Jeff Soinski - CEO Dr. John Simpson - Founder and Executive Chairman Matt Ferguson - CFO.

Chris Cooley - Stephens Cecilia Furlong - Canaccord.

Good day, ladies and gentlemen, and welcome to the Avinger Fourth Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I would like to introduce your host for today’s conference, Caroline Corner [ph]. Ma’am, you may begin..

Thank you, and thank you all for participating in today’s call. Joining us today are Avinger’s CEO, Jeff Soinski; Founder and Executive Chairman, Dr. John Simpson; and Chief Financial Officer, Matt Ferguson. Earlier today, Avinger released financial results for the full year and fourth quarter ended December 31, 2016.

Before we begin, I would like to remind you that management will make statements during this call that include forward-looking statements within the meaning of Federal Securities laws which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Any statements contained in this call that are not statements of historical fact should be deemed to be forward-looking statements. All forward-looking statements including without limitation our future financial expectations are based upon our current estimates and various assumptions.

These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements.

For a list and description of the risks and uncertainties associated with our business, please see our filings with the Securities and Exchange Commission.

Avinger disclaims any intention or obligation except as required by law to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. I’d now like to turn the call over to Jeff..

Thanks, Caroline. Good afternoon and thank you all for joining us. Today, I would like to review a few key items in 2016 and also provide some updates as we look to leverage our installed base and launch new products over the next 12 months. In the fourth quarter, total revenues grew 64% from the fourth quarter of 2015.

We increased our installed base by 13 accounts and are now selling into 156 Lumivascular accounts, which surpassed our goal of 150 accounts by the end of 2016.

Before we discuss our commercialization plans, I would like to provide an update on our Pantheris product development efforts as we progress the next generation Pantheris and our below-the-knee atherectomy device towards market launch.

Our R&D and manufacturing teams have been working diligently to rollout a series of incremental improvements to our current version of Pantheris to improve the consistency and reliability of our currently marketed products while we are completing our verification and validation activities to ready the next generation of Pantheris for 510(k) submission midyear.

Recall that the new Pantheris device is a true upgrade, which brings a host of additional improvements and important new features and benefits to the Pantheris franchise, including more a robust shaft for better pushability and improved handle designs, a redesigned single balloon system for apposition and occlusion as well as an improved nosecone and longer nosecone option.

This device will also include the addition of longitudinal markers on the shaft to further reduce the need for fluoroscopy a thereby decrease radiation exposure for physicians and patients.

We believe that the multiple improvements in this next generation device will allow us to broaden the applicable procedure market especially in tough to treat lesions and that it will have a direct and an positive impact on increasing utilization rates in existing and new accounts.

As mentioned on our last call, all these changes and improvements have been directly informed by the physician input we have received in the field during our first year of launch. We are proud of the report we’ve developed with our physician customers and continue to be impressed with the outstanding clinical outcomes they have achieved.

However, we acknowledge that the reliability of Pantheris during its first year in the market has not been where we needed to be.

We will continue to support our key opinion leaders as they redefine the treatment of PAD with our Lumivascular devices, and with the next generation Pantheris bring them a completely updated catheter to expand their efforts. Turning to our below-the-knee device, our development efforts for our 6Fr version of Pantheris continue to remain on track.

And we expect to file a 510(k) application for this device in the third quarter of 2017.

As we have described before, this device is a lower profile and longer length than our existing Pantheris products and should enable much better penetration of the sizable below-the-knee market, where our outstanding safety profile takes on even greater importance.

We are also excited about the progress we are making with this device since much of the R&D work for this lower profile device will be directly leveragable to coronaries, which is an exciting future market for us.

You may recall from our last quarterly update back in November that we have received 510(k) clearance from the FDA in October, recognizing Pantheris as a technology that can be used for diagnostic purposes as well as its primary use as a therapeutic device.

Concurrent with the 510(k) clearance of our upgraded L250 imaging counsel in December, we were able to add vessel measurement capabilities for Pantheris.

We believe these two new 510(k) clearances are critical since they provide important new capabilities for physicians and underscore the value of the clinical information provided by real time imaging.

We also believe that the addition of these new diagnostic capabilities provides the functionality we need to support the pursuit of incremental diagnostic reimbursement for our Lumivascular devices, down the road. I’d now like to update you on our commercialization efforts.

In the fourth quarter, the size of our sales force increased modestly; and at quarter-end, we had 60 sales professionals.

While we’re pleased with the efforts of our sales force in building our user base and increasing our fourth quarter disposable volume, a 118% year-over-year due to the launch of Pantheris, we continue to increase our focus on expanding device utilization in current and new accounts.

As we look forward towards the expected launch of our next gen Pantheris and BTK devices in the latter part of 2017, we do not anticipate expanding our sales force in the near-term. We’re also making changes in sales management, as we continue to refine our focus and get ready for the launch of our important new product initiatives.

Earlier in the year, we promoted two of our most-experienced sales directors to area VPs with responsibility for sales for the eastern and western parts of the U.S. In addition, JD Simpson, who was promoted to SVP of Sales and Marketing in July of last year will be leaving the Company effective March 10th to pursue other opportunities.

As many of know J D has been with the Company since its early days in a variety of roles and we wish him the best in his future endeavors. We recognize that we’ve had challenges in maintaining consistency in the sales leadership position.

However, our two area sales VPs have been top performers with the Company for six and over three years respectively and our VP of Marketing has been in his current position for more than four years. Going forward, all three of these commercial VPs will report directly to me, as they have previously.

We do not plan to replace the Senior Vice President position which will bring more efficiency to the organization and allow me to be closer to our commercial activities.

We continue to believe that Pantheris will be a game-changer in the treatment of PAD, and our product development regulatory and physician training teams are all working hard to ready our new products for launch.

Our management team is currently working to refine our new product launch plans and forecasts for the balance of 2017, based on the most current information available to us. As a result, we will not provide financial guidance on this call.

However, we do plan to provide financial guidance for the year once this process is complete, which we expect to occur by our next quarterly call. I’d now like to ask Dr. Simpson to elaborate on our recent clinical and development progress and to speak about some of our near-term R&D priorities. Following Dr.

Simpson’s remarks, Matt will review our Q4 financial results and then, we’ll open the call for your questions.

John?.

Thanks Jeff. So, we’ve had continued good clinical news this quarter, and I’d like to take this opportunity to update everyone just on a few of our recent successes. So, as many of you will recall, we previously reported the original data from the VISION study which included six-month follow-up on patients treated with Pantheris.

This was used to support our initial 510(k) clearance with the FDA in 2015. In 2016, we made the decision to reopen the follow-up to collect data through 12 and 24 months on as many of the patients that were originally VISION trial as many as possible.

The interim results of these data were very promising and were presented recently as an interim cohort by Dr. Ian Cawich from the Arkansas Heart Hospital. He presented this data at the Leipzig Interventional Course in Germany, more commonly referred to as LINC. The data that Dr.

Cawich presented from target lesion revascularization, TLR at12 months and 24 months which were 86% and 82%, respectively based on Kaplan-Meier curve estimates. There were no amputations.

Furthermore, the statistically significant improvements in ankle brachial indices, ABI, and the Rutherford classification that we saw at 30 days and six months were maintained through the 24 months timeframe.

Finally, I’ll mention that a majority of the lesions were originally treated using standalone OCT guided atherectomy with the Pantheris catheter with only 9.6% of the overall regional population, they were actually receiving adjunctive drug coated balloon therapy and only 5% receiving adjunctive stent therapy.

While these results are definitely encouraging, it’s also important to emphasize that the study data we generated following the treatment with the first clinical version of the Pantheris in the hands of new users with no previous Pantheris experience.

We’re excited about the results with the next generation Pantheris and especially in the hands of some of the long-term Pantheris users. We continue to gather data on the remaining VISION patients and expect to have all the data in-house in the next two to three months. Also at length, Dr.

Marianne Brodmann of the Medical University of Graz in Austria presented an independent study, prospective case series actually on 30 patients, 35 lesions with long-term follow-up including patency as measured by duplex ultrasound; and freedom from target lesion revascularization at six and 12 months with two of the important endpoints in this study.

The study represented the first cohort of patient outcomes using duplex ultrasound to document patency and that patency was documented to be 89% at six months, 86% at 12 months. OCT guided atherectomy achieved 84% standalone luminal gain, and two thirds of these lesions in her study were CTOs.

Standalone true lumen crossing was achieved in 95% or a 95% of the time using our Avinger CTO crossing device, we call the Ocelot. Dr. Broadmann’s presentation also demonstrated the consistence of our data across studies.

Now, it’s very, very important I think in this space, at six months, freedom from TLR of 94% closely matched in her study, closely matched our VISION six-month results of 92%; and freedom from TLR at 12 months at 88% was -- also approximates the VISION 12-month interim results of 86%. So, in addition, Dr.

Broadmann’s study demonstrated statistically significant improvement in ABIs from baseline to both six and 12 months. So, looking ahead, we continue to be excited about pursuing in-stent restenosis client for Pantheris.

As a reminder and unlike the other directional atherectomy device in the market, Pantheris is not contraindicated for ISR and we’re optimistic about Pantheris’ potential role in this area. We’re planning to submit an IND for this study in the coming months.

So, in summary, I’m really happy with the clinical outcomes that we’ve generated to-date with the Pantheris, also like to comment on the pipeline that we have in the R&D group, and I remain fully confident that image-guided therapy which we call Lumivascular will ultimately have really large impact on our space.

So, with that I’ll turn the call over to Matt..

Okay. Thank you, John. Total revenue for the fourth quarter ended December 31, 2016 was $4.7 million, a 64% increase from the fourth quarter of 2015 and the 12% decrease from the third quarter of 2016.

Revenue related to Lightbox imaging consoles was $1 million, a 17% decrease compared to the fourth quarter of 2015 and a 29% decrease from the third quarter of 2016.

There were eight purchased Lightboxes during the quarter, two of which were sold to international distributors and there were seven net accounts that acquired a Lightbox through our rental or placement to purchase programs.

Revenue from disposable devices was $3.7 million for the fourth quarter of 2016, a 118% increase compared to the fourth quarter of 2015 and a 5% decrease from the third quarter of 2016. Gross margin for the fourth quarter of 2016 was 21%, down from 37% in the comparable quarter of 2015 and down from 30% in third quarter of 2016.

The year-over-year decrease was primarily attributable to the growth of the Company’s manufacturing infrastructure associated with the commercial launch of Pantheris and the higher proportion of Lumivascular accounts participating in the company’s placement to purchase and rental programs.

The decrease compared to the third quarter of 2016 related primarily to a decrease in average selling price for Lightbox imaging consoles. Gross margin for the fourth quarter was also negatively impacted by higher costs related to product warranties and excess and obsolete inventories.

Operating expenses for the fourth quarter of 2016 were $12.9 million, compared to $13.4 million in the fourth quarter of 2015. This decrease was primarily attributable to higher sales and marketing expenses in 2015, as the Company expanded commercial organization in anticipation of the commercial launch of Pantheris.

Loss from operations for the fourth quarter of 2016 was $12 million, compared to $12.3 million for the fourth quarter of 2015. Net loss for the fourth quarter of 2016 was $13.5 million, which was consistent with the fourth quarter of 2015. Loss per share for the fourth quarter of 2016 was $0.58, compared to $1.07 for the fourth quarter of 2015.

The decreased loss per share includes the impact of the issuance of 9.9 million shares in the Company’s follow-on public offering which closed on August 16, 2016, and 1.1 million shares issued throughout 2016 under the Company’s at the market or ATM public offering program.

Adjusted EBITDA, a non-GAAP measure, was a loss of $9.5 million for the fourth quarter of 2016, compared to a loss of $9.8 million for the fourth quarter of 2015. Now, looking briefly at our full year 2016 results. Total revenue was $19.2 for 2016, a 79% increase from 2015.

Lightbox imaging console revenues were $4.7 million, a 15% increase compared to 2015 and revenues from the sold devices were $14.5 million, a 120% increase compared to 2015. Revenue growth for 2016 reflects the launch of Pantheris during the first quarter of the year. Gross margin for 2016 was 25%, down from 40% in 2015.

The decrease was primarily attributable to the growth in manufacturing infrastructure in conjunction with the launch of Pantheris and higher costs related to product warranties and excess and obsolete inventories. Operating expenses for the 2016 were $55.5 million, compared to $44.9 million in 2015.

This growth was primarily attributable to Pantheris development expense and expansion of the Company’s commercial organization. Loss from operations for 2016 was $50.7 million compared to $40.7 million for 2015. Loss per share for 2016 was $3.39 compared to $4.38 in 2015.

Adjusted EBITDA for the year was a loss of $41.8 million for 2016 compared to a $33.5 million loss for 2015. Turning now to our balance sheet. Cash and cash equivalents totaled $36.1 million as of December 31, 2016 compared to $43.1 million as of December 31, 2015 and $43.3 million as of September 30, 2016.

The net cash decrease during the fourth quarter $7.2 million, reflects cash expenditures of $11 million partially offset by $3.8 million in net proceeds from the sales of common stock under the Company’s ATM program. Lastly, total debt at yearend was $41.3 million. And at this point I’d like to turn the call back to Jeff..

Thanks, Matt. Looking ahead, we’re working diligently to ready the Company for the launch of our new products while we continue to expand adoption of our Lumivascular platform and drive utilization of our current devices.

As a reminder of our key upcoming milestones, we plan to file for 510(k) clearance for the next generation of Pantheris in mid 2017 and we plan to file for 510(k) clearance of our below-the-knee atherectomy device in the third quarter of 2017.

We also plan to release 24-month follow-up data on the complete VISION population by the end of second quarter, and we also plan to submit an IDE application for an ISR study in the next two to three months and expect to begin enrollment once necessary approvals are in place. We look forward to updating you on our progress in the coming months.

And with those comments, we like to open the call to your questions..

Thank you. [Operator Instructions] And our first question comes from Chris Cooley from Stephens. Your line is open..

Good afternoon, gentlemen. Thanks for taking the questions. Just two from me and then I’ll hop back in queue. When we look at the regulatory timeline for Pantheris and maybe, I just want to make sure I’m on the same page. It looks like timelines pretty much across the board have slid by about a quarter, if I remember back to the prior 3Q call.

And I just wanted to one, confirm that that was in fact the case; and two, maybe get a little bit more clarity around that slippage, if in fact that’s correct.

So, I had you down for the next gen Pantheris to be filed the 510(k) in the 1Q and the below-the-knee device at the 510(k) filing mid-2017 and on the ISR indication hoping to start the trial actually during the first half. So, it sounds like we’re just on the line on all three of those.

But, I just want to make sure I understand the basis for that and I’ve got one quick follow-up. Thank you..

Okay. Yes. Chris, on the next generation of Pantheris, we had anticipated Q2. And as we have our current timelines, we are looking at that, the latter part of Q2, early Q3 while we can revise that to mid-2017 as we get further along in our final verification and validation. So, we wanted to make sure that we were representing properly where that is.

So, there is a good chance that might push into the early third quarter, so a slight revision there. As we look at the below-the-knee device, we had always been thinking early Q3 on that device, which was consistent with the mid-2017 timing.

But again, we’re giving ourselves little time there, because one of the things that we’ve done, as I think we’ve talked about in the past calls, is we’ve made our verification and validation, testing and protocol suffer a little more comprehensive because we want to make sure we’re avoiding any potential quality issues prior to launch.

So, we want to take the time to make sure that we’ve these products right. We’re very, very happy with the development programs that we’re moving forward. We’d also pulled certain of the improvements that will be in 1.4 earlier in -- or in our -- I’m sorry in the next generation of Pantheris into our current device.

So, we’ll be rolling out this quarter and next quarter certain improvements related to the inflation system, related to the nosecone on our current device that will also be incorporated into the next generation device.

So, that does delay the timeframe a little bit on the next gen device, but we thought that it was important to make those improvements that we could under a letter to file regulatory approach and start rolling them into the market and then of course add a number of other improvements into our next generation Pantheris, which of course we’ll launch sometime in the latter part of the year given the filing timeframe.

So, a little bit of taking some of those improvements earlier than we originally anticipated. And then, the below-the-knee device is pretty much on track, where we had anticipated it to be.

As far as the IDE application, we’re on track to file that IDE application; we anticipate by early Q2, and it really just is the matter of when we get approval, get IRB approval and are we able to start enrollment, which obviously we can control the submission timing but we can’t necessarily control the feedback timing..

Understood, I appreciate the additional color, and that makes perfect sense on pulling forward one quarter to make the current generation little bit more robust. My other question pertains to the change from a sales and marketing leadership standpoint.

I just have -- I guess very directly, I’ve never seen six different heads before in this short of a window.

And I was hoping you could address maybe the application process in terms of how you’re identifying candidates, what you’re looking for in those candidates and then maybe how that individual’s role is within the Company, so that, as we think on a go-forward basis, how to get some consistency here going forward from a head of sales and marketing perspective?.

So, from a change perspective, obviously JD has been with the Company almost since the beginning, over eight years in a variety of roles. And he had been in this role since mid or July 2016 last year, a relatively brief tenure.

He made the decision that it was not something that he wanted to continue to pursue in the near or long-term, and that his desire is to explore other opportunities outside the Company, perhaps the opportunity to lead an entire organization. As far as I know and based on conversations with him, he’s not identified any opportunities.

But, this was a decision he made after aggressively pursuing that role, going into the back half of the year. So, as we look at that near, and I really believe long-term, we have identified and promoted earlier in the year in January, two of our most experienced sales directors to area of VPs for the east and the west.

And without planned continued expansion of our sales force as we are waiting to the new products to be developed and launched, we do not plan to fill that SVP role. These VPs had reported directly to me before when they were regional sales directors.

Also, our VP of Marketing has been with the Company for over four years, very strong experienced guy, all the way back from Fox Hollow days, and he has reported to me directly before as well. So, we are going to take this as an opportunity to bring some more efficiency to our sales organization.

I think we have strong leadership in place that’s very connected with the day to day, and it does enable me to get closer to the commercial activities. So, the answer is, we feel that this has been a challenging position. We think we have a really good level of management that’s more directly related to what’s going on, on the ground.

And I am excited about working directly with those folks on a go forward basis..

And our next question comes from Jason Mills from Canaccord. Your line is open..

Hi. This is actually Cecilia on for Jason.

And I just wanted to ask a little bit about what you are seeing currently in the market, the play between DCB platforms, driving atherectomy volume and just any changes to your selling strategy that you have implemented in this current market?.

I’ll ask Dr. Simpson to comment a little bit.

But, when we look at what’s happening in the market, and I think we’ve talked about before, Cecilia, there is a real interest and sincere belief in the clinical community in the ideal combination of de-bulking of vessel and significantly de-bulking of vessel as you can with directional atherectomy prior to application of a drug coated balloon.

A fundamental premise of what we are all about here at Avinger is to provide important real time information to the clinicians, so that they are empowered to make the decision that they feel they are best to their patients; that has not changed.

We also believe it’s important to provide precision of control and visibility, so that they can provide effective treatment broad luminal gain without damaging the healthy arterial structures, which has been proven in our clinical studies and another studies as well to be directly related to limiting restenosis.

So clearly, we have had excellent standalone results. We continue to see a significant amount of DCB usage following treatment with Pantheris and we see outstanding results there as well. But our strategy from a commercial standpoint is to provide information, to empower the physicians to make their own decisions.

But I certainly invite you Dr Simpson to add your perspective on this interplay..

Yes, I agree. I think you said it really clearly. I mean, we think that the standalone is probably personally best of best choice. We can get great results and as you [indiscernible] by OCT. But we certainly see a lot of the DCB used as well in conjunction.

DCB is by themselves had very disappointing results, so they need -- they ought to be prepared let’s say in a way for them to have the best chance of reducing recurrence of TLRs. And so, I think it’s Pantheris and DCB is a really good combination if you want to use DCB, Pantheris along, certainly that is an option..

Okay, thank you very much for the color. And then, just one follow-up. I know you haven’t provided guidance but just around account growth expectations for 2017 and just how we should think about either the VA contracts, placement to purchase model, rental program, just kind of how you’re thinking about this right now? Thank you..

Okay. Sure, Cecilia. So, as we look at building the installed base, again we’ll provide more specific guidance by our first quarter call, but we’re really pleased with the amount of new account adoption that we’ve been driving through 2016. We think that’s a good pace.

Our focus is on driving utilization, bringing in new users within current accounts, driving utilization within new accounts.

And in mid 2015, we introduced a more, as you might remember, a more flexible capital acquisition model, which enables us to have a more productive and quicker, I guess, dialogue with our customers to get Lumivascular installed for physicians who want to use it and to provide that very important clinical case experience, even as part of an evaluation process, which we’re really confident in.

So, we’re going to continue on that model. We think that part of our business is working well. And we continue to sell Lightboxes, convert Lightboxes that have been placed, sell Lightboxes right out of the gates in some cases. But I would expect a similar kind of account adoption pace through this year.

But we’ll give more specific guidance as we -- by our first quarter call..

[Operator Instructions] And our next question comes from Steven Lichtman with Oppenheimer. Your line is open..

Hi, guys, it’s Dennis in for Steve. Just two questions, the first is for Matt on the gross margin commentary. Wondering if you could talk a little more what the product warranties are related to and if you could give a sense of what they were in the quarter and when would that expense start coming down..

Yes. So, in terms of gross margins, we’ve talked quite a bit about some of the reliability issues with Pantheris since it launched, and that has translated to higher level of returns. And so that really is the main driver of higher than planned warranty expense.

We think we’ve gotten that under control pretty well but we would expect to continue to have it be higher than we really want it to be for the next couple of quarters until we can get some of these improvements in place.

And those will be both, some of the incremental improvements that will be coming out sooner and then the next generation of Pantheris, which is more of a wholesale upgraded of the device later in the year.

So that’s the main driver, nothing having to do with any kind of safety related issues, more kind of a minor annoyance factor, but we are very willing to replace the product that doesn’t perform completely up to our own standards and the expectations of our customers.

And I think during the quarter, we did have one situation where we actually had to replace the Lightbox, which is I think the only situation where we had to do that in the Company’s history, but it’s certainly a bigger ticket item, which had some impact on that overall number.

So, I can’t remember if there was another part of your question but that’s sort of the basic gist of it..

Great, I appreciate that. I just had one follow-up on the pipeline.

Any sense for when you get an approval decision on next gen and also in below-the-knee?.

Typically our average approval -- our average time to approval from filing the 510(k) has been extremely good here, either at or before the 90 days. And our own internal timelines, we tend to think about 120-day timing, 90-day for review of a traditional 510(k).

And we believe that both the next gen product and the below-the-knee device will be traditional 510(k) and then an incremental 30 days for questions back and forth.

Of course, there isn’t real predictability around that other than to say that we’ve been on average under that 90 days for our very -- several 510(k) filings that we’ve made here as a company. So, great track record, great relationship with FDA and a lot of experience built working on it.

So, I think for just planning purposes and timing purposes, I think to think of 90 to 120 days from filing..

And at this time I’m showing no further questions. I would like to turn the call back over to Jeff Soinski for any closing remarks..

Well, thank you all very much for joining our call this afternoon. Of course, we appreciate your continued interest in our Company and we look forward to updating you on our progress when we report first quarter results. Thank you..

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect. Everyone, have a great day..