Avinger Inc
NASDAQ:AVGR
Earnings Call Analysis
Q4-2023 Analysis
Avinger Inc
For the fourth quarter of 2023, revenue slightly increased to $1.9 million compared to the previous quarter but saw a slight decrease from $2.0 million in the corresponding period of the previous year. The company's gross margin experienced contraction, moving down to 20% from the previous quarter's 21% and a more significant drop from 34% in the same quarter of the previous year. This decline was attributed mainly to reduced production activity and increased noncash stock compensation expenses. Operating expenses escalated to $5.0 million due to an expansion in sales force and expenses related to a significant transaction. Consequently, there was a deepening of net loss and comprehensive loss to $5.0 million for the quarter, rising from losses in both prior quarters.
The company increased its sales force by more than 25% since the end of the previous quarter to stimulate revenue growth. With an infusion of $7.5 million through an investment transaction with Zylox-Tonbridge, the company appears well-positioned to pursue its growth strategy. Moreover, the sales team expansion is expected to enhance revenue generation, with an anticipated timeline of about 6 months for new sales members to reach full productivity.
As part of a strategic alliance with Zylox-Tonbridge, the company expects to penetrate the Chinese peripheral vascular market, with regulatory clearance for products in the region estimated to take about 9 to 15 months. The aim is to launch these products in China during 2025, aligning with the significant growth opportunity identified within a less competitive atherectomy sector. Only a few similar products are currently approved in China, and given the vast population suffering from peripheral artery disease (PAD), this venture could prove transformative for the company's growth trajectory.
As it looks to deliver growth through the latter half of the year and into 2025, the company is tailored for an upward trajectory, albeit with a careful eye on the productivity of its sales force and the evolving regulatory landscape in China. With the lease on its manufacturing facility extended to support Zylox business ahead of local production clearance, operational capacity remains robust to cater to both domestic and imminent international demand.
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Greetings. Welcome to Avinger's Fourth Quarter and Full Year 2023 Results Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Matt Kreps, Investor Relations at Avinger. You may begin.
Thank you, Paul, and thank you, everyone, for participating in today's call. I'd like to welcome you to Avinger's Fourth Quarter and Full Year 2023 Conference Call. Joining us today are Avinger's CEO, Jeff Soinski; and Principal Financial Officer, Nabeel Subainati. Earlier today, Avinger released financial results for the quarter and year ended December 31, 2023. 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 and historical facts should be deemed to be forward-looking statements. All forward-looking statements, including, without limitation, our future financial expectations and expected timing for commercial launch of products and filings with the FDA are based on our current estimates and various assumptions. These statements involve material risks and uncertainties 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. Also, today's presentation will include reference to non-GAAP financial measures such as adjusted EBITDA. A reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measures is available within the earnings release, which can be found on Avinger's website. And with that, I'd like to now turn the call over to Jeff.
Thank you, Matt. Good afternoon, and thank you all for joining us. It's been an exciting time at Avinger since our last earnings call. We recently announced a multifaceted strategic partnership with Zylox-Tonbridge, a leading company in the interventional vascular space in China. We've advanced commercial activities on 2 innovative new peripheral devices, Tigereye ST and Pantheris LV. We've expanded our field sales force to broaden our geographic sales footprint and strengthen our presence in key markets, and we've made significant progress towards an IDE filing for our exciting first coronary product application. First, let's discuss our new strategic partnership with Zylox-Tonbridge. Zylox is a fully integrated medical device company and a leader in the peripheral vascular and neurovascular markets in China. They are an innovative company with a well-developed R&D capability. And since their founding in 2012, Zylox has developed and launched 36 products into the Greater China interventional markets. Zylox maintains a state-of-the-art manufacturing facility at their headquarters in Hangzhou, China, not far from Shanghai. They are certified to ISO 1345:2016 and have commercialized their products in 19 countries outside of Greater China. With the sales and marketing organization of more than 130 people and a vast and well-developed distribution network, we believe that Zylox is extremely well qualified to distribute Avinger products in the Greater China territory. Our partnership with Zylox-Tonbridge has several key elements, which provide significant strategic benefits to both companies. First, under the terms of an equity financing agreement, Zylox will invest up to $15 million into Avinger through the purchase of preferred and common stock in 2 tranches. The $7.5 million first tranche investment has already been funded. This initial investment was priced at the market under NASDAQ rules at a purchase price of $3.66 per share on an as converted to common stock basis. A second tranche $7.5 million equity investment will be funded upon achieving key milestones, including successfully registering Zylox as a manufacturer of Avinger's products with the U.S. FDA and Avinger achieving $10 million in aggregate revenue over 4 consecutive quarters. Avinger's obligation to accept conversion of the initial shares of preferred stock and issue and sell shares of preferred stock upon completion of the milestones are each subject to the approval of Avinger's stockholders and we expect to file a proxy for a stockholder vote on these proposals in the near term.
Second, under the terms of a license and technology transfer agreement, Zylox has exclusive rights to distribute and manufacture Avinger's proprietary image-guided devices in the Greater China region, including Mainland China, Hong Kong, Macau and Taiwan. With Avinger's support, Zylox will lead all regulatory activities for the registration of the Avinger products in the territory. We will sell products to Xylox to support their regulatory process and initial product launch following regulatory clearance, until such time as Zylox has established their own manufacturing capability and gained regulatory authorization for manufacturing Avinger products for the China market. Sales of Avinger products in the Zylox territory will be royalty bearing to Avinger. Third, under the terms of a strategic cooperation framework agreement, Avinger has the right to access certain Zylox's peripheral vascular products for distribution in the U.S. and Germany, where we have our own direct sales capability. In the U.S., this provides access to a suite of high-quality peripheral devices such as PTA balloon catheters, including a proprietary scoring balloon, introducer sheaths and other accessory products. In Germany, Zylox has already obtained CE marking for a number of peripheral products, including PTA balloon catheters, peripheral stent systems, including a drug-eluting stent and a drug-coated PTA balloon. Avinger is conducting a market and regulatory assessment of these products for potential distribution in markets where we have a sales presence. We believe this could provide the opportunity for incremental revenue growth and increase productivity of our sales force without the need for significant R&D investment. And fourth, once Zylox has established their manufacturing capability and been successfully registered as a manufacturer of Avinger's products with the U.S. FDA, Avinger will have the option to source finished product from Zylox on a cost-plus basis. We believe this could provide the opportunity for Avinger to reduce cost of goods sold, improve gross margin and reduce facility and related overhead expense in the future. As mentioned in our press release and outlined in our 8-K filing, concurrent with Zylox's initial investment, CRG Partners, the primary holder of Avinger's debt and preferred equity, exchanged its Series A preferred stock with an aggregate liquidation preference of approximately $60 million, for new Series A1 preferred stock with a value of $10 million. The new Series A1 preferred stock is convertible at a conversion price of $3.66 per share, and carries no liquidation preference or dividends. CRG also extended principal payments on our debt by 3 years from the first quarter of 2024 to the first quarter of 2027 with PIK interest payments accruing during this time. The Zylox-Tonbridge strategic partnership and related transactions with CRG are critical positive steps forward for Avinger, strengthening our balance sheet and improving our capitalization structure, opening vast new markets for our products, providing access to new products for our existing markets, and creating the opportunity to improve our gross margin and cost structure over time. Most of all, we are excited about the opportunity for many more physicians and patients around the world to realize the benefits of our Lumivascular technology, as we advance our mission of radically changing the way vascular disease is treated. The Zylox investment also provides new funding to support our U.S. growth initiatives and the development of our first coronary product. And at this point, I'd like to provide updates in each area. On our third quarter earnings call, we spoke about our plans to increase the size of our U.S. sales force by more than 25% in order to expand our sales footprint and deepen our presence in certain territories. We achieved this goal by adding 6 sales professionals to our organization since the end of the third quarter, including the addition of an experienced sales leader for the Midwest region, bringing our current sales head count to 26. Most important, we are very pleased with the quality of hiring and how our new team members are progressing through their initial training period. Along with our more tenured sales team, we expect these new hires to be important contributors to our growth over the next 12 months as they build their sales pipelines and gain clinical proficiency with our devices. In addition to the investment in our sales team, we've also expanded commercial activities in the U.S. on 2 innovative new peripheral devices, Tigereye ST and Pantheris LV, both of which we believe will be important growth drivers for our business. Let's begin with Tigereye ST.
Tigereye ST is a low-profile 5-French system designed across chronic total occlusions or CTOs, which are completely blocked arteries in the peripheral vasculature, both above and below the knee. Tigereye ST spins at speeds up to 1,000 RPM and generates high-definition OCT imaging during the procedure, providing real-time information to guide treatment and help physicians stay in the true lumen during crossing, a critical advantage for the patient. This innovative new device has a user-controlled deflectable tip to allow the physician to precisely direct the catheter during treatment and incorporates multiple design features to increase crossing power and procedural success. We received 510(k) clearance and initiated limited launch for Tigereye ST in the second quarter of 2023. Based on the positive physician feedback, clinical outcomes and reliability demonstrated during the limited launch period, we made the decision to expand a full commercial launch late in the third quarter. While still early in the commercial launch period, we are encouraged by the progress we are seeing in the field with Tigereye ST revenue increasing by more than 50% in the fourth quarter compared to the prior quarter and 32 physicians at 25 sites using the device since introduction. The more experience we have with this advanced device, the more excited we are about the potential for Tigereye ST to drive growth of our peripheral CTO business throughout the year. Now turning to Pantheris LV. Our new Pantheris LV image-guided atherectomy system is designed to streamline the atherectomy procedure and in combination with our Lightbox 3 imaging console, expand the mainstream appeal of our image-guided platform. LV stands for large vessel and consistent with its name, Pantheris LV is ideal for the treatment of the larger arteries above and behind the knee where the majority of PAD procedures are performed today. Pantheris LV does not require a balloon for plaque apposition and operates at significantly higher rotational speeds than our current atherectomy offerings with variable speeds up to 3,000 RPM. It also introduces enhanced Guidewire management and plaque management systems to our platform. We initiated limited launch for Pantheris LV in the third quarter, and since that time, have been gaining valuable case experience with the device in a real-world clinical setting, with 19 physicians performing approximately 50 cases with Pantheris LV since limited launch. We continue to gain additional case experience with the device, and based on our learning to date, expect to be in a position to advance this exciting new device to full commercial launch midyear 2024. With the build-out of our peripheral device portfolio now largely complete, we've shifted our primary R&D efforts to focus on the development of our first coronary product application and we are very excited to bring the benefits of our image-guided platform to the large and growing coronary artery disease market. Crossing chronic total occlusions in the coronary arteries can be complex, challenging and time-consuming procedures with uncertain outcomes. By leveraging our proprietary image-guided technology, we believe we can provide physicians with a superior, simplified and more predictable solution for crossing coronary CTOs, with the need for less radiation exposure and contrast media usage. We think this makes great sense from both a clinical and business perspective and believe our Lumivascular approach has the potential to redefine the standard of care for the less invasive percutaneous crossing of coronary CTOs. Our development program focuses on low-profile catheter design that combines real-time OCT guidance with precise control and steerability to facilitate an integrated approach, intended to allow a larger number of physicians to safely and efficiently cross coronary CTOs. Like our peripheral catheters, our coronary device incorporates a precise measurement capability to help physicians properly size balloons or stents prior to placement, which is critical for optimal outcomes. We believe our coronary CTO crossing device will present a highly compelling economic value proposition, reducing crossing time, contrast media usage and the need for certain accessory devices would result in significant cost savings for the hospital system. In addition, our coronary device would not only access existing high-value reimbursement codes for CTO crossing, it would also access existing codes for coronary OCT diagnostic imaging immediately upon FDA clearance. We continue to make excellent progress on this initiative, including successfully completing a third round of animal studies and a second round of human cadaver heart studies with key opinion leader physicians, enabling us to finalize design selection and complete Phase II of our development process prior to the end of the year. We are working diligently on the verification and validation of our selected design and at this point, anticipate being in a position to file an investigational device exemption or IDE application with the FDA in the third quarter of this year to allow for initiation of a clinical study following approval. The past few months have been transformative for Avinger. Our strategic partnership with Zylox-Tonbridge opens a pathway to exciting new markets in Asia and provides the potential for incremental revenue and significant cost savings in the future. Our expanded sales team and the launch of 2 strategically important new peripheral products provides a foundation for growth in the U.S. and our progress on the development of our first coronary product brings the exciting opportunity represented by this revolutionary device closer to reach. We look forward to reporting our continued progress in these and other areas in the coming quarters. At this point, I'd like to turn the call over to Nabeel Subainati, our Principal Financial Officer and Accounting Officer, to take us through the financial results, then I'll return for Q&A. Nabeel?
Thank you, Jeff. Total revenue was $1.9 million for the fourth quarter of 2023 compared with $1.8 million in the third quarter of 2023 and $2.0 million in the fourth quarter of 2022. As Jeff mentioned, we have expanded our sales force by more than 25% since the end of the third quarter to support our revenue growth as we advance through the year. Gross margin for the fourth quarter of 2023 was 20% compared with 21% in the third quarter of 2023 and 34% in the fourth quarter of 2022. The change in gross margin primarily reflects lower production activity during the fourth quarter of 2023 as we seek to optimize inventory levels as well as increased noncash stock compensation expense during the quarter. Operating expenses for the fourth quarter of 2023 were $5.0 million compared with $4.4 million in the third quarter of 2023 and $4.5 million in the fourth quarter of 2022. The increase in operating expense primarily relates to the increase in sales headcount, corporate expenses related to the Zylox-Tonbridge transaction and noncash stock-based compensation expense. Net loss and comprehensive loss for the fourth quarter of 2023 was $5.0 million, compared with $4.5 million in the third quarter of 2023 and $4.2 million in the fourth quarter of 2022. Adjusted EBITDA, as defined under our non-GAAP financial measures provided in today's press release, was a loss of $4.3 million compared to a loss of $3.7 million in the third quarter of 2023 and a loss of $3.8 million in the fourth quarter of 2022. For more information regarding non-GAAP financial measures, please see non-GAAP financial measures and the reconciliation of non-GAAP measures to the nearest GAAP measure provided in the tables in today's press release. Cash and cash equivalents totaled $5.3 million as of December 31. As Jeff discussed, the company subsequently raised gross proceeds of $7.5 million in March 2024 through the closing of the Zylox-Tonbridge initial equity investment. At this point, I'd like to turn the call back to Jeff for Q&A.
Thanks, Nabeel. We're excited about our new partnership with Zylox-Tonbridge and the progress we're making across the company, building our sales organization and commercial product portfolio to support our growth and advancing our first coronary product application towards IDE filing this year. We remain committed to making a difference in the lives of patients and the physicians who treat them wherever they may be with the most advanced image-guided devices available on the market. At this point, we'd be happy to take your questions.
[Operator Instructions] And the first question today is coming from RK from H.C. Wainright.
So a couple of -- a couple of quick questions here. First, congratulations on the Zylox deal. So you were saying that Zylox would need to get the approval in China for it to start commercializing your product. So in general, how long does it take for such products to get approved to start commercialization?
Yes. So although it's difficult to put a precise time line on it, we -- based on our interest in supporting Zylox to make this happen as quickly as possible, we actually started the process with them while we were finalizing the deal. So we got a bit of a head start. Zylox is anticipating that the clearance process for our products will take somewhere around 9 to 15 months. So we're hopeful that within the first half of 2025 that they will have regulatory clearance for our products and can start selling into the China market. Of course, there's a lot that needs to be done between now and then and a lot out of our control or Zylox's control. But the goal is to launch our products into the China market sometime in '25.
Okay. So how big is the Greater China opportunity for peripheral vascular catheters? And what is the competition out there?
It's a good question because it's a very different dynamic than we have in the U.S. As you know, the atherectomy market in the United States, which in the subset of the larger peripheral vascular market that we compete in, is a large market, around $600 million to $700 million market. It is characterized by a lot of competition with all of the big peripheral companies having atherectomy entries. The atherectomy market overall in China is not nearly as well developed. It's more in the early stages. There's only a couple of products approved in China currently and marketed. So one of the opportunities that both we and Zylox see is for them as part of their very comprehensive full suite of peripheral products to be an early mover to really help establish and grow this atherectomy market with a highly differentiated device backed up by strong clinical data. So think of it more like atherectomy, the atherectomy market years ago in the United States, where there's a lot of opportunity and a huge population that's growing significantly of patients suffering from PAD.
Okay. So since Zylox may not have the [indiscernible] approved by mid-2025, do you have enough resources and capacity to not only take care of your growing business in the U.S. but also help Zylox with the product in China?
Yes, we do. In our current facility, we have the manufacturing capability to not only support our growth, but to support incremental demand from Zylox. And we obviously will have time to prepare, but we currently only operate on one shift here in our facility. You may have also noticed, we filed an 8-K that we extended our lease in this facility for a year to provide sufficient time to support the Zylox business prior to them having their manufacturing capability cleared for supplying to the China market.
Okay. And then here in the U.S., you said you added 6 new personnel to your sales force. In general, how long would it take for them to be productive? I don't mean it in a negative way, but in a way such that it helps the top line growth.
Yes. So typically, it takes around 6 months for us to start to see the productivity increase from the folks. We have hired some experienced TSMs, territory sales managers, so they need to build their pipelines. We've also hired new clinical specialists. So they are working to gain clinical proficiency with the devices, so that they can independently support cases. But that process typically takes around a 6-month time frame. Obviously, we did hire some of these employees in the fourth quarter. We hired some in the first quarter. So we'll expect over the second and third quarter for them to really start to contribute to our growth as we advance through the year. And also, we will have access, hopefully, in the second half for the full commercial launch of our Pantheris LV image-guided atherectomy device. So a couple of things, both our investment and the sales team as well as the expanded product portfolio, providing a foundation for that growth as we move throughout the remainder of the year.
Okay. So my last question. So you exited 2023 with $1.9 million per quarter. So for you to get to the $2.5 million per quarter range so that you can get the next tranche from Zylox, roughly, how long would it take you to get there, do you think?
Yes. As we -- as -- really relates to your earlier question, as the new folks come up to speed and start to make more and more contribution, as we continue to go a little deeper in our current productive markets and then we have the benefit of the new products coming on board, we look to deliver that kind of growth as we go through the second half of the year and into '25.
And that does conclude our Q&A session. I will now pass the call back to Jeff Soinski for closing remarks.
Well, thank you very much for joining our call this afternoon. We very much appreciate your interest in our company and look forward to reporting our continued progress on our next call. Thank you so much.
Thank you. This does conclude today's conference. You may disconnect your lines at this time, and have a wonderful day. Thank you for your participation.