(2)

Significant Accounting Policies

The Company’sOur significant accounting policies are described in Note 2 of the notes to the consolidated financial statements included in the Company’s 2016our Annual Report on Form 10-K. There have been no changes to those policies except as described below.

In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification in the statement of cash flows and forfeitures. The Company adopted ASU 2016-09 effective January 1, 2017.

The impact of adopting ASU 2016-09 resulted in the following:

There were no other material impacts to our condensed consolidated financial statements as a result of adopting this updated standard.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), on January 1, 2018 which provides comprehensive guidanceled to an amended revenue policy, as described in the following paragraphs, there have been no changes to those policies.

Revenue Recognition

Net product revenue – We currently have a portfolio of enabling and delivery products. Revenue from product sales is recognized generally upon shipment to the end customer, which is when control of the product is deemed to be transferred.

Collaboration agreement revenue – Collaboration agreement revenue is income from agreements under partnering programs with corporate and academic institutions, wherein we provide biotherapeutic delivery systems and customer training and support for revenue recognition. ASU 2014-09 affects any entity which either enters into contracts with customerstheir use in clinical trials and studies. These programs provide additional clinical data, intellectual property rights and opportunities to transfer goods or services or enters into contractsparticipate in the development of combination products for the transfertreatment of nonfinancial assets. The core principlecardiac disease.

Revenue is recognized when control of the guidance provides that a company should recognize revenue when promised goods orproducts and services areis transferred to customersthe customer in an amount that reflects the consideration that we expect to whichreceive from the entity expects to be entitledcustomer in exchange for those goods orproducts and services. Additionally, qualitative and quantitative disclosures are required about customer contracts, significant judgments and changes in judgments, and assets recognized fromThis process involves identifying the costs to obtain or fulfill a contract. The new standard can be applied retrospectively to each prior reporting period presented or retrospectivelycontract with the cumulative effectcustomer, determining the performance obligations in the contract, determining the contract price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when the performance obligations have been satisfied. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identifiable from other promises in the contract. We consider a performance obligation satisfied once control of a good or service has been transferred to the customer, meaning the customer has the ability to use and obtain the benefit of the change recognized at the date of the initial application in retained earnings.good or service.

In August 2015, the FASB issued ASU No. 2015-14 RevenueAmounts received from Contracts with Customers, which deferred the effective date for implementation of the standard. Public entities are to apply the new standard for annual and interim reporting periods beginning after December 15, 2017 and earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company has not elected early adoption. The Company has formed a task force that iscustomers in the process of assessing the Company’s customer contracts and the potential impacts the standard may have on previously reported revenues and future revenues. Given the relatively small volumeadvance of revenue arrangements,recognition are recorded as deferred revenue on the Company believes that the analysis will be completed in sufficient time to adopt the new standard when required. The Company expects to elect the cumulative effect adoption method.consolidated balance sheets.

On January 1, 2018, we adopted Topic 606 using the cumulative effect adoption method. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605. The adoption of Topic 606 did not have a material impact on our financial statements.

In January 2016, the FASB issued ASU No. 2016-01 (ASU 2016-01), Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 changes accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. In addition, the update clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The guidance will become effective for the Company’s fiscal year beginningWe adopted ASU 2016-01 on January 1, 2018 and must be adopted using a modified retrospective approach, with certain exceptions. Earlythe adoption is permitted for certain provisions. The Company is currently evaluating the impact that the standard will have on its Consolidated Financial Statements. Management’s assessment indicates that the amendment willdid not have a significantmaterial impact ason our financial statements.

In May 2017, the Company currently has no equity investments, however,FASB issued ASU No. 2017-09 Compensation – Stock Compensation (Topic 718) Scope of Modification Accounting (ASU 2017-09). The amendments in ASU 2017-09 provide guidance about which changes to the update mayterms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. We adopted ASU 2017-09 effective January 1, 2018, and the adoption did not have a significantmaterial impact in the future. As of September 30, 2017, the Company has not elected to early adopt the amendments of ASU 2016-01.on our financial statements.

In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842) (ASU 2016-02), which supersedes existing guidance on accounting for leases in “LeasesLeases (Topic 840)” and generally requires all leases to be recognized in the consolidated balance sheet. ASU 2016-02 is effective for annual and interim reporting periods beginning after December 15, 2018; early adoption is permitted. The Company does not plan to elect early adoption. The provisions of ASU 2016-02 are to be applied using a modified retrospective approach. The Company is currently assessing the future impact of this ASU on its consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09 Compensation – Stock Compensation (Topic 718) Scope of Modification Accounting. The amendments in ASU 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The adoption of ASU 2017-09, which will become effective for annual periods beginning after December 15, 2017, is not expected to have a material impact on the Company’s consolidated financial statements.

Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, and the American Institute of Certified Public Accountants did not or are not believed by management to have a material impact on the Company’sCompany’s financial statement presentation or disclosures.

The fair value of financial instruments reflects the amounts that the Company estimates to receive in connection with the sale of an asset or paid in connection with the transfer of a liability in an orderly transaction between market participants at the measurement date (exit price). The Company follows a fair value hierarchy that prioritizes the use of inputs used in valuation techniques into the following three levels:

Level 1 – quoted prices in active markets for identical assets and liabilities

Level 2 – observable inputs other than quoted prices in active markets for identical assets and 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.

The Company’s money market instruments are classified as Level 2 because they are valued using observable inputs other than quoted market prices. The Company’s marketable securities consist of available-for-sale securities and are classified as Level 2 because their value is based on valuation using significant inputs derived from or corroborated by observable market data.

The following table sets forth the fair value of our financial assets measured on a recurring basis as of September 30,March 31, 2018 and December 31, 2017 and indicates the fair value hierarchy utilized to determine such fair value (in thousands):

The following table sets forth the fair value of our financial assets measured on a recurring basis as of December 31, 2016 and indicates the fair value hierarchy utilized to determine such fair value (in thousands):

As discussed in Note 8, in 2015, the Company issued warrants to purchase preferred stock in connection with the note agreements to various shareholders as described below. Upon the completion of the Merger, the Company exchanged 20% and 10% of outstanding Series D and Series F convertible preferred stock warrants for 81,460 and 48,223 shares of the Company’s common stock (approximately 6,788 and 4,018 shares after giving effect to the Company’s reverse stock split effected on November 3, 2017), respectively, and cancelled the remaining convertible preferred stock warrants pursuant to the Merger Agreement. Hence no warrants are outstanding as of September 30, 2017 and December 31, 2016. The warrant liabilities were recorded at the fair value on the date of issuance and were remeasured each subsequent balance sheet date and as of the warrant exercise date, with fair value changes recognized as income (decrease in fair value) or expense (increase in fair value) in other income (expense) in the consolidated statements of operations.

In May 2015, the Company entered into note agreements with various stockholders of the Company and other lenders for a total of $7.2 million, or the 2015 Notes. Upon the completion of the Merger, the 2015 Notes and related accrued interest converted into 67,443,988 shares of the Company’s common stock (approximately 5,620,332 shares after giving effect to the Company’s reverse stock split effected on November 3, 2017). Hence no notes are outstanding as of September 30, 2017 and December 31, 2016. As discussed more fully in Note 8, the 2015 Notes included embedded derivative features that were determined to be a compound embedded derivative requiring bifurcation and separate accounting at estimated fair value. The Company estimated the fair value of the compound embedded derivative utilizing a Monte Carlo simulation model from inception through September 30, 2016. The inputs used to determine the estimated fair value of the compound embedded derivative instrument include the probability of an underlying event triggering the redemption event and its timing prior to the maturity date of the 2015 Notes. The fair value measurement is based upon significant inputs not observable in the market. These assumptions are inherently subjective and involve significant management judgment. Upon the completion of the Merger, the valuation of the compound embedded derivative was determined based on the settlement value of the common stock exchanged for the notes on October 24, 2016. 

The following table summarizes the estimated value of the Company’s marketable securities and the gross unrealized gains and losses as of September 30, 2017 (in thousands):

As of September 30, 2017, the contractual maturity of the available-for-sale marketable securities is less than one year. There was no other-than-temporary impairment recognized during the nine months ended September 30, 2017.

ITEM 2. MANAGEMENT’SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains certain forward-looking statements that involve risk and uncertainties. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those listed in our Annual Report on Form 10-K and elsewhere in this report. Historical results are not necessarily indicative of future results.

Special Note Regarding Smaller Reporting Company Status

We are filing this Quarterly Report on Form 10-Q as a “smaller reporting company” (as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended, or the Exchange Act) based on our public float (the aggregate market value of our common equity held by non-affiliates of the Company) as of the last business day of our second fiscal quarter of 2016. As a result of being a smaller reporting company, we are allowed and have elected to omit certain information, including tabular disclosure of contractual obligations, from this Management’s Discussion and Analysis of Financial Condition and Results of Operations; however, we have provided all information for the periods presented that we believe to be appropriate and necessary.

Overview

We are a clinical-stage regenerative medicine company developing novel therapeutics for cardiovascular diseases with large unmet medical needs. Our lead therapeutic candidate is the investigational CardiAMP Cell Therapy System, or CardiAMPwhich provides an autologous bone marrow derived cell therapy (using a patient’s own cells) for the treatment of two clinical indications: heart failure. failure that develops after a heart attack and chronic myocardial ischemia.

We initiated our U.S. Food and Drug Administration, or FDA, accepted Phase III pivotal trial for CardiAMP Cell Therapy in ischemic systolic heart failure, in December 2016. The CardiAMP Heart Failure Trial is a Phase III, multi-center, randomized, double-blinded, sham-controlled study of up to 260 patients at 40 centers nationwide, which includes a 10-patient roll-in cohort. The trial’s primary endpoint is an improvement ina clinical composite of six minute walkingwalk distance at 12 months post-treatment. In addition, the primary endpoint analysis incorporates the impact ofand major adverse cardiac events and other clinically meaningfulcerebrovascular events.

In September 2017, the independent Data Safety Monitoring Board (DSMB) completed the pre-specified interim analysis of safety outcomes for the first 10 patients treated in the Phase 3III trial of its investigational CardiAMP cell therapy product. The DSMB indicated there were no significant safety concerns with the CardiAMP study results and recommended that the trial continue, as planned. Currently five13 world class medical centers are actively enrolling in the study. Efficacy results from the primary endpoint in the open label roll in cohort are anticipated in the second half of 2018. We anticipate that trial enrollment will be completed in the first half of 2019.

We anticipate filing anIn January 2018, the FDA approved a second investigational device exemption (IDE) supplement to add an interim efficacy readoutfor the randomized controlled pivotal trial of autologous bone marrow mononuclear cells using the CardiAMP Cell Therapy System in the fourth quarter of 2018 and expect top line data in the fourth quarter of 2019. If our trial is successful, we believe we will be the first company to reach the marketpatients with a cell-based therapy to treat heart failure. Additionally, the Company anticipates an FDA filing for a second CardiAMP indication inrefractory chronic myocardial ischemia (CMI)for up to 343 patients at up to 40 clinical sites in 2017 insteadthe United States. This therapeutic approach uses many of the same novel aspects as the CardiAMP Heart Failure Trial and leverages our experience and investment in post myocardial infarction as previously disclosed.the heart failure trial.

The Department of Health & Human Services Centers for Medicare & Medicaid Services, or CMS, has designated that both the CardiAMP Heart Failure Trial and the CardiAMP Chronic Myocardial Ischemia Trial qualify for Medicare national coverage. Covered costs are anticipated to include patient screening, the CardiAMP Cell Therapy System and procedure, and clinical follow-up at one and two years after the procedure.  Private insurance plans covering 50 million insured Americans follow this CMS reimbursement policy, and are similarly anticipated to cover these costs.   

Our second therapeutic candidate is the CardiALLO Cell Therapy System, or CardiALLO, which utilizes bone marrow derived mesenchymal cells from a donor to treat heart failure. We anticipate submitting an Investigational New Drug (IND) application for submission to the FDA for a Phase II trial for CardiALLO Cell Therapy System for the treatment of ischemic systolic heart failure in 2018. This IND is expected to have improved Chemistry Manufacturing Controls in the IND relative to our previous co-sponsored investigations utilizing culture expanded bone marrow derived mesenchymal stem cells.

We are committed to applying our expertise in the fields of autologous and allogeneic cell-based therapies to improve the lives of patients with cardiovascular conditions. As we engage in clinical trials of our therapeutic candidates, we have compensated and intend to compensate all parties performing the trials or studies (including all the parties identified in our Annual Report on Form 10-K) only on terms that are standard and customary in clinical study arrangements. 

To date, we have devoted substantially all of our resources to research and development efforts relating to our therapeutic candidates and biotherapeutic delivery systems, including conducting clinical trials, developing manufacturing and sales capabilities, in-licensing related intellectual property, providing general and administrative support for these operations and protecting our intellectual property. We have also generated modest revenues from sales of our approved products. We have funded our operations primarily through the sales of equity and convertible debt securities, and certain government and private grants. All convertible debt securities were converted into shares of our Common Stock in connection with the Merger.

We have incurred net losses in each year since our inception. Our net losses were approximately $3.0$3.6 million and $3.3$2.9 million for the three months ended September 30,March 31, 2018 and 2017, and 2016, respectively, and approximately $8.8 million and $6.7 million for the nine months ended September 30, 2017 and 2016, respectively. As of September 30, 2017,March 31, 2018, we had an accumulated deficit of approximately $69.0$76.0 million. Substantially all of our net losses have resulted from costs incurred in connection with our research and development programs, clinical trials, intellectual property matters, building our manufacturing and sales capabilities, and from general and administrative costs associated with our operations. As discussed in more detail under “Liquidity and Capital Resources”, there is substantial doubt about our ability to continue as a going concern within one year after the date these financial statements are issued, and we plan to raise additional capital, potentially including debt and equity arrangements, to finance our future operations.

Financial Overview

Revenue

We currently have a portfolio of enabling and delivery products, from which we have generated modest revenue.

Cost of Goods Sold

Cost of goods sold includes the costs of raw materials and components, manufacturing personnel and facility costs and other indirect and overhead costs associated with manufacturing our enabling and delivery products.

Research and Development Expenses

Our research and development expenses consist primarily of:

We expense all research and development costs in the periods in which they are incurred. Costs for certain development activities are recognized based on an evaluation of the progress toof completion of specific tasks using information and data provided to us by our vendors and clinical sites. Nonrefundable advance payments for goods or services to be received in future periods for use in research and development activities are deferred and capitalized. The capitalized amounts are then expensed as the related goods are delivered and the services are performed.

We plan to increase our research and development expenses for the foreseeable future as we continue tothe pivotal CardiAMP Heart Failure Trial, advance the pivotal CardiAMP Chronic Myocardial Ischemia Trial, further develop the CardiAMP and CardiALLO Cell Therapy Systems, and subject to the availability of additional funding, further advance the development of CardiALLO and anydevelop other therapeutic candidates for additional indications. We typically use our employee and infrastructure resources across multiple research and development programs, and accordingly, we have not historically allocated resources specifically to our individual programs.

The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and the successful development of our therapeutic candidates is highly uncertain. As a result, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of any of our therapeutic candidates.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist primarily of salaries and related costs for employees in executive, finance and administration, sales, corporate development and administrative support functions, including share-based compensation expenses and benefits. Other significant selling, general and administrative expenses include sales commissions, rent, accounting and legal services, obtaining and maintaining patents, the cost of consultants, occupancy costs, insurance premiums and information systems costs.

We expect that our selling, general and administrative expenses will increase as we advance our Phase III pivotal heart failure trial for CardiAMP, and subject to the availability of additional funding, conduct our Phase II trial for CardiALLO and prepare for commercialization. We believe that these increases will likely include increased costs for director and officer liability insurance, costs related to the hiring of additional personnel to support product commercialization efforts and operations and increased fees for outside consultants, attorneys and accountants. We also expect to incur increased costs to comply with corporate governance, internal controls, investor relations and disclosures, and similar requirements applicable to public companies.

Other Income (Expense)

Other income and expense consists primarily of interest income we earn on our cash,, cash equivalents and investments, interest charges we incurred in periods when we have convertible debt outstanding, and changes in the fair value of our warrant and convertible shareholder note derivative liabilities in periods when we have warrants or convertible debt outstanding. Subsequent to the Merger, we have no interest charges related to the convertible debt and changes in the fair value of our warrant and convertible shareholder note derivative liabilities as such instruments were converted, cancelled or exchanged as part of the Merger. We expect our interest income to increase following the completion of the Merger as we invest our cash on hand pending its use in our operations.investments.

Critical Accounting Policies and Estimates

Our management’smanagement’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which we have prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP.States. The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of our financial statements, as well as the reported expenses during the periods presented.liabilities. We evaluate these estimates and judgments on an ongoing basis. We base our estimates on historical experience and on other factorsvarious judgements that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparentclear from other sources. Actual results may differ from these estimates under different assumptions or conditions. 

Other than

Apart from the adoption of ASU No. 2014-09 Revenue from Contracts with Customers (Topic 606) on January 1, 2018, which led to an amended revenue policy described below, there were no material changes during the three months ended March 31, 2018 in our critical accounting estimates or accounting policies described in “Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2016 Annual Report on Form 10-K during the nine months ended September 30, 2017.10-K.

Share-Based Compensation Revenue Recognition

Net product revenue – We measurecurrently have a portfolio of enabling and recognize share-based compensation expensedelivery products. Revenue from product sales is recognized generally upon shipment to the end customer, which is when control of the product is deemed to be transferred.

Collaboration agreement revenue – Collaboration agreement revenue is income from agreements under partnering programs with corporate and academic institutions, wherein we provide biotherapeutic delivery systems and customer training and support for equity awardstheir use in clinical trials and studies. These programs provide additional clinical data, intellectual property rights and opportunities to employees, directorsparticipate in the development of combination products for the treatment of cardiac disease.

Revenue is recognized when control of products and consultants basedservices is transferred to the customer in an amount that reflects the consideration that we expect to receive from the customer in exchange for those products and services. This process involves identifying the contract with the customer, determining the performance obligations in the contract, determining the contract price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when the performance obligations have been satisfied. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on fair value atits own or together with other resources that are readily available to the grant date.customer and is separately identifiable from other promises in the contract. We consider a performance obligation satisfied once control of a good or service has been transferred to the customer, meaning the customer has the ability to use and obtain the Black-Scholes-Merton option-pricing model,benefit of the good or BSM, to calculate the fair valueservice.

Amounts received from customers in advance of stock options. Restricted stock units (RSUs)revenue recognition are measured basedrecorded as deferred revenue on the fair market values of the underlying stock on the dates of grant. Share-based compensation expense recognized in the statements of operations is based on awards at the time of grant, and is reduced for actual forfeitures at the time that the forfeitures occur. Compensation cost for employee share-based awards will be recognized over the vesting period of the applicable award on a straight-line basis. 

For options granted to nonemployees, we revalue the unearned portion of the share-based compensation and the resulting change in fair value is recognized in the statements of operations over the period the related services are rendered.

The BSM option-pricing model requires the input of subjective assumptions, including the risk-free interest rate, the expected volatility in the value of our Common Stock, and the expected term of the option. These estimates involve inherent uncertainties and the application of management’s judgment. If factors change and different assumptions are used, our share-based compensation expense could be materially different in the future. consolidated balance sheets.

Results of Operations

Comparison of Three Months Ended September 30, 2017March 31, 2018 and 20162017

The following table summarizes our results of operations for the three months ended September 30,March 31, 2018 and 2017 and 2016 (in thousands):

Revenue.    Revenue increased by approximately $13,000$62,000 in the three months ended September 30, 2017March 31, 2018 compared to the three months ended September 30, 2016,March 31, 2017 primarily due to higher collaboration revenues partially offset by a reduction in Morph sales.increased revenue earned under programs with our collaborative partners due to the adoption of Topic 606. We expect currentoverall sales volumes to remain relatively stable, withincrease modestly lowerin 2018, resulting in moderate growth in net product revenue for 2017 relative to 2016.year over year.

Cost of Goods Sold.    Cost of goods sold decreased by approximately $49,000$18,000 in the three months ended September 30, 2017March 31, 2018 compared to the three months ended September 30, 2016,March 31, 2017 primarily due to $57,000 charged to cost of goods sold for inventory write-downs and reservesa decrease in the three months ended September 30, 2016 coupled with lower revenues in the three months ended September 30, 2017.product sales volumes. We expect cost of goods sold for 2017 to be relatively consistent with 2016.increase moderately in 2018 due to growth in net product revenues during the latter half of the year.

Research and Development Expenses. Research and development expenses increased by approximately $1,016,000$922,000 in the three months ended September 30, 2017March 31, 2018 compared to the three months ended September 30, 2016,March 31, 2017 primarily due to increased expenses incurred in conducting the planning, preparationongoing pivotal CardiAMP Heart Failure Trial and inceptionin the development of the CardiAMP Phase III pivotal heart failure trial.CardiALLO Cell Therapy System. These expenses include fees paid to consultants and contract research organizations (CRO) and additional personnel costs. We expect research and development expenses to continue to increase as we continue to enroll and treat patientsenrollment accelerates in the trialCardiAMP Heart Failure Trial and incur additional development expenses related towe further develop the CardiAMP and CardiALLO therapeutic program. platforms.

Selling, General and Administrative Expenses.    Selling, general and administrative expenses increased by approximately $403,000 infor the three months ended September 30, 2017March 31, 2018 totaled $1,707,000, which was a 5.4% decrease as compared to the$1,804,000 for three months ended September 30, 2016, primarily due to additional costs for the organizational structure needed to support the CardiAMP Phase III pivotal trial and operations as a public company. These expenses include additional salary expenses, stock compensation and legal, accounting, tax and other corporate expenses.March 31, 2017. We expect selling, general and administrative expenses for the remaining quarter of 20172018 to increase moderately fromin the three months ended September 30,latter half of 2018 compared to 2017, as we continue to buildenhance and strengthen the supporting staff and infrastructure to support the CardiAMP Phase III pivotal trial and public company operations.  

Interest Income.   Interest income for the three months ended September 30, 2017 consisted primarily of interest income earned on cash equivalents and short-term investments.

Interest Expense.   Interest expense for the three months ended September 30, 2016 consisted primarily of interest expense related to convertible notes which are no longer outstanding.

Other Income (Expense). Other income (expense) for the three months ended September 30, 2016 consisted primarily of the changes in value of the convertible preferred stock warrant liabilities and the change in value of the convertible shareholder note derivative liability.

Comparison of Nine Months Ended September 30, 2017 and 2016

The following table summarizes our results of operations for the nine months ended September 30, 2017 and 2016 (in thousands):

Revenue.     Revenue decreased by approximately $60,000 in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, primarily due to a reduction in Morph sales volumes. We expect current sales volumes to remain relatively stable, with modestly lower net product revenue for 2017 relative to 2016.

Cost of Goods Sold.    Cost of goods sold decreased by approximately $53,000 in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, primarily due to the decrease in revenues, partially offset by increased stock compensation cost for manufacturing personnel. We expect cost of goods sold for 2017 to be relatively consistent with 2016.

Research and Development Expenses.    Research and development expenses increased by approximately $2.4 million in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, primarily due to expenses incurred in the planning, preparation and inception of the CardiAMP Phase III pivotal heart failure trial, including fees paid to consultants and contract research organization (CRO), higher personnel costs and increased stock compensation expense. We expect research and development expenses to increase as we continue to enroll and treat patients in the trial and incur additional development expenses related to CardiALLO therapeutic program. 

Selling, General and Administrative Expenses.    Selling, general and administrative expenses increased by approximately $2.3 million in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, primarily due to additional costs for the organizational structure needed to support the CardiAMP Phase III pivotal trialHeart Failure Trial and operations as a public company. These costs include additional salary expenses, stock compensation and legal, accounting, tax, and other corporate expenses. We expect selling, general and administrative expenses for the final quarterdevelopment of 2017 to increase moderately from the three months ended September 30, 2017, as we continue to build the supporting staff and infrastructure to support the CardiAMP Phase III pivotal trial and public company operations.  

Interest Income.   Interest income for the nine months ended September 30, 2017 consisted primarily of interest income earned on cash equivalents and short-term investments.

Interest Expense.   Interest expense for the nine months ended September 30, 2016 consisted primarily of interest expense related to convertible notes which are no longer outstanding.

Other Income (Expense).  Other income (expense) for the nine months ended September 30, 2016 consisted primarily of the changes in value of the convertible preferred stock warrant liabilities and the change in value of the convertible shareholder note derivative liability.our therapeutic programs.  

Liquidity and Capital Resources

We have incurred net losses each year since our inception and as of September 30, 2017,March 31, 2018, we had an accumulated deficit of approximately $69.0$76.0 million. We anticipate that we will continue to incur net losses for at least the next several years.

We have funded our operations principally through the sales of equity and convertible debt securities as well as the cash acquired through the Merger.reverse merger transaction completed on October 24, 2016. As of September 30, 2017,March 31, 2018, we had cash and cash equivalents of approximately $13.3$9.7 million.

The following table shows a summary of our cash flows for the periods indicated (in thousands):

Cash Flows from Operating Activities. The increase in overall spending for operating activities of approximately $3.1 million$758,000 in the ninethree months ended September 30, 2017March 31, 2018 compared to the ninethree months ended September 30, 2016 relatesMarch 31, 2017 related primarily to increased cash outflows to conduct the pivotal CardiAMP Phase III pivotal trial,Heart Failure Trial, further develop the CardiAMP and CardiALLO programs and to build the supporting infrastructure to sustain these efforts and support operations as a public company. We expect spending to increase as we continue enrolling and treating patients in the CardiAMP Heart Failure Trial, further develop the CardiAMP and CardiALLO cell therapy systems and continue to strengthen and enhance the supporting organization.

Cash Flows from Investing Activities. Net cash used in investing activities of $1.9 million$5,000 during the ninethree months ended September 30, 2017 consistsMarch 31, 2018 consisted of the purchases of property and equipment and short-term investments.

equipment.

Cash Flows from Financing Activities. Net cash provided by financing activities of $26,000$5,000 during the ninethree months ended September 30, 2017 consistsMarch 31, 2018 consisted of the proceeds from the exercise of stock options.

Future Funding Requirements

To date, we have generated modest revenue from sales of our approved products. We do not know when, or if, we will generate any revenue from our development stage biotherapeutic programs. We do not expect to generate any revenue from sales of our CardiAMP or CardiALLO therapeutic candidates unless and until we obtain regulatory approval. At the same time, we expect our expenses to increase in connection with our ongoing development activities, particularly as we continue the research, development and clinical trials of, and seek regulatory approval for, our therapeutic candidates. In addition, subject to obtaining regulatory approval for any of our therapeutic candidates and companion diagnostic, we expect to incur significant commercialization expenses for product sales, marketing, manufacturing and distribution. We anticipate that we will need additional funding in connection with our continuing operations.  

Based upon our current operating plan, we believe that the cash and cash equivalents of $13.3$9.7 million coupled with $1.8 million in short-term investments as of September 30, 2017March 31, 2018 are sufficient to fund our operations into the thirdfourth quarter of 2018. In order to continue to further the development of our lead therapeutic candidate,candidates, the CardiAMP cell therapy system,Cell Therapy System, and our second therapeutic candidate, the CardiALLO cell therapy system,Cell Therapy System, through and beyond the thirdfourth quarter of 2018, we will be required to raise additional capital. We plan to raise additional capital, potentially including debt and equity arrangements, to finance our future operations. If adequate funds are not available, we may be required to reduce operating expenses, delay or reduce the scope of our product development programs, obtain funds through arrangements with others that may require us to relinquish rights to certain of our technologies or products that we would otherwise seek to develop or commercialize ourselves, or cease operations. While we believe in the viability of our strategy to raise additional funds, there can be no assurances that we will be able to obtain additional capital on acceptable terms and in the amounts necessary to fully fund our operating needs. We have based our estimates on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development and commercialization of our therapeutic candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures necessary to complete the development of our therapeutic candidates.

Our future capital requirements will depend on many factors, including:

Until such time that we can generate meaningful revenue from the sales of approved therapies and products, if ever, we expect to finance our operating activities through public or private equity or debt financings, government or other third-party funding, marketing and distribution arrangements, and other collaborations, strategic alliances and licensing arrangements or a combination of these approaches. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of our Common Stock holders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our Common Stock holders. Debt financing, if available, may involve agreements that include conversion discounts or covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through government or other third-party funding, marketing and distribution arrangements or other collaborations, or strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs, products or therapeutic candidates or to grant licenses on terms that may not be favorable to us.

Our condensed consolidated financial statements as of and for the three and nine months ended September 30, 2017March 31, 2018 have been prepared on the basis that the Companywe will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. Due to the factors described above, there is substantial doubt about the Company’sour ability to continue as a going concern within one year after the date these financial statements are issued. Our ability to continue as a going concern will depend in a large part, on our ability to raise additional capital. If weadequate funds are unable to obtain funding on a timely basis, our ability to continue as a going concern would be jeopardized andnot available, we may be required to significantly curtail,reduce operating expenses, delay or discontinue one or morereduce the scope of our research andproduct development programs, implement general cost saving measures, reduce expenditures for third party contractors, including professional advisors and other vendors, which couldobtain funds through arrangements with others that may require us to relinquish rights to certain of our technologies or products that we would otherwise seek to develop or commercialize ourselves, or cease operations. While we believe we have a negative impactviable strategy to raise additional funds, there can be no assurances that we will be able to obtain additional capital on acceptable terms and in the amounts necessary to fully fund our ability to continue our business as currently contemplated, including our ability to develop and commercialize products within planned timelines and materially adversely affect our business, financial condition and results of operations.operating needs.

The financial statements do not include any adjustments that might result from the outcome of this uncertainty.uncertainty. If we are unable to continue as a going concern, we may be forced to liquidate assets. In such a scenario, the values received for assets in liquidation or dissolution could be significantly lower than the values reflected in our financial statements.

Off-Balance Sheet Arrangements

During the periods presented, we did not have, nor do we currently have, any off-balance sheet arrangements as defined under the rules of the SEC.Securities and Exchange Commission.

Recent Accounting Pronouncements

See Note 2 of our notes to condensed consolidated financial statements for information regarding recent accounting pronouncements that are of significance or potential significance to us.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.There have been no material changes in our market risks during the quarter ended March 31, 2018.

Our exposure to market risk is currently limited to our cash and cash equivalents, all of which have maturities of less than three months. The goals of our investment policy are preservation of capital, maintenance of liquidity needs, and fiduciary control of cash and investments. We also seek to maximize income from our investments without assuming significant risk or departing from our investment policy. We currently do not hedge interest rate exposure. Because of the short-term nature of our cash equivalents, we do not believe that an increase in market rates would have a material negative impact on the value of our portfolio.

Interest Rate Risk

As of March 31, 2018, based on current interest rates and total borrowings outstanding, a hypothetical 100 basis point increase or decrease in interest rates would have an immaterial pre-tax impact on our results of operations.

Foreign Currency Exchange Risks

We are a U.S. entity and our functional currency is the U.S. dollar. The vast majority of our revenues were derived from sales in the United States. We have business transactions in foreign currencies, however, we believe we do not have significant exposure to risk from changes in foreign currency exchange rates at this time. We do not currently engage in hedging or similar transactions to reduce our foreign currency risks. We will continue to monitor and evaluate our internal processes relating to foreign currency exchange, including the potential use of hedging strategies.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’sour reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as the Company’sour controls are designed to do, and management necessarily was required to apply its judgment in evaluating the risk related to controls and procedures.

In connection with the preparation of this Quarterly Report on Form 10-Q, as of September 30, 2017,March 31, 2018, an evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer,Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). We disclosed the existence of a material weakness in internal control over financial reporting described in our Annual ReportBased on 10-K for the fiscal year end dated December 31, 2016, resulting from an insufficient number of qualified personnel and inadequate processes within our accounting function which has impacted our ability to appropriately segregate duties and to perform timely and effective reviews over general ledger account reconciliations and non-routine transactions. We have implemented measures designed to improve our internal control over financial reporting to remediate this material weakness, including hiring additional qualified accounting, operations and clinical personnel, formalizing our business processes and internal controls documentation and strengthening supervisory review. These actions are subject to review and testing by our senior management, as well as oversight by the Audit Committee of our Board of Directors. Although we believe that our efforts will be successful, we cannot be certain at this time, that the material weaknesses will be remediated at December 31, 2017. As a result, we concluded that the material weakness identified above continued to exist as of September 30, 2017. Accordingly,evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of March 31, 2018, our disclosure controls and procedures were, not effective as of September 30, 2017. These conclusions were communicated to our Audit Committee. Notwithstanding the existence of this material weakness, management has concluded that the condensed consolidated financial statements in this Quarterly Report on Form 10-Q fairly present, in all material respects, the Company’s financial position, results of operationsdesign and cash flows for all periods and dates presented.operation, effective.

Changes in Internal Control over Financial Reporting

Except for the remediation efforts described above, thereThere were no changes into our internal control over financial reporting identified in connection with the evaluation required by rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the three month period covered by this Quarterly Report on Form 10-Qquarter ended March 31, 2018 that have materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The CompanyWe may be subject to various claims, complaints, and legal actions that arise from time to time in the normal course of business. Management does not believe that the Company iswe are a party to any currently pending legal proceedings. There can be no assurance that existing or future legal proceedings arising in the ordinary course of business or otherwise will not have a material adverse effect on the Company’sour business, financial position, results of operations, or cash flows.

ITEM 1A. RISK FACTORS

In addition to the risk factor set forth below and the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item“Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016,2017, which could materially affect our business, financial condition, or future results. The risks described in this report and in our Annual Report on 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.

We will require additional financing in 2018 in order to continue the trial and to continue operations at the current level.

As discussed above in “Management Discussion and Analysis – Future Funding Requirements,” our current cash resources are sufficient to fund operations at the expected level of activity only into the third quarter of 2018.  We will need additional capital to continue operations at the current level and to continue the Phase III trial.  While we plan  to raise additional capital to fund operations, including the trial, there can be no assurances as to the availability of capital or the terms on which capital will be available.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBIT INDEX

The exhibits listed in the Exhibit Index to this Quarterly Report on Form 10-Q are incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

EXHIBIT INDEX

(1) Previously filed as an exhibit to the Current Report on Form 8-K filed on March 18, 2008.

(2) Previously filed as an exhibit to the Current Report on Form 8-K filed on November 7, 2017.

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