Nuwellis (NUWE) 10-Q 2016 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016

OR

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to           

Commission file number 001-35312

SUNSHINE HEART, INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware	No. 68-0533453
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

12988 Valley View Road, Eden Prairie, MN 55344

(Address of Principal Executive Offices) (Zip Code)

(952) 345-4200

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer o	Accelerated filer x
Non-accelerated filer o	Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o  No x

The number of outstanding shares of the registrant’s common stock, $0.0001 par value, as of May 3, 2016 was 18,389,791.

TABLE OF CONTENTS

		Page Number
PART I—FINANCIAL INFORMATION
Item 1	Financial Statements	3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations and Comprehensive Loss	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
Item 3	Quantitative and Qualitative Disclosures About Market Risk	13
Item 4	Controls and Procedures	13
PART II—OTHER INFORMATION
Item 1	Legal Proceedings	14
Item 1A	Risk Factors	14
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	14
Item 3	Defaults Upon Senior Securities	14
Item 4	Mine Safety Disclosures	14
Item 5	Other Information	14
Item 6	Exhibits	15

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PART I—FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

SUNSHINE HEART, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Dollars in thousands, except share amounts)

	March 31, 2016			December 31, 2015
	(unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	16,470		$	23,113
Other current assets	547			479
Total current assets	17,017			23,592
Property, plant and equipment, net	462			535
Other assets	299			323
TOTAL ASSETS	$	17,778		$	24,450
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current portion of long-term debt	$	3,867		$	3,798
Accounts payable and accrued expenses	2,410			2,832
Accrued salaries, wages, and other compensation	555			1,368
Total current liabilities	6,832			7,998
Long-term debt, net of discount	2,934			3,881
Other Liabilities	400			400
Total liabilities	10,166			12,279
Commitments and contingencies	—			—
Stockholders’ equity
Series A junior participating preferred stock as of March 31, 2016 and December 31, 2015, $0.0001 par value per share; authorized 30,000 shares, none outstanding	—			—
Preferred stock as of March 31, 2016 and December 31, 2015, $0.0001 par value per share; authorized 39,970,000 shares, none outstanding	—			—
Common stock as of March 31, 2016 and December 31, 2015, par value $0.0001 per share; authorized 100,000,000 shares; issued and outstanding 18,368,849 and 18,344,478 shares, respectively	2			2
Additional paid-in capital	164,336			164,105
Accumulated other comprehensive income:
Foreign currency translation adjustment	1,242			1,246
Accumulated deficit	(157,968		)	(153,182		)
Total stockholders’ equity	7,612			12,171
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	17,778		$	24,450

See notes to the condensed consolidated financial statements.

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SUNSHINE HEART, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

(In thousands, except per share amounts)

	Three months ended March 31,
	2016			2015
Net sales	$	—		$	59
Operating expenses:
Selling, general and administrative	1,349			2,186
Research and development	3,206			4,865
Total operating expenses	4,555			7,051
Loss from operations	(4,555		)	(6,992		)
Interest expense	(229		)	(63		)
Other income (expense), net	1			(3		)
Loss before income taxes	(4,783		)	(7,058		)
Income tax expense	3			5
Net loss	$	(4,786	)	$	(7,063	)
Basic and diluted loss per share	$	(0.26	)	$	(0. 40	)
Weighted average shares outstanding — basic and diluted	18,353			17,509
Other comprehensive income:
Foreign currency translation adjustments	$	(4	)	$	10
Total comprehensive loss	$	(4,790	)	$	(7,053	)

See notes to the condensed consolidated financial statements.

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SUNSHINE HEART, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

	Three months ended March 31,
	2016			2015
Operating activities:
Net loss	$	(4,786	)	$	(7,063	)
Adjustments to reconcile net loss to cash flows used in operating activities:
Depreciation	81			80
Stock-based compensation expense, net	231			743
Amortization of debt discount and financing fees	84			14
Changes in operating assets and liabilities:
Other current assets	(67		)	(561		)
Other assets	2			(135		)
Accounts payable and accrued expenses	(1,241		)	(162		)
Net cash used in operations	(5,696		)	(7,084		)
Investing activities:
Purchases of property and equipment	(8		)	(72		)
Net cash used in investing activities	(8		)	(72		)
Financing activities:
Net proceeds from the sale of common stock	—			6,902
Proceeds from (repayments on) borrowings on long-term debt	(940		)	6,000
Net cash provided by financing activities	(940		)	12,902
Effect of exchange rate changes on cash	1			(12		)
Net (decrease) increase in cash and cash equivalents	(6,643		)	5,734
Cash and cash equivalents - beginning of period	23,113			31,293
Cash and cash equivalents - end of period	$	16,470		$	37,027
Supplement schedule of non-cash activities
Warrants issued in connection with debt financing	$	—		$	266
Supplemental cash flow information
Interest paid on debt borrowings	$	136		$	6

See notes to the condensed consolidated financial statements.

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SUNSHINE HEART, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 1 - Basis of Presentation

Unless otherwise specified or indicated by the context, “Sunshine Heart,” “Company,” “we,” “us” and “our” refer to Sunshine Heart, Inc. and its subsidiaries.

Principles of Consolidation: The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S.) (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information necessary for a fair presentation of results of operations, comprehensive income, financial condition, and cash flows in conformity with U.S. GAAP. In the opinion of management, the condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the results of Sunshine Heart and its subsidiaries for the periods presented. Operating results for interim periods are not necessarily indicative of results that may be expected for the year as a whole. The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the financial statements and during the reporting period. Actual results could materially differ from these estimates.

For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

Going Concern: The Company’s financial statements have been prepared and presented on a basis assuming it continues as a going concern. During the years ended December 31, 2015 and 2014 and through March 31, 2016, the Company incurred losses from operations and net cash outflows from operating activities as disclosed in the consolidated statements of operations and cash flows, respectively. At December 31, 2015, the Company had an accumulated deficit of $153.2 million and it expects to incur losses for the foreseeable future. To date, the Company has been funded by debt and equity financings. Although the Company believes that it will be able to successfully fund its operations, there can be no assurance that it will be able to do so or that it will ever operate profitably.

The Company’s ability to continue as a going concern is dependent on the Company’s ability to raise additional capital based on the achievement of existing milestones as and when required. Should future capital raising be unsuccessful, the Company may not be able to continue as a going concern. Furthermore, the ability of the Company to continue as a going concern is subject to the ability of the Company to develop and successfully commercialize the product being developed. If the Company is unable to obtain such funding of an amount and timing necessary to meet its future operational plans, or to successfully commercialize its intellectual property, the Company may be unable to continue as a going concern. No adjustments have been made relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company not continue as a going concern.

Earnings per share: Basic earnings per share is computed based on the weighted average number of common shares outstanding. Diluted earnings per share is computed based on the weighted average number of common shares outstanding, increased by the number of additional shares that would have been outstanding had the potentially dilutive common shares been issued, and reduced by the number of shares the Company could have repurchased from the proceeds from issuance of the potentially dilutive shares. Potentially dilutive shares of common stock include warrants, stock options and other stock-based awards granted under stock-based compensation plans. These potentially dilutive shares totaling 3,644,149 and 2,931,306 for the three months ended March 31, 2016 and 2015, respectively, were excluded from the computation of loss per share as their effect was antidilutive due to the Company’s net loss in each of those periods.

New Accounting Pronouncements: In April 2015, the Financial Accounting Standards Board (FASB) issued amended guidance concerning debt issuance costs in relation to a recognized debt liability to require it be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This guidance is effective for the Company’s interim and annual reporting periods beginning January 1, 2016.   Upon adoption of this standard, the Company reclassified $105,000 of unamortized debt issuance costs classified as other current assets and as other assets in the accompanying balance sheet to an offset of current and long-term debt as of March 31, 2016. In connection with the adoption of this standard, the Company reclassified $120,000 of debt issuance costs that were previously reported as current assets and other assets on the December 31, 2015 balance sheet, to an offset to current and long-term debt.

In May 2014, the FASB issued amended revenue recognition guidance to clarify the principles for recognizing revenue from contracts with customers. The guidance requires an entity to recognize revenue to depict the transfer of goods or services to customers in an

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amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. The guidance also requires expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. 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 standard allows the Company to transition to the new model using either a full or modified retrospective approach, and early adoption is not permitted. In August 2015, the FASB amended the guidance to defer the effective date by one year, so this guidance will be effective for the Company’s interim and annual periods beginning January 1, 2018. The Company is currently evaluating the impact that this standard will have on its business practices, financial condition, results of operations and disclosures.

In August 2014, the FASB amended guidance relating to the presentation and disclosure of the uncertainties of an entity’s ability to continue as a going concern.  This guidance explicitly requires management of a company to evaluate whether there is substantial doubt about a company’s ability to continue as a going concern and to provide related footnote disclosure in certain circumstances. This guidance is effective for the Company’s interim and annual reporting periods beginning January 1, 2017, with early adoption permitted. The Company is evaluating the impact that the adoption of this standard will have, if any, on its financial statements and disclosures.

In November 2015, the FASB issued amended guidance concerning the classification of deferred taxes on the balance sheet to require that deferred tax assets and deferred tax liabilities be presented as noncurrent in a classified balance sheet. The amendment is effective for our annual and interim reporting periods beginning January 1, 2017, with early adoption permitted. The adoption of this standard will not have an impact on the Company’s consolidated financial statements as all deferred tax assets are fully reserved.

In February 2016, the FASB issued updated guidance to improve financial reporting about leasing transactions. This guidance will require organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. This guidance is effective for the Company’s annual reporting period beginning January 1, 2020, and for interim periods beginning January 1, 2021.  The Company is evaluating the impact that the adoption of this standard will have, if any, on its financial statements and disclosures.

Note 2 — Debt

On February 18, 2015, the Company entered into a loan and security agreement with Silicon Valley Bank for proceeds of up to $10.0 million at an annual interest rate of 7.0%. Under this agreement, a $6.0 million term loan was funded at closing and an additional term loan in the amount of $2.0 million was funded on June 26, 2015.  Availability of the second term loan was conditioned on the U.S. Food and Drug Administration (FDA) granting the Company interim analysis of COUNTER HF™, its U.S. pivotal study for the C-Pulse® Heart Assist System. The Company achieved this regulatory milestone in February 2015.  The remaining $2.0 million term loan was available until September 30, 2015, provided that the Company had enrolled its one hundredth patient in the COUNTER HF study on or before that date. The Company did not achieve this milestone and did not secure additional borrowings under this facility. Total borrowings outstanding under the Silicon Valley Bank facility totaled $7.1 million as of March 31, 2016.

On December 8, 2015, the Company entered into an amendment to the loan and security agreement.  The amendment removed the existing requirement to raise a minimum of $20.0 million in unencumbered net cash proceeds from the issuance and sale of equity securities by March 31, 2016.  The Company agreed instead to a liquidity covenant requiring it to maintain cash and cash equivalents in an amount equal to or greater than eight times the Company’s monthly cash burn amount.  The amendment also increased the prepayment fees required to be paid by the Company in the event that the loan is repaid before its maturity date.

The proceeds from the term loans are used for general corporate and working capital purposes.  The Company was entitled to make interest only payments until January 1, 2016.  Commencing on January 1, 2016, and continuing on the first day of each calendar month thereafter, the Company is required to repay the advances made in twenty-four consecutive equal monthly installments. Principal payments coming due within twelve months have been classified as current in the accompanying balance sheet.

The agreement is secured by a security interest in assets of the Company and its current and future subsidiaries, including a security interest in intellectual property proceeds, but excluding a current security interest in intellectual property. The agreement contains a liquidity covenant that requires that the Company maintain cash and cash equivalents in an amount equal or greater than eight times its monthly cash utilization, as well as customary representations (tested on a continual basis) and covenants that, subject to exceptions, restrict the Company’s ability to do the following things: declare dividends or redeem or repurchase equity interests; incur additional liens; make loans and investments; incur additional indebtedness; engage in mergers, acquisitions, and asset sales; transact with affiliates; undergo a change in control; add or change business locations; and engage in businesses that are not related to its existing

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business.  As of March 31, 2016, the Company was in compliance with all covenants under this agreement.

Upon repayment of the term loans, the Company is required to make a final payment to Silicon Valley Bank equal to 5.0% of the original principal amount of the term loans. This final payment totals $0.4 million and it has been classified as Other Liabilities on the accompanying balance sheets as of March 31, 2016.

Warrants: In connection with funding of the first term loan for $6.0 million, the Company issued 68,996 warrants at an exercise price of $5.22 per share to Silicon Valley Bank and one of its affiliates. The Company valued these warrants at $3.86 per share utilizing the Black Scholes valuation model and the following assumptions: an expected dividend yield of 0%, an expected stock price volatility of 88.07%, a risk-free interest rate of 1.86%, and an expected life of 6.25 years.

In connection with the funding of the second term loan for $2.0 million, the Company issued 32,609 warrants at an exercise price of $3.68 per share to Silicon Valley Bank and one of its affiliates. The Company valued these warrants at $2.71 per share utilizing the Black Scholes valuation model and the following assumptions: an expected dividend yield of 0%, an expected stock price volatility of 87.04%, a risk-free interest rate of 2.20%, and an expected life of 6.25 years.

All warrants have a life of ten years and were fully vested at the date of grant. The value of these warrants was recorded as debt discount in the accompanying balance sheet and will be amortized to interest expense over the term of the debt agreement using the effective interest rate method.  As of March 31, 2016, and December 31, 2015, $154,000 and $201,000, respectively, of unamortized debt discount was netted against long-term debt in the accompanying condensed consolidated balance sheets.

Note 3 - Equity

ATM Sales: In March 2014, the Company entered into a sales agreement (the “Sales Agreement”) with Cowen and Company LLC (“Cowen”) to sell from time to time, in “at the market” offerings, shares of its common stock having an aggregate offering price of up to $40.0 million.  There were no issuances of common stock under this facility in the three months ended March 31, 2016. During the three months ended March 31, 2015, the Company sold 1,214,395 shares of common stock for net proceeds of $6.9 million after stock issuance costs of $0.2 million.

As of March 31, 2016, the Company had a total of $32.6 million available for future sales under the Sales Agreement.

Note 4 - Stock-Based Compensation

Under the fair value recognition provisions of U.S. GAAP for accounting for stock-based compensation, the Company measures stock-based compensation expense at the grant date based on the fair value of the award and recognizes the compensation expense over the requisite service period, which is generally the vesting period.

The following table presents the classification of stock-based compensation expense recognized for the three months ended March 31, 2016 and 2015:

	Three months ended March 31,
(in thousands)	2016		2015
Selling, general and administrative expense	$	135	$	567
Research and development expense	112		300
Total stock-based compensation expense	$	247	$	867

Note 5 - Fair Value of Financial Instruments

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities. The Company believes that the carrying amounts of the financial instruments approximate their respective current fair values due to their relatively short maturities.

Pursuant to the requirements of FASB Accounting Standards Codification Topic 820 “Fair Value Measurement,” the Company’s financial assets and liabilities measured at fair value on a recurring basis are classified and disclosed in one of the following three categories:

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·Level 1 - Financial instruments with unadjusted quoted prices listed on active market exchanges.

·Level 2 - Financial instruments lacking unadjusted, quoted prices from active market exchanges, including over the counter traded financial instruments. The prices for the financial instruments are determined using prices for recently traded financial instruments with similar underlying terms as well as directly or indirectly observable inputs, such as interest rates and yield curves that are observable at commonly quoted intervals.

·Level 3 - Financial instruments that are not actively traded on a market exchange. This category includes situations where there is little, if any, market activity for the financial instrument. The prices are determined using significant unobservable inputs or valuation techniques.

All cash equivalents are considered Level 1 measurements for all periods presented. The Company does not have any financial instruments classified as Level 2 or Level 3 and there were no movements between these categories during the periods ended March 31, 2016 and December 31, 2015.

Note 6 — Income Taxes

The Company provides for a valuation allowance when it is more likely than not that it will not realize a portion of the deferred tax assets. The Company has established a full valuation allowance for U.S. and foreign deferred tax assets due to the uncertainty that enough taxable income will be generated in those taxing jurisdictions to utilize the assets. Therefore, the Company has not reflected any benefit of such deferred tax assets in the accompanying financial statements.

As of March 31, 2016, there were no material changes to what the Company disclosed regarding tax uncertainties or penalties in its Annual Report on Form 10-K for the year ended December 31, 2015.

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our interim condensed consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report and the audited consolidated financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2015. This discussion contains forward-looking statements that involve risks and uncertainties.  Our actual results could differ materially from those anticipated in the forward-looking statements as a result of a variety of factors, including those discussed in Part I, Item 1A “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2015 and in our subsequent filings with the Securities and Exchange Commission (“SEC”).

OVERVIEW

We are a medical device company developing innovative technologies for cardiac and coronary disease. The Company’s primary product, the C-Pulse System, is an implantable, non-blood contacting, heart assist therapy for the treatment of moderate to severe heart failure, which can be implanted using a minimally invasive procedure. The C-Pulse System is designed to relieve the symptoms of heart failure through the use of counter-pulsation technology by enabling an increase in cardiac function, an increase in coronary blood flow, and a reduction in the heart’s pumping load.

We are in the process of pursuing regulatory approvals necessary to commercialize our system in the United States.  We completed enrollment of our North American feasibility clinical study in the first half of 2011.  In November 2011, we announced the preliminary results of the six-month follow-up period for the feasibility study and we submitted the clinical data to the FDA.  In March 2012, the FDA notified us that it had completed its review of the C-Pulse System feasibility study data and concluded we met the applicable agency requirements, and further indicated that we could move forward with an investigational device exemption application.  In November 2012, the FDA provided us with unconditional approval to initiate a pivotal study.  We commenced enrollment in our COUNTER HF™ pivotal study in September 2013.

We obtained CE Mark approval for the C-Pulse System in July 2012 and have taken initial steps to evaluate the market potential for our system in targeted countries that accept the CE Mark in anticipation of commencing commercial sales.  In order to gain additional clinical data and support reimbursement in Europe, we initiated OPTIONS HF, a post-market study in Europe to evaluate endpoints similar to those for our U.S. pivotal study.

On February 25, 2015, we announced that we had received unconditional approval from the FDA to conduct an interim analysis of COUNTER HF.  This interim analysis could have reduced the overall duration of the trial. On March 6, 2015, we announced that COUNTER HF had reached a pre-determined pausing point and we temporarily suspended enrollment in accordance with the

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study protocol.   On May 26, 2015, we announced that the FDA had approved the resumption of patient enrollment in the study and we began the process of reactivating clinical sites and of resuming patient enrollment into the study. We concluded 2015 with 66 enrollments, 35 randomizations, 29 activated centers and 9 additional centers committed to participate.

As we evaluated the pace of enrollment into our pivotal and post market studies, we determined that enrolling these studies would take much longer than anticipated as a result of the invasiveness of the implant procedure and requirements imposed by the trial design. As a result, on March 3, 2016 we announced that we are no longer enrolling patients into the COUNTER HF and OPTIONS HF studies and that we plan to pursue a new strategic direction, We are currently working with our investigators to develop the specifics of our revised clinical and product development strategy. For further information, see Part I, Item 1 “Business-Our Strategy” in our Annual Report on Form 10-K for the year ended December 31, 2015.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We have adopted various accounting policies to prepare the condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States. (U.S. GAAP). Our most significant accounting policies are disclosed in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015.

The preparation of the condensed consolidated financial statements, in conformity with U.S. GAAP, requires us to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Our estimates and assumptions, including those related to stock-based compensation, valuation of equity and debt securities, and income tax reserves are updated as appropriate, which in most cases is quarterly. We base our estimates on historical experience, valuations, or various assumptions that are believed to be reasonable under the circumstances. There have been no material changes to our critical accounting policies and estimates from the information provided in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2015.

Going Concern: Our financial statements have been prepared and presented on a basis assuming we continue as a going concern. During the years ended December 31, 2015 and 2014, and through March 31, 2016, we incurred losses from operations and net cash outflows from operating activities as disclosed in the consolidated statements of operations and cash flows, respectively.

Our ability to continue as a going concern is dependent on our ability to raise additional capital based on the achievement of existing milestones as and when required. Our directors, after due consideration, believe that we will be able to raise new equity capital as required to fund our business plan. We expect to seek additional financing during 2016. Should future capital raising be unsuccessful, we may not be able to continue as a going concern. Furthermore, our ability to continue as a going concern is subject to our ability to develop and successfully commercialize the product being developed. If we are unable to obtain such funding of an amount and timing necessary to meet our future operational plans, or to successfully commercialize our intellectual property, we may be unable to continue as a going concern. No adjustments have been made relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should we not continue as a going concern.

NEW ACCOUNTING PRONOUNCEMENTS

Information regarding new accounting pronouncements is included in Note 1 to the current period’s condensed consolidated financial statements.

FINANCIAL OVERVIEW

We are an early-stage medical device company focused on developing, manufacturing and commercializing our C-Pulse System for treatment of Class III and ambulatory Class IV heart failure.  Our activities since inception have consisted principally of raising capital, performing research and development and conducting preclinical and clinical studies.  At March 31, 2016, we had an accumulated deficit of $158.0 million and we expect to incur losses for the foreseeable future. To date, we have been funded by private and public equity and debt financings. Although we believe that we will be able to successfully fund our operations, there can be no assurance that we will be able to do so or that we will ever operate profitably.

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Results of Operations

Comparison of Three Months Ended March 31, 2016 to Three Months Ended March 31, 2015

Revenue

Three Months Ended March 31, 2016		Three Months Ended March 31, 2015		Increase (Decrease)			% Change
$	—	$	59,000	$	(59,000	)	N/A

Our revenue has been generated by sales of the C-Pulse System to hospitals and clinics in conjunction with our U.S. clinical study.  The C-Pulse System is not approved for commercial sale, however, the FDA has assigned the C-Pulse System to a Category B designation, making it eligible for reimbursement at certain U.S. sites when implanted in connection with our clinical studies.  Since certain insurance companies and governmental institutions have a non-coverage policy for experimental or investigational procedures, we have not been successful in achieving reimbursement for some implant procedures. On March 3, 2016, we announced that we are no longer enrolling patients in the COUNTER HF and OPTIONS HF studies, and that we plan to pursue a new strategic direction, as discussed above and under Part I, Item 1 “Business—Our Strategy” in our Form 10-K for the year ended December 31, 2015. Since we have terminated enrollment in our OPTIONS HF and COUNTER HF clinical trials, we do not expect to generate revenue from sales of the C-Pulse System during fiscal 2016. We recognized revenue for one C-Pulse System implant in the three-month period ended March 31, 2015.

Product costs incurred for our clinical studies are deemed to be development costs and, accordingly, are expensed to research and development as incurred.

Selling, General and Administrative Expense

Three Months Ended March 31, 2016		Three Months Ended March 31, 2015		Increase (Decrease)			% Change
$	1,349,000	$	2,186,000	$	(837,000	)	(38.3	)%

The decrease in selling, general and administrative expense for the three months ended March 31, 2016 as compared to 2015 is attributed to the consolidation and streamlining of activities in an effort to increase efficiencies and reduce our cash utilization, and to lower stock compensation costs.

Research and Development Expense

Three Months Ended March 31, 2016		Three Months Ended March 31, 2015		Increase (Decrease)			% Change
$	3,206,000	$	4,865,000	$	(1,659,000	)	(34.1	)%

The decrease in research and development expense for the three months ended March 31, 2016 as compared to 2015 resulted primarily from our decision to stop enrollment in the COUNTER HF and OPTIONS HF studies discussed above, which was announced on March 3, 2016.  Since we have terminated enrollment in the studies, we expect that our research and development costs will decrease during fiscal 2016, but may increase thereafter as we accelerate funding of our fully implantable system and begin executing on a new clinical strategy.

Interest Expense

Three Months Ended March 31, 2016		Three Months Ended March 31, 2015		Increase (Decrease)		% Change
$	229,000	$	63,000	$	166,000	263.5.0	%

The increase is primarily due to interest expense related to borrowings outstanding under our term loan with Silicon Valley Bank, which were outstanding only for a portion of the first quarter of 2015. Foreign exchange rate gains and losses are recorded as other expense.

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Liquidity and Capital Resources

Sources of Liquidity

We have funded our operations primarily through a series of equity and debt issuances. During the three months ended March 31, 2015, we entered into a loan agreement with SVB for proceeds of up to $10.0 million, and issued common shares for net cash proceeds of $6.9 million under our Sales Agreement (ATM) with Cowen.  No similar financings were completed during the three months ended March 31, 2016. As of March 31, 2016 and December 31, 2015, cash and cash equivalents were $16.5 million and $23.1 million, respectively.

From time to time we may seek to sell additional equity or debt securities or enter into credit facilities.  The sale of additional equity, debt, or convertible debt securities may result in dilution to our stockholders.  If we raise additional funds through the issuance of debt, convertible debt or enter into credit facilities, these securities and debt holders could have rights senior to those of our common stock, and this debt could contain covenants that would restrict our operations and would require us to use cash for debt service rather than our operations.  We may require additional capital beyond our currently forecasted amounts.  Although we have successfully financed our operations through the issuance of common stock, debt, and warrants to date, any such required additional capital may not be available to us on acceptable terms, or at all.

Cash Flows from Operating Activities

Net cash used in operating activities was $5.7 million and $7.1 million for the three months ended March 31, 2016 and 2015, respectively. The net cash used in each of these periods primarily reflects the net loss for those periods, offset in part by stock-based compensation, depreciation, amortization of debt discount and financing fees and the effects of changes in operating assets and liabilities.

Cash Flows from Investing Activities

Net cash used in investing activities was $8,000 and $72,000 for the three months ended March 31, 2016 and 2015, respectively. The majority of cash used in investing activities during these periods was for the purchase of laboratory and office equipment.

Cash Flows from Financing Activities

Net cash used in financing activities was $940,000 for the three months ended March 31, 2016 and was attributable to repayments of principal amounts outstanding under our debt facility. Cash provided by financing activities was $12.9 million for the three months ended March 31, 2015, and was attributable to proceeds from debt borrowings and sales of our common stock.

Capital Resource Requirements

As of March 31, 2016, we did not have any material commitments for capital expenditures.

Off-Balance Sheet Arrangements

In April 2015, we amended our lease agreement for our office space leased in Eden Prairie, Minnesota, to extend it for an additional thirty-six months beyond its original expiration date. This amended lease agreement expires March 31, 2019.

On December 8, 2015, we amended our loan and security agreement with Silicon Valley Bank to remove the requirement that we complete an equity financing of at least $20.0 million in unencumbered proceeds by March 31, 2016. The amended agreement contains a liquidity covenant that requires that we maintain cash and cash equivalents in an amount equal or greater than eight times our monthly cash utilization. As of March 31, 2016, we were in compliance with all covenants under this facility.

Except as disclosed above, we have no off-balance sheet transactions, arrangements, obligations (including contingent obligations), or other relationships with unconsolidated entities or other persons that have, or may have, a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

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Forward-Looking Statements and Risk Factors

Certain statements in this report are forward-looking statements that are based on management’s beliefs, assumptions and expectations and information currently available to management.  All statements that address future operating performance, events or developments that we expect or anticipate will occur in the future are forward-looking statements, including without limitation, our expectations with respect to product development and commercialization efforts, results of pre-clinical and clinical studies activities and results, design and development of future studies, site activations, patient enrollment in studies, timing of regulatory filings and approvals, regulatory acceptance of our filings, our ability to meet our debt obligations, research and development activities, ultimate clinical outcomes and benefits of our products to patients, market and physician acceptance of our products, intellectual property protection, and potentially competitive product offerings. The risk factors described in our filings with the SEC could cause actual events to adversely differ from the expectations indicated in these forward-looking statements. Management believes that these forward-looking statements are reasonable as and when made. However, you should not place undue reliance on forward-looking statements because they speak only as of the date when made. Sunshine Heart does not assume any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Sunshine Heart may not actually achieve the plans, projections or expectations disclosed in forward-looking statements, and actual results, developments or events could differ materially from those disclosed in the forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties, including without limitation, the possibility that regulatory authorities do not accept our application or approve the marketing of the C-Pulse System, the possibility we may be unable to raise the funds necessary for the development and commercialization of our products, and those described in our filings with the SEC.  We may update our risk factors from time to time.

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents.  We maintain our accounts for cash and cash equivalents principally at one major bank in the United States and one major bank in the United Kingdom. We have not experienced any losses on our deposits of our cash and cash equivalents.

We do not currently sell our products in the U.S. or in international markets. All of our revenue to date has been generated by reimbursement related to our U.S. clinical studies.

We do not believe our operations are currently subject to significant market risks for interest rates, foreign currency exchange rates, commodity prices or other relevant market price risks of a material nature.  Under our current policies, we do not use foreign currency derivative instruments to manage exposure to fluctuations in foreign exchange rates.

We are exposed to declines in the interest rates paid on deposited funds.  A hypothetical 100 basis point decline in the current market interest rates paid on deposits would result in interest earnings being reduced by approximately $15,000 on an annual basis.

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 our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer (together, the “Certifying Officers”), as appropriate, to allow for timely decisions regarding required disclosure.

In designing and evaluating disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired objectives. Also, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. The design of any system of controls is based, in part, upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

As of March 31, 2016, the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of management, including the Certifying Officers, of the effectiveness of the design and operation of our disclosure

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controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their stated objectives.  Based on their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2016.

Changes in Internal Controls

There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

We are not currently subject to any material legal proceedings.

ITEM 1A.RISK FACTORS

You should carefully consider the risks and uncertainties we describe in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, and in other reports filed thereafter with the SEC, before deciding to invest in or retain shares of our common stock. Other than as set forth below, we do not believe there are any material changes to the risk factors discussed in Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

If the trading price of our common stock fails to comply with the continued listing requirements of NASDAQ, we could face possible delisting. NASDAQ delisting could materially adversely affect the market for our shares.

On March 23, 2016, we received notice from the NASDAQ Capital Market that we did not meet the continued listing requirements for listing our common stock on the NASDAQ Capital Market because for 30 consecutive business days the bid price of our common stock had closed below $1.00 per share. To regain compliance, the closing bid price of our common stock must be at least $1.00 per share for a minimum of ten consecutive business days (or such longer period of time as the NASDAQ staff may require in some circumstances, but generally not more than 20 consecutive business days) before September 19, 2016. If we are not able to achieve compliance by September 19, 2016, we will need to cure the deficiency by effecting a reverse stock split. However, if it appears to the NASDAQ staff that we will not be able to cure the deficiency, or if we do not meet the other listing standards, NASDAQ could provide notice that our common stock will become subject to delisting. We cannot guarantee that our stock price will meet the listing requirements and therefore our common stock may be subject to delisting.  If our common stock is delisted, this would, among other things, substantially impair our ability to raise additional funds and could result in a loss of institutional investor interest and fewer development opportunities for us.

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

Not applicable

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4.MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.OTHER INFORMATION

None.

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ITEM 6.EXHIBITS

The exhibits filed as part of this Quarterly Report on Form 10-Q are listed in the Exhibit Index immediately following the signature page of this report.

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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.

	Sunshine Heart, Inc.
Date: May 5, 2016	By:	/s/ John L. Erb
		John L. Erb
		Chief Executive Officer and Chairman of the Board
		(principal executive officer)
Date: May 5, 2016	By:	/s/ Claudia Drayton
		Claudia Drayton
		Chief Financial Officer
		(principal financial officer)

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Exhibit Index

Sunshine Heart, Inc.

Form 10-Q for the Quarterly Period Ended March 31, 2016

		Incorporated By Reference
Exhibit Number	Exhibit Description	Form	File Number	Date of First Filing	Exhibit Number	Filed Herewith	Furnished Herewith
10.1	Executive Employment Agreement between Sunshine Heart, Inc. and John L. Erb, dated March 1, 2016†	8-K	001-35312	March 2, 2016	10.1
10.2	Separation and Release Agreement by and between Sunshine Heart, Inc. and Brian J. Brown, dated February 3, 2016					X
10.3	Separation and Release Agreement by and between Sunshine Heart, Inc. and Debra Kridner, dated January 24, 2016					X
10.	Third Amendment to the Sunshine Heart, Inc. New-Hire Equity Incentive Plan †	S-8	333-210215	March 15, 2016	99.13
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002					X
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002					X
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002						X
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002						X
101.INS	XBRL Instance Document					X
101.SCH	XBRL Taxonomy Extension Schema Document					X
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document					X
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document					X
101.LAB	XBRL Taxonomy Extension Label Linkbase Document					X
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document					X

†Indicates management compensatory plan, contract or arrangement.

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