Good day, ladies and gentlemen, and welcome to Avinger's 2019 Third Quarter Conference Call. [Operator Instructions]. I would like to remind you that this conference is being recorded. It is now my pleasure to introduce Matt Kreps, Managing Director at Darrow Associates Investor Relations. Mr. Kreps, the floor is yours..

Thank you, Kat. And thank you, everyone, for participating in today's call. I'd like to welcome all of you to Avinger's Third Quarter 2019 Conference Call. Joining us today are Avinger's CEO, Jeff Soinski; and Chief Financial Officer, Mark Weinswig. Earlier today, Avinger released financial results for the third quarter ended September 30, 2019.

A copy of the release is posted on the Avinger website under Investor Relations.

Before we begin, I'd 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 Form 10-K and 10-Q 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..

Thank you, Matt. Good afternoon, and thank you all for joining us. I'm excited to be with you today as we report a strong growth quarter with catheter sales up 33% year-over-year, driving a 19% increase in total revenue.

During the third quarter, we saw the first contribution to revenue from Pantheris SV, which was released in the national distribution in the last 2 weeks of the quarter. Despite this limited availability, we launched Pantheris SV into 25 sites in the third quarter showcasing the demand for this new product in the market.

We continue to increase penetration of Pantheris SV into our account base and with a full quarter of availability expect this highly differentiated new product to provide an increased contribution to revenue in the fourth quarter.

While there was a lot of excitement and activity around the Pantheris SV launch, our Pantheris seven-French next-generation catheter, which we launched mid last year, also meaningfully contributed to our growth in the third quarter with sales for this device increasing by 29% year-over-year.

Pantheris seven-French continues to be very successful in the market and is lumivascular physicians' go-to treatment option for the larger vessels, primarily above the knee, where the majority of atherectomy procedures are performed.

Total Pantheris revenue increased 81% year-over-year and 48% quarter-over-quarter to $1.6 million, which includes over $400,000 in revenue from Pantheris SV. We're very pleased with the market response to our new Pantheris products and are excited about the potential for this important product line to drive revenue growth in the quarters to come.

By focusing our efforts on driving higher-margin catheter sales versus capital sales, we continued our trend of improving gross margins delivering a gross margin of 35% in the third quarter, up from 31% in the second quarter and 20% in the first quarter.

As we accelerate revenue growth and continue to improve operating efficiencies, we expect gross margins to continue to improve as we gain operating leverage on the business. Let me provide a few other highlights on the progress we made during the quarter.

First, we began the limited rollout of Pantheris SV to 13 select key opinion leader sites in July and received immediate feedback on the safety and efficacy of the device in treating small vessels, especially in the difficult to reach arteries below the knee.

These first 50-or-so cases enabled us to evaluate the device in a real-world clinical setting. Physicians put the product through its paces, treating a variety of challenging PAD lesions with the device performing exceptionally well and delivering positive clinical outcomes.

This limited launch process also gave us the opportunity to refine our clinical programs for training and supporting SV cases prior to national launch. And we're confident that our team is well prepared to support the continued rollout and building utilization of this device.

We began full commercial launch late in the third quarter, an effort that's continued straight into the fourth quarter as new sites embrace this innovative treatment for PAD where they have limited therapeutic options and potentially severe patient consequences, if left untreated.

Clearly, there's demand for this platform, and we anticipate it to be a meaningful contributor to our growth strategy for years to come.

In addition to the launch of Pantheris SV, we expanded our customer base in the third quarter by launching 7 new clinical sites in key markets, including sites in the high-volume PAD markets of Florida, Georgia and Arizona. This new account growth is supported by the ongoing expansion of our sales team.

At quarter end, we were at 28 sales headcount, up from 20 a year ago. We are working to ensure our sales team is placed in optimal locations to support more cases at top centers to further expand our account base and accelerate our growth.

As our new reps and clinical specialists become more experienced with our platform, we see productivity improving and are focused on increasing sales productivity in the fourth quarter and into 2020 as new hires come up the learning curve with our devices.

With the successful launch of Pantheris SV, our product development team is now focused on preparing our next pipeline product, Ocellaris, for market launch.

Ocellaris is a next-generation image-guided catheter designed for crossing CTOs or chronic total occlusions, which are completely blocked arteries that represent some of the most severe and challenging PAD cases.

Ocellaris is a new product extension of our current Ocelot family of catheters and is designed to bring significant improvements to the platform, including enhanced imaging, the ability to spin at speeds up to 1,000 RPM, and a steerable tip for precise maneuverability, all of which we believe will enhance physician's ability for true luminal crossing of a wider range of CTOs.

Similar to Pantheris SV, we plan to follow a structured launch program for Ocellaris with a number of important milestones anticipated over the next several months. First, we anticipate receiving CE Marking for Ocellaris later this quarter, which would allow us to initiate first cases at key opinion leader sites in Europe.

Following this initial case experience in Europe, we anticipate submitting a 510(k) submission to the U.S. FDA for use of Ocellaris in the peripheral arteries in the first half of 2020. If all goes according to plan, we hope to receive pre-marketing clearance and be in a position to proceed to limited launch and then full national launch in the U.S.

next year. We believe this elegant and innovative tool will give us the platform to grow and accelerate our CTO business and look forward to securing the required approvals to begin cases at key sites in the coming months.

As we look to the future, we also see the potential to apply this advanced technology for the treatment of CTOs in the coronary arteries, a large and valuable market that's difficult to address today.

As we gain experience with Ocellaris in the peripheral arteries, we look forward to providing updates on our progress in developing coronary applications. We've also made good progress on our clinical programs over the past quarter, starting with our INSIGHT IDE clinical trial.

This study is designed to evaluate Pantheris for the treatment of in-stent restenosis or ISR in lower extremity arteries. Early results have been very encouraging, including the preliminary data that we released at the CVC conference in July.

The first 36 patients enrolled in the study showed a 72% average reduction in the stenosis or blockage after the use of Pantheris alone and a greater than 90% reduction following the use of adjunctive therapy. Freedom from target lesion revascularization or TLR, which is an indicator of restenosis, was 95% after 6 months in this patient group.

We hope to complete enrollment in the INSIGHT study in the first half of 2020 and anticipate being in a position to submit a 510(k) application to the FDA by the end of next year to expand our label to specifically include the ISR indication.

We are also preparing to initiate a post-market safety and efficacy study for Pantheris SV in a real-world clinical setting and expect to initiate study enrollment later this quarter.

Based on our initial clinical experience with this device, we're very excited to generate what we believe will be compelling clinical outcomes data in support of Pantheris SV as a best-in-class treatment for small vessel disease.

We've made significant progress against our strategic milestones and growth initiatives over the past several quarters, progress, which is translating to meaningful revenue growth in the third quarter with upside drivers for subsequent quarters.

Our Pantheris next-generation device continues to gain market adoption, driving increased utilization at current sites and the launch of new sites.

Pantheris SV is off to an exciting start with clear market interest and new sites coming onboard each week enabling us to treat even more PAD cases in our centers and generate a new source of revenue growth.

We continue to build a compelling pipeline of new products to provide a comprehensive solution for PAD and generate strong clinical data in support of our lumivascular approach to the treatment of vascular disease.

And we continue to do so with a lean operating cost structure and highly leverageable business model as we further grow revenue and expand margins. At this point, let me pause and ask Mark to cover our financials, and then I'll come back for Q&A.

Mark?.

Thank you, Jeff. Total revenue was $2.4 million in the third quarter ended September 30, 2019, compared with $2 million for the third quarter of 2018, an increase of 19%. Key to our growth in the quarter was a 33% increase in disposable sales, evidence of our strategic focus on higher-margin recurring disposable sales.

As we've evolved our business and sales model towards catheter sales, as expected, we have seen console revenues decline over last year. As Jeff discussed, 1 of the key drivers to our future revenue growth is the addition of new products to our best-in-class solutions. As such, we are excited to add Pantheris SV to our toolbox.

The third quarter results include our first small vessel revenues from the initial launch in the United States. It is important to note that in the third quarter only 1/3 of our active user base had used the SV product.

As such, we see SV as an important driver of disposable revenue growth with the fourth quarter being the first full quarter of sales for this new device. Gross margin for the third quarter was 35%, an increase from 31% in the second quarter and 27% in the year-ago quarter.

The significant increase in our gross margin reflects revenue growth of our higher-margin disposable products and continued focus on driving efficiencies in our manufacturing operations.

We believe that there is significant potential to further increase our gross margin as we grow our revenues and increase the operating leverage from higher factory utilization driven by increased manufacturing volumes. Operating expenses for the third quarter were $5.5 million, down 7% from the prior year.

Over the past year, we have made significant progress in lowering our cost structure, even as we have added sales headcount to drive more revenue growth, advanced our clinical work and continue developing new innovative products for the PAD market.

Most importantly, we have seen a shift within the expense makeup as we have significantly grown our sales and marketing functions, which is expected to drive our future revenue growth while significantly reducing G&A spending.

Net loss before preferred dividends was $4.6 million in the third quarter, an improvement of 14% from $5.4 million in the prior year. Net loss attributable to common stockholders for the third quarter of 2019 was $5.5 million, an improvement from $6.2 million from the third quarter of 2018.

Adjusted EBITDA, which is a non-GAAP measure that excludes certain excess and obsolete inventory charges, restructuring, stock compensation and other items, as noted in the tables in today's press release, was a loss of $3.9 million, an improvement from a loss of $4.4 million for the prior year third quarter and a slight improvement from a loss of $4 million from the prior quarter.

A copy of the reconciliation relating to adjusted EBITDA can be found in today's press release, which is also posted on our website at www.avinger.com under the Investors section.

Cash and cash equivalents totaled $14.5 million as of September 30, 2019, compared to $14.8 million at June 30, 2019, which includes the impact of $4.5 million in gross proceeds from our August financing. At this point, I'd like to turn the call back to Jeff..

Thanks, Mark. It was a strong quarter of progress, and I believe we're well positioned to continue to grow case volume, expand the Pantheris SV rollout and target more new sites with our larger sales team.

With the expanded number of atherectomy cases we can now treat with both Pantheris next-gen and Pantheris SV, we're excited about the path forward and what we can do to drive revenue growth today. We have an important milestone coming up for our next pipeline product, Ocellaris, with CE Marking anticipated later this quarter.

We're excited about the potential for adding this best-in-class image-guided CTO crossing device to our marketed product portfolio next year as we continue to invest in opportunities for accelerating growth into the future. At this point, we'd be happy to take your questions..

[Operator Instructions]. And our first question comes from Jeffrey Cohen from Ladenburg Thalman..

So firstly, Mark, what was debt as of Sep 30?.

Yes. So we currently have a debt balance of $8.6 million at the end of September. And this debt actually has a payment term that will begin in 2021 for the principal and run through 2023..

Got it. Okay. And I heard your commentary as far as the OpEx goes.

Does that sound like that's going to be somewhat flattish going forward?.

Yes, Jeff, great question. So as you probably have seen over the last year, we have made significant strides in increasing our headcount. If we go back roughly a year ago, we had about 20 people in our sales function. Today, we're up to 28. And we're going to continue to invest in our sales and marketing function as we look to expand our revenue base.

We have been able to do this while keeping our total OpEx roughly flat by reducing our G&A spending. We would expect to continue to really focus on reducing our G&A levels, while we're increasing our sales and marketing, so that we can continue our expansion of the revenue base..

Got it.

What are total FTEs now approximately?.

We have roughly about 83 people today. And of the 83 people that we have, we have roughly 28 in sales, to give you some perspective on the headcount base..

Got it. Okay. And could you also discuss the margins a bit? I mean, there's a nice uptick for the quarter. Just curious as far as how you're thinking about the time to get to, say, 40 points or 45 points..

Yes, great question. We are -- I can't tell you how excited we are about the improvement that we've seen in the gross margin side. If we go back just a couple of quarters ago or even last year, our gross margins were in the low- to mid-20s. We have seen a significant increase in our gross margins, as we've done a few things.

First of all, we've reduced the overall cost base. We focused on reducing the cost of the product. We've seen a lot of operating efficiencies. And in addition to that, we've also, more importantly, focused the business model more on the higher-margin catheter disposable sales, which has had a significant impact.

As we continue to grow the revenue base, we would expect our gross margins to continue to increase. The third quarter is typically a seasonally weaker quarter for us. We did see an increase quarter-to-quarter and a significant increase year-over-year. We would also expect to see some significant strides in the fourth quarter..

Okay. Got it. And then, lastly, could you talk about the user profile now amongst Pantheris, talk maybe about some utilization trends? I know that there's 25 accounts now, at least on SV. 13 were the initial rollout.

What's the experience there? What kind of composition is SV taking up over a total with the seven-French?.

Yes. This is Jeff. So first of all, we've continued to make great strides with SV, even since the third quarter. We've now shipped this new product to 43 accounts. So we're continuing to see a lot of interest and excitement, new accounts coming onboard literally every week.

The makeup is -- especially at the beginning is primarily selling SV into our current account base as well as we add new accounts they're very interested in putting SV into the program.

The majority of utilization at this point, I think, both from an account -- just because we don't have full penetration yet, but also even with accounts that have SV is still more utilization of the A400 product, which is our seven-French product, just because there are more atherectomy procedures in general above and behind the knee.

However, as we work through the fourth quarter and we have a full quarter of availability in specific accounts, I think we'll have a pretty good sense of how things are going to shake out. But as I think you know, the market pretty much splits. You see estimates of 60% to 65% above-the-knee and 35% to 40% below-the-knee.

We could end up splitting out around that same kind of mix. But with the extreme kind of excitement around having a differentiated and very safe solution for below-the-knee, we might have that grow at a little faster clip. So as it relates to kind of the clinical experience has just been outstanding with Pantheris SV.

Well, it is the only image-guided product. We are the only image-guided atherectomy products. And we also are directional atherectomy. So we provide a significant luminal gain compared to what you would see with more vessel prep type devices like orbital atherectomy or laser below-the-knee.

So far, we really are seeing no clinically significant dissections, no perforations, really no significant safety events at all. And we think that's the empowerment of visualization, right? It just fits right into our thesis behind the importance of our products..

Our next question comes from Nathan Weinstein from Aegis Capital..

So if we could just touch on a macro view of the market, if you could maybe help us think about what the TAM might be or your estimate of TAM, if you sort of aggregated the different products and what that overall market looks like?.

Yes. So when you look at our largest market that we compete in is atherectomy, and atherectomy in the U.S. is over a $500 million market and growing. I think it's driven by, A, physician's interest in actually removing plaque and truly treating the vessel. Obviously, there has been the controversy around DCB.

Whether a DCB is used or not as an adjunctive therapy, atherectomy is a critical driver of patient care. It also is 1 of the highest reimbursed procedures in the cath lab. So we see atherectomy continuing to grow in importance. As we look at CTO crossing, that is a smaller specialty market, around $90 million to $100 million market.

However, CTO crossing in the peripheral arteries is critical to enable true treatment of the vessel through atherectomy or some other means and to unlock those higher reimbursing codes. So we see a great potential there.

And frankly, we're very excited about the Ocellaris product to bring excitement and new revenue growth to our CTO crossing line, similar to how the next-gen Pantheris and the Pantheris SV did to our atherectomy line. So total, we're looking at $600 million plus market for the 2 markets we compete directly.

And as you know, peripheral vascular market overall for devices is close to $4 billion. We also are developing -- as after we get and as we get experience with our Ocellaris next-generation CTO crosser in the peripheral arteries are starting to return our attention to coronary applications. A huge potential market, not an established market.

We'd actually be helping define that market. It's more white space with an image-guided CTO crosser for the coronary arteries right now. Physicians will either perform highly invasive coronary bypass procedures, grafts, which are, as you know, very expensive with a lot of complications and a significant recovery time.

There are also certain physicians, a very small percentage, who will do percutaneous treatment of CTOs and the coronary arteries, but these are very, very complex procedures that will take oftentimes 4 to 5 hours under fluoroscopy and the associated X-ray radiation with a very high estimated to be about a 10% perforation rate.

So we're excited about potentially empowering physicians, interventional cardiologists to cross CTOs and the coronary arteries with an image-guided device that will reduce their amount of fluoro exposure, but also provide a very safe procedure for crossing those coronary CTOs on a percutaneous basis.

If we had to size that market, we'd say it's about a $200 million market. But again, the potential could be much higher since we'd be really, I think, in many ways, creating it..

That's helpful. When we look at the heat map of PAD incidents, there's huge swaths of the country there, and you guys have been growing your sales force diligently.

So do you feel like you have good coverage on all those geographies where there's high PAD incidents? And then, secondly, where could the 20 sales headcount go when we look at end of next year?.

Yes. So as you referred to kind of an atherectomy heat map and kind of where the majority of atherectomy procedures are, and that is exactly how we're building our force. We're putting our reps and our clinical specialists, importantly, in the markets where there are the most atherectomy procedures.

And as we've added -- built from 20 to 28 throughout the course of this year, we have built our presence in those key markets. We added a rep in Florida. We added a rep in Georgia. We added capability in Arizona. We've gone a little deeper in some critical markets such as the Chicago area as well as in the Northeast. And so we're pretty well represented.

There are a few other areas that we have on our plan for 2020 to have our first presence or renewed presence for the company, so that we can expand into those new markets. But we'll also look to go deeper as we build more accounts in some of the large markets that we're currently participating in.

We have one professional who's doing a great job in Florida, but we'll definitely be looking at getting him some support from a clinical basis as we continue to add accounts in these robust markets. We do expect, overall, to slow our pace of hiring somewhat in 2020.

We're not putting out a specific number, but our focus as we go into next year is to really improve and continue to increase sales force productivity as our newer reps get more and more up to speed. And we've made good strides on that in the third quarter. We expect to make continued improvement in the fourth quarter.

And I'm very pleased with our sales leaderships plan and program for continuing to drive these increases in productivity, not only in new accounts, but especially in current accounts as we go forward..

Okay. And I guess just one more for me. You guys have been very deliberate with your new product rollouts.

But when you get positive feedback like perhaps you've been getting on the Pantheris SV, and it sounds like you are, does that change your thought process in terms of accelerating sort of a broader rollout?.

Well, we're in full national launch mode now with Pantheris SV. And so we transitioned very quickly from our limited launch, which we started in July, to full national launch in the second half of the third quarter. So really, we're looking at just a little -- a couple of months process here.

We were able to -- based on the excitement around the product, we're able to get the first 50 cases done very quickly. And as we talked about or I talked about just a moment ago, we're now in 43 accounts. But we think we're moving very fast. We're not going to accelerate to a point where we put our programs, our plans at risk.

We have kind of a very deliberate process that will go through the same process for Ocellaris. We think it's the right thing to do for our -- certainly for patients. We think it's the right thing to do for our physician customers. And we think it's the right thing to do for the company. But we're moving fast.

So we're not talking about 6 months in market before we choose to expand. And we collect data. We collect data from every case we do. We're still collecting data. And the data we've seen from Pantheris SV has been just outstanding. On average, we're delivering about an 80% luminal gain with Pantheris SV alone. So these are highly stenosed arteries.

We're starting at about a 90% stenosis rate, and we're bringing them down below 17%. When you add in any adjunctive therapy, which if there's adjunctive therapy used, it's usually a low-pressure POVO. We're bringing it down to -- or bringing it up to 92% luminal gain, with, as I said, extremely safe performance, all empowered by visualization.

So with those kind of results, we're excited to keep doing cases. We're excited to expand.

But that's really what drove our decision to move so quickly to national launch, is based on the extreme safety and the very positive clinical outcomes and feedback from physicians as well as very, very good reliability and quality metrics for the device as a new product. All right.

If there's no further questions, I'd like to just thank you all for joining our call. We hope you can feel the excitement around our growth and the progress we've made and even more so around the opportunities ahead for the company. And we look forward to updating on our progress ahead..

Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day..