ITEM 7.MANAGEMENT’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 the audited consolidated financial statements
and the audited consolidated notes to those statements included elsewhere in this Annual Report on Form 10-K. This discussion
includes forward-looking statements that involve risks and uncertainties. As a result of many factors, our actual results may differ
materially from those anticipated in these forward-looking statements.
Company Overview
Capricor
Therapeutics, Inc. is a biotechnology company focused on the development of transformative cell- and exosome-based therapeutics
for the treatment and prevention of a broad spectrum of diseases.
Cell Therapy (CAP-1002) Program
CAP-1002 - Duchenne Muscular Dystrophy
Program
We
have completed HOPE-2, a Phase II clinical trial in the United States with our product candidate, CAP-1002, a cardiac cell derived
therapy which was used to treat patients with late-stage Duchenne muscular dystrophy, or DMD. The 12-month final top-line
data showed improvements in multiple measures of upper limb, cardiac and respiratory functions. Following receipt of the 12-month
data, we discussed this program with the FDA in a Type B meeting focusing on the data, next steps and a pathway to approval of
a Biologics License Application, or BLA, for CAP-1002 in DMD. The FDA has continued to encourage us to conduct a Phase III study;
at this time, however, we are still discussing the pathway forward for this program with the FDA and have not initiated a Phase
III study. Additionally, we are actively seeking partners for this program.
CAP-1002 - COVID-19 Program
In 2020, under an Expanded
Access (or Compassionate Use) program, seven patients hospitalized with severe COVID-19 (also referred to sometimes as SARS-CoV-2)
symptoms, six of whom were ventilated, were treated with CAP-1002. Four of the seven patients were fully discharged and three died
between one- and two-months post-treatment. Previously published data has shown that COVID-19 patients on ventilators experience
higher mortality rates. While we are unable to definitively ascertain whether CAP-1002 improved patient outcomes, by analyzing
blood samples and other tests, it was determined that CAP-1002 was associated with identifiable improvements in certain patients
such as a decrease in white blood cell count, a decrease in IL-6, a decrease in C-reactive protein, and/or reduced reliance on
supplemental oxygen. However, the efficacy of CAP-1002 in treating COVID-19 was not demonstrated due to the small sample size,
the fact that seven patients were contemporaneously on other experimental medications, and the lack of an established control group,
among other factors.
In August 2020,
we received FDA acceptance of our IND application for a clinical study of CAP-1002 in patients with severe or critical COVID-19.
The INSPIRE trial is a Phase II, randomized, double-blind, placebo-controlled study that is enrolling up to 60 patients from several
trial sites in the United States. The study is enrolling patients who have a diagnosis of SARS-CoV-2 and require supplemental
oxygen. Various outcome measures will be analyzed including, but not limited to, safety, cytokine biomarkers, all-cause mortality,
cardiac biomarkers and hospitalization length. We expect to have top-line data available in the third quarter of 2021. Following
receipt of this data, we will discuss next steps for the program with FDA. Additionally, we are actively seeking partners for this
program.
Exosomes Program
Exosome-Based Vaccines
We
are currently engaged in the development of two vaccine candidates for the potential prevention of COVID-19. The first vaccine
candidate is a tripartite exosome-mRNA vaccine which is designed to elicit a protective, long-lasting immune response to SARS-CoV-2
by targeting multiple structural proteins of the virus. In December 2020, we announced positive preclinical data from
a study using our exosome-mRNA vaccine approach We recently met with the FDA in a pre-IND meeting and are planning on filing an
IND by the third quarter of 2021, subject to regulatory approval, for this vaccine for SARS-CoV-2. We have also been investigating
an exosomal antigen vaccine which is a vesicle-based, nucleic acid-free formulation carrying multiple structural proteins of SARS-CoV-2.
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Exosome-Based Therapeutics
We are also developing
our exosomes platform technology as a next-generation therapeutic platform. Our current focus is on the development of exosomes
loaded with nucleic acids, including mRNA, to treat a variety of diseases. mRNA medicines are not small molecules, like traditional
pharmaceutical drugs and they are not traditional biologics (such as recombinant proteins and monoclonal antibodies) – which
were the origins of the biotech industry. Instead, mRNA medicines are sets of instructions. And these instructions direct cells
in the body to make all the proteins required for life as well as to prevent or fight disease.
Our platform builds
on advances in fundamental RNA science, targeting technology and manufacturing, providing us the opportunity to build a broad pipeline
of potential new therapeutic candidates. At this time, we are developing therapeutics and vaccines for infectious diseases,
monogenic diseases and other indications.
CDC-Derived Exosomes (CAP-2003)
In April 2020,
we filed an IND with the FDA to investigate the use of CAP-2003 in patients with DMD. At this time, the FDA has requested more
information related to manufacturing and we are evaluating the next steps for this program. We need to submit further information
to FDA to support the potential acceptance of this IND.
Additionally, in July 2018,
we entered into a Cooperative Research and Development Agreement with the U.S. Army Institute of Surgical Research, or USAISR,
pursuant to which we agreed to cooperate in research and development on the evaluation of our CAP-2003 for the treatment of trauma
related injuries and conditions.
Aspects of our exosomes
pipeline have been supported through collaborations and alliances. We have entered into a Sponsored Research Agreement with Johns
Hopkins University, or JHU, pursuant to which researchers in the lab of Dr. Stephen Gould will perform certain research activities
in connection with our exosomes program and the further development of the platform. Additional collaborations include the Department
of Defense, the National Institutes of Health and Cedars-Sinai Medical Center, or CSMC.
Our
executive offices are located at 8840 Wilshire Blvd., 2nd Floor, Beverly Hills, California 90211. Our telephone number
is (310) 358-3200 and our Internet address is www.capricor.com.
Our Technologies
Cardiosphere-Derived Cells (CAP-1002)
Our core cell therapy
technology is based on cardiosphere-derived cells, or CDCs, a cardiac-derived cell therapy that was first identified in the academic
laboratory of Capricor’s scientific founder, Dr. Eduardo Marbán. Since the initial publication in 2007, CDCs
have been the subject of over 100 peer-reviewed scientific publications and have been administered to over 200 human subjects across
several clinical trials. CDCs have been shown to exert potent immunomodulatory activity and to alter the immune system’s
activity to encourage cellular regeneration. We have been developing allogeneic CDCs (CAP-1002) as a product candidate for the
treatment of DMD and investigating their effects on skeletal and cardiac function. Preclinical and clinical data support the therapeutic
concept of administering CDCs as a means to address conditions in which the heart or skeletal muscle has been damaged.
In a variety of preclinical
experimental models of heart injury, CDCs have been shown to stimulate cell proliferation and blood vessel growth and to inhibit
programmed cell death and scar formation. Published data by CSMC, which tested the effectiveness of CDCs in a mouse model of DMD,
showed for the first time that the skeletal and cardiac improvements could be directly attributed to treatment with CDCs. The data
also provide further evidence of the potential of CDCs to stimulate tissue repair and regeneration by first reducing inflammation,
which then enables new healthy muscle to form, as was shown in the mouse model of DMD.
CDCs are derived from
cardiospheres, or CSps, which are self-adherent multicellular clusters derived from the heart. CDCs are sufficiently small that,
within acceptable dose limits, they can be infused into a coronary artery or into the peripheral vasculature. Capricor has performed
clinical studies to establish the range of CDC dose levels that appear to be safe via intracoronary administration and peripheral
venous access.
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While CDCs originate
from either a deceased human donor (allogeneic source) or from heart tissue taken directly from recipient patients themselves (autologous
source), the methods for manufacturing CDCs from either source are similar.
Capricor’s proprietary
manufacturing methods are focused on producing therapeutic doses of CDCs to boost the regenerative capacity of the heart and skeletal
muscles, with the goal of improving cardiac and skeletal muscle function. Capricor has exclusively licensed intellectual property
covering CDCs and CSps from three academic institutions and is also pursuing its own intellectual property rights relating to CDCs
as a product candidate.
Exosomes
Extracellular vesicles,
including exosomes and microvesicles, are nano-scale, membrane-enclosed vesicles which are secreted by most cells and contain characteristic
lipids, proteins and nucleic acids such as mRNA and microRNAs. They can signal through the binding and activation of membrane receptors
or through the delivery of their cargo into the cytosol of target cells. Our preclinical data has shown that CDCs mediate most
of their therapeutic activities through the secretion of extracellular vesicles.
Exosomes act as messengers
to regulate the functions of neighboring or distant cells and have been shown to regulate functions such as cell survival, proliferation,
inflammation and tissue regeneration. Furthermore, preclinical research has shown that exogenously-administered exosomes can modify
cellular activities, thereby supporting their therapeutic potential. Their size, low or null immunogenicity and ability to communicate
in native cellular language potentially makes them an exciting new class of therapeutic agents with the potential to expand our
ability to address complex biological responses. Because exosomes are a cell-free substance, they can be stored, handled, reconstituted
and administered in similar fashion to common biopharmaceutical products such as antibodies.
The following table summarizes our active
product development programs:
Product Indication/Population Development Stage
HOPE-Duchenne Phase I/II completed**
CAP-1002 SARS-CoV-2 INSPIRE Phase II enrolling
Exosome-mRNA vaccine SARS-CoV-2 Preclinical
Engineered Exosomes (RNA delivery) Monogenic Diseases Discovery
CDC-Exosomes (CAP-2003) Duchenne Muscular Dystrophy IND submitted
Exosome-VLP vaccine SARS-CoV-2 Preclinical
Engineered Exosomes (biologics delivery) Evaluating Discovery
*
The U.S. Food and Drug Administration, or FDA, has granted Orphan Drug, Regenerative Medicine Advanced Therapies, or RMAT, and
Rare Pediatric Disease designations to CAP-1002 for the treatment of DMD.
**We completed an Open Label Extension, or OLE, for the usual
care only comparator arm of the HOPE-Duchenne trial.
***We are currently conducting an OLE of the HOPE-2 trial.
These programs represent
our core technology and products.
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Financial Operations Overview
We have no commercial
product sales to date and will not have the ability to generate any commercial product revenue until after we have received approval
from the FDA or equivalent foreign regulatory bodies to begin selling our pharmaceutical product candidates. Developing pharmaceutical
products is a lengthy and very expensive process. Even if we obtain the capital necessary to continue the development of our product
candidates, whether through a strategic transaction or otherwise, we do not expect to complete the development of a product candidate
for several years, if ever. To date, most of our development expenses have related to our product candidates, consisting of CAP-1002
and our exosome technologies. As we proceed with the clinical development of CAP-1002, and as we further develop our exosome technologies,
our expenses will further increase. Accordingly, our success depends not only on the safety and efficacy of our product candidates,
but also on our ability to finance the development of our products and our clinical programs. Our recent major sources of working
capital have been primarily proceeds from private and public equity sales of securities. While we pursue our preclinical and clinical
programs, we continue to explore potential partnerships for the development of one or more of our product candidates.
Research and development,
or R&D, expenses consist primarily of salaries and related personnel costs, supplies, clinical trial costs, patient treatment
costs, rent for laboratories and manufacturing facilities, consulting fees, costs of personnel and supplies for manufacturing,
costs of service providers for preclinical, clinical and manufacturing, and certain legal expenses resulting from intellectual
property prosecution, stock compensation expense and other expenses relating to the design, development, testing and enhancement
of our product candidates. Except for certain capitalized intangible assets, R&D costs are expensed as incurred.
General and administrative,
or G&A, expenses consist primarily of salaries and related expenses for executive, finance and other administrative personnel,
stock compensation expense, accounting, legal and other professional fees, consulting expenses, rent for corporate offices, business
insurance and other corporate expenses.
Our results have included
non-cash compensation expense due to the issuance of stock options and warrants, as applicable. We expense the fair value of stock
options and warrants over their vesting period as applicable. When more precise pricing data is unavailable, we determine the fair
value of stock options using the Black-Scholes option-pricing model. The terms and vesting schedules for share-based awards vary
by type of grant and the employment status of the grantee. Generally, the awards vest based upon time-based or performance-based
conditions. Performance-based conditions generally include the attainment of goals related to our financial performance and product
development. Stock-based compensation expense is included in the consolidated statements of operations under G&A or R&D
expenses, as applicable. We expect to record additional non-cash compensation expense in the future, which may be significant.
Results of Operations for the fiscal years ended December 31,
2020 and 2019
Revenue
Grant
Income. Grant income for the years ended December 31, 2020 and 2019 was approximately $0.2 million and $0.5 million,
respectively. The decrease in grant income of approximately $0.3 million in 2020 as compared to 2019 is primarily due to the timing
of grant activities. The DoD grant award came to completion during the third quarter of 2020.
Miscellaneous
Income. Miscellaneous income for the years ended December 31, 2020 and 2019 was approximately $0.1 million and
$0.5 million, respectively. The miscellaneous income was related to providing CAP-1002 for investigational purposes for clinical
trials sponsored by CSMC. The decrease in miscellaneous income is due to delays in the clinical trials sponsored by CSMC caused
by the COVID-19 pandemic.
Operating Expenses
General
and Administrative Expenses. G&A expenses for the years ended December 31, 2020 and 2019 were approximately
$5.5 million and $3.6 million, respectively. The increase of approximately $1.9 million in G&A expenses in the year ended December 31,
2020 compared to the year ended December 31, 2019 is attributable to an approximately $1.2 million increase in stock-based
compensation expense, an approximately $0.5 million increase in salaries and recruiting related expenses, an approximately $0.3
million increase in investor relations expenses, and an approximately $0.1 million increase in insurance costs, partially offset
by a decrease of approximately $0.2 million in rent and other general corporate expenses.
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Research
and Development Expenses. R&D expenses for the years ended December 31, 2020 and 2019 were approximately $8.5
million and $5.1 million, respectively. The increase of approximately $3.4 million for the year ended December 31, 2020 as
compared to the year ended December 31, 2019 is primarily due to the timing of clinical development activities of CAP-1002
(DMD and COVID-19 clinical trials). These activities resulted in a net increase of approximately $0.4 million. Furthermore, for
the year ended December 31, 2020, there was an increase of approximately $1.7 million in research and development expenses
primarily related to our exosomes program and an increase of approximately $1.1 million in technology transfer and manufacturing
related activities of CAP-1002. Lastly, there was an increase of approximately $0.1 million in stock-based compensation expenses
allocable to R&D for the year ended December 31, 2020 as compared to December 31, 2019.
Other Income
Investment
Income. Investment income for the years ended December 31, 2020 and 2019 was $32,943 and $94,791, respectively.
The decrease in investment income in 2020 as compared to 2019 is due to reduced interest rates offered on our savings and money
market fund accounts.
Products Under Active Development
CAP-1002
– CAP-1002 is in its developmental stages. We expect to spend approximately $4.0 million to $6.0 million during
2021 on the development of CAP-1002 for DMD and COVID-19, which expenses are primarily related to clinical, regulatory, and manufacturing-related
expenses, including our technology transfer with Lonza Houston, Inc. These figures are largely dependent on the next steps
in our DMD and COVID-19 programs, the regulatory status of our programs with the FDA, and our ability to secure a partner for the
potential future further clinical development of CAP-1002 for DMD, if necessary, and various other factors.
Exosome
Technologies – We expect to spend approximately $10.0 million to $12.0 million during 2021 on development expenses
related to our exosomes program, which includes preclinical and manufacturing related expenses for these technologies. Our expenses
for this program are primarily related to our exosome-mRNA vaccine, which may include expenses related conducting a clinical trial,
subject to regulatory approval, as well as expenses focused on the expansion of our engineered exosomes platform. Furthermore,
we have expenses in connection with our Sponsored Research Agreement with Johns Hopkins University for further research related
to our exosome platform technology.
Our expenditures on
current and future clinical development programs, particularly our CAP-1002 and exosomes programs, cannot be predicted with any
significant degree of certainty as they are dependent on the results of our current trials and our ability to secure additional
funding and a strategic partner. Further, we cannot predict with any significant degree of certainty the amount of time which will
be required to complete our clinical trials, the costs of completing research and development projects or whether, when and to
what extent we will generate revenues from the commercialization and sale of any of our product candidates. The duration and cost
of clinical trials may vary significantly over the life of a project as a result of unanticipated events arising during manufacturing
and clinical development and as a result of a variety of other factors, including:
· the number of trials and studies in a clinical program;
· the number of patients who participate in the trials;
· the number of sites included in the trials;
· the rates of patient recruitment and enrollment;
· the duration of patient treatment and follow-up;
· the costs of manufacturing our product candidates;
· additional delays caused by the COVID-19 pandemic.
Liquidity and Capital Resources for
the fiscal years ended December 31, 2020 and 2019
The following table
summarizes our liquidity and capital resources as of and for each of our last two fiscal years, and our net increase (decrease)
in cash and cash equivalents as of and for each of our last two fiscal years and is intended to supplement the more detailed discussion
that follows. The amounts stated in the tables below are expressed in thousands.
Liquidity and capital resources December 31, 2020 December 31, 2019
Cash, cash equivalents and marketable securities $ 32,666 $ 9,885
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Years ended December 31,
Cash provided by (used in):
Net increase (decrease) in cash and cash equivalents $ 28,766 $ (646 )
Our total cash, cash
equivalents and marketable securities as of December 31, 2020 was approximately $32.7 million compared to approximately $9.9
million as of December 31, 2019. The increase in cash, cash equivalents and marketable securities from December 31, 2020
as compared to December 31, 2019 was primarily due to net financing activities of approximately $33.0 million and a net loss
of approximately $13.7 million in 2020. As of December 31, 2020, we had approximately $6.4 million in total liabilities. As
of December 31, 2020, we had approximately $30.7 million in net working capital. We had a net loss of approximately $13.7
million for the year ended December 31, 2020.
Cash used in operating
activities was approximately $10.1 million and $6.8 million for the years ended December 31, 2020 and 2019, respectively.
The difference of approximately $3.3 million in cash from operating activities is primarily due to an increase of approximately
$6.0 million in net loss for the year ended December 31, 2020 as compared to the same period in 2019. Furthermore, there was
a change of approximately $1.3 million in stock-based compensation expense and a change of approximately $0.6 million in prepaid
expenses and other current assets for the year ended December 31, 2020 as compared to the same period in 2019. To the extent
we obtain sufficient capital and/or long-term debt funding and are able to continue developing our product candidates, including
if we expand our technology portfolio, engage in further research and development activities, and, in particular, conduct preclinical
studies and clinical trials, we expect to continue incurring substantial losses, which will generate negative net cash flows from
operating activities.
We had cash flow provided
by (used in) investing activities of approximately $5.4 million and $(3.0) million for the years ended December 31, 2020 and
2019, respectively. The increase in cash provided by investing activities for the year ended December 31, 2020 as compared
to the same period of 2019 is primarily due to the net effect from purchases, sales, and maturities of marketable securities as
well as purchases of property and equipment.
We had cash flow provided
by financing activities of approximately $33.4 million and $9.2 million for the years ended December 31, 2020 and 2019, respectively.
The increase in cash provided by financing activities for the year ended December 31, 2020 as compared to the same period
of 2019 is primarily due to the net proceeds from the sale of common stock. During 2020 we received net proceeds from the sale
of equities of approximately $33.0 million compared to approximately $9.2 million over the same period of 2019. Furthermore, we
received $0.3 million under the SBA Paycheck Protection Program of the CARES Act in 2020.
From inception through
December 31, 2020, we financed our operations primarily through private and public sales of our equity securities, NIH and
DoD grants, a payment from a former collaboration partner, a CIRM loan and a CIRM grant award. As we have not generated any revenue
from the commercial sale of our products to date, and we do not expect to generate revenue for several years, if ever, we will
need to raise substantial additional capital to fund our research and development, including our long-term plans for clinical trials
and new product development. We may seek to raise additional funds through various potential sources, such as equity and debt financings,
government grants, or through strategic collaborations and license agreements. We can give no assurances that we will be able
to secure such additional sources of funds to support our operations, complete our clinical trials or if such funds become available
to us, that such additional financing will be sufficient to meet our needs. Moreover, to the extent that we raise additional funds
by issuing equity securities, our stockholders may experience significant dilution, and debt financing, if available, may involve
restrictive covenants. To the extent that we raise additional funds through collaboration and licensing arrangements, it may be
necessary to relinquish some rights to our technologies or our product candidates or grant licenses on terms that may not be favorable
to us.
Our estimates regarding
the sufficiency of our financial resources are based on assumptions that may prove to be wrong. We may need to obtain additional
funds sooner than planned or in greater amounts than we currently anticipate. At this time, we believe our cash resources are sufficient
to fund our operations for at least the next twelve months. The actual amount of funds we will need to operate is subject to many
factors, some of which are beyond our control. These factors include the following:
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· the progress of our research activities;
· the number and scope of our research programs;
· additional costs associated with maintaining licenses and insurance;
· the costs and timing of regulatory approvals.
As a result of the
spread of the COVID-19 coronavirus, uncertainties have arisen that could potentially impact enrollment of clinical trials, deliverables
related to contract performance, payments from trial sponsors, workforce stability, supply chain disruptions or delays, timing
of grant disbursements as well as other potential business operations. While the disruption is currently expected to be temporary,
there is considerable uncertainty around its expected duration. In addition to potential impact on grant disbursements, there may
be risks to the Company’s ability to obtain financing from other sources, due to the impact of the coronavirus. There could
be other financial impacts on our business of the coronavirus, the specifics of which are unknown at this time.
Financing Activities by the Company
May 2020
ATM Program. On May 4, 2020, the Company initiated an at-the-market offering under a prospectus supplement
for aggregate sales proceeds of up to $40.0 million, or the May 2020 ATM Program, with the common stock to be distributed
at the market prices prevailing at the time of sale. The May 2020 ATM Program was established under a Common Stock Sales Agreement,
or the July 2019 Sales Agreement, with H.C. Wainwright & Co. LLC, or Wainwright, under which we may, from time to
time, issue and sell shares of our common stock through Wainwright as sales agent. The July 2019 Sales Agreement provides
that Wainwright will be entitled to compensation for its services at a commission rate of 3.0% of the gross sales price per share
of common stock sold. All shares issued pursuant to the July 2019 ATM Program were issued pursuant to our shelf registration
statement on Form S-3 (File No. 333-227955), which was initially filed with the SEC on October 24, 2018, amended
on July 17, 2019 and declared effective by the SEC on July 18, 2019. Since May 4, 2020 and through March 12,
2021, the Company has sold an aggregate of 5,947,852 shares of common stock under the May 2020 ATM Program at an average price
of approximately $6.16 per share for gross proceeds of approximately $36.6 million. Approximately $3.4 million of common stock
may still be sold pursuant to the May 2020 ATM Program. The Company paid cash commissions on the gross proceeds, plus reimbursement
of expenses of Wainwright and legal fees in the aggregate amount of approximately $1.2 million.
March 2020
Warrant Inducement. On March 25, 2020, the Company entered into a letter agreement, or the Exercise Agreement,
with a holder of December 2019 Common Warrants (as defined below), or the Exercising Holder. Pursuant to the Exercise Agreement,
in connection with the exercise by the Exercising Holder of the remaining 4,000,000 December 2019 Common Warrants held by
the Exercising Holder which had not been previously exercised, the Company agreed to issue 4,000,000 additional warrants, or the
New Warrants, to purchase Common Stock. The December 2019 Common Warrants had a per share exercise price of $1.10, and pursuant
to the Exercise Agreement, the Exercising Holder agreed to pay $1.225 per share to cover both the exercise price of the December 2019
Common Warrants and a $0.125 per share purchase price for the New Warrants. The New Warrants have an exercise price of $1.27 per
share.
The New Warrants and
the shares of Common Stock issuable upon the exercise of the New Warrants were not registered under the Securities Act of 1933,
as amended, or the Securities Act, and were offered pursuant to the exemption provided in Section 4(a)(2) under the Securities
Act or Rule 506(b) promulgated thereunder. The New Warrants are exercisable immediately upon issuance, and have a term
of exercise of 5 1/2 years.
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The
Company received aggregate gross proceeds of approximately $4.9 million from the exercise of the December 2019 Common Warrants
by the Exercising Holder. These gross proceeds were reduced by fees due and payable to the placement agent for the transactions
pursuant to the Exercise Agreement and New Warrants in the amount of $343,000, and further reduced by reimbursements to the placement
agent for legal fees and other expenses. In addition, certain employees of the placement agent received new warrants, or the March 2020
Placement Agent Warrants, for shares of Common Stock equal to 5.0% of the New Warrants issued, or 200,000 shares. These March 2020
Placement Agent Warrants are exercisable immediately and have a term of exercise of 5 years. The holders of each of the
New Warrants and of the March 2020 Placement Agent Warrants have the option to make a cashless exercise of such warrant if
no resale registration statement covering the shares of the Company’s Common Stock underlying such warrant is effective after
six months. On May 7, 2020, the Company filed a resale registration statement on Form S-3 for the shares underlying the
New Warrants and March 2020 Placement Agent Warrants, and that resale registration statement was declared effective by the
SEC on May 19, 2020. As of December 31, 2020, 65,000 March 2020 Placement Agent Warrants remained outstanding under
the March 2020 Warrant Inducement.
December 2019
Public Offering. In December 2019, the Company completed a public offering, or the December Offering,
pursuant to which the Company issued (i) 531,173 shares of its common stock, (ii) warrants, or the December 2019
Common Warrants, to purchase up to 4,139,477 shares of common stock, and (iii) pre-funded warrants to purchase up to 3,608,304
shares of common stock, at a combined purchase price of $1.226 per share and associated common warrant and $1.225 per pre-funded
warrant and associated common warrant for an aggregate purchase price of approximately $5.1 million. The Company issued (a) to
each purchaser of shares in the December Offering a common warrant to purchase a number of shares of common stock equal to
the number of shares purchased by such purchaser in the December Offering, and (b) to each purchaser of pre-funded warrants
in the December Offering a common warrant to purchase a number of shares of common stock equal to the number of pre-funded
warrant shares underlying the pre-funded warrants purchased by such purchaser in the December Offering. All shares and warrants
issued pursuant to the December Offering, other than the Placement Agent Warrants, were issued pursuant to our registration
statement on Form S-1 (File No. 333-235358), which was initially filed with the Securities and Exchange Commission, or
the SEC, on December 5, 2019, amended on December 13, 2019 and declared effective by the SEC on December 17, 2019.
Fees paid in conjunction with the deal, which included placement agent commissions, management fees, legal costs, and other offering
expenses, amount to approximately $0.7 million in the aggregate and were recorded as a reduction to additional paid-in capital,
resulting in net proceeds of approximately $4.4 million. As of December 31, 2020, 61,173 December 2019 Common Warrants
remained outstanding under the December 2019 Financing.
August 2019
ATM Program. On August 29, 2019, the Company initiated an at-the-market offering under a prospectus supplement
for aggregate sales proceeds of up to $1.95 million, or the August 2019 ATM Program, with the common stock to be distributed
at the market prices prevailing at the time of sale. The August 2019 ATM Program was established under the July 2019
Sales Agreement, which provided that Wainwright was entitled to compensation for its services at a commission rate of 3.0% of the
gross sales price per share of common stock sold. All shares issued pursuant to the August 2019 ATM Program were issued pursuant
to our shelf registration statement on Form S-3 (File No. 333-227955), which was initially filed with the SEC, on October 24,
2018, amended on July 17, 2019 and declared effective by the SEC on July 18, 2019. At the expiration of the August 2019
ATM Program, the Company had sold an aggregate of 360,316 shares of common stock under the August 2019 ATM Program at an average
price of approximately $3.07 per share for gross proceeds of approximately $1.1 million. The Company paid cash commissions on the
gross proceeds, plus reimbursement of expenses of the placement agent and legal fees in the aggregate amount of approximately $0.1
million. As of May 4, 2020, the August 2019 ATM Program has expired and been replaced with the May 2020 ATM Program.
July 2019
ATM Program. On July 22, 2019, the Company initiated an at-the-market offering under a prospectus supplement
for aggregate sales proceeds of up to $1.8 million, or the July 2019 ATM Program, with the common stock to be distributed
at the market prices prevailing at the time of sale. The July 2019 ATM Program was established under the July 2019 Sales
Agreement, which provides that Wainwright was entitled to compensation for its services at a commission rate of 3.0% of the gross
sales price per share of common stock sold. All shares issued pursuant to the July 2019 ATM Program were issued pursuant to
our shelf registration statement on Form S-3 (File No. 333-227955), which was initially filed with the SEC on October 24,
2018, amended on July 17, 2019 and declared effective by the SEC on July 18, 2019. As of the expiration of the July 2019
ATM Program, the Company sold an aggregate of 418,450 shares of common stock under the July 2019 ATM Program at an average
price of approximately $4.30 per share for gross proceeds of approximately $1.8 million. The Company paid cash commissions on the
gross proceeds, plus reimbursement of expenses of the placement agent and legal fees in the aggregate amount of approximately $0.1
million.
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Financing Activities by Capricor, Inc.
CIRM Grant Award
On June 16, 2016,
Capricor entered into the CIRM Award with CIRM in the amount of approximately $3.4 million to fund, in part, Capricor’s
Phase I/II HOPE-Duchenne clinical trial investigating CAP-1002 for the treatment of Duchenne muscular dystrophy-associated cardiomyopathy.
Pursuant to terms of the CIRM Award, the disbursements were tied to the achievement of specified operational milestones. In addition,
the terms of the CIRM Award included a co-funding requirement pursuant to which Capricor was required to spend approximately $2.3
million of its own capital to fund the CIRM funded research project. The CIRM Award is further subject to the conditions and requirements
set forth in the CIRM Grants Administration Policy for Clinical Stage Projects. Such requirements include, without limitation,
the filing of quarterly and annual reports with CIRM, the sharing of intellectual property pursuant to Title 17, California Code
of Regulations (CCR) Sections 100600-100612, and the sharing with the State of California of a fraction of licensing revenue received
from a CIRM funded research project and net commercial revenue from a commercialized product which resulted from the CIRM funded
research as set forth in Title 17, CCR Section 100608. The maximum royalty on net commercial revenue that Capricor may be
required to pay to CIRM is equal to nine times the total amount awarded and paid to Capricor.
After completing the
CIRM funded research project and at any time after the award period end date (but no later than the ten-year anniversary of the
date of the award), Capricor has the right to convert the CIRM Award into a loan, the terms of which will be determined based on
various factors, including the stage of the research and development of the program at the time the election is made. On June 20,
2016, Capricor entered into a Loan Election Agreement with CIRM whereby, among other things, CIRM and Capricor agreed that
if Capricor elects to convert the grant into a loan, the term of the loan could be up to five years from the date of execution
of the applicable loan agreement; provided that the maturity date of the loan will not surpass the ten-year anniversary of the
grant date of the CIRM Award. Beginning on the date of the loan, the loan shall bear interest on the unpaid principal balance,
plus the interest that has accrued prior to the election point according to the terms set forth in CIRM’s Loan Policy, or
the New Loan Balance, at a per annum rate equal to the LIBOR rate for a three-month deposit in U.S. dollars, as published by the
Wall Street Journal on the loan date, plus one percent. Interest shall be compounded annually on the outstanding New Loan Balance
commencing with the loan date and the interest shall be payable, together with the New Loan Balance, upon the due date of the loan.
If Capricor elects to convert the CIRM Award into a loan, certain requirements of the CIRM Award will no longer be applicable,
including the revenue sharing requirements. Capricor has not yet made its decision as to whether it will elect to convert the CIRM
Award into a loan. If we elect to do so, Capricor would be required to repay some or all of the amounts awarded by CIRM, therefore
the Company accounts for this award as a liability rather than income.
As of December 31,
2020, Capricor’s liability balance for the CIRM Award was approximately $3.4 million. In June 2019, Capricor completed
all milestones associated with the CIRM Award and expended all funds received. In the third quarter of 2019, Capricor completed
all final close-out documentation associated with this award.
NIH Grant Award (HLHS)
In
September 2016, Capricor was approved for a grant from the NIH to study CAP-2003 (cardiosphere-derived cell exosomes) for
hypoplastic left heart syndrome (HLHS). Under the terms of the NIH grant, disbursements will be made to Capricor in an amount up
to approximately $4.2 million, subject to annual and quarterly reporting requirements as well as completion of the study objectives.
As of June 30, 2019, approximately $0.7 million was incurred under the terms of the NIH grant award. In the second quarter
of 2019, the award was closed and all filings were completed with no additional expenses expected to be incurred.
U.S. Department of Defense Grant Award
In September 2016,
Capricor was approved for a grant award from the Department of Defense in the amount of approximately $2.4 million to be used toward
developing a scalable, commercially-ready process to manufacture CAP-2003. Under the terms of the award, disbursements were made
to Capricor over a period of approximately four years, subject to annual and quarterly reporting requirements. The Company was
granted a no-cost extension until September 29, 2020 to be able to utilize these funds. The Company utilized approximately
$2.3 million of the $2.4 million under the terms of the award. We are currently completing all close-out documentation associated
with this award.
Contractual Obligations and Commitments
We
are a smaller reporting company, as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, and are
not required to provide the information required under this item.
Off-Balance Sheet Arrangements
There were no off-balance
sheet arrangements as described by Item 303(a)(4) of Regulation S-K as of December 31, 2020.
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Critical Accounting Policies and Estimates
Our financial statements
are prepared in accordance with generally accepted accounting principles. The preparation of these financial statements requires
us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures.
We evaluate our estimates and assumptions on an ongoing basis, including research and development and clinical trial accruals,
and stock-based compensation estimates. Our estimates are based on historical experience and various other assumptions that we
believe to be reasonable under the circumstances. Our actual results could differ from these estimates. We believe the following
critical accounting policies reflect the more significant judgments and estimates used in the preparation of our financial statements
and accompanying notes.
Leases
Effective January 1,
2019, the Company adopted ASC 842, using the optional transition method utilizing the effective date as its date of initial application,
for which prior periods are presented in accordance with the previous guidance in ASC 840.
At the inception of
an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances
present in the arrangement. Leases with a term greater than 12 months are recognized on the balance sheet as right of use assets
and short-term and long-term lease liabilities, as applicable. The Company has elected not to recognize on the balance sheet leases
with terms of 12 months or less. The Company typically only includes an initial lease term in its assessment of a lease arrangement.
Options to renew a lease are not included in the Company’s assessment unless there is reasonable certainty that the Company
will renew. The Company monitors its plans to renew its leases no less than on a quarterly basis. In addition, the Company’s
lease agreements generally do not contain any residual value guarantees or restrictive covenants.
Operating lease liabilities
and their corresponding right of use assets are recorded based on the present value of future lease payments over the expected
remaining lease term at lease commencement. Lease cost for operating leases is recognized on a straight-line basis over the lease
term as an operating expense. Certain adjustments to the right of use asset may be required for items such as lease prepayments
or incentives received. The interest rate implicit in lease contracts is typically not readily determinable. As a result, the Company
utilizes its incremental borrowing rate, which reflects the fixed rate at which the Company could borrow on a collateralized basis
the amount of the lease payments in the same currency, for a similar term, in a similar economic environment. In transition to
ASC 842, the Company utilized the remaining lease term of its leases in determining the appropriate incremental borrowing rate.
In accordance with
ASC 842, components of a lease should be bifurcated between lease components and non-lease components. The fixed and in-substance
fixed contract consideration identified must then be allocated based on the respective relative fair values to the lease components
and non-lease components. However, ASC 842 provides a practical expedient that allows an accounting policy election to not separate
lease and non-lease components by class of underlying asset. In using this expedient, the lease component and non-lease
components are accounted for together as a single component. For real estate leases, the Company has elected to account
for the lease and non-lease components together for existing classes of underlying assets and allocates the contract consideration
to the lease component only. This practical expedient is not elected for manufacturing facilities and equipment embedded in
product supply arrangements.
Revenue Recognition
For contracts completed
as of December 31, 2017, revenue was recognized in accordance with ASC 605 and other standards which have been superseded
for subsequent fiscal years. The Company applied ASU 606 using the modified retrospective approach for all contracts in process
as of January 1, 2018.
Grant Income
The
determination as to when income is earned is dependent on the language in each specific grant. Generally, we recognize grant income
in the period in which the expense is incurred for those expenses that are deemed reimbursable under the terms of the grant. Grant
income is due upon submission of reimbursement request. The transaction price varies for grant income based on the expenses incurred
under the awards.
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Miscellaneous Income
Revenue
is recognized in connection with the delivery of doses which were developed as part of our past R&D efforts. Income is recorded
when the Company has satisfied the obligations as identified in the contracts with the customer. Miscellaneous income is
due upon billing. Miscellaneous income is based on contracts with fixed transaction prices.
CIRM Grant Award
Capricor
accounts for the disbursements under its CIRM Award as long-term liabilities. Capricor recognizes the CIRM grant disbursements
as a liability as the principal is disbursed rather than recognizing the full amount of the grant award. After completing the CIRM
funded research project and after the award period end date, Capricor has the right to convert the CIRM Award into a loan, the
terms of which will be determined based on various factors, including the stage of the research and the stage of development at
the time the election is made. In June, 2016, Capricor entered into a Loan Election Agreement with CIRM whereby, among
other things, CIRM and Capricor agreed that if Capricor elects to convert the grant into a loan, the term of the loan could be
up to five years from the date of execution of the applicable loan agreement; provided that the maturity date of the loan will
not surpass the ten-year anniversary of the grant date of the CIRM Award. Since Capricor may be required to repay some or all of
the amounts awarded by CIRM, the Company accounts for this award as a liability rather than income.
Research and Development Expenses
and Accruals
R&D expenses consist
primarily of salaries and related personnel costs, supplies, clinical trial costs, patient treatment costs, rent for laboratories
and manufacturing facilities, consulting fees, costs of personnel and supplies for manufacturing, costs of service providers for
preclinical, clinical and manufacturing, and certain legal expenses resulting from intellectual property prosecution, stock compensation
expense and other expenses relating to the design, development, testing and enhancement of our product candidates. Except for certain
capitalized intangible assets, R&D costs are expensed as incurred.
Our cost accruals for
clinical trials and other R&D activities are based on estimates of the services received and efforts expended pursuant to contracts
with numerous clinical trial centers and contract research organizations, or CROs, clinical study sites, laboratories, consultants
or other clinical trial vendors that perform activities in connection with a trial. Related contracts vary significantly in length
and may be for a fixed amount, a variable amount based on actual costs incurred, capped at a certain limit, or for a combination
of fixed, variable and capped amounts. Activity levels are monitored through close communication with the CROs and other clinical
trial vendors, including detailed invoice and task completion review, analysis of expenses against budgeted amounts, analysis of
work performed against approved contract budgets and payment schedules, and recognition of any changes in scope of the services
to be performed. Certain CRO and significant clinical trial vendors provide an estimate of costs incurred but not invoiced at the
end of each quarter for each individual trial. These estimates are reviewed and discussed with the CRO or vendor as necessary,
and are included in R&D expenses for the related period. For clinical study sites which are paid periodically on a per-subject
basis to the institutions performing the clinical study, we accrue an estimated amount based on subject screening and enrollment
in each quarter. All estimates may differ significantly from the actual amount subsequently invoiced, which may occur several months
after the related services were performed.
In the normal course
of business, we contract with third parties to perform various R&D activities in the on-going development of our product candidates.
The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment
flows. Payments under the contracts depend on factors such as the achievement of certain events, the successful enrollment of patients,
and the completion of portions of the clinical trial or similar conditions. The objective of the accrual policy is to match the
recording of expenses in the financial statements to the actual services received and efforts expended. As such, expense accruals
related to clinical trials and other R&D activities are recognized based on our estimates of the degree of completion of the
event or events specified in the applicable contract.
No adjustments for
material changes in estimates have been recognized in any period presented.
Stock-Based Compensation
Our results include
non-cash compensation expense as a result of the issuance of stock, stock options and warrants, as applicable. We have issued stock
options to employees, directors and consultants under our four stock option plans: (i) the 2006 Stock Option Plan, (ii) the
2012 Restated Equity Incentive Plan (which superseded the 2006 Stock Option Plan), (iii) the 2012 Non-Employee Director Stock
Option Plan, and (iv) the 2020 Equity Incentive Plan, or the 2020 Plan.
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We expense the fair
value of stock-based compensation over the vesting period. When more precise pricing data is unavailable, we determine the fair
value of stock options using the Black-Scholes option-pricing model. This valuation model requires us to make assumptions and judgments
about the variables used in the calculation. These variables and assumptions include the weighted-average period of time that the
options granted are expected to be outstanding, the volatility of our common stock, and the risk-free interest rate. We account
for forfeitures upon occurrence.
Stock options or other
equity instruments to non-employees (including consultants) issued as consideration for goods or services received by us are accounted
for based on the fair value of the equity instruments issued. The fair value of stock options is determined using the Black-Scholes
option-pricing model. Historically, the Company periodically re-measured the fair value for non-qualified option grants recording
an expense over the applicable vesting periods. However, in the third quarter of 2018, the Company early adopted ASU 2018-07. The
Company calculates the fair value for non-qualified options as of the date of grant and expenses over the applicable vesting periods.
The terms and vesting
schedules for share-based awards vary by type of grant and the employment status of the grantee. Generally, the awards vest based
upon time-based or performance-based conditions. Performance-based conditions generally include the attainment of goals related
to our financial and development performance. Stock-based compensation expense is included in general and administrative expense
or research and development expense, as applicable, in the Statements of Operations and Comprehensive Income (Loss). We expect
to record additional non-cash compensation expense in the future, which may be significant.
Clinical Trial Expense
As
part of the process of preparing our consolidated financial statements, we are required to estimate our accrued expenses. Our clinical
trial accrual process is designed to account for expenses resulting from our obligations under contracts with vendors, consultants,
and CROs and clinical site agreements in connection with conducting clinical trials. The financial terms of these contracts are
subject to negotiations, which vary from contract to contract and may result in payment flows that do not match the periods over
which materials or services are provided to us under such contracts. Our objective is to reflect the appropriate clinical trial
expenses in our consolidated financial statements by matching the appropriate expenses with the period in which services are provided
and efforts are expended. We account for these expenses according to the progress of the trial as measured by patient progression
and the timing of various aspects of the trial. We determine accrual estimates through
financial models that take into account discussion with applicable personnel and outside service providers as to the progress or
state of completion of trials, or the services completed. During the course of a clinical trial, we adjust our clinical expense
recognition if actual results differ from our estimates. We make estimates of our accrued expenses as of each balance sheet date
in our consolidated financial statements based on the facts and circumstances known to us at that time. Our clinical trial accrual
and prepaid assets are dependent, in part, upon the receipt of timely and accurate reporting from CROs and other third-party vendors.
Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status
and timing of services performed relative to the actual status and timing of services performed may vary and may result in us reporting
amounts that are too high or too low for any particular period.
Recently Issued or Newly Adopted
Accounting Pronouncements
In November 2018,
the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): clarifying the interaction between Topic 808 and Topic
606. The amendments in the update clarify that certain transactions between collaborative arrangement participants should be accounted
for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the context of a unit of account;
adds unit-of-account guidance in Topic 808 to align with the guidance in Topic 606 when an entity is assessing whether the collaborative
arrangement or a party of the arrangement is within the scope of Topic 606; requires that in a transaction with a collaborative
arrangement participant that is not directly related to sales to third parties, presenting the transaction together with revenue
recognized under Topic 606 is precluded if the collaborative arrangement participant is not a customer. The amendments for this
update are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The
Company adopted ASU 2018-18 and all subsequent updates related to this topic in the first quarter of 2020. The adoption of this
update did not have a material impact on the Company’s financial statements.