The Company’s significant accounting policies are described in Note 2 of the notes to the consolidated financial statements included in the Company’s 2016 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), which provides comprehensive guidance for revenue recognition. ASU 2014-09 affects any entity which either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets. The core principle of the guidance provides that a company should recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, qualitative and quantitative disclosures are required about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The new standard can be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of the change recognized at the date of the initial application in retained earnings.

In August 2015, the FASB issued ASU No. 2015-14 Revenue 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 is 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 volume of revenue arrangements, 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.

Accrued expenses and other current liabilities consisted of the following (in thousands):

Nonemployee Share-Based Compensation

During the nine months ended September 30, 2017, the Company granted options to purchase 162,315 shares of common stock to consultants. These options were granted in exchange for consulting services to be rendered and vest over the term specified in the grant, which correlates to the period the services are rendered. The Company recorded approximately $188,000 and $20,000 for the three months ended September 30, 2017 and 2016, respectively, and approximately $698,000 and $21,000 for the nine months ended September 30, 2017 and 2016, respectively, as nonemployee share-based compensation expense.

The Company accounts for share-based compensation arrangements with nonemployees, using the Black-Scholes option pricing model, based on the fair value as these instruments vest. Accordingly, at each reporting date, the Company revalues the unearned portion of the share-based compensation and the resulting change in fair value is recognized in the consolidated statements of operations over the period the related services are rendered. The following assumptions were used to value the awards for the nine months ended September 30, 2017:

Basic net loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding for the period. Since we were in a loss position for all periods presented, dilutedDiluted net loss per share is computed by dividing the same as basic net loss perby the weighted-average number of common share equivalents outstanding for the period determined using the treasury-stock method. For all periods aspresented, there is no difference in the inclusionnumber of all potential commonshares used to calculate basic and diluted shares outstanding would have been anti-dilutive.since the effects of potentially dilutive securities are antidilutive due to its net loss position.  

The following outstanding common stock equivalents were excluded from the computation of diluted net loss per share for the periods presented because including them would have been antidilutive:

During the ninethree months ended September 30, 2017March 31, 2019 and 2016,2018, there was no income tax expense or benefit for federal or state income taxes in the accompanying condensed consolidated statement of operations due to the Company’s net loss and a full valuation allowance on the resulting deferred tax assets.

As of September 30, 2017,March 31, 2019, the Company retains a full valuation allowance on its deferred tax assets in all jurisdictions. The realization of the Company’sits deferred tax assets depends primarily on its ability to generate future taxable income which is uncertain. The Company does not believe that its deferred tax assets are realizable on a more-likely-than-not basis; therefore, the net deferred tax assets have been fully offset by a valuation allowance.

In August 2016, the Company granted an option to purchase 5,027,726418,977 shares of common stock, (418,977 shares after giving effect to the Company’s reverse stock split effected on November 3, 2017) with a 4-year vesting period and an exercise price of $1.80 per share, to OPKO Health, Inc., or OPKO, (“OPKO”) as consideration for consulting services to be provided by OPKO in accordance withOPKO. BioCardia recorded approximately $22,000 (as adjusted for the consulting agreement entered into between the Companyadoption of ASU 2018-07) and OPKO. The unearned portion of the$37,000 as share-based compensation expense related to the OPKO stock option was revalued at September 30, 2017, and the Company recorded $126,000 and $432,000 as expense during the three and nine months ended September 30, 2017,March 31, 2019 and 2018, respectively. The estimated grant-date fair value of the option was $5.3 million. The term of the consulting agreement is 4 years and will be automatically renewed for successive one year periods. The chairman and chief executive officer of OPKO is a beneficial owner of more than 5% of the outstanding shares of the Company’s common stock and OPKO itself is also a beneficial owner of more than 5% of the outstanding shares of the Company’s common stock. 

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 within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Any and all statements contained in this Annual Report that involve riskare not statements of historical fact may be deemed forward-looking statements.Terms such as “may,”“might,”“would,”“should,”“could,”“project,”“estimate,”“pro-forma,”“predict,”“potential,”“strategy,”“anticipate,”“attempt,”“develop,”“plan,”“help,”“believe,”“continue,”“intend,”“expect,”“future” and uncertainties.terms of similar import (including the negative of any of the foregoing) may be intended to identify forward-looking statements. However, not all forward-looking statements may contain one or more of these identifying terms. Forward-looking statements in this Quarterly Report may include, without limitation, statements regarding (i) the plans and objectives of management for future operations, including plans or objectives relating to the development of our cell therapy systems and our clinical trials, (ii) a projection of income (including income/loss), earnings (including earnings/loss) per share, capital expenditures, dividends, capital structure or other financial items, (iii) our ability to raise additional capital, and (iv) our future financial performance, including any such statement contained in a discussion and analysis of financial condition by management or in the results of operations included pursuant to the rules and regulations of the SEC and (vi) the assumptions underlying or relating to any statement described in points (i) – (iv) above. 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 identified below and elsewhere in this Quarterly Report on Form 10-Q and those listed in our Annual Report on Form 10-K and elsewhere in this report.10-K. Historical results are not necessarily indicative of future results.

Special Note Regarding Smaller Reporting Company Status

We are filingExcept as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q as a “smaller reporting company” (as definedto conform these statements to actual results or to changes 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.expectations.

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 heart failure. We initiated our U.S. Food and Drug Administration, or FDA, accepted Phase III pivotal trial for CardiAMP in ischemic systolictwo clinical indications: heart failure in December 2016. The CardiAMP Heart Failure Trial isthat develops after 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 in six minute walking distance at 12 months post-treatment. In addition, the primary endpoint analysis incorporates the impact of major adverse cardiac eventsheart attack and other clinically meaningful 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 3 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 five world class centers are actively enrolling in the study.

We anticipate filing an investigational device exemption (IDE) supplement to add an interim efficacy readout 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 market with a cell-based therapy to treat heart failure. Additionally, the Company anticipates an FDA filing for a second CardiAMP indication in chronic myocardial ischemia (CMI) in 2017 instead of in post myocardial infarction as previously disclosed.

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 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. ischemia.

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$3.7 million and $3.3$3.6 million for the three months ended September 30, 2017March 31, 2019 and 2016, respectively, and approximately $8.8 million and $6.7 million for the nine months ended September 30, 2017 and 2016,2018, respectively. As of September 30, 2017,March 31, 2019, we had an accumulated deficit of approximately $69.0$90.0 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 this Quarterly Report on Form 10-Q is filed with the SEC, and we plan to raise additional capital, potentially including debt and equity arrangements, to finance our future operations. There can be no assurances as to the availability of capital or the terms on which capital will be available, if at all.

CardiAMP Cell Therapy System

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 Phase III pivotal trial is designed to provide the primary support for the safety and efficacy of the CardiAMP Cell Therapy System. The trial’s primary endpoint is a clinical composite of six minute walk distance and major adverse cardiac and cerebrovascular events. Based on the results achieved in the Phase II trial, our Phase III pivotal trial is designed to have more than 95% probability of achieving a positive result with statistical significance.

The Data Safety Monitoring Board (DSMB) safety review of the 10-patient roll-in cohort treated at three clinical sites was completed successfully in the third quarter of 2017, and efficacy data from the primary endpoint in the open label roll-in cohort was presented at the American Heart Association Scientific Sessions in 2018. At the primary endpoint of exercise capacity at 12 months, the 10-patient roll-in cohort of the trial showed clinically meaningful improvement, walking an average of 46.4 meters more than baseline, although the improvement was not considered statistically significant (p=0.06). Eight of the 10 patients experienced improvement in their exercise capacity based on the distance they were able to walk above their baseline. This improvement is more than triple the average improvement over baseline reported in the CardiAMP-treated arm of the Phase II TAC-HFT-MNC trial, and greater than the average improvement seen in a number of pivotal trials for implantable pacemakers to treat heart failure. In the secondary efficacy endpoint of quality of life, patients showed a clinically meaningful improvement of 9.8 points relative to baseline, which was not statistically significant (p=0.33) in the small cohort.  Seven of the 10 patients reported better quality of life after CardiAMP treatment. This was a greater improvement over baseline than was seen in the Phase II TAC-HFT-MNC trial of CardiAMP therapy.

The secondary efficacy endpoints of superiority relative to major adverse cardiac events (MACE) and survival were not possible to assess in this roll-in cohort as there is no control arm specific to this cohort. There were no treatment emergent major adverse cardiac events (MACE) in this group at 30 days, while there was one MACE event due to a hospitalization at nine months. All patients from this cohort were alive and out of the hospital at 12 months.

The CardiAMP Heart Failure Trial is actively enrolling today at 21 clinical sites, which have enrolled 37 patients in the trial to date. The rate of enrollment is increasing, which we believe is due to additional data presented from the roll-in cohort, the addition of world class centers to the trial, and the completion of competitive clinical programs. We anticipate a first interim readout from the trial in Q3 2019, a second interim readout in Q3 2020, that trial enrollment will be completed in Q3 2020 and that top line data will be available in Q3 2021.

In January 2018, the FDA approved a second investigational device exemption (IDE) for the randomized controlled pivotal trial of autologous bone marrow mononuclear cells using the CardiAMP Cell Therapy System in patients with refractory chronic myocardial ischemia for up to 343 patients at up to 40 clinical sites in the 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 the heart failure trial. We anticipate that many of the investigators and sites will be the same for both the heart failure and chronic myocardial ischemia indications.

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.   

CardiALLO Cell Therapy System

Our second therapeutic candidate is the CardiALLO Cell Therapy System, an investigational culture expanded bone marrow derived “off the shelf” mesenchymal stem cell therapy. CardiALLO cell therapy cells are expanded from Neurokinin-1 receptor (“NK1-receptor” or “NK1R”) positive bone marrow cells. While these cells are being advanced to treat heart failure, they have potential for numerous therapeutic applications as these are anticipated to be the cells that respond to the release of Substance P. Substance P (“SP”) is a neuropeptide released from sensory nerves and is associated with the inflammatory processes and pain. SP is believed to be a key first responder to most noxious/extreme stimuli (stressors), i.e., those with a potential to compromise biological integrity. SP is thus regarded as an immediate defense, stress, repair survival system. The endogenous receptor for SP is the NK1-receptor, which is distributed over cytoplasmic membranes of many cell types (for example neurons, glia, endothelia of capillaries and lymphatics, fibroblasts, stem cells, and white blood cells) in many tissues and organs. SP amplifies or excites most cellular processes. Elevation of serum, plasma, or tissue SP and/or its receptor NK1R has been associated with many diseases: sickle cell crisis, inflammatory bowel disease, major depression and related disorders, fibromyalgia rheumatological, and infections such as HIV/AIDS and respiratory syncytial virus, as well as in cancer.

Our CardiALLO NK1R positive derived cells are believed to be an important subset of the cells that we have delivered in our previous preclinical and clinical mesenchymal stem cell studies. We believe this therapy presents the advantages of an "off the shelf" therapy that does not require tissue harvesting or cell processing. We have completed manufacturing validation runs of these cells at BioCardia to support future clinical studies. We are working to obtain FDA acceptance of an Investigational New Drug (“IND”) application for a Phase I/II trial for CardiALLO Cell Therapy System for the treatment of ischemic systolic heart failure in the second quarter of 2019.

The subset of patients we are targeting initially for the CardiALLO Heart Failure Trial are those that have been excluded from our ongoing CardiAMP Heart Failure Trial due to their lower cell potency assay scores. CardiALLO trial activation is anticipated to enhance enrollment in the CardiAMP Heart Failure Trial. Further, if the CardiAMP trial is successful there is the potential for the CardiALLO therapy indication to be designated as an orphan indication.

Helix™ Biotherapeutic Delivery System

BioCardia’s Helix Biotherapeutic Delivery System or “Helix” is believed to be the leading percutaneous catheter delivery system for cardiovascular regenerative medicine. It enables investigational studies of local delivery of cell and gene based therapies, including CardiAMP and CardiALLO cell therapies to treat cardiovascular indications. Helix is in use or has potential to be used to treat many cardiac diseases including heart failure with reduced ejection fraction, heart failure with preserved ejection fraction, obstructive hypertrophic cardiomyopathy, myocardial infarction, chronic myocardial ischemia, and cardiac conduction disorders. The Helix’s small hollow, distal helical needle is advanced, similar to an angioplasty catheter, and is passed over the aortic arch and across the aortic valve through the Company’s Morph guide catheter or “Morph”. The Helix is then advanced from within the Morph, and its helical needle is rotated into the heart tissue to provide active fixation during therapeutic delivery, similar to the active fixation electrodes used in cardiac pacing. This fixation to the beating heart wall provides for stability and control during the delivery procedure. It uses simplified fluoroscopic imaging, crosses the aortic arch and valve over a guide wire, and provides the operator with three degrees of freedom to maximize operator control. The Helix is under investigational use in the United States and is being used in pre-clinical and clinical investigations of cell, gene, and protein therapies.

Morph Deflectable Guide and Sheaths Product

BioCardia’s Morph catheter is designed to enable physicians to navigate through tortuous anatomy, customize the shape of the catheter to the patient's anatomy and their clinical needs during the procedure, and to have stellar back up support once positioned. Morph catheters enable all Helix procedures and have been commercially available to treat more than ten thousand patients. A number of Morph guides and sheaths are approved for commercial sale in the United States.

Morph AVANCE™ Steerable Introducer

The AVANCE™ steerable introducer, is an investigational device designed for introducing various cardiovascular catheters into the heart, including via the left side of the heart through the interatrial septum. The AVANCE steerable introducer leverages technology from its FDA-cleared Morph steerable introducer with several enhancements for transseptal procedures, which are designed to improve upon commercially-available offerings. The device is virtually whipless around curves due to its helically arranged pull-wires, enabling greater predictability, stability and control during procedures. It is bidirectional, when most available offerings are uni-directional, allowing for better catheter conformance to patient anatomy and easier navigation through tortuous anatomy. AVANCE also offers rotating hemostasis, which helps reduce physician frustration with tangled fluid lines during a procedure.

Procedures that leverage transseptal delivery include atrial fibrillation ablation, patent foramen ovale (PFO) and atrial septal defect (ASD) repair, percutaneous mitral valve repair, left atrial appendage closure, and percutaneous left ventricular assist device placement, among others. FDA clearance of the 510(k) submitted to the FDA during the first quarter of 2019 was received in May 2019.

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.received.

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 below,Apart from the adoption of ASU No. 2018-07, Compensation–Stock Compensation (Topic 718): Improvements to Nonemployee Share-based Payment Accounting on January 1, 2019, which led to an amended stock-based compensation policy (see Note 2 of our Condensed Consolidated Financial Statements), there werehave been no material changes 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.

Share-Based Compensation 

We measure and recognize share-based compensation expense for equity awards to employees, directors and consultants based on fair value at the grant date. We use the Black-Scholes-Merton option-pricing model, or BSM, to calculate the fair value of stock options. Restricted stock units (RSUs) are measured based 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. 

10-K.

Results of Operations

Comparison of Three Months Ended March 31, 201September 30, 20179 and 201and 20168

The following table summarizes our results of operations for the three months ended September 30, 2017March 31, 2019 and 20162018 (in thousands):

Revenue.    Revenue increased by approximately $13,000$17,000 in the three months ended September 30, 2017March 31, 2019 compared to the three months ended September 30, 2016,March 31, 2018 primarily due to higher collaboration revenues partially offset by a reduction in Morph sales.increased revenue earned under programs with our collaborative partners. We expect current sales volumescollaboration agreement revenues to remain relatively stable, withincrease modestly lowerin 2019. We expect net product revenue will be flat or increase modestly in the latter half of 2019 depending on demand for 2017 relativethe new Morph AVANCE™ steerable introducer and subject to 2016.our ability to secure funding for marketing and production.

Cost of Goods Sold.    Cost of goods sold decreased by approximately $49,000$51,000 in the three months ended September 30, 2017March 31, 2019 compared to the three months ended September 30, 2016,March 31, 2018 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 2019, depending on the sales volumes of Morph AVANCE™ in 2019.

Research and Development Expenses. Research and development expenses increased by approximately $1,016,000$211,000 in the three months ended September 30, 2017March 31, 2019 compared to the three months ended September 30, 2016,March 31, 2018 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, 2019 totaled $1,631,000 which was a 4.5% decrease as compared to $1,707,000 for the 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, 2018. We expect selling, general and administrative expenses for the remaining quarter of 20172019 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 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 $60,000remain relatively consistent in the nine months ended September 30, 2017latter half of 2019 compared to the nine months ended September 30, 2016, primarily due to a reductionsame period 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 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 quarter 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.2018.

Liquidity and Capital Resources

We have incurred net losses each year since our inception and as of September 30, 2017,March 31, 2019, we had an accumulated deficit of approximately $69.0$90.0 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 our reverse merger transaction that was completed on October 24, 2016 and the Merger.$3.8 million raised from the sale of unregistered securities on December 24, 2018. As of September 30, 2017,March 31, 2019, we had cash and cash equivalents of approximately $13.3$2.8 million.

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

Cash Flows from Operating Activities. The increasedecrease in overall spending for operating activities of approximately $3.1 million$571,000 in the ninethree months ended September 30, 2017March 31, 2019 compared to the ninethree months ended September 30, 2016 relatesMarch 31, 2018 related primarily to increasedpayment of personnel related costs in the three months ended March 31, 2018 that were not incurred during the three months ended March 31, 2019, board cash outflowscompensation that was deferred coupled with reduced professional fees during the three months ended March 31, 2019. We expect spending to conductincrease as we continue enrolling and treating patients in the CardiAMP Phase III pivotal trial,Heart Failure Trial, further develop the CardiAMP and CardiALLO programscell therapy systems and continue to buildstrengthen and enhance the supporting infrastructure to sustain these efforts and support operations as a public company.   organization.

Cash Flows from Investing Activities. Net cash used in investing activities of $1.9 million$55,000 during the ninethree months ended September 30, 2017 consistsMarch 31, 2019 consisted primarily of the purchases of property and equipment and short-term investments.

lab 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$2.8 million coupled with $1.8 million in short-term investments as of September 30, 2017March 31, 2019 are not sufficient to fund our operations intobeyond the thirdsecond quarter of 2018.2019. 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 thirdsecond quarter of 2018,2019, 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,operations, but there can be no assurances that weas to the availability of capital or the terms on which capital will be able to obtain additional capital on acceptable terms and inavailable, if at all. See Note 13 of the amounts necessary to fully fund our operating needs.condensed consolidated financial statements. 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, 2019 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.