revenues$4,539$4,680$5,316$4,679$2,088$3,047$2,721$2,857Gross profit1,1791,0351,5749818001,4139711,051Operating expenses16,20813,32813,00512,94510,22510,49610,84713,357Net loss(16,167)(13,496)(12,969)(13,497)(12,801)(10,220)(13,250)(13,456)Net loss per share attributable tocommon stockholders, basic anddiluted$(1.28)$(1.06)$(0.73)$(0.58)$(1.53)$(0.83)$(1.08)$(1.07) 85Table of Contents SIGNATURES Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report onForm 10-K to be signed on its behalf by the undersigned thereunto duly authorized. Avinger, Inc.(Registrant) Date: March 14, 2017/s/ JEFFERY M. SOINSKIJeffrey M. SoinskiChief Executive Officer(Principal Executive Officer) Date: March 14, 2017/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 14, 2017Jeffrey M. Soinski /s/ MATTHEW B. FERGUSONChief Financial Officer and Chief Business Officer (Principal FinancialMarch 14, 2017Matthew B. Fergusonand Accounting Officer) /s/ DONALD A. LUCASDirectorMarch 14, 2017Donald A. Lucas /s/ JOHN B. SIMPSONExecutive Chairman of the Board of Directors; DirectorMarch 14, 2017John B. Simpson, Ph.D., M.D. /s/ JAMES B. MCELWEEDirectorMarch 14, 2017James B. McElwee /s/ JAMES G. CULLENDirectorMarch 14, 2017James G. Cullen /s/ THOMAS J. FOGARTYDirectorMarch 14, 2017Thomas J. Fogarty 86POWER OF ATTORNEYTable 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 of convertiblepromissory 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, LLC23.1Consent 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 87(1)(1)(2)(3)(4)(4)(3)(3)(3)(3)(3)(4)(4)(4) (5)(4)(4)(4)(4)(4)(4)(4)(4)(4)(4)(3)(3)(6)(6)(7)adopted 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.Table of Contents ExhibitNumberExhibit Title101.INS101.SCH101.CAL101.DEF101.LAB101.PRE (5)Previoulsy filed as an Exibit to the Annual Report on Form 10-K filed with the Securities and Exchange Commission onMarch 8, 2016, and incorporated by reference herein. 88XBRL Instance DocumentXBRL Taxonomy Extension Schema DocumentXBRL Taxonomy Extension Calculation Linkbase DocumentXBRL Taxonomy Extension Definition Linkbase DocumentXBRL Taxonomy Extension Label Linkbase DocumentXBRL 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 onFebruary 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.(6)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.(7)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 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. and (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, Stand-Alone Option Agreement 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 14, 2017 with respect to the financial statements and schedule of Avinger, Inc., and to the reference to our firm under the caption“Risk Factors” included in this Annual Report (Form 10-K) for the year ended December 31, 2016. /s/ Ernst & Young LLP Redwood City, CaliforniaMarch 14, 2017 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 14, 2017 /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 14, 2017 /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, 2016, 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 14 day of March, 2017. /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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