See accompanying notes to the unaudited
condensed consolidated financial statements.
See accompanying notes to the unaudited
condensed consolidated financial statements.
See accompanying notes to the unaudited
condensed consolidated financial statements.
See accompanying notes to the unaudited
condensed consolidated financial statements.
|
1.
|
ORGANIZATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Description of Business
Capricor
Therapeutics, Inc., a Delaware corporation (referred to herein as “Capricor Therapeutics” or the “Company”
or “we”), is a clinical-stage biotechnology company focused on the discovery, development and commercialization
of innovative cell and exosome-based therapies for the treatment and prevention of diseases. Capricor, Inc. (“Capricor”),
a wholly-owned subsidiary of Capricor Therapeutics, was founded in 2005 as a Delaware corporation based on the innovative work
of its founder, Eduardo Marbán, M.D., Ph.D. After completion of a merger between Capricor and a subsidiary of Nile Therapeutics, Inc.,
a Delaware corporation (“Nile”), on November 20, 2013, Capricor became a wholly-owned subsidiary of Nile and Nile
formally changed its name to Capricor Therapeutics, Inc. Capricor Therapeutics, together with its subsidiary, Capricor, has
two active drug candidates in various stages of development.
Basis of Presentation
The accompanying unaudited
interim condensed consolidated financial statements for Capricor Therapeutics and its wholly-owned subsidiary have been prepared
in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and with
the instructions to Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of financial
position, results of operations and cash flows in conformity with U.S. GAAP. In the Company’s opinion, all adjustments, consisting
of normal and recurring adjustments, considered necessary for a fair presentation have been included. The accompanying financial
information should be read in conjunction with the financial statements and the notes thereto in the Company’s most recent
Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (the “SEC”) on March 27,
2020, from which the December 31, 2019 consolidated balance sheet has been derived. Interim results are not necessarily indicative
of the results that may be expected for the year ending December 31, 2020.
Certain reclassification
of prior period amounts has been made to conform to the current year presentation.
Basis of Consolidation
Our condensed consolidated
financial statements include the accounts of the Company and our wholly-owned subsidiary. All intercompany transactions have been
eliminated in consolidation.
Liquidity
The Company has historically
financed its research and development activities as well as operational expenses from equity financings, government grants, a payment
from Janssen Biotech, Inc. (“Janssen”) pursuant to a Collaboration Agreement with Janssen and a loan award and
a grant from the California Institute for Regenerative Medicine (“CIRM”).
Cash, cash equivalents
and marketable securities as of September 30, 2020 were approximately $35.3 million, compared to approximately $9.9 million
as of December 31, 2019. The Company has entered into various Common Stock Sales Agreements with H.C. Wainwright &
Co. LLC (“Wainwright”) to create at-the-market equity programs under which the Company from time to time offered and
sold shares of its common stock, par value $0.001 per share (see Note 3 – “Stockholders’ Equity”). In March 2020,
the Company entered into a warrant inducement transaction whereby an existing warrant holder exercised all existing warrants for
gross proceeds of approximately $4.9 million (see Note 3 – “Stockholder’s Equity”).
The Company’s
principal uses of cash are for research and development expenses, general and administrative expenses, capital expenditures and
other working capital requirements.
CAPRICOR
THERAPEUTICS, INC.
Notes
to CONDENSED CONSOLIDATED financial statements
(unaudited)
|
1.
|
ORGANIZATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
The
Company’s future expenditures and capital requirements may be substantial and will depend on many factors, including,
but not limited to, the following:
|
·
|
the timing and costs associated with its clinical trials and pre-clinical studies;
|
|
·
|
the timing and costs associated with the manufacturing of its product candidates;
|
|
·
|
the timing and costs associated with commercialization of its product candidates;
|
|
·
|
the number and scope of its research programs; and
|
|
·
|
the costs involved in prosecuting and enforcing patent claims and other intellectual property rights.
|
The Company’s
options for raising additional capital include potentially seeking additional financing primarily from, but not limited to, the
sale and issuance of equity or debt securities, the licensing or sale of its technology and other assets, and from government grants.
The Company will require
substantial additional capital to fund its operations, in particular if it elects to expand its clinical programs as contemplated
by its current business plan. The Company cannot provide assurances that financing will be available when and as needed or that,
if available, financing will be available on favorable or acceptable terms. If the Company is unable to obtain additional financing
when and if required, it would have a material adverse effect on the Company’s business and results of operations. The Company
would likely need to delay, curtail or terminate all or portions of its clinical trial programs. To the extent the Company issues
additional equity securities, its existing stockholders would experience substantial dilution.
Reverse Stock Split
On June 4, 2019,
the Company effected a reverse stock split of its outstanding shares of common stock at a ratio of one-for-ten pursuant to a Certificate
of Amendment to the Company’s Certificate of Incorporation filed with the Secretary of State of the State of Delaware. The
reverse stock split was reflected on the Nasdaq Capital Market (“Nasdaq”) beginning with the opening of trading on
June 5, 2019. The primary purpose of the reverse stock split, which was approved by the Company’s stockholders at the
Company’s annual stockholders meeting on May 29, 2019, was to enable the Company to regain compliance with the $1.00
minimum bid price requirement for continued listing on Nasdaq. Pursuant to the reverse stock split, every ten shares of the Company’s
issued and outstanding shares of common stock were automatically combined into one issued and outstanding share of common stock,
without any change in the par value per share of the common stock. Unless otherwise indicated, all share and per share amounts
of the common stock included in the accompanying condensed consolidated financial statements have been retrospectively adjusted
to give effect to the reverse stock split for all periods presented, including reclassifying an amount equal to the reduction in
par value to additional paid-in capital. Amounts of common stock resulting from the reverse stock split were rounded down to the
nearest whole share and any resulting fractional shares were cancelled for cash. The number of authorized shares of the Company’s
common stock remained unchanged. The reverse stock split affected all issued and outstanding shares of the Company’s common
stock, and the respective numbers of shares of common stock underlying outstanding stock options, outstanding warrants and the
Company’s equity incentive plans were proportionately adjusted.
Use of Estimates
The preparation of
financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated
financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. The most
sensitive estimates relate to the recoverability and fair value of intangible assets and the assumptions used to estimate stock-based
compensation expense. Management uses its historical records and knowledge of its business in making these estimates. Accordingly,
actual results may differ from these estimates.
Cash, Cash Equivalents, and Restricted Cash
The Company considers
all highly liquid investments with a maturity of less than 30 days at the date of purchase to be cash equivalents.
CAPRICOR
THERAPEUTICS, INC.
Notes
to CONDENSED CONSOLIDATED financial statements
(unaudited)
|
1.
|
ORGANIZATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
The following table
provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets
that total the same such amounts shown in the condensed consolidated statements of cash flows.
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Cash and cash equivalents
|
|
$
|
35,300,340
|
|
|
$
|
6,827,570
|
|
Restricted cash
|
|
|
-
|
|
|
|
232,803
|
|
Total cash, cash equivalents, and restricted cash shown in the statements of cash flows
|
|
$
|
35,300,340
|
|
|
$
|
7,060,373
|
|
For the nine months
ended September 30, 2019, the Company had an outstanding letter of credit for $232,803 as a security deposit for its operating
lease agreement for corporate office space (see Note 7 – “Commitments and Contingencies”). The Company was required
to maintain this deposit for the duration of the lease agreement. The letter of credit was cancelled in December 2019. The
Company had no restricted funds as of September 30, 2020.
Marketable Securities
The Company determines
the appropriate classification of its marketable securities at the time of purchase and reevaluates such designation at each balance
sheet date. All of the Company’s marketable securities are considered as available-for-sale and carried at estimated fair
values. Realized gains and losses on the sale of debt and equity securities are determined using the specific identification method.
Unrealized gains and losses on available-for-sale securities are excluded from net income (loss) and reported in accumulated other
comprehensive income (loss) as a separate component of stockholders’ equity.
Property and Equipment
Property and equipment
are stated at cost. Repairs and maintenance costs are expensed in the period incurred. Depreciation is computed using the straight-line
method over the related estimated useful life of the asset, which such estimated useful lives range from five to seven years. Leasehold
improvements are depreciated on a straight-line basis over the shorter of the useful life of the asset or the lease term. Depreciation
was $98,567 and $96,787 for the nine months ended September 30, 2020 and 2019, respectively.
Property and equipment,
net consisted of the following:
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
Furniture and fixtures
|
|
$
|
48,676
|
|
|
$
|
43,617
|
|
Laboratory equipment
|
|
|
1,185,587
|
|
|
|
931,166
|
|
Leasehold improvements
|
|
|
47,043
|
|
|
|
47,043
|
|
|
|
|
1,281,306
|
|
|
|
1,021,826
|
|
Less accumulated depreciation
|
|
|
(677,587
|
)
|
|
|
(579,020
|
)
|
Property and equipment, net
|
|
$
|
603,719
|
|
|
$
|
442,806
|
|
CAPRICOR
THERAPEUTICS, INC.
Notes
to CONDENSED CONSOLIDATED financial statements
(unaudited)
|
1.
|
ORGANIZATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
Intangible Assets
Amounts
attributable to intellectual property consist primarily of the costs associated with the acquisition of certain technologies, patents,
pending patents and related intangible assets with respect to research and development activities. Certain intellectual property
assets are stated at cost and are amortized on a straight-line basis over the respective estimated useful lives of the assets ranging
from five to fifteen years. Total amortization expense was $3,247 and $32,457 for the nine months ended September 30, 2020
and 2019, respectively. A summary of future amortization expense as of September 30, 2020 is as follows:
Years ended
|
|
Amortization Expense
|
|
2020 (3 months)
|
|
|
1,083
|
|
2021
|
|
|
2,165
|
|
The Company reviews
goodwill and intangible assets at least annually for possible impairment. Goodwill and intangible assets are reviewed for possible
impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value
of the reporting unit below its carrying value. No impairment was recorded for the nine months ended September 30, 2020 and
2019.
Leases
Effective January 1,
2019, the Company adopted ASC Topic 842, “Leases” (“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 Topic 840, “Leases” (“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 assets. 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.
CAPRICOR
THERAPEUTICS, INC.
Notes
to CONDENSED CONSOLIDATED financial statements
(unaudited)
|
1.
|
ORGANIZATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
Revenue Recognition
For contracts completed
as of December 31, 2017, revenue was recognized in accordance with ASC 605 and other superseded standards. The company applied
ASU 606 using the modified retrospective approach for all contracts in process as of January 1, 2018.
Government Research Grants
Generally,
government research grants that provide funding for research and development activities are recognized as income when the related
expenses are incurred, as applicable. Because the terms of the CIRM Award allow Capricor to elect to convert the grant into a loan
after the end of the project period, the CIRM Award is being classified as a liability rather than income (see Note 6 -
“Government Grant Awards”). Grant income is due upon submission of a reimbursement request. The transaction price varies
for grant income based on the expenses incurred under the awards.
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 (see Note 9 – “Related
Party Transactions”). Miscellaneous income is due upon billing. Miscellaneous income is based on contracts with fixed
transaction prices.
Rent
Rent expense for the
Company’s leases, which generally have escalating rental amounts over the term of the lease, is recorded on a straight-line
basis over the lease term. The difference between the rent expense and rent paid has been recorded as deferred rent in the consolidated
balance sheet under accounts payable and accrued expenses. Rent is amortized on a straight-line basis over the term of the applicable
lease, without consideration of renewal options.
Research and Development
Costs relating to the
design and development of new products are expensed as research and development as incurred in accordance with Financial Accounting
Standards Board (“FASB”) ASC 730-10, Research and Development. Research and development costs amounted to approximately
$2.6 million and $0.9 million for the three months ended September 30, 2020 and 2019, respectively, and approximately $5.7
million and $4.3 million for the nine months ended September 30, 2020 and 2019, respectively.
Comprehensive Income (Loss)
Comprehensive income
(loss) generally represents all changes in stockholders’ equity during the period except those resulting from investments
by, or distributions to, stockholders. The Company’s comprehensive loss was approximately $3.9 million and $1.6 million for
the three months ended September 30, 2020 and 2019, respectively, and approximately $9.5 million and $6.2 million for the
nine months ended September 30, 2020 and 2019, respectively. The Company’s other comprehensive income (loss) is related
to a net unrealized gain (loss) on marketable securities. For both the three months ended September 30, 2020 and 2019, the
Company’s other comprehensive income (loss) was zero. For the nine months ended September 30, 2020 and 2019, the Company’s
other comprehensive income (loss) was $757 and $(12,393), respectively.
CAPRICOR
THERAPEUTICS, INC.
Notes
to CONDENSED CONSOLIDATED financial statements
(unaudited)
|
1.
|
ORGANIZATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
Clinical Trial Expense
As
part of the process of preparing our condensed 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 contract research organizations (“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.
Business Uncertainty Related to the
Coronavirus
As a result of the
spread of the COVID-19 coronavirus, uncertainties have arisen that could potentially impact enrollment of and the ability to conduct
clinical trials, deliverables related to contract performance, payments from trial sponsors including Cedars-Sinai Medical Center,
as we describe further below, 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 and as a result, the Company is considering the impact of COVID-19 on its ability to conduct both
pre-clinical development and clinical studies. 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 due to the coronavirus, the specifics of which are unknown at this time.
In light of the increased
uncertainties due to COVID-19 and its economic and other impacts and to uncertainties around the timing and availability of grant
disbursements, the loss of revenue from the delay and/or suspension of the REGRESS and ALPHA trials as well as any potential equity
and debt financings, the Company applied for a loan under the Small Business Administration (the “SBA”) Paycheck Protection
Program of the Coronavirus Aid, Relief and Economic Security Act of 2002 (the “CARES Act”). On April 29, 2020,
the Company was approved and received a loan of $318,160 (the “Loan”) under the SBA Paycheck Protection Program of
the CARES Act. The Company utilized the funds for covered payroll costs, all which the Company believes were in accordance with
the relevant terms and conditions of the CARES Act (see Note 2 – “Note Payable”).
Stock-Based Compensation
The Company accounts
for stock-based employee compensation arrangements in accordance with guidance issued by the FASB, which requires the measurement
and recognition of compensation expense for all share-based payment awards made to employees, consultants, and directors based
on estimated fair values.
CAPRICOR
THERAPEUTICS, INC.
Notes
to CONDENSED CONSOLIDATED financial statements
(unaudited)
|
1.
|
ORGANIZATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
The Company estimates
the fair value of stock-based compensation awards on the date of grant using an option-pricing model. The value of the portion
of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company’s
statements of operations. The Company estimates the fair value of stock-based compensation awards using the Black-Scholes model.
This model requires the Company to estimate the expected volatility and value of its common stock and the expected term of the
stock options, all of which are highly complex and subjective variables. The variables take into consideration, among other things,
actual and projected stock option exercise behavior. For employees and directors, the expected life was calculated based on the
simplified method as described by the SEC Staff Accounting Bulletin No. 110, Share-Based Payment. For other service providers,
the expected life was calculated using the contractual term of the award. The Company's estimate of expected volatility was based
on the historical stock price of the Company. The Company has selected a risk-free rate based on the implied yield available on
U.S. Treasury securities with a maturity equivalent to the expected term of the options.
Basic and Diluted Loss per Share
The Company reports
earnings per share in accordance with FASB ASC 260-10, Earnings per Share. Basic earnings (loss) per share is computed by
dividing income (loss) available to common stockholders by the weighted-average number of shares of common stock outstanding during
the period. Diluted earnings (loss) per share is computed similarly to basic earnings (loss) per share except that the denominator
is increased to include the number of additional shares of common stock that would have been outstanding if the potential shares
of common stock had been issued and if the additional shares of common stock were dilutive.
For
the three and nine months ended September 30, 2020 and 2019, warrants and options to purchase 2,494,068 and 775,225 shares
of common stock, respectively, have been excluded from the computation of potentially dilutive securities. Potentially dilutive
common shares, which primarily consist of stock options issued to employees, consultants, and directors as well as warrants issued,
have been excluded from the diluted loss per share calculation because their effect is anti-dilutive. Because the impact of these
items is anti-dilutive during periods of net loss, there was no difference between basic and diluted loss per share for the three
and nine months ended September 30, 2020 and 2019.
Fair Value Measurements
Assets and liabilities
recorded at fair value in the balance sheet are categorized based upon the level of judgment associated with the inputs used to
measure their fair value. The categories are as follows:
Level Input:
|
|
Input Definition:
|
Level I
|
|
Inputs are unadjusted,
quoted prices for identical assets or liabilities in active markets at the measurement date.
|
Level II
|
|
Inputs, other than
quoted prices included in Level I, that are observable for the asset
or liability through corroboration with market data at the measurement date.
|
Level III
|
|
Unobservable inputs
that reflect management’s best estimate of what market
participants would use in pricing the asset or liability at the measurement date.
|
The following tables
summarize the fair value measurements by level for assets and liabilities measured at fair value on a recurring basis:
|
|
December 31, 2019
|
|
|
|
Level I
|
|
|
Level II
|
|
|
Level III
|
|
|
Total
|
|
Marketable Securities
|
|
$
|
5,986,050
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,986,050
|
|
CAPRICOR
THERAPEUTICS, INC.
Notes
to CONDENSED CONSOLIDATED financial statements
(unaudited)
|
1.
|
ORGANIZATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
Carrying amounts reported
in the balance sheet of cash and cash equivalents, grants receivable, accounts payable and accrued expenses approximate fair value
due to their relatively short maturity. The carrying amounts of the Company’s marketable securities are based on market quotations
from national exchanges at the balance sheet date. Interest and dividend income are recognized separately on the income statement
based on classifications provided by the brokerage firm holding the investments. The fair value of borrowings is not considered
to be significantly different from its carrying amount because the stated rates for such debt reflect current market rates and
conditions.
Recent 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 to 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.
Other recent accounting
pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants,
and the SEC, did not or are not believed by management to have a material impact on the Company’s present or future consolidated
financial statement presentation or disclosures.
Paycheck Protection Program Loan
On April 7, 2020,
Capricor applied to City National Bank (“CNB”) under the SBA Paycheck Protection Program of the CARES Act for the Loan
in the amount of $318,160. On April 29, 2020, the Loan was approved and Capricor received the Loan proceeds, which we used
for covered payroll costs in accordance with the relevant terms and conditions of the CARES Act.
The Loan, which took
the form of a promissory note issued by Capricor (the “Promissory Note”), has a two-year term, matures on April 29,
2022, and bears interest at a rate of 1.0% per annum. Monthly principal and interest payments, less the amount of any potential
forgiveness, will commence on November 29, 2020. Capricor did not provide any collateral or guarantees for the Loan, nor did
Capricor pay any facility charge to obtain the Loan. The Promissory Note provides for customary events of default, including, among
others, those relating to failure to make payment, bankruptcy, breaches of representations and material adverse events. Capricor
may prepay the principal of the Loan at any time without incurring any prepayment charges.
The Loan may be forgiven
partially or fully if the Loan proceeds are used for eligible purposes, including payroll costs, rent and utilities, provided that
such amounts are incurred during an 8 or 24-week period that commenced on April 29, 2020. Any forgiveness of the Loan will
be subject to approval by the SBA and CNB and will require Capricor to apply for such treatment. The Company plans to submit for
forgiveness in the fourth quarter of 2020. In the event the Loan, or any portion thereof, is forgiven pursuant to the SBA, the
amount forgiven is applied to the outstanding principal. Any unforgiven portion of the Loan will be payable in accordance with
the terms of the Promissory Note as described above. While the Company currently believes that its use of the loan proceeds will
meet the conditions for forgiveness of the Loan, it cannot be sure that it will be eligible for forgiveness, in whole or in part.
CAPRICOR
THERAPEUTICS, INC.
Notes
to CONDENSED CONSOLIDATED financial statements
(unaudited)
Common Stock Sales Agreements
Since July 2019,
the Company has entered into multiple Common Stock Sales Agreements with Wainwright establishing “at-the-market”, or
ATM, programs by which Wainwright sold and may continue to sell our common stock at the market prices prevailing at the time of
sale. Wainwright is entitled to compensation for its services at a commission rate of 3.0% of the gross sales price per share of
common stock sold plus reimbursement of certain expenses. These programs are referred to below as the “July 2019 ATM
Program,” the “August 2019 ATM Program,” and the “May 2020 ATM Program” based on when each
program was initiated. In addition, the Company completed a public offering of its common stock in December 2019 and a warrant
inducement offer in March 2020.
July 2019 ATM Program
From July 22,
2019 through expiration of the July 2019 ATM Program on August 23, 2019, 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 Wainwright
and legal fees in the aggregate amount of approximately $0.1 million.
August 2019 ATM Program
On August 29,
2019, the Company initiated the August 2019 ATM Program. From August 29, 2019 through May 4, 2020, the Company 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 Wainwright 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 described below.
May 2020 ATM Program
On May 4, 2020,
the Company initiated the May 2020 ATM Program. The Company filed the May 2020 ATM with an aggregate offering price of
up to $40.0 million. Since May 4, 2020 and through November 12, 2020, the Company has sold an aggregate of 3,599,359
shares of common stock under the May 2020 ATM Program at an average price of approximately $6.42 per share for gross proceeds
of approximately $23.1 million. The Company paid cash commissions on the gross proceeds, plus reimbursement of expenses of Wainwright
and legal fees in the aggregate amount of approximately $0.8 million.
December 2019 Financing
In December 2019,
the Company completed a public offering pursuant to which the Company issued (i) 531,173 shares of its common stock, (ii) warrants
(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 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 offering, and (b) to each purchaser of pre-funded
warrants in the 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 offering. In connection with the offering, the Company
issued to designees of Wainwright, the placement agent for the offering, warrants (the “December 2019 Placement Agent
Warrants”) to purchase an aggregate of 203,915 shares of common stock. The December 2019 Placement Agent Warrants have
an exercise price of $1.5325 per share, are immediately exercisable and expire in December 2024. 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 September 30, 2020, 61,173 December 2019 Common Warrants remain outstanding under
the December 2019 Financing.
CAPRICOR
THERAPEUTICS, INC.
Notes
to CONDENSED CONSOLIDATED financial statements
(unaudited)
|
3.
|
STOCKHOLDER’S EQUITY
(Continued)
|
March 2020 Warrant Inducement
On March 25, 2020,
the Company entered into a letter agreement (the “Exercise Agreement”) with a holder of December 2019 Common Warrants
(the “Exercising Holder”). Pursuant to the Exercise Agreement, in connection with 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 (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. A total of 724,500 shares were issued to
the Exercising Holder, with the remaining 3,275,500 shares being held in abeyance until such time as it would not result in the
Exercising Holder exceeding its beneficial ownership limitation of 4.99% of the Company’s outstanding common stock. In the
second quarter of 2020, the Company issued all shares that were being held in abeyance.
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 (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.
The exercise of December 2019
Common Warrants by the Exercising Holder generated gross proceeds of approximately $4.9 million. Fees paid in conjunction with
the Exercise Agreement, which included placement agent commissions, legal costs, and other offering expenses, amount to approximately
$0.4 million. In connection with the Exercise Agreement, certain employees of the placement agent were issued new warrants (the
“March 2020 Placement Agent Warrants”) to purchase an aggregate of 200,000 shares of common stock. The March 2020
Placement Agent Warrants have an exercise price of $1.5313 per share and expire in March 2025. 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 September 30, 2020, 105,000 March 2020 Placement Agent Warrants remain outstanding under
the March 2020 Warrant Inducement.
Outstanding Shares
At September 30, 2020, the Company
had 20,211,602 shares of common stock issued and outstanding.
|
4.
|
STOCK AWARDS, WARRANTS
AND OPTIONS
|
Warrants
The following table
summarizes all warrant activity for the nine months ended September 30, 2020:
|
|
Warrants
|
|
|
Weighted Average
Exercise Price
|
|
Outstanding at December 31, 2019
|
|
|
7,501,696
|
|
|
$
|
0.65
|
|
Granted
|
|
|
4,200,000
|
|
|
|
1.28
|
|
Exercised
|
|
|
(11,535,523
|
)
|
|
|
0.87
|
|
Outstanding at September 30, 2020
|
|
|
166,173
|
|
|
$
|
1.37
|
|
CAPRICOR
THERAPEUTICS, INC.
Notes
to CONDENSED CONSOLIDATED financial statements
(unaudited)
|
4.
|
STOCK AWARDS, WARRANTS
AND OPTIONS (Continued)
|
The following table
summarizes all outstanding warrants to purchase shares of the Company’s common stock:
|
|
|
|
Warrants Outstanding
|
|
|
|
|
|
|
Type
|
|
Grant Date
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
|
Exercise Price
per Share
|
|
|
Expiration
Date
|
Common Warrants
|
|
12/19/2019
|
|
|
61,173
|
|
|
|
4,139,477
|
|
|
$
|
1.10
|
|
|
12/19/2024
|
Common Warrants
|
|
12/19/2019
|
|
|
-
|
|
|
|
203,915
|
|
|
$
|
1.5325
|
|
|
12/17/2024
|
Pre-Funded Warrants
|
|
12/19/2019
|
|
|
-
|
|
|
|
3,158,304
|
|
|
$
|
0.001
|
|
|
N/A
|
Common Warrants
|
|
3/27/2020
|
|
|
105,000
|
|
|
|
-
|
|
|
$
|
1.5313
|
|
|
3/27/2025
|
|
|
|
|
|
166,173
|
|
|
|
7,501,696
|
|
|
|
|
|
|
|
Stock Options
The Company’s
Board of Directors (the “Board”) has approved four stock option plans: (i) the 2006 Stock Option Plan, (ii) the
2012 Restated Equity Incentive Plan (which superseded the 2006 Stock Option Plan) (the “2012 Plan”), (iii) the
2012 Non-Employee Director Stock Option Plan (the “2012 Non-Employee Director Plan”), and (iv) the 2020 Equity
Incentive Plan (the “2020 Plan”).
At the time the merger
between Capricor and Nile became effective, 414,971 shares of common stock were reserved under the 2012 Plan for the issuance of
stock options, stock appreciation rights, restricted stock awards and performance unit/share awards to employees, consultants and
other service providers. Included in the 2012 Plan are the shares of common stock that were originally reserved under the 2006
Stock Option Plan. Under the 2012 Plan, each stock option granted will be designated in the award agreement as either an incentive
stock option or a nonstatutory stock option. Notwithstanding such designation, however, to the extent that the aggregate fair market
value of the shares with respect to which incentive stock options are exercisable for the first time by the participant during
any calendar year (under all plans of the Company and any parent or subsidiary) exceeds $100,000, such options will be treated
as nonstatutory stock options.
On
June 2, 2016, at the Company’s annual stockholder meeting, the stockholders approved a proposal to amend the 2012 Plan,
to, among other things, increase the number of shares of common stock of the Company that may be issued under the 2012 Plan to
equal the sum of 414,971 plus 2% of the outstanding shares of common stock as of December 31, 2015, with the number of shares
that may be issued under the 2012 Plan automatically increasing thereafter on January 1 of each year, commencing with January 1,
2017, by 2% of the outstanding shares of common stock as of the last day of the immediately preceding fiscal year (rounded down
to the nearest whole share). For the fiscal years beginning on January 1, 2020 and 2019, the number of shares added
was equal to 104,547 and 62,775 shares, respectively.
At the time the merger
between Capricor and Nile became effective, 269,731 shares of common stock were reserved under the 2012 Non-Employee Director Plan
for the issuance of stock options to members of the Board who are not employees of the Company.
On June 5, 2020,
at the Company’s annual stockholder meeting, the stockholders approved the 2020 Plan with 2,500,000 shares of common stock
reserved under the 2020 Plan for the issuance of stock awards. The number of Shares available for issuance under the 2020 Plan
shall be automatically increased on January 1 of each year, commencing with January 1, 2021, by an amount equal to the
lesser of (i) four percent (4%) of the outstanding shares of Common Stock as of the last day of the immediately preceding
fiscal year or (ii) such number of shares of Common Stock determined by the Compensation Committee in its sole discretion.
As of September 30,
2020, 1,033,865 options remain available for issuance under the respective stock option plans.
Each of the Company’s
stock option plans are administered by the Board, or the compensation committee of the Board, which determines the recipients and
types of awards to be granted, as well as the number of shares subject to the awards, the exercise price and the vesting schedule.
Currently, stock options are granted with an exercise price equal to the closing price of the Company’s common stock on the
date of grant, and generally vest over a period of one to four years. The term of stock options granted under each of the plans
cannot exceed ten years.
CAPRICOR
THERAPEUTICS, INC.
Notes
to CONDENSED CONSOLIDATED financial statements
(unaudited)
|
4.
|
STOCK AWARDS, WARRANTS
AND OPTIONS (Continued)
|
The estimated weighted
average fair value of the options granted during the three months ended September 30, 2020 and 2019 were approximately $5.23
and $2.73 per share, respectively. The estimated weighted average fair value of the options granted during the nine months ended
September 30, 2020 and 2019 were approximately $3.91 and $2.73 per share, respectively.
The Company estimates
the fair value of each option award using the Black-Scholes option-pricing model. The Company used the following assumptions to
estimate the fair value of stock options issued in the nine months ended September 30, 2020 and 2019:
|
|
September 30, 2020
|
|
September 30, 2019
|
Expected volatility
|
|
104% – 123%
|
|
106% – 128%
|
Expected term
|
|
5 – 6 years
|
|
5 – 6 years
|
Dividend yield
|
|
0%
|
|
0%
|
Risk-free interest rates
|
|
0.4 – 1.5%
|
|
1.4 – 1.6%
|
Employee and non-employee
stock-based compensation expense was as follows:
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
General and administrative
|
|
$
|
418,147
|
|
|
$
|
170,428
|
|
|
$
|
1,287,474
|
|
|
$
|
423,318
|
|
Research and development
|
|
|
68,630
|
|
|
|
54,840
|
|
|
|
191,460
|
|
|
|
149,333
|
|
Total
|
|
$
|
486,777
|
|
|
$
|
225,268
|
|
|
$
|
1,478,934
|
|
|
$
|
572,651
|
|
The Company does not
recognize an income tax benefit as the Company believes that an actual income tax benefit may not be realized. For non-qualified
stock options, the loss creates a timing difference, resulting in a deferred tax asset, which is fully reserved by a valuation
allowance.
Common stock, stock
options or other equity instruments issued to non-employees (including consultants) as consideration for goods or services received
by the Company 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. The Company calculates the fair value for non-qualified options as of the date of
grant and expenses over the applicable vesting periods. We account for forfeitures upon occurrence.
On
February 12, 2020, pursuant to the authority granted to it under the 2012 Restated Equity Incentive Plan and the 2012 Non-Employee
Director Stock Option Plan, the board of directors of the Company approved a program under which outstanding options and other
awards granted under the 2012 Plan and the 2012 Director Plan to employees, officers and directors and designated service providers
of the Company were repriced to their then current fair market value. There were 662,968 outstanding options which were
repriced to $1.39 per share, which was the market price of our common stock on the date of the approval of the repricing. The effect
of the modification generated a total incremental cost of approximately $178,000, of which approximately $171,000 was recognized
in the first quarter of 2020 stock-based compensation expense with the remainder to be expensed over the remaining unvested period
terms.
CAPRICOR
THERAPEUTICS, INC.
Notes
to CONDENSED CONSOLIDATED financial statements
(unaudited)
|
4.
|
STOCK AWARDS, WARRANTS
AND OPTIONS (Continued)
|
The following is a
schedule summarizing employee and non-employee stock option activity for the nine months ended September 30, 2020:
|
|
Number of
Options
|
|
|
Weighted Average
Exercise Price
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding at January 1, 2020
|
|
|
754,913
|
|
|
$
|
12.63
|
|
|
$
|
-
|
|
Granted
|
|
|
1,788,058
|
|
|
|
2.00
|
|
|
|
|
|
Exercised
|
|
|
(63,774
|
)
|
|
|
3.19
|
|
|
$
|
329,035
|
|
Expired/Cancelled
|
|
|
(151,302
|
)
|
|
|
5.78
|
|
|
|
|
|
Outstanding at September 30, 2020
|
|
|
2,327,895
|
|
|
$
|
1.86
|
|
|
$
|
8,078,197
|
|
Exercisable at September 30, 2020
|
|
|
802,347
|
|
|
$
|
1.45
|
|
|
$
|
3,057,187
|
|
The
aggregate intrinsic value represents the difference between the exercise price of the options and the estimated fair value of the
Company’s common stock for each of the respective periods.
Cash Concentration
The Company has historically
maintained checking accounts at two financial institutions. These accounts are each insured by the Federal Deposit Insurance Corporation
for up to $250,000. Historically, the Company has not experienced any significant losses in such accounts and believes it is not
exposed to any significant credit risk on cash, cash equivalents and marketable securities. As of September 30, 2020, the
Company maintained approximately $34.9 million of uninsured deposits.
|
6.
|
GOVERNMENT GRANT AWARDS
|
CIRM Grant Award (HOPE)
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.
CAPRICOR
THERAPEUTICS, INC.
Notes
to CONDENSED CONSOLIDATED financial statements
(unaudited)
|
6.
|
GOVERNMENT GRANT AWARDS
(Continued)
|
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 (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.
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. As of September 30, 2020,
Capricor’s liability balance for the CIRM Award was approximately $3.4 million.
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 will be
made to Capricor over a period of approximately three 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. As of September 30, 2020,
approximately $2.3 million has been incurred under the terms of the award. We are currently completing all close-out documentation
associated with this award.
|
7.
|
COMMITMENTS AND CONTINGENCIES
|
Leases
Capricor
leases space for its corporate offices from The Bubble Real Estate Company, LLC (“Bubble Real Estate”) pursuant to
a lease that was originally effective for a two-year period beginning July 1, 2013 with an option to extend the lease for
an additional twelve months. Capricor subsequently entered into several amendments extending the term of the lease and modifying
its terms. On January 11, 2019, Capricor entered into a Fourth Amendment to Lease (the “Fourth Lease Amendment”)
with the Bubble Real Estate. Under the terms of the Fourth Lease Amendment, the lease term extension commenced on January 1,
2019 and ended on December 31, 2019 with a base rent of $25,867 per month. The Company delivered to the landlord a letter
of credit in the amount of $232,803 to cover payments of rent for the remainder of the 2019 lease term, which was subsequently
cancelled, with the funds being returned to Capricor. Effective January 1, 2020, the Company entered into a Fifth Amendment
to Lease with the Bubble Real Estate pursuant to which we extended our lease for an additional year ending December 31, 2020
and reduced the square footage of the leased premises. The monthly rental payment is $16,229 for this annual period. Currently,
we are exploring our ability to extend our lease on a month-to-month basis or will consider other short-term options.
CAPRICOR
THERAPEUTICS, INC.
Notes
to CONDENSED CONSOLIDATED financial statements
(unaudited)
|
7.
|
COMMITMENTS AND CONTINGENCIES
(Continued)
|
Capricor leases facilities
from Cedars-Sinai Medical Center (“CSMC”) pursuant to a lease (the “Facilities Lease”) that was originally
effective for a three-year period beginning June 1, 2014. Capricor has subsequently entered into several amendments extending
the term of the lease and modifying its terms. From August 1, 2017 through March 1, 2019, total monthly rent was $19,756.
Effective March 1, 2019, the square footage of the leased premises was reduced, resulting in a rent reduction of approximately
$4,000 per month. In July 2019, Capricor exercised an option to extend the term of the Facilities Lease for an additional
12-month period through July 31, 2020 with a monthly lease payment of $15,805. In June 2020, the Company exercised its
option to extend the term of the Facilities Lease for an additional 12-month period through July 31, 2021. In August 2020,
the Company entered into a Fourth Amendment to the Facilities Lease with CSMC pursuant to which the Company was granted an additional
option to extend the term of the Facilities Lease for a portion of the leased premises for an additional 12-month period through
July 31, 2022 with a reduction of square footage and a monthly lease payment of approximately $10,700.
Included within the
table below, future minimum rental payments to related parties totaled $158,050. A summary of future minimum rental payments required
under operating leases as of September 30, 2020 is as follows:
Years ended
|
|
Operating Leases
|
|
2020 (3 months)
|
|
$
|
96,102
|
|
2021
|
|
|
110,635
|
|
Expenses incurred under
operating leases to unrelated parties for the three months ended September 30, 2020 and 2019 were $48,687 and $77,601, respectively,
and $146,061 and $239,803 for the nine months ended September 30, 2020 and 2019, respectively. Expenses incurred under operating
leases to related parties for each of the three months ended September 30, 2020 and 2019 were $47,415. Expenses incurred under
operating leases to related parties for each of the nine months ended September 2020 and 2019 were $142,245 and $150,147,
respectively.
Legal Contingencies
The Company is not
a party to any material legal proceedings at this time. From time to time, the Company may become involved in various
legal proceedings that arise in the ordinary course of its business or otherwise.
Accounts Payable
Over the normal course
of business, disputes with vendors may arise. If a vendor dispute payment is probable and able to be estimated, we will record
an estimated liability.
Employee Severances
In the event of a termination,
subject to certain conditions, the Board of Directors approved severance packages for specific full-time employees based on their
length of service and position ranging up to six months of their base salaries. No liability has been recorded as of September 30,
2020.
Capricor’s Technology - CAP-1002, CAP-1001, CSps and
Exosomes
Capricor has entered
into exclusive license agreements for intellectual property rights related to certain cardiac-derived cells with Università
Degli Studi Di Roma La Sapienza (the “University of Rome”), The Johns Hopkins University (“JHU”) and CSMC.
In addition, Capricor has filed patent applications related to the technology developed by its own scientists.
CAPRICOR
THERAPEUTICS, INC.
Notes
to CONDENSED CONSOLIDATED financial statements
(unaudited)
|
8.
|
LICENSE AGREEMENTS (Continued)
|
University of Rome License Agreement
Capricor and the University
of Rome entered into a License Agreement, dated June 21, 2006 (the “Rome License Agreement”), which provides for
the grant of an exclusive, world-wide, royalty-bearing license by the University of Rome to Capricor (with the right to sublicense)
to develop and commercialize licensed products under the licensed patent rights in all fields. Capricor has a right of first negotiation,
for a certain period of time, to obtain a license to any new and separate patent applications owned by the University of Rome utilizing
cardiac stem cells in cardiac care.
Pursuant to the Rome
License Agreement, Capricor paid the University of Rome a license issue fee, is currently paying minimum annual royalties in the
amount of 20,000 Euros per year, and is obligated to pay a lower-end of a mid-range double-digit percentage on all royalties received
as a result of sublicenses granted, which are net of any royalties paid to third parties under a license agreement from such third
party to Capricor. The minimum annual royalties are creditable against future royalty payments.
The Rome License Agreement
will, unless extended or sooner terminated, remain in effect until the later of the last claim of any patent or until any patent
application comprising licensed patent rights has expired or been abandoned. Under the terms of the Rome License Agreement, either
party may terminate the agreement should the other party become insolvent or file a petition in bankruptcy. Either party may terminate
the agreement upon the other party’s material breach, provided that the breaching party will have up to 90 days to cure its
material breach. Capricor may also terminate for any reason upon 90 days’ written notice to the University of Rome.
The Johns Hopkins University License
Agreement
Capricor and JHU entered
into an Exclusive License Agreement, effective June 22, 2006 (the “JHU License Agreement”), which provides for
the grant of an exclusive, world-wide, royalty-bearing license by JHU to Capricor (with the right to sublicense) to develop and
commercialize licensed products and licensed services under the licensed patent rights in all fields and a nonexclusive right to
the know-how. In May 2009, the JHU License Agreement was amended to add additional patent rights to the JHU License Agreement
in consideration of a payment to JHU and reimbursement of patent costs. Capricor and JHU executed a Second Amendment to the JHU
License Agreement, effective as of December 20, 2013, pursuant to which, among other things, certain definitions were added
or amended, the timing of certain obligations was revised and other obligations of the parties were clarified. Under the JHU License
Agreement, Capricor is required to exercise commercially reasonable and diligent efforts to develop and commercialize licensed
products covered by the licenses from JHU.
Pursuant
to the JHU License Agreement, JHU was paid an initial license fee and, thereafter, Capricor is required to pay minimum annual royalties
on the anniversary dates of the JHU License Agreement. The minimum annual royalties range from $5,000 on the first and second anniversary
dates to $20,000 on the tenth anniversary date and thereafter. The minimum annual royalties are creditable against a low single-digit
running royalty on net sales of products and net service revenues, which Capricor is also required to pay under the JHU License
Agreement, which running royalty may be subject to further reduction in the event that Capricor is required to pay royalties on
any patent rights to third parties in order to make or sell a licensed product. In addition, Capricor is required to pay a low
double-digit percentage of the consideration received by it from sublicenses granted, and is required to pay JHU certain defined
development milestone payments upon the successful completion of certain phases of its clinical studies and upon receiving approval
from the U.S. Food and Drug Administration (the “FDA”). The development milestones range from $100,000 upon
successful completion of a full Phase I clinical study to $1,000,000 upon full FDA market approval and are fully creditable against
payments owed by Capricor to JHU on account of sublicense consideration attributable to milestone payments received from a sublicensee.
The maximum aggregate amount of milestone payments payable under the JHU License Agreement, as amended, is $1,850,000. In May 2015,
Capricor paid the development milestone related to Phase I that was owed to JHU pursuant to the terms of the JHU License Agreement.
The next milestone is triggered upon successful completion of a full Phase II study for which a payment of $250,000 will be due.
At this time, it is uncertain as to whether the $250,000 milestone payment will become due.
The JHU License Agreement
will, unless sooner terminated, continue in effect in each applicable country until the date of expiration of the last to expire
patent within the patent rights, or, if no patents are issued, then for twenty years from the effective date. Under the terms of
the JHU License Agreement, either party may terminate the agreement should the other party become insolvent or file a petition
in bankruptcy, or fail to cure a material breach within 30 days after notice. In addition, Capricor may terminate for any reason
upon 60 days’ written notice.
CAPRICOR
THERAPEUTICS, INC.
Notes
to CONDENSED CONSOLIDATED financial statements
(unaudited)
|
8.
|
LICENSE AGREEMENTS (Continued)
|
Cedars-Sinai Medical Center License Agreements
License Agreement for CDCs
On January 4,
2010, Capricor entered into an Exclusive License Agreement with CSMC (the “Original CSMC License Agreement”) for certain
intellectual property related to its CDC technology. In 2013, the Original CSMC License Agreement was amended twice resulting in,
among other things, a reduction in the percentage of sublicense fees which would have been payable to CSMC. Effective December 30,
2013, Capricor entered into an Amended and Restated Exclusive License Agreement with CSMC (the “Amended CSMC License Agreement”)
which amended, restated, and superseded the Original CSMC License Agreement, pursuant to which, among other things, certain definitions
were added or amended, the timing of certain obligations was revised and other obligations of the parties were clarified.
The Amended CSMC License
Agreement provides for the grant of an exclusive, world-wide, royalty-bearing license by CSMC to Capricor (with the right to sublicense)
to conduct research using the patent rights and know-how and develop and commercialize products in the field using the patent rights
and know-how. In addition, Capricor has the exclusive right to negotiate for an exclusive license to any future rights arising
from related work conducted by or under the direction of Dr. Eduardo Marbán on behalf of CSMC. In the event the parties
fail to agree upon the terms of an exclusive license for any future rights, Capricor will have a non-exclusive license to such
future rights, subject to royalty obligations.
Pursuant to the Original
CSMC License Agreement, CSMC was paid a license fee and Capricor was obligated to reimburse CSMC for certain fees and costs incurred
in connection with the prosecution of certain patent rights. Additionally, Capricor is required to meet certain spending and development
milestones. The annual spending requirements ranged from $350,000 to $800,000 each year between 2010 and 2017 (with the exception
of 2014, for which there was no annual spending requirement).
Pursuant to the Amended
CSMC License Agreement, Capricor remains obligated to pay low single-digit royalties on sales of royalty-bearing products as well
as a low double-digit percentage of the consideration received from any sublicenses or other grant of rights. The above-mentioned
royalties are subject to reduction in the event Capricor becomes obligated to obtain a license from a third party for patent rights
in connection with the royalty-bearing product. In 2010, Capricor discontinued its research under some of the patents.
The Amended CSMC License
Agreement will, unless sooner terminated, continue in effect on a country by country basis until the last to expire of the patents
covering the patent rights or future patent rights. Under the terms of the Amended CSMC License Agreement, unless waived by CSMC,
the agreement shall automatically terminate: (i) if Capricor ceases, dissolves or winds up its business operations; (ii) in
the event of the insolvency or bankruptcy of Capricor or if Capricor makes an assignment for the benefit of its creditors; (iii) if
performance by either party jeopardizes the licensure, accreditation or tax exempt status of CSMC or the agreement is deemed illegal
by a governmental body; (iv) within 30 days for non-payment of royalties; (v) after 90 days’ notice from CSMC if
Capricor fails to undertake commercially reasonable efforts to exploit the patent rights or future patent rights; (vi) if
a material breach has not been cured within 90 days; or (vii) if Capricor challenges any of the CSMC patent rights. If Capricor
fails to undertake commercially reasonable efforts to exploit the patent rights or future patent rights, and fails to cure that
breach after 90 days’ notice from CSMC, instead of terminating the license, CSMC has the option to convert any exclusive
license to Capricor to a non-exclusive or co-exclusive license. Capricor may terminate the agreement if CSMC fails to cure any
material breach within 90 days after notice.
On March 20, 2015,
Capricor and CSMC entered into a First Amendment to the Amended CSMC License Agreement, pursuant to which the parties agreed to
delete certain patent applications from the list of scheduled patents which Capricor determined not to be material to the portfolio.
On August 5, 2016,
Capricor and CSMC entered into a Second Amendment to the Amended CSMC License Agreement (the “Second License Amendment”),
pursuant to which the parties agreed to add certain patent applications to the schedule of patent rights set forth in the agreement.
Under the Second License Amendment, (i) the description of scheduled patent rights was replaced by a revised schedule that
includes six additional patent applications; (ii) Capricor paid an upfront fee of $2,500; and (iii) Capricor reimbursed
CSMC approximately $10,000 for attorneys’ fees and filing fees that were incurred in connection with the additional patent
applications.
CAPRICOR
THERAPEUTICS, INC.
Notes
to CONDENSED CONSOLIDATED financial statements
(unaudited)
|
8.
|
LICENSE AGREEMENTS (Continued)
|
On December 26,
2017, Capricor entered into a Third Amendment to the Amended CSMC License Agreement thereby amending the CDCs License (the “Third
License Amendment”). Under the Third License Amendment, (i) the description of scheduled patent rights was replaced
by a revised schedule that includes seven additional patent applications; and (ii) Capricor is required to reimburse CSMC
approximately $50,000 for attorneys’ fees and filing fees that were incurred in connection with the additional patent rights.
On June 20, 2018,
Capricor and CSMC entered into a Fourth Amendment to the Amended CSMC License Agreement (the “Fourth License Amendment”). Under
the Fourth License Amendment, the description of scheduled patent rights has been replaced by a revised schedule that includes
two additional patent applications.
License Agreement for Exosomes
On May 5, 2014,
Capricor entered into an Exclusive License Agreement with CSMC (the “Exosomes License Agreement”), for certain intellectual
property rights related to exosomes technology. The Exosomes License Agreement provides for the grant of an exclusive, world-wide,
royalty-bearing license by CSMC to Capricor (with the right to sublicense) in order to conduct research using the patent rights
and know-how and to develop and commercialize products in the field using the patent rights and know-how. In addition, Capricor
has the exclusive right to negotiate for an exclusive license to any future rights arising from related work conducted by or under
the direction of Dr. Eduardo Marbán on behalf of CSMC. In the event the parties fail to agree upon the terms of an
exclusive license, Capricor shall have a non-exclusive license to such future rights, subject to royalty obligations.
Pursuant to the Exosomes
License Agreement, CSMC was paid a license fee and Capricor reimbursed CSMC for certain fees and costs incurred in connection with
the preparation and prosecution of certain patent applications. Additionally, Capricor is required to meet certain non-monetary
development milestones and is obligated to pay low single-digit royalties on sales of royalty-bearing products as well as a single-digit
percentage of the consideration received from any sublicenses or other grant of rights. The above-mentioned royalties are subject
to reduction in the event Capricor becomes obligated to obtain a license from a third party for patent rights in connection with
the royalty bearing product.
The Exosomes License
Agreement will, unless sooner terminated, continue in effect on a country by country basis until the last to expire of the patents
covering the patent rights or future patent rights. Under the terms of the Exosomes License Agreement, unless waived by CSMC, the
agreement shall automatically terminate: (i) if Capricor ceases, dissolves or winds up its business operations; (ii) in
the event of the insolvency or bankruptcy of Capricor or if Capricor makes an assignment for the benefit of its creditors; (iii) if
performance by either party jeopardizes the licensure, accreditation or tax exempt status of CSMC or the agreement is deemed illegal
by a governmental body; (iv) within 30 days for non-payment of royalties; (v) after 90 days if Capricor fails to undertake
commercially reasonable efforts to exploit the patent rights or future patent rights; (vi) if a material breach has not been
cured within 90 days; or (vii) if Capricor challenges any of the CSMC patent rights. If Capricor fails to undertake commercially
reasonable efforts to exploit the patent rights or future patent rights, and fails to cure that breach after 90 days’ notice
from CSMC, instead of terminating the license, CSMC has the option to convert any exclusive license to Capricor to a non-exclusive
or co-exclusive license. Capricor may terminate the agreement if CSMC fails to cure any material breach within 90 days after notice.
On February 27,
2015, Capricor and CSMC entered into a First Amendment to Exosomes License Agreement (the “First Exosomes License Amendment”).
Under the First Exosomes License Amendment, (i) the description of scheduled patent rights was replaced by a revised schedule
that includes four additional patent applications; (ii) Capricor was required to pay CSMC an upfront fee of $20,000; (iii) Capricor
was required to reimburse CSMC approximately $34,000 for attorneys’ fees and filing fees that were incurred in connection
with the additional patent rights; and (iv) Capricor is required to pay CSMC certain defined product development milestone
payments upon reaching certain phases of its clinical studies and upon receiving approval for a product from the FDA. The product
development milestones range from $15,000 upon the dosing of the first patient in a Phase I clinical trial of a product to $75,000
upon receipt of FDA approval for a product. The maximum aggregate amount of milestone payments payable under the Exosomes
License Agreement, as amended, is $190,000.
On June 10, 2015,
Capricor and CSMC entered into a Second Amendment to Exosomes License Agreement, thereby amending the Exosomes License Agreement
further to add an additional patent application to the Schedule of Patent Rights.
CAPRICOR
THERAPEUTICS, INC.
Notes
to CONDENSED CONSOLIDATED financial statements
(unaudited)
|
8.
|
LICENSE AGREEMENTS (Continued)
|
On August 5, 2016,
Capricor and CSMC entered into a Third Amendment to the Exosomes License Agreement (the “Third Exosomes License Amendment”),
pursuant to which the parties agreed to add certain patent applications to the schedule of patent rights under the agreement. Under
the Third Exosomes License Amendment, (i) the description of scheduled patent rights was replaced by a revised schedule that
includes three additional patent applications; (ii) Capricor paid CSMC an upfront fee of $2,500; and (iii) Capricor reimbursed
CSMC approximately $16,000 for attorneys’ fees and filing fees that were incurred in connection with the additional patent
applications.
On December 26,
2017, Capricor and CSMC entered into a Fourth Amendment to Exosomes License Agreement, thereby amending the Exosomes License (the
“Fourth Exosomes License Amendment”). Under the Fourth Exosomes License Amendment, (i) the description of scheduled
patent rights was replaced by a revised schedule that includes seven additional patent applications; (ii) Capricor is required
to reimburse CSMC approximately $50,000 for attorneys’ fees and filing fees that were incurred in connection with the additional
patent rights; and (iii) a schedule to the Exosomes License was modified to extend the milestone deadline for filing an IND
for at least one product to December 31, 2018.
On June 20, 2018, Capricor
and CSMC entered into a Fifth Amendment to the Exosomes License Agreement (the “Fifth License Amendment”). Under the
Fifth License Amendment, (i) the description of scheduled patent rights was replaced by a revised schedule that includes four
additional patent applications; and (ii) Capricor is required to reimburse CSMC approximately $27,000 for attorneys’
fees and filing fees that were incurred in connection with the additional patent rights.
On
September 25, 2018, Capricor and CSMC entered into a Sixth Amendment to the Exosomes License Agreement (the “Sixth
License Amendment”). Under the Sixth License Amendment, the milestone deadline for filing an IND for at least one product
was extended to December 31, 2019. If the Company did not file an IND by December 31, 2019, or negotiate an additional
extension of the milestone deadline, CSMC had the option to convert the exclusive license to a non-exclusive license or to
a co-exclusive license or terminate the license under Title 35, Section 203 of the United States Code. Prior to exercising
such option, Capricor had the opportunity to cure the failure to file an IND for a period of 90 days after its receipt of written
notice from CSMC of its intent to exercise its option. In the first quarter of 2020, Capricor received a notice from CSMC
indicating that Capricor was in default of this milestone and further, that unless such default was cured by April 19, 2020,
the Exosomes License Agreement would automatically terminate. On April 15, 2020, Capricor filed an IND with the FDA, satisfying
its milestone requirement under the Exosomes License Agreement and has therefore cured such default.
On August 19,
2020, Capricor and CSMC entered into the Seventh Amendment to the Exosomes License Agreement (the “Seventh License Amendment”).
Under the Seventh License Amendment, (i) Capricor agrees that it shall be required to satisfy certain performance milestones
with respect to product candidates covered by certain future patent rights in order to maintain an exclusive license to those future
patent rights; failure to meet those milestones would cause CSMC to have the right to convert the license from exclusive to non-exclusive
or co-exclusive, or to terminate the license, subject to Capricor’s right to license such patent rights for internal research
purposes on a non-exclusive basis; (ii) CSMC acknowledges that Capricor has satisfied the performance milestones with respect
to certain patent families corresponding to certain future patent rights, thereby maintaining its exclusive license to such patent
rights; and (iii) CSMC and Capricor agree to make certain patent filings to update the inventors listed in such filings and
to have CSMC exclusively license its interest therein to Capricor.
On August 28,
2020, Capricor and CSMC entered into the Eighth Amendment to the Exosomes License Agreement (the “Eighth License Amendment”).
Under the Eighth Amendment, CSMC granted to Capricor an exclusive license to CSMC’s co-owned interests in two additional
patent families.
Initiation of Sponsored Research Agreement
On April 1, 2020
we entered into a Sponsored Research Agreement (“SRA”), with Johns Hopkins University pursuant to which researchers
in the lab of Dr. Stephen Gould will perform certain research activities in connection with our exosomes program. Pursuant
to the SRA, we have agreed to fund certain research activities and will have the right to negotiate for exclusive or non-exclusive
rights to intellectual property that may result from such research activities.
CAPRICOR
THERAPEUTICS, INC.
Notes
to CONDENSED CONSOLIDATED financial statements
(unaudited)
|
9.
|
RELATED PARTY TRANSACTIONS
|
Lease and Sub-Lease Agreement
As noted above, Capricor
is a party to lease agreements with CSMC, which holds shares of capital stock of Capricor Therapeutics (see Note 7 – “Commitments
and Contingencies”), and CSMC has served as an investigative site in Capricor’s clinical trials. Additionally, Dr. Eduardo
Marbán, who is a stockholder of Capricor Therapeutics and has participated from time to time as an observer at the Company’s
meetings of the Board of Directors, is the Director of the Cedars-Sinai Smidt Heart Institute, and co-founder of Capricor.
On
April 1, 2013, Capricor entered into a sublease with Reprise Technologies, LLC, a limited liability company which is wholly
owned by Dr. Frank Litvack, the Company’s Executive Chairman and member of its Board of Directors, for $2,500 per month. The
sublease was on a month-to-month basis and was terminated effective September 1, 2020. For the nine months periods
ended September 30, 2020 and 2019, Capricor recognized $20,000 and $22,500, respectively, in sublease income from the related
party. Sublease income is recorded as a reduction to general and administrative expenses.
Consulting Agreements
In 2013, Capricor entered
into a Consulting Agreement with Dr. Frank Litvack, the Company’s Executive Chairman and a member of its Board of Directors,
whereby Capricor agreed to pay Dr. Litvack $10,000 per month for consulting services. The agreement is terminable upon 30
days’ notice.
In July 2020,
Capricor entered into an Advisory Services Agreement with Dr. Eduardo Marbán whereby he was granted an option to purchase
50,000 shares of the Company’s common stock.
Payables to Related Party
As of September 30,
2020 and December 31, 2019, the Company had accounts payable and accrued expenses to related parties totaling $24,215 and
$22,315, respectively. CSMC accounts for $24,215 and $12,315 of the total accounts payable and accrued expenses to related parties
as of September 30, 2020 and December 31, 2019, respectively. CSMC expenses relate to research and development costs,
license and patent fees, and facilities rent. During the nine months ended September 30, 2020 and 2019, the Company paid CSMC
approximately $235,000 and $288,000, respectively, for such costs.
Related Party Clinical Trials
Capricor has agreed
to provide CAP-1002 for investigational purposes in two clinical trials sponsored by CSMC. This product was developed as part of
the Company’s past research and development efforts. The first trial is known as “Regression of Fibrosis and Reversal
of Diastolic Dysfunction in HFpEF Patients Treated with Allogeneic CDCs”, or REGRESS. Dr. Eduardo Marbán is the
named principal investigator under the study. In March 2020, we were informed that the
REGRESS study was put on clinical hold by the FDA. The information we received suggested that the issue was related to inadequate
patient monitoring at the study site to assess safety for certain patients who were experiencing adverse events after receiving
an intracoronary infusion of CAP-1002. The clinical hold was removed in August 2020 and the trial has been re-initiated. The
second trial is known as “Pulmonary Arterial Hypertension treated with Cardiosphere-derived Allogeneic Stem Cells”
or ALPHA. In both studies, Capricor is providing the necessary number of doses of cells and will receive a negotiated amount of
monetary compensation which is estimated to be approximately $2.1 million over several years. For the nine months ended September 30,
2020 and 2019, the Company recognized approximately $67,000 and $283,000, respectively, as revenue. As of September 30, 2020,
and December 31, 2019, zero and approximately $58,000, respectively, is outstanding and recorded in prepaid expenses and other
current assets. As of September 30, 2020, there remains approximately $0.6 million to be received by the Company, subject
to enrollment and certain conditions under the agreements. Due to the current COVID-19 pandemic, additional testing in each of
the ALPHA and REGRESS trials has been delayed and as a result, purchases of additional doses of CAP-1002 have been delayed.
CAPRICOR
THERAPEUTICS, INC.
Notes
to CONDENSED CONSOLIDATED financial statements
(unaudited)
Additional Sales Under May 2020
ATM Program
Subsequent to September 30,
2020 and through November 12, 2020, the Company sold an aggregate of 195,902 common shares under the May 2020 ATM Program
at an average price of approximately $4.73 per common share for gross proceeds of approximately $0.9 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 $29,000.