(

)

Significant Accounting Policies

(a)

Basis of Presentation and Consolidation

These consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (GAAP) and include all adjustments necessary for the fair presentation of the Company

’s financial position for the periods presented. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All material intercompany accounts and transactions have been eliminated during the consolidation process. The Company manages its operations as a single segment for the purposes of assessing performance and making operating decisions.

(b)

Liquidity

- Going Concern

The Company has incurred net losses and negative cash flows from operations since its inception and had an accumulated deficit of

$72.5

million as of

December 31, 2017.

Management expects operating losses and negative cash flows to continue through at lea

st the next several years. The Company expects to incur increasing costs as the pivotal CardiAMP Heart Failure trial is advanced and development of the CardiAMP and CardiALLO Cell Therapy Systems continue. Therefore absent additional funding, management believes cash and cash equivalents of

$12.7

million as of

December 31, 2017

are

not

sufficient to fund the Company beyond the

fourth

quarter of

2018.

These factors raise substantial doubt about the Company’s ability to continue as a going concern beyond

one

year from the date these financial statements are issued. The financial statements do

not

include any adjustments that might result from the outcome of this uncertainty.

The Company

’s ability to continue as a going concern and to continue further development of its therapeutic candidates through and beyond the

fourth

quarter of

2018,

will require the Company to raise additional capital. The Company plans to raise additional capital, potentially including debt and equity arrangements, to finance its future operations. While management believes this plan to raise additional funds will alleviate the conditions that raise substantial doubt, these plans are

not

entirely within its control and cannot be assessed as being probable of occurring. If adequate funds are

not

available, the Company

may

be required to reduce operating expenses, delay or reduce the scope of its product development programs, obtain funds through arrangements with others that

may

require the Company to relinquish rights to certain of its technologies or products that the Company would otherwise seek to develop or commercialize itself, or cease operations.

(c)

Use of Estimates

The preparation of the financial statements in accordance with U.S. GAAP requires Company management to make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates. Significant items subject to such estimates and assumptions include the useful lives of property and equipment; allowances for doubtful accounts and sales returns; inventory valuation; fair value of the convertible preferred stock warrant liability; fair value of the maturity date preferred stock warrant liability; fair value of the convertible shareholder notes derivative liabilit

y; and share-based compensation.

(d)

Cash Equivalents

The Company classifies all highly liquid investments with original maturities of

three

months or less at the date of purchase as cash equivalents. The Company maintains its cash and cash equivalents with reputable financial institutions.

(e)

Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash. The Company maintains its cash at financial institutions, which at times, exceed federally insured limits. At

December 31, 2017,

the Company’s cash was held by

one

financial institution and the amount on deposit was in excess of FDIC insurance limits. The Company has

not

recognized any losses from credit risks on such accounts since inception. The Company believes it is

not

exposed to significant credit risk on cash.

(f)

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are recorded at the invoiced amount and do

not

bear interest. The Company considers the creditworthiness of its customers, but does

not

require collateral in advance of a sale. The Company evaluates collectability and maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio when necessary. The estimate is based on the Company

’s historical write-off experience, customer creditworthiness, facts and circumstances specific to outstanding balances and payment terms. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The allowance for doubtful accounts was

$6,000

and

$2,000

as of

December 31, 2017

and

2016,

respectively.

(g)

Inventory

Inventory is stated at the lower of cost or net realizable value. Cost is determined using the average-cost method. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The Company analyzes its inventory levels quarterly and writes down inventory that has become obsolete or has a cost basis in excess of its expected net realizable value or inventory quantities in excess of expected requirements. Excess requirements are determined based on comparison of existing inventories to forecasted sales, with consideration given to inventory shelf life. Expired inventory is disposed of and the related costs are recognized in cost of goods sold.

(h)

Deferred Financing Costs

Deferred financing costs represent direct costs associated with future issuances of our corporate securities. Direct costs include, but are

not

limited to the legal, accounting and printing costs. Indirect costs associated with future issuance of corporate securities are expensed as incurred. Upon the completion of the proposed issuances, the deferred financing costs will be offset against the proceeds from the security issuance. If the proposed issuances are

not

completed, the deferred financing costs will be charged to expense. The Company deferred costs incurred for an initial public offering of BioCardia Lifesciences common stock

, which was delayed and subsequently withdrawn. The deferred offering costs for that offering in the amount of

$1,634,000

were expensed in

2015.

(i)

Property and Equipment, Net

Property and equipment, net are carried at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets, as described in the table below. Maintenance and repairs are expensed as incurred. When assets are retired or otherwise disposed of, the cost and the related accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is reflected in the accompanying consolidated statements of operations.

Asset		Estimated useful lives (in years)
Computer equipment and software		3
Laboratory and manufacturing equipment		3
Furniture and fixtures		3
Leasehold improvements		5 years or lease term, if shorter

(j)

Long-Lived Assets

The Company evaluates long-lived assets such as property and equipment whenever events or changes in circumstances indicate the carrying amount of an asset

may

not

be recoverable. An impairment loss is recognized when estimated future undiscounted cash flows expected to result from the use of the asset and its eventual disposition is less than the carrying amount. When undiscounted future cash flows are

not

expected to be sufficient to recover an asset

’s carrying amount, the asset is written down to its fair value. There have been

impairments of the Company’s long-lived assets in any of the years presented.

(k)

Clinical Trial Accruals

As part of the process of preparing its consolidated financial statements, the Company is required to estimate its expenses resulting from its obligations under contracts with vendors and consultants and clinical site agreements in connection with conducting clinical trials. The financial terms of these contracts are subject to negotiation and

may

result in payment flows that do

not

match the periods over which materials or services are provided by the vendor under the contracts. The Company

’s objective is to reflect the clinical trial expenses in its consolidated financial statements by matching those expenses with the period in which the services and efforts are expended. The Company accounts for these expenses according to the progress of the trial as measured by patient progression and the timing of various aspects of the trial. The Company makes estimates of its accrued expenses as of each balance sheet date in its consolidated financial statements based on the facts and circumstances known at that time. Although, the Company does

not

expect its estimates to be materially different from amounts actually incurred, its understanding of the status and timing of services relative to the actual status and timing of services performed

may

vary and

may

result in reported amounts that differ from the actual amounts incurred.

(l)

Derivatives

Fair value accounting requires bifurcation of embedded derivative instruments such as conversion features in equity instruments and warrants granted, and measurement of their fair value. In determining the appropriate fair value

of the compound embedded derivative requiring bifurcation from the convertible notes issued in

2015,

the Company used Monte Carlo simulation to calculate potential payouts in each of

three

conversion scenarios. In cases where the payout includes newly created equity shares and warrants, the Black-Scholes based option pricing method is used to calculate the amounts due to investors. Derivative instruments are subsequently adjusted to reflect fair value at the end of each reporting period. Any increase or decrease in the fair value is recorded in results of operations as a change in the fair value of derivatives. Once a derivative liability ceases to exist any remaining fair value is reclassified to additional paid-in capital if redeemed or through earnings if forfeited or expired.

(m)

Deferred Rent

The Company

’s lease for its facility provides for fixed increases in minimum annual rental payments. The total amount of rental payments due over the lease term is charged to rent expense ratably over the life of the lease. Deferred rent consists of the difference between cash payments and the recognition of rent expense on a straight-line basis.

(n)

Revenue Recognition

The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the price to the buyer is fixed or determinable, and collection from the customer is reasonably assured.

Net product revenue

– The Company currently has a portfolio of enabling and delivery products. The Company recognizes revenue from product sales when title and risk of loss have passed to the customer, which typically occurs upon delivery. Product sale transactions are evidenced by customer purchase orders, customer contracts, invoices and/or related shipping documents.

Revenue is recognized net of provisions made for discounts, expected sales returns and allowances. Estimated returns and allowances are based on historical experience and other relevant factors. The Company accepts returns for unused, unopened and resellable product in its original packaging, subject to a restocking fee. The sales return reserve was approximately $

1,000

as of

December 31, 2017

and

2016.

Amounts received from customers in advance of revenue recognition are recorded as deferred revenue on the consolidated balance sheets.

Collaboration agreement revenue

– Collaboration agreement revenue is income from agreements under partnering programs with corporate and academic institutions, wherein the Company provides biotherapeutic delivery systems and customer training and support for their use in clinical trials and studies. These programs provide additional clinical data, intellectual property rights and opportunities to participate in the development of combination products for the treatment of cardiac disease. The Company evaluates activities under these agreements to determine if they represent a multiple element arrangement by identifying the deliverables included within the agreements. The Company accounts for these deliverables as separate units of accounting if the following

two

criteria are met:

●

The delivered items have value to the customer on a stand-alone basis

●

If there is a general right of return relative to the delivered items, delivery or performance of the undelivered items is considered probable and within the Company

’s control

Factors considered in this determination include, among other things, whether any other vendors sell the items separately and if the customer could use the delivered item for its intended purpose without receipt of the remaining deliverables.

If an arrangement includes multiple deliverables that are separable into different units of accounting, the Company allocates the arrangement consideration to those units of accounting based on their relative selling prices and recognizes the associated revenue when the appropriate recognition criteria are met for those deliverables. The amount of allocable arrangement consideration is limited to the amounts that are fixed and determinable.

(o)

Shipping Costs

Costs incurred for the shipping of products to customers totaled

approximately

$5,000,

$7,000

and

$11,000

for the years ended

December 31, 2017,

2016

and

2015,

respectively, and are included in cost of goods sold in the accompanying consolidated statements of operations.

(p)

Product Warranties

The Company provides a standard warranty of serviceability on all its products for the duration of the product

’s shelf life, which is

two

years for Helix and Morph products currently. Estimated future warranty costs, if any, are accrued and charged to costs of goods sold in the period that the related revenue is recognized. Historical data and trends of product reliability and costs of repairing or replacing defective products are considered. Due to the low historical warranty claims experience, a general warranty accrual has

not

been required or recorded as of

December 31, 2017

and

2016.

(q)

Research and Development

The Company

’s research and development costs are expensed as incurred. Research and development expense includes the costs of basic research activities as well as other research, engineering, and technical effort required to develop new products or services or make significant improvement to an existing product or manufacturing process. Research and development costs also include pre-approval regulatory and clinical trial expenses and support costs for collaborative partnering programs wherein the Company provides biotherapeutic delivery systems and customer training and support for their use in clinical trials and studies. The Company’s research and development costs consist primarily of:

●

Salaries, benefits and other personnel-related expenses, including share-based compensation

●

Fees paid for services provided by clinical research organizations, research institutions, consultants and other outside service providers

●

Costs to acquire and manufacture materials used in research and development activities and clinical trials

●

Laboratory consumables and supplies

●

Facility-related expenses allocated to research and development activities

●

Fees to collaborators to license technology

●

Depreciation expense for equipment used for research and development and clinical purposes.

(r)

Share-Based Compensation

The Company measures and recognizes share-based compensation expense for equity awards to employees, directors and consultants based on fair value at the grant date. The Company uses the Black-Scholes option pricing model to calculate fair value. Share-based compensation expense recognized in the consolidated statements of operations is based on the period the services are performed. The Company accounts for forfeitures as they occur.

For options granted to nonemployees, 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

Black-Scholes option pricing model requires the input of subjective assumptions, including the risk-free interest rate, the expected volatility in the value of the Company’s 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. These assumptions are estimated as follows:

Risk-free Interest Rate

The risk free interest rate assumption is based on the

zero

-coupon U.S. Treasury instruments appropriate for the expected term of the stock option grants.

Expected Volatility

The Company

has limited historical data of its own to utilize in determining expected volatility. As such we based our volatility assumption on a combined weighted average of our own historical data and that of a selected peer group. The peer group was developed based on companies in the biotechnology and medical device industries whose shares are publicly-traded.

Expected Term

The expected term represents the period of time that options are expected to be outstanding. As the Company does

not

have sufficient historical experience for determining the expected term of the stock options awards granted, the expected life is determined using the simplified method, which is an average of the contractual terms of the option and its ordinary vesting period.

Common Stock Valuation

Prior to the completion of the Merger, due to the absence of a public market for the

BioCardia Lifesciences common stock, it was necessary to estimate the fair value of the common stock underlying the share-based awards when performing fair value calculations using the BSM option pricing model. The fair value of the common stock underlying the share-based awards was assessed on each grant date by the board of directors of BioCardia Lifesciences. All options to purchase shares of the Company’s common stock have been granted with an exercise price per share

less than the fair value per share of the common stock underlying those options on the grant date. For stock options granted subsequent to the Merger, the fair value is based on the closing price of common stock as reported on the OTC Markets on the date of grant.

(s)

Income Taxes

The Company accounts for income taxes based on the asset and liability method whereby deferred tax asset and liability account balances are determined based on differences between the financial reporting and tax bases of assets, liabilities, operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is provided when it is more likely than

not

that some portion or all of the deferred tax assets will

not

be realized.

In evaluating the ability to recover its deferred income tax assets, the Company considers all available positive and negative evidence, including its operating results, forecasts of future taxable income, and ongoing tax planning. In the event the Company was to determine that it would be able to realize its deferred tax assets in the future in excess of their net recorded amount, it would make an adjustment to the valuation allowance, which would reduce the provision for income taxes. Conversely, in the event that all or part of the net deferred tax assets are determined

not

to be realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period such determination is made.

The Company recognizes and measures benefits for uncertain tax positions using a

two

-step approach. The

first

step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than

not

that the tax position will be sustained upon audit, including resolution of any related appeals or litigation processes. For tax positions that are more likely than

not

to be sustained upon audit, the

second

step is to measure the tax benefit as the largest amount that is more than

50%

likely to be realized upon settlement. Significant judgment is required to evaluate uncertain tax positions. The Company evaluates its uncertain tax positions quarterly. Evaluations are based upon a number of factors, including the technical merits of the tax position, changes in facts or circumstances, changes in tax law, interactions with tax authorities during the course of audits, and effective settlement of audit issues. The Company

’s policy is to recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense in the consolidated statements of operations and accrued interest and penalties within accrued liabilities in the consolidated balance sheets.

such interest and penalties have been recorded to date.

(t)

Fair Value of Financial Instruments

The Company applies fair value accounting for all financial assets and liabilities and nonfinancial assets and liabilities that are required to be recognized or disclosed at fair value in the consolidated financial statements. The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where observable prices or inputs are

not

available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments complexity.

The Company

’s financial assets and liabilities consist principally of cash and cash equivalents, accounts receivable, accounts payable, warrants for convertible preferred stock, convertible notes and the convertible shareholder notes derivative liability. The fair value of the Company’s cash equivalents is determined based on quoted prices in active markets for identical assets. The recorded values of the Company’s accounts receivable and accounts payable approximate their current fair values due to the relatively short-term nature of these accounts. The fair value of the Company’s convertible preferred stock warrants is measured using the Black-Scholes option pricing model. Convertible notes are recorded at amortized cost. The fair value of the Company’s convertible shareholder notes derivative liability is measured utilizing a Monte Carlo simulation model. Based on borrowing rates currently available for loans with similar terms, the carrying value of convertible notes approximates fair value.

(u)

Net Loss per Share

Basic net loss per share is calculated by dividing the net loss by the weighted average number of shares of common stock outstanding. Diluted net loss per share is computed by dividing the net loss by the weighted-average number of common share equivalents outstanding for the period determined using the treasury-stock method. Common stock equivalents are comprised of convertible preferred stock, notes convertible into preferred stock, warrants to purchase convertible preferred stock and options outstanding under our stock option plans. For all periods presented, there is

difference in the number of shares used to calculate basic and diluted shares outstanding since the effects of potentially dilutive securities are antidilutive due to our net loss position.

(v)

Recently Adopted Accounting Pronouncements

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

). 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

effective

January 1, 2017.

The impact of adopting ASU

2016

resulted in the following:

	●	We classified the excess income tax benefits from stock-based compensation arrangement as a discrete item within income tax expense, rather than recognizing such excess income tax benefits in additional paid-in capital. The adoption of this guidance had no material impact to our consolidated financial statements due to a full valuation allowance recognized against our deferred tax assets .

	●	We elected to recognize forfeitures as they occur. The cumulative effect adjustment as a result of the adoption of this guidance on a modified retrospective basis was insignificant .

	●	We applied the change in classification of cash flows resulting from excess tax benefits and cash paid by us when directly withholding shares for tax-withholding purposes on a retrospective basis. The adoption of these provisions did not result in changes in our consolidated statements of cash flow

There were

other material impacts to our consolidated financial statements as a result of adopting this updated standard.

(w)

Recently Issued Accounting Pronouncements

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

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

August 2015,

the FASB issued ASU

No.

2015

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.

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. The Company will adopt this guidance using the cumulative effect adoption method on

January 1, 2018

and does

not

expect the adoption of this guidance to have a material impact on its financial statements.

January 2016,

the FASB issued ASU

No.

2016

(ASU

2016

), Recognition and Measurement of Financial Assets and Financial Liabilities. ASU

2016

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 beginning

January 1, 2018

and must be adopted using a modified retrospective approach, with certain exceptions. Management’s assessment indicates that the amendment will

not

have a significant impact as the Company currently has

equity investments, however, the update

may

have a significant impact in the future. The Company will adopt ASU

2016

January 1, 2018

and does

not

expect the adoption to have a material impact on its financial statements.

February 2016,

the FASB issued ASU

No.

2016

Leases (Topic

842

), which supersedes existing guidance on accounting for leases in “Leases (Topic

840

)” and generally requires all leases to be recognized in the consolidated balance sheet. ASU

2016

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

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.

May 2017,

the FASB issued ASU

No.

2017

Compensation

– Stock Compensation (Topic

718

) Scope of Modification Accounting. The amendments in ASU

2017

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 Company will adopt ASU

2016

January 1, 2018

and does

not

expect the adoption to have a material impact on its 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

’s financial statement presentation or disclosures.