1. Organization

 

Organization, Nature of Business

 

Avinger, Inc. (the “Company”), a Delaware corporation, was incorporated in March 2007. The Company designs, manufactures and sells image-guided, catheter-based systems that are used by physicians to treat patients with peripheral artery disease (“PAD”). Patients with PAD have a build-up of plaque in the arteries that supply blood to areas away from the heart, particularly the pelvis and legs. The Company manufactures and sells a suite of products in the United States (“U.S.”) and in select international markets. The Company has developed its Lumivascular platform, which integrates optical coherence tomography (“OCT”) visualization with interventional catheters and is the industry’s only system that provides real-time intravascular imaging during the treatment portion of PAD procedures. The Company’s Lumivascular platform consists of a capital component, Lightbox, 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 to penetrate a total blockage in an artery, known as a chronic total occlusion (“CTO”). In March 2016, the Company received 510(k) clearance from the U.S. Food and Drug Administration (“FDA”) for commercialization of Pantheris, the Company’s image-guided atherectomy system, designed to allow physicians to precisely remove arterial plaque in PAD patients. In May 2018, the Company also received 510(K) clearance from the FDA for its next-generation of Pantheris. In April 2019, the Company further received FDA clearance for Pantheris SV, a lower profile Pantheris. The Company has sales in the U.S. and select international markets. The Company is located in Redwood City, California.

 

Liquidity Matters

 

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

 

In the course of its activities, the Company has incurred losses and negative cash flows from operations since its inception. As of June 30, 2019, the Company had an accumulated deficit of $338.6 million. The Company expects to incur losses for the foreseeable future. The Company believes that its cash and cash equivalents of $14.8 million at June 30, 2019 and expected revenues and funds from operations will be sufficient to allow the Company to fund its current operations through at least the fourth quarter of 2019. Even though we received net proceeds of $10.2 million from the sale of our Series C Preferred Stock and common stock in our November 2018 offering, net proceeds of $15.5 million from the sale of our Series B preferred stock and warrants in our February 2018 offering, proceeds from issuance of common stock upon the exercise of warrants in the six months ended June 30, 2019 of $8.0 million and net proceeds of $3.0 million from the sale of common stock and warrants in our July 2018 offering, the Company will need to raise additional funds through future equity or debt financings within the next twelve months to meet its operational needs and capital requirements for product development, clinical trials and commercialization and may subsequently require additional fundraising. The Company can provide no assurance that it will be successful in raising funds pursuant to additional equity or debt financings or that such funds will be raised at prices that do not create substantial dilution for our existing stockholders. Given the recent decline in the Company’s stock price, any financing that we undertake in the next twelve months could cause substantial dilution to our existing stockholders, there can be no assurance that the Company will be successful in acquiring additional funding at levels sufficient to fund its operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. If the Company is unable to raise additional capital in sufficient amounts or on terms acceptable to it, the Company may have to significantly reduce its operations or delay, scale back or discontinue the development of one or more of its products. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company’s ultimate success will largely depend on its continued development of innovative medical technologies, its ability to successfully commercialize its products and its ability to raise significant additional funding.

 

Additionally, due to the substantial doubt about the Company’s ability to continue operating as a going concern and the material adverse change clause in the Loan Agreement with CRG, the entire amount of borrowings at June 30, 2019 and 2018 has been classified as current in these financial statements. CRG has not invoked the material adverse change clause.

 

 

Public Offerings

 

On February 16, 2018, we completed a public offering of 17,979 shares of Series B preferred stock and warrants to purchase 1,797,900 shares of common stock. As a result, we received net proceeds of approximately $15.5 million after underwriting discounts, commissions, legal and accounting fees. The Series B preferred stock has a liquidation preference of $0.001 per share, full ratchet price based anti-dilution protection, has no voting rights and is subject to certain ownership limitations. The Series B preferred stock is immediately convertible at the option of the holder, has no stated maturity, and does not pay regularly stated dividends or interest. Each share of Series B preferred stock is accompanied by one Series 1 warrant that expires on the seventh anniversary of the date of issuance to purchase up to 50 shares of common stock and one Series 2 warrant that expires on the earlier of (i) the seventh anniversary of the date of issuance or (ii) the 60th calendar day following the receipt and announcement of FDA clearance of our Pantheris below-the-knee device (or the same or similar product with a different name) to purchase up to 50 shares of common stock; provided, however, if at any time during such 60-day period the volume weighted average price for any trading day is less than the then effective exercise price, the termination date shall be extended to the seven year anniversary of the initial exercise date. In addition, pursuant to the Series A Purchase Agreement, we issued to CRG 41,800 shares of Series A preferred stock at the closing of the Series B Offering. The Series A preferred stock was issued in exchange for the conversion of $38.0 million of the outstanding principal amount of their senior secured term loan (plus the back-end fee and prepayment premium applicable thereto), totaling approximately $41.8 million. The Series A Preferred Stock is initially convertible into 2,090,000 shares of common stock subject to certain limitations contained in the Series A Purchase Agreement.

 

On July 12, 2018, we entered into a securities purchase agreement with certain investors pursuant to which we agreed to sell and issue, in a registered direct offering, an aggregate of 216,618 shares of our common stock at an offering price of $16.425 per share. In a concurrent private placement, or the Private Placement, we agreed to issue to these investors warrants exercisable for one share of our common stock for each two shares purchased in the registered direct offering, which equals an aggregate of 108,309 shares of common stock. The closing of such registered direct offering and the concurrent Private Placement occurred on July 16, 2018, in connection with which we received net proceeds of approximately $3.0 million after deducting placement agent fees and other expenses payable by us and the conversion price of the outstanding shares of Series B preferred stock, issued in our February 2018 offering, was reduced to $1.58 per share as a result. The warrants have an exercise price of $15.80 per share of our common stock and may be exercised from time to time beginning on January 17, 2019 and expire on July 16, 2021.

 

On November 1, 2018, we completed a public offering of 728,500 shares of common stock and 8,586 shares of Series C convertible preferred stock (the “Series C preferred stock”). As a result, we received net proceeds of approximately $10.2 million after underwriting discounts, commissions, legal and accounting fees. Upon any dissolution, liquidation or winding up, whether voluntary or involuntary, holders of Series C preferred stock will be entitled to receive distributions out of our assets, whether capital or surplus, of an amount equal to $0.001 per share of Series C preferred stock before any distributions shall be made on the common stock but after distributions shall be made on any outstanding Series A preferred stock and any of our existing or future indebtedness. The Series C preferred stock has no voting rights.

 

  2. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited condensed financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) and pursuant to the rules and regulations of the SEC. The accompanying unaudited condensed interim financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for a fair statement of the Company’s financial information. The results for the three and six months ended June 30, 2019 are not necessarily indicative of results to be expected for the year ending December 31, 2019, or for any other interim period or for any future year. The December 31, 2019 condensed balance sheet data has been derived from audited financial statements. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to SEC rules and regulations relating to interim financial statements. These unaudited condensed financial statements and notes should be read in conjunction with the financial statements included in the Company’s Form 10-K for the fiscal year ended December 31, 2018, which was filed with the SEC on March 6, 2019. The Company’s significant accounting policies are more fully described in Note 2 of the Notes to Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

 

On January 30, 2018, the Company’s Board of Directors approved an amendment to the Company’s amended and restated certificate of incorporation to effect a 1-for-40 reverse stock split of the Company’s common stock. Further, on June 19, 2019 , the Company’s Board of Directors approved an amendment to the Company’s amended and restated certificate of incorporation to effect an additional 1-for - 10 reverse stock split of the Company’s common stock. The reverse stock split became effective on June 21, 2019. The par value of the common stock and convertible preferred stock was not adjusted as a result of the reverse stock split. All common stock, stock options, and restricted stock units, and per share amounts in the financial statements have been retroactively adjusted for all periods presented to give effect to the reverse stock splits.

 

 

Use of Estimates

 

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

 

 

Fair Value of Financial Instruments

 

The Company has evaluated the estimated fair value of its financial instruments as of June 30, 2019 and December 31, 2018. Financial instruments consist of cash 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.

 

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 cash equivalents. Cash equivalents are considered available-for-sale marketable securities and are recorded at fair value, using level 1 inputs, based on quoted market prices. As of June 30, 2019 and December 31, 2018, the Company’s cash equivalents are entirely comprised of investments in money market funds. Any related unrealized gains and losses are recorded in other comprehensive income (loss) and included as a separate component of stockholders’ equity (deficit). There were no unrealized gains and losses as of June 30, 2019 and December 31, 2018. Any realized gains and losses and interest and dividends on available-for-sale securities are included in interest income or expense and computed using the specific identification cost method.

 

Concentration of Credit Risk, and Other Risks and Uncertainties

 

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

 

The Company’s policy is to invest in cash and cash equivalents, consisting of money market funds. These financial instruments are held in Company accounts at one financial institution. The counterparties to the agreements relating to the Company’s investments consist of financial institutions of high credit standing.

 

The Company provides for uncollectible amounts when specific credit problems arise. Management’s estimates for uncollectible amounts have been adequate, and management believes that all significant credit risks have been identified at June 30, 2019 and December 31, 2018.

 

The Company’s accounts receivable are due from a variety of healthcare organizations in the United States and select international markets. At June 30, 2019 and December 31, 2018, there were no customers that represented 10% or more of the Company’s accounts receivable. For the three and six months ended June 30, 2019 and 2018, there were no customers that represented 10% or more of revenues. Disruption of sales orders or a deterioration of financial conditions 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’s product components and sub-assemblies continue to be manufactured by sole suppliers. Disruption in component or sub-assembly supply from these manufacturers or from in-house production would have a negative impact on the Company’s financial position and results of operations.

 

The Company is subject to certain risks, including that its devices may not be approved or cleared for marketing by governmental authorities or be successfully marketed. There can be no assurance that the Company’s products will achieve widespread adoption in the marketplace, nor can there be any assurance that existing devices or any future devices can be developed or manufactured at an acceptable cost and with appropriate performance characteristics. The Company is also subject to risks common to companies in the medical device industry, including, but not limited to, new technological innovations, dependence upon third-party payors to provide adequate coverage and reimbursement, dependence on key personnel and suppliers, protection of proprietary technology, product liability claims, and compliance with government regulations.

 

Existing or future devices developed by the Company may require approvals or clearances from the FDA or international regulatory agencies. In addition, in order to continue the Company’s operations, compliance with various federal and state laws is required. If the Company were denied or delayed in receiving such approvals or clearances, it may be necessary to adjust operations to align with the Company’s currently approved portfolio. If clearance for the products in the current portfolio were withdrawn by the FDA, this may have a material adverse impact on the Company.

 

 

Revenue Recognition

 

The Company’s revenues are derived from (1) sale of Lightboxes, (2) sale of disposables, which consist of catheters and accessories, and (3) sale of customer service contracts. The Company sells its products directly to hospitals and medical centers as well as through distributors. The Company accounts for a contract with a customer when there is a legally enforceable contract between the Company and the customer, the rights of the parties are identified, the contract has commercial substance, and collectability of the contract consideration is probable. The Company’s revenues are measured based on consideration specified in the contract with each customer, net of any sales incentives and taxes collected from customers that are remitted to government authorities. For all sales, the Company uses either a signed agreement or a binding purchase order as evidence of an arrangement. The Company’s revenue recognition policies generally result in revenue recognition at the following points:

 

	1.	Lightbox sales: The Company sells its products directly to hospitals and medical centers. Provided all other criteria for revenue recognition have been met, the Company recognizes revenue for Lightbox sales directly to end customers when delivery and acceptance occurs, which is defined as receipt by the Company of an executed form by the customer acknowledging that the training and installation process is complete.
	2.	Sales of disposables: Disposable revenues consist of sales of the Company’s catheters and accessories and are recognized when the product has shipped, risk of loss and title has passed to the customer and collectability is reasonably assured.
	3.	Service revenue: Service contract revenue is recognized ratably over the term of the service period and maintenance contract revenue is recognized as work is performed. 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 limited commercial evaluation program 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 under a lease agreement or under a commercial evaluation program, the Company retains title to the equipment and it remains capitalized on 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 Accounting Standards Codification (“ASC”) 840, Leases and ASU No. 2014 09, Revenue from Contracts with Customers (Topic 606) . The guidance requires arrangement consideration to be allocated between a lease 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 guidance and given that any payments under the lease agreements are dependent upon contingent future sales, it was determined that collectability of the minimum lease payments is not reasonably predictable. Accordingly, the Company concluded the embedded lease did not meet the criteria of a sales-type lease and accounts for it as an operating lease. The Company recognizes revenue allocated to the lease as the contingent disposable product purchases are delivered and 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 the distributor. The distributors are responsible for all marketing, sales, training and warranty in their respective territories. The standard terms and conditions contained in the Company’s distribution agreements do not provide price protection or stock rotation rights to any of its distributors. In addition, its distributor agreements do not allow the distributor to return or exchange products, and the distributor is obligated to pay the Company upon invoice regardless 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 analyzes historical returns, current economic trends and changes in customer demand and acceptance of its products. The Company expenses shipping and handling costs 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 classify the 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 of revenues currently consists of manufacturing overhead costs. These overhead costs include the cost of quality assurance, material procurement, inventory control, facilities, equipment and operations supervision and management. Cost of revenues also includes depreciation 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 the customer. The Company accrues for the estimated cost of product warranties upon invoicing its customers, based on historical results. Warranty costs are reflected in the statement of operations and comprehensive loss as a cost of revenues. The warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from these estimates, revisions to the estimated warranty liability would be required. Periodically the Company assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. Warranty provisions and claims are summarized as follows (in thousands):

 

Balance at December 31, 2018		$	272
Warranty provision			36
Usage/Release			(93	)
Balance at June 30, 2019		$	215

 

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 the weighted average number of shares of common stock outstanding during the period, without consideration for potential dilutive common shares. Diluted net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted average number of shares of common stock and dilutive potential shares of common stock outstanding during the period. Any common stock shares subject to repurchase are excluded from the calculations as the continued vesting of such shares is contingent upon the holders’ continued service to the Company. As of June 30, 2019 and December 31, 2018, there were no shares subject to repurchase. Since the Company was in a loss position for all periods presented, basic net loss per share attributable to common stockholders is the same as diluted net loss per share attributable to common stockholders as the inclusion of all potentially dilutive common shares would have been anti-dilutive.

 

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

 

		Three Months Ended June 30,								Six Months Ended June 30,
		201 9				201 8				201 9				201 8
Net loss attributable to common stockholders		$	(5,546	)		$	(6,635	)		$	(11,496	)		$	(22,542	)
Weighted average common stock outstanding			6,377				675				5,319				435
Net loss per share attributable to common stockholders, basic and diluted		$	(0.87	)		$	(9.83	)		$	(2.16	)		$	(51.82	)

 

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

 

		Three Months Ended June 30,								Six Months Ended June 30,
		201 9				201 8				201 9				201 8
Common stock warrants			23,845,311				18,032,715				36,458,617				17,742,215
Common stock options			7,492				5,586				7,673				8,484
Convertible preferred stock			44,923				52,762				45,109				43,501
Unvested restricted stock units			287,817				345				288,581				330
			24,185,543				18,091,408				36,799,980				17,794,530

 

 

  Segment and Geographical Information

 

The Company operates and manages its business as one reportable and operating segment. The Company’s chief executive officer, who is the chief operating decision maker, reviews financial information on an aggregate basis for purposes of allocating resources and evaluating financial performance. Primarily all of the Company’s long-lived assets are based in the United States. Long-lived assets are comprised of property and equipment. For the three months ended June 30, 2019 and 2018, 92% and 95%, respectively, of the Company’s revenues were in the United States based on the shipping location of the external customer. For the six months ended June 30, 2019 and 2018, 92% and 93%, respectively, of the Company’s revenues were in the United States based on the shipping location of the external customer.

 

 

Recent Accounting Pronouncements

 

Adopted:

 

In May 2014, the FASB issued ASU No. 2014-09 ,   Revenue from Contracts with Customers (Topic 606) , which supersedes the revenue recognition requirements in ASC 605,  Revenue Recognition . This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, FASB issued ASU No. 2015-14,  Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date , which effectively delayed the adoption date by one year, to an effective date for public entities for annual and interim periods beginning after December 15, 2017.

 

In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606 ) : Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net), to clarify certain aspects of the principal-versus-agent guidance in its new revenue recognition standard.

 

In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606 ) : Identifying Performance Obligations and Licensing to clarify how to identify the performance obligations and the licensing implementation guidance in its new revenue recognition standard.

 

In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606 ) : Narrow-Scope Improvements and Practical Expedients , to address certain issues identified by the Transition Resource Group, (the “TRG”) in the guidance on assessing collectability, presentation of sales tax, noncash consideration, and completed contracts and contracts modifications at transition.

 

The Company adopted ASC 606 and related ASUs on January 1, 2018, using the modified retrospective approach. The adoption did not have a material impact on the Company’s financial statements.

 

In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718 ) : Scope of Modification Accounting, which provides guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date. The Company adopted this guidance on January 1, 2018 and such adoption did not have a material impact on the Company’s financial statements.

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230 ): Classification of Certain Cash Receipts and Cash Payments . This update clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This ASU is effective for public business entities for fiscal years beginning after December 15, 2017, and for interim periods therein with early adoption permitted and must be applied retrospectively to all periods presented. The Company adopted this guidance on January 1, 2018 and such adoption did not have a material impact on the Company’s financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02,  Leases (Topic 842 ). Topic 842 amends a number of aspects of lease accounting, including requiring lessees to recognize leases with a term greater than one year as a right-of-use asset and corresponding liability, measured at the present value of the lease payments. In July, the FASB issued supplemental adoption guidance and clarification to Topic 842 within ASU No. 2018-10, Codification Improvements to Topic 842, Leases and ASU No. 2018-11, Leases (Topic 842 ): Targeted Improvements . The guidance became effective for us beginning in the first quarter of 2019 and was required to be adopted using a modified retrospective approach. The Company adopted this guidance on January 1, 2019. This adoption resulted in the recognition of a right of use asset and a corresponding leasehold liability related to the Company’s building lease on the balance sheet of approximately $1.8 million with no material impact on the statements of operations and comprehensive loss. To maintain comparability between periods, the Company reclassified sublease payments received of approximately $240,000 that were netted against rent expense in the three and six months ended June 30, 2018 to other income on the condensed statement of operations and comprehensive loss. In addition, we elected to take advantage of the available practical expedients.

 

In June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock Compensation (Topic 718 ): Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope of Topic 718 to include share based payment transactions for acquiring goods and services from nonemployees and applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606. This update is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. The Company adopted this guidance on January 1, 2019 and such adoption did not have a material impact on the Company’s financial statements.

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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 amount that 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-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. A three-tier fair value hierarchy 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 similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially 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 June 30, 2019 and December 31, 2018, cash equivalents were all categorized as Level 1 and consisted of money market funds. As of June 30, 2019 and December 31, 2018, there were no financial assets and liabilities categorized as Level 2 or 3. There were no transfers between fair value hierarchy levels during the three and six months ended June 30, 2019 and 2018.

 

4. Inventories

 

Inventories consisted of the following (in thousands):

 

		June 3 0 ,				December 31,
		2019				2018
Raw materials		$	1,689			$	2,102
Work-in-process			695				158
Finished products			1,721				1,162
Total inventories		$	4,105			$	3,422

 

 

 

5. Borrowings

 

CRG

 

On September 22, 2015, the Company entered into a Term Loan Agreement, as amended (the “Loan Agreement”) with CRG under which, subject to certain conditions, the Company had the right to borrow up to $50,000,000 in principal amount from CRG on or before March 29, 2017. The Company borrowed $30,000,000 on September 22, 2015. The Company borrowed an additional $10,000,000 on June 15, 2016 under the Loan Agreement.

 

On October 28, 2016, the Company and CRG amended the Loan Agreement to reduce the minimum revenue that the Company was required to achieve in 2016 to $18,000,000. On February 14, 2018, the Company and CRG further amended the Loan Agreement concurrent with the conversion of $38,000,000 of the principal amount of the senior secured term loan (plus $3,800,000 in back-end fees and prepayment premium applicable thereto) into a newly authorized Series A convertible preferred stock (see Note 7, below). For the three and six months ended June 30, 2018, the $3,800,000 was accounted for in the condensed statement of operations and comprehensive loss as interest expense.

 

Under the Loan Agreement, as amended, no cash payments for either principal or interest are due until the first quarter of 2020. Beginning in the first quarter of 2020 accrued interest will be partially paid and partially accrued and included in the debt balance based (to the extent not paid) on principal amounts outstanding at the beginning of the quarter at an interest rate of 12.5%. Beginning in the third quarter of 2021, the Company will be required to make quarterly principal payments (in addition to the interest) of $1.2 million with total principal payments of $2.4 million in 2021, $4.8 million in 2022 and $2.4 million in 2023.

 

 

The Company may voluntarily prepay the borrowings in full, with a prepayment premium beginning at 5.0% and declining by 1.0% annually thereafter, with no premium being payable if prepayment occurs after the fifth year of the loan. Each tranche of borrowing required the payment, on the borrowing date, of a financing fee equal to 1.5% of the borrowed loan principal, which is recorded as a discount to the debt. In addition, a facility fee equal to 7.0% of the amounts borrowed plus any payment-in-kind (“PIK”) was to be payable at the end of the term or when the borrowings are repaid in full. A long-term liability is being accreted using the effective interest method for the facility fee over the term of the Loan Agreement with a corresponding discount to the debt. The borrowings are collateralized by a security interest in substantially all of the Company’s assets.

 

The Loan Agreement requires that the Company adheres to certain affirmative and negative covenants, including financial reporting requirements, certain minimum financial covenants for pre-specified liquidity and revenue requirements and a prohibition against the incurrence of indebtedness, or creation of additional liens, other than as specifically permitted by the terms of the Loan Agreement. In particular, the covenants of the original Loan Agreement included a covenant that the Company maintain a minimum of $5,000,000 of cash and certain cash equivalents, and the Company had to achieve minimum revenue of $7,000,000 in 2015, $23,000,000 in 2016, $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. If the Company fails to meet the applicable minimum revenue target in any calendar year, the Loan Agreement provides the Company with a cure right if it prepays a portion of the outstanding principal equal to 2.0 times the revenue shortfall. In addition, the Loan Agreement prohibits the payment of cash dividends on the Company’s capital stock and also places restrictions on mergers, sales of assets, investments, incurrence of liens, incurrence of indebtedness and transactions with affiliates. CRG may accelerate the payment terms of the Loan Agreement upon the occurrence of certain events of default set forth therein, which include the failure of the Company to make timely payments of amounts due under the Loan Agreement, the failure of the Company to adhere to the covenants set forth in the Loan Agreement, the insolvency of the Company or upon the occurrence of a material adverse change.

 

On February 14, 2018, the Company entered into Amendment No. 2 to the Loan Agreement to, among other things:

 

	●	extend the interest only payment period and the period during which the Company may elect to pay a portion of the interest in PIK interest payments through June 30, 2021;
	●	provide for a 15% facility fee to be paid on the maturity date (“final facility fee”);
	●	permit the Company to make the entire interest payment for payment dates in 2018 and 2019 in PIK interest payments, provided no default has occurred and is continuing;
	●	extend the maturity date to June 30, 2023;
	●	modify certain of the covenants, including the indebtedness covenant, lien covenant and restricted payments covenant, to eliminate or modify permitted exceptions to the restrictions in those covenants;
	●	modify the financial covenants to reduce the minimum liquidity requirement to $3,500,000 at all times, to eliminate the minimum revenue requirements for 2018 and 2019, and to reduce the minimum revenue requirements to $15,000,000 million for 2020, $20,000,000 for 2021 and $25,000,000 for 2022; and
	●	provide CRG with board observer rights.

 

As of June 30, 2019, the Company was in compliance with all applicable covenants under the Loan Agreement.

 

As of June 30, 2019, principal, final facility fee and PIK payments due under the Loan Agreement are as follows (in thousands):

 

Year Ending December 31,
2019 (remaining six months of the year)		$	—
2020			799
2021			3,403
2022			5,522
2023			3,981
			13,705
Less: Amount of PIK additions and final facility fee to be accreted subsequent to June 30, 2019			(4,832	)
Less: Amount representing debt financing costs			(672	)
Borrowings, as of June 30, 2019		$	8,201

 

 

In connection with drawdowns under the Loan Agreement, the Company recorded aggregate debt discounts of $1.3 million as contra-debt. The debt discounts are being amortized as non-cash interest expense using the effective interest method over the term of the Loan Agreement. As of June 30, 2019 and December 31, 2018, the balance of the aggregate debt discount was approximately $672,000 and $757,000, respectively. The Company’s interest expense associated with the amortization of debt discount amounted to $43,000 and $30,000 during the three months ended June 30, 2019 and 2018, respectively. The Company’s interest expense associated with amortization of the debt discount amounted to $85,000 and $56,000 during the six months ended June 30, 2019 and 2018, respectively. For the three months ended June 30, 2019 and 2018, the Company incurred interest expense of approximately $364,000 and $362,000, respectively. For the six months ended June 30, 2019 and 2018, the Company incurred interest expense of approximately $714,000 and $5.0 million, respectively.

 

Due to the substantial doubt about the Company’s ability to continue operating as a going concern and the material adverse change clause in the Loan Agreement with CRG, the entire amount of borrowings at June 30, 2019 and December 31, 2018 is classified as current in these financial statements. CRG has not invoked the material adverse change clause.

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6. Commitments and Contingencies

 

Lease Commitments

 

The Company’s operating lease obligations primarily consist of leased office, laboratory, and manufacturing space under a non-cancelable operating lease that originally were to expire in November 2019. In addition to the minimum future lease commitments presented below, the lease requires the Company to pay property taxes, insurance, maintenance, and repair costs. The lease includes a rent holiday concession and escalation clauses for increased rent over the lease term. Rent expense is recognized using the straight-line method over the term of the lease. The Company records deferred rent calculated as the difference between rent expense and the cash rental payments. In connection with the facility lease, the landlord also provided incentives of $369,000 to the Company in the form of leasehold improvements. These amounts were reflected as deferred rent and are being amortized as a reduction to rent expense over the original term of the Company’s operating lease.

  

On October 19, 2017, the Company entered into an agreement to sublease one of its facilities. The sublease agreement commenced on approximately December 1, 2017 and is scheduled to expire on November 15, 2019 (which is 15 days prior to the expiration of the facility lease). The sublessee pays a base rent of $82,410 per month. In addition to the base rent, the sublessee pays the Landlord’s operating expenses and property taxes due and payable with respect to the subleased facility.

 

Upon the adoption of Topic 842 on January 1, 2019, the Company recognized a right of use asset and a corresponding leasehold liability related to this lease of approximately $1.8 million, representing the present value of the remaining minimum lease payments as of that date. The asset was being reduced over the remaining period of the lease on a straight-line basis. The leasehold liability is being reduced as payments are made.

 

On April 1, 2019, we entered into an amendment to the lease which extended the lease term for an additional period of five years subsequent to the original expiration of November 30, 2019. As amended, the lease will expire on November 30, 2024. Under the terms of the amendment, we will be obligated to pay approximately $5.8 million in base rent payments through November 2024, beginning on December 1, 2019. This amendment does not extend the term of the lease with respect to the building being subleased.

 

In connection with the amendment the Company adjusted its right-of-use asset and lease liability to $6.0 million. As of the date of the amendment, the operating lease is included on the balance sheet at the present value of the future base payments discounted at a 6.5% discount rate using the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term and amount equal to the lease payments in a similar economic environment as the leases do not provide an implicit rate.

 

For the three months ended June 30, 2019, our operating lease expense, excluding variable maintenance fees and other expenses paid by the Company on a monthly basis, was approximately $314,000. Rent expense for the three months ended June 30, 2018 was approximately $480,000. For the six months ended June 30, 2019, our operating lease expense, excluding variable maintenance fees and other expenses paid by the Company on a monthly basis, was approximately $806,000. Rent expense for the six months ended June 30, 2018 was approximately $960,000. Operating right-of-use asset amortization was approximately $219,000 for the six months ended June 30, 2019. Due to payments being made in excess of operating lease expense recognized, the Company recorded approximately $179,000 as prepaid rent included in other assets on the condensed balance sheet as of June 30, 2019.

 

The following table presents the future operating lease payments and lease liability included on the condensed balance sheet related to the Company’s operating lease as of June 30, 2019 (in thousands):

 

Year Ending December 31,
2019 (remaining six months of the year)		$	912
2020			1,085
2021			1,123
2022			1,162
2023			1,203
Thereafter			1,138
			6,623
Less: Imputed interest			(1,027	)
Leasehold liability as of June 30, 2019		$	5,596

 

 

Purchase Obligations

 

Purchase obligations consist of agreements to purchase goods and services entered into in the ordinary course of business. The Company had non-cancellable commitments to suppliers for purchases totaling approximately $1.9 million as of June 30, 2019.

 

Indemnification

 

In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and may provide for indemnification of the counterparty. The Company’s exposure under these agreements is unknown because it involves claims that may be made against 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 to its 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 was serving at the Company’s request in such capacity, as permitted under Delaware law and in accordance with its certificate of incorporation and bylaws. The term 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 such capacity. The maximum amount of potential future indemnification is unlimited; however, the Company currently holds director liability insurance. This insurance allows the transfer of risk associated with the Company’s exposure and may enable it to recover a portion of any future amounts paid. The Company believes that the fair value of these indemnification obligations is minimal. Accordingly, it has not recognized any liabilities relating to these obligations for any period presented.

 

Legal Proceedings

 

Except as set forth below, we are not involved in any pending legal proceedings that we believe could have a material adverse effect on our financial condition, results of operations or cash flows. From time to time we may be involved in legal proceedings or investigations, which could harm our reputation, business and financial condition and divert the attention of our management from the operation of our business.

 

Between May 22, 2017 and May 25, 2017, three class actions were filed in the Superior Court of the State of California, County of San Mateo, or the State Court, against us and certain of our officers and directors. The underwriters of our IPO in January 2015 are also named as defendants. The actions were captioned Grotewiel v. Avinger, Inc., et al., No. 17-CIV-02240, Gonzalez v. Avinger, Inc., et al., No. 17-CIV-02284, and Olberding v. Avinger, Inc., et al., No. 17-CIV-02307. These lawsuits allege that the registration statement for our IPO made false and misleading statements and omissions in violation of the Securities Act of 1933. Plaintiffs seek to represent a class of purchasers of our common stock in and/or traceable to our IPO. Plaintiffs seek, among other things, unspecified compensatory damages, interest, costs, recission, and attorneys’ fees. On June 12, 2017, defendants removed these actions to the United States District Court for the Northern District of California, or Federal Court.

 

On June 22, 2017, and June 23, 2017, plaintiffs Olberding and Gonzalez moved to remand their cases to the State Court. Defendants opposed these motions. On July 21, 2017, the Federal Court granted the motions to remand the Olberding and Gonzalez actions to the State Court. On August 9, 2017, the State Court consolidated the Olberding and Gonzalez actions under the caption Gonzalez v. Avinger, Inc., et al., No. 17-CIV-02284, or State Action. On September 22, 2017, an amended complaint was filed in the State Action. On October 31, 2017, the parties in the State Action stipulated to a stay of proceedings until judgment is entered in the federal Grotewiel action, or Federal Action. On June 20, 2018, the State Court dismissed the State Action pursuant to the proposed settlement described below.

 

On October 11, 2017, the Federal Court appointed a lead plaintiff and approved the selection of a lead counsel in the Federal Action. On November 21, 2017, an amended complaint was filed in the Federal Action. Defendants filed a motion to dismiss that complaint on January 26, 2018. On March 19, 2018, plaintiff in the Federal Action filed a further amended complaint, on behalf of a class of purchasers of our common stock in and/or traceable to our IPO, as well as purchasers of our common stock during the period January 30, 2015, to April 10, 2017.

 

The Company and its directors believe that the foregoing lawsuits were without merit; however, in the interest of avoiding the cost and disruption of continuing to defend against these lawsuits, the Company entered into a settlement of the actions. The settlement is for a total of $5 million. The Company’s total contribution to the settlement fund is $1.76 million, which the Company paid in March 2018. On October 24, 2018, the court approved the settlement.

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7. Stockholders’ Equity (Deficit)

 

Convertible Preferred Stock

 

The Company’s certificate of incorporation, as amended and restated, authorizes the Company to issue up to 5,000,000 shares of convertible preferred stock with $0.001 par value per share, of which 44,923 shares were issued and outstanding as of June 30, 2019.

 

Series A Convertible Preferred Stock

 

On February 14, 2018, the Company entered into a Series A Purchase Agreement with CRG, pursuant to which it agreed to convert $38.0 million of the outstanding principal amount of its senior secured term loan (plus $3,800,000 in back-end fees, accrued interest, debt discount and prepayment premium applicable thereto), totaling $42.8 million, into a newly authorized Series A convertible preferred stock (the “Series A preferred stock”). The Series A preferred stock was initially convertible into 2,090,000 shares of common stock subject to certain limitations contained in the Series A Purchase Agreement. Under the terms of the Series A Purchase Agreement, the holders of Series A preferred stock are entitled to receive annual accruing dividends at a rate of 8%, payable in additional shares of Series A preferred stock or cash, at the Company’s option. The shares of Series A preferred stock have no voting rights and rank senior to all other classes and series of the Company’s equity in terms of repayment and certain other rights. The Series A preferred stock and any of the Company’s common stock issued upon conversion of the Series A preferred stock were subject to a lockup agreement through February 14, 2019. In January 2019, 2,945 additional shares were issued to CRG as payment of dividends accrued through December 31, 2018. As of June 30, 2019, 44,745 shares of Series A preferred stock were outstanding. The Series A preferred stock accrued additional dividends of approximately $1.8 million during the six months ended June 30, 2019.

 

Series B Convertible Preferred Stock

 

On February 16, 2018, the Company completed a public offering of 17,979 shares of Series B convertible preferred stock (the “Series B preferred stock”). As a result, the Company received net proceeds of approximately $15.5 million after underwriting discounts, commissions, legal and accounting fees. The Series B preferred stock has a liquidation preference of $0.001 per share, full ratchet price based anti-dilution protection, has no voting rights and is subject to certain ownership limitations. The Series B preferred stock is immediately convertible at the option of the holder, has no stated maturity, and does not pay regularly stated dividends or interest. As of December 31, 2018, there were 1,701 shares of Series B preferred stock outstanding. During the six months ended June 30, 2019, 1,523 of these shares converted into 380,750 shares of common stock and 178 shares of Series B preferred stock remained outstanding.

 

The Company evaluated the Series B convertible preferred stock issuance in accordance with the provisions of ASC 815, Derivatives and Hedging, including consideration of embedded derivatives requiring bifurcation. The issuance of the convertible preferred stock could generate a beneficial conversion feature (“BCF”), which arises when a debt or equity security is issued with an embedded conversion option that is beneficial to the investor or in the money at inception because the conversion option has an effective conversion price that is less than the market price of the underlying stock at the commitment date. The Company recognized the BCF by allocating the intrinsic value of the conversion option, which is the number of shares of common stock available upon conversion multiplied by the difference between the effective conversion price per share and the fair value of common stock per share on the commitment date, to additional paid-in capital, resulting in a discount on the convertible preferred stock. As the Series B convertible preferred stock may be converted immediately, the Company recognized a BCF of $5.2 million as a deemed dividend in the statements of operations as of February 16, 2018. 

 

Series C Convertible Preferred Stock

 

On November 1, 2018, the Company completed a public offering of 728,500 shares of common stock and 8,586 shares of Series C convertible preferred stock (the “Series C preferred stock”). As a result, we received net proceeds of approximately $10.2 million after underwriting discounts, commissions, legal and accounting fees. Upon any dissolution, liquidation or winding up, whether voluntary or involuntary, holders of Series C preferred stock will be entitled to receive distributions out of our assets, whether capital or surplus, of an amount equal to $0.001 per share of Series C preferred stock before any distributions shall be made on the common stock but after distributions shall be made on any outstanding Series A preferred stock and any of our existing or future indebtedness. The Series C preferred stock has no voting rights. As of December 31, 2018, there were 2,170 shares of Series C preferred stock outstanding. During the six months ended June 30, 2019, all 2,170 of these shares were converted into 542,500 shares of common stock and no shares remained outstanding.

 

Common Stock

 

As of June 30, 2019, the Company’s certificate of incorporation, as amended and restated, authorizes the Company to issue up to 100,000,000 shares of common stock with $0.001 par value per share, of which 6,421,317 shares were issued and outstanding.

 

 

Common Stock Warrants

 

In connection with the issuance of the Company’s Series E convertible preferred stock in September 2014 through January 2015, the Company issued warrants to purchase an aggregate of up to the number of shares of common stock equal to 50% of the number of shares of the Company’s Series E Convertible preferred stock purchased by such investor. As of June 30, 2019, there were warrants outstanding to purchase an aggregate of 5,380 shares of common stock with an exercise price of $5,040.00 per share. These warrants expire upon the earlier of September 2, 2019 or upon consummation of a change in control of the Company.

  

On February 16, 2018, in connection with the Company’s completed public offering of Series B preferred stock, the Company issued two series of warrants that together provide for the purchase, by the investors in that offering, of an aggregate of 1,797,900 shares of common stock (the “Series B Warrants”). Each share of Series B preferred stock is accompanied by one warrant to purchase one share of common stock at $4.00 per share that expires on the seventh anniversary of the date of issuance to purchase up to 50 shares of common stock and one warrant that expires on the earlier of (i) the seventh anniversary of the date of issuance or (ii) the 60th calendar day following the receipt and announcement of FDA clearance of the Company’s Pantheris below-the-knee device (or the same or similar product with a different name) to purchase up to 50 shares of common stock; provided, however, if at any time during such 60-day period the volume weighted average price for any trading day is less than the then effective exercise price, the termination date shall be extended to the seven year anniversary of the initial exercise date. The Company determined that the Series B Warrants should be classified as equity. As of June 30, 2019, Series B Warrants to purchase an aggregate of 1,768,850 shares of common stock remain outstanding.

 

On July 13, 2018, in connection with the Company’s completed public offering of 216,618 shares of common stock, the Company issued warrants that provide for the purchase of 108,309 shares of common stock at $15.80 per share. Each share of common stock is accompanied by one half of one warrant that expires on the third anniversary of the date of issuance. The Company determined that these warrants should be classified as equity. As of June 30, 2019 all of these warrants remain outstanding.

 

On November 1, 2018, in connection with the Company’s completed public offering of 728,500 shares of common stock and 8,586 shares of Series C convertible preferred stock, the Company issued warrants to provide for the purchase of 2,875,000 shares of common stock. Each share of common stock is accompanied by one warrant to purchase one share of common stock at $4.00 per share. These warrants expire on the 5 ^th anniversary of the date of issuance. Each share of preferred stock is accompanied by one warrant to purchase 250 shares of common stock. The Company determined that the warrants should be classified as equity. As of December 31, 2018 all 28,750,000 of these warrants were outstanding. During the six months ended June 30, 2019, warrants were exercised for an aggregate of 1,998,160 shares of common stock with proceeds to the Company of approximately $8.0 million. As of June 30, 2019, warrants to purchase an aggregate of 876,840 shares of common stock remain outstanding.

 

The Company accounted for the common stock warrants issued during the year ended December 31, 2018 as issuance costs relating to the respective equity financing, and used the Black-Scholes method to estimate their fair value. The fair value of the common stock warrants issued in July 2018 and November 2018 was not significant. The assumptions used to estimate the fair value of the common stock warrants issued in February 2018 were as follows:

 

Expected term (years)			7
Expected volatility			55	%
Risk-free interest rate			2	%
Dividend rate			—

 

As of June 30, 2019 and December 31, 2018, warrants to purchase an aggregate of 27,593,789 and 47,575,393 shares of common stock were outstanding, respectively.

 

Stock Plans

 

In January 2015, the Board of Directors adopted and the Company’s stockholders approved the 2015 Equity Incentive Plan (“2015 Plan”). The 2015 Plan replaced the 2009 Stock Plan (the “2009 Plan”) which was terminated immediately prior to consummation of the Company’s IPO (collectively the “Plans.)” 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 of 3,300 shares of common stock were reserved for issuance pursuant to the 2015 Plan. The shares reserved for issuance under the 2015 Plan included shares reserved 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 full or that are forfeited or repurchased. In addition, the number of shares available for issuance under the 2015 Plan includes an automatic annual increase on the first day of each fiscal year beginning in fiscal 2016, equal to the lesser of 4,225 shares, 5.0% of the outstanding shares of common stock as of the last day of the immediately preceding fiscal year or an amount as determined by the Board of Directors. In addition, during fiscal 2018, the Board of Directors approved an additional 300,000 shares of common stock for issuance under the 2015 Plan. The Company’s stockholders approved this increase on June 8, 2018. On June 19, 2019, the Company’s stockholders approved an additional 800,000 increase to the 2015 Plan. As of June 30, 2019, 809,453 shares were available for grant under the 2015 Plan.

 

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 of grant 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 all classes 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’s Board 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.

 

 

Stock option activity under the Plans is set forth below:

 

		Number of Shares (in thousands)				Weighted Average Exercise Price				Weighted Average Remaining Contractual Life (in years)				Intrisic Value (in thousands)
Balance at December 31, 2018			7,954			$	1,707.30				7.7			$	—
Options granted			—
Options exercised			—
Options expired			(371	)			2,863.83
Options forfeited			(103	)		$	1,876.54
Balance at June 30, 2019			7,480			$	1,340.79				7.3			$	—
Exercisable at June 30, 2019			7,193			$	1,318.21				7.3			$	—
Vested and expected to vest at June 30, 2019			7,480			$	1,340.79				7.3			$	—

 

There were no options exercised during the six months ended June 30, 2018. As of June 30, 2019, there was approximately $221,000 of remaining unamortized stock-based compensation expense associated with unvested stock options, which will be expensed over a weighted average remaining service period of approximately 1.0 years. Because of the Company’s net operating losses, the Company did not realize any tax benefits from share-based payment arrangements for the three and six month periods ended June 30, 2019 and 2018.

 

The Company’s RSUs generally vest annually over three or four years in equal increments. 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 is recognized as expense on a straight-line basis over the vesting period of the award. A summary of all RSU activity is presented below:

 

		Number of Shares				Weighted Average Grant Date Fair Value				Weighted Average Remaining Contractual Term
Awards outstanding at December 31, 2018			294,066			$	17.34				3.1
Awarded			18,500			$	5.03				—
Released			(87	)		$	2,175.45				—
Forfeited			(15,072	)		$	21.90				—
Awards outstanding at June 30, 2019			297,407			$	15.71				2.1

 

As of June 30, 2019, there was approximately $3.3 million of remaining unamortized stock-based compensation expense associated with RSUs, which will be expensed over a weighted average remaining service period of approximately 2.1 years. The 297,407 outstanding non-vested and expected to vest RSUs have an aggregate intrinsic value of approximately $900,000. The Company used the closing market price of $3.03 per share at June 30, 2019, to determine the aggregate intrinsic value for the RSUs outstanding at that date. As of June 30, 2019 and 2018, the fair value of RSUs vested was approximately $565 and $1,900, respectively. There were no RSUs granted during the six months ended June 30, 2018.

 

  2018 Officer and Director Share Purchase Plan

 

On August 22, 2018, the Board of Directors of the Company approved the adoption of an Officer and Director Share Purchase Plan (“ODPP”), which allows executive officers and directors to purchase shares of our common stock at fair market value in lieu of salary or, in the case of directors, director fees. Eligible individuals may voluntarily participate in the ODPP by authorizing payroll deductions or, in the case of directors, deductions from director fees for the purpose of purchasing common stock. Elections to participate in the ODPP may only be made during open trading windows under our insider trading policy when the participant does not otherwise possess material non-public information concerning the Company. The Board of Directors has authorized 20,000 shares to be made available for purchase by officers and directors under the ODPP. Common stock issued under the ODPP during the six months ended June 30, 2019 totaled 7,596 shares. As of June 30, 2019, there were 8,411 shares reserved for issuance under the ODPP.

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8. Stock-Based Compensation

 

Total noncash stock-based compensation expense relating to the Company’s stock options and RSUs recognized during the three and six months ended June 30, 2019 and 2018, is as follows (in thousands):

 

		Three Months Ended June 30,								Six Months Ended June 30,
		201 9				201 8				201 9				201 8
Cost of revenues		$	40			$	17			$	87			$	36
Research and development expenses			116				105				218				216
Selling, general and administrative expenses			360				519				704				1,008
		$	516			$	641			$	1,009			$	1,260

 

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