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.

October

19,

2017,

the Company entered into an agreement to sublease

one

of its facilities. The sublease agreement commenced on approximately

December

2017

and expired on

November

15,

2019

(which was

days prior to the expiration of the facility lease). The sublessee paid a base rent of

$82,410

per month. In addition to the base rent, the sublessee paid the Landlord’s operating expenses and property taxes due and payable with respect to the subleased facility.

Upon the adoption of Topic

842

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.

Additionally, as a result of the adoption of Topic

842,

the Company recorded

$1.1

million of sublease payments received in other income on the statement of operations and comprehensive loss during the year ended

December 31, 2019.

To maintain comparability between periods, the Company reclassified these payments received of approximately

$962,000

in the year ended

December 31, 2018

that were previously netted against rent expense included in selling, general and administrative expenses to the same line item on the statement of operations.

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 are 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 was 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 lease do provide an implicit rate.

For the year ended

December 31, 2019,

our operating lease expense, excluding variable maintenance fees and other expenses paid by the Company on a monthly basis, was approximately

$1.4

million. Rent expense for the year ended

December 31, 2018

was approximately

$2.0

million. Operating right-of-use asset amortization for the year ended

December 31, 2019

was approximately

$676,000.

Due to payments being made in excess of operating lease expense recognized, the Company recorded approximately

$461,000

as prepaid rent included in other assets on the balance sheet as of

December 31, 2019.

The following table presents the future operating lease payments and lease liability included on the balance sheet related to the Company’s operating lease as of

December 31, 2019 (

in thousands):

Year Ending December 31,
2020	$	1,085
2021		1,123
2022		1,162
2023		1,203
2024		1,138
		5,711
Less: Imputed interest		(854	)
Leasehold liability as of December 31, 2019	$	4,857

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.

-CIV-

02240,

Gonzalez v. Avinger, Inc., et al.,

No.

-CIV-

02284,

and Olberding v. Avinger, Inc., et al.,

No.

-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.

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

2017,

the State Court consolidated the Olberding and Gonzalez actions under the caption Gonzalez v. Avinger, Inc., et al.,

No.

-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.

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.

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,

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

million. The Company’s total contribution to the settlement fund is

$1.76

million, which the Company paid in

March 2018.

October 24, 2018,

the court approved the settlement.