What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-03-15 compared with 2020-03-27 · 775 added, 774 removed, 586 unchanged (73% of the section changed)

Financial Statements and Supplementary Data

Statements and Supplementary Data

CAPRICOR THERAPEUTICS, INC.

to Financial Statements

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets

Consolidated Statements of Operations and Comprehensive Loss

Consolidated Statements of Stockholders’

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

REPORT OF INDEPENDENT

REGISTERED PUBLIC ACCOUNTING FIRM

of Independent Registered Public Accounting Firm

Balance Sheets

Statements of Operations and Comprehensive Loss

Statements of Stockholders’

Statements of Cash Flows

to Consolidated Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC

ACCOUNTING FIRM

To the Board of Directors and Stockholders of

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balance sheets of Capricor Therapeutics, Inc.

and Subsidiary (the Company) as of December 31, 2019 and 2018, and the related consolidated

statements of operations and comprehensive income (loss), stockholders’

equity (deficit), and cash flows for each of the

years in the two-year period ended December 31, 2019, and the related notes (collectively referred to as the consolidated financial

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial

position of the Company as of December 31, 2019 and 2018, and the consolidated results of its operations and its cash flows for

each of the years in the two-year period ended December 31, 2019, in conformity with accounting principles generally accepted in

the United States of America.

and Subsidiary (the Company) as of December 31, 2020 and 2019, and the

related consolidated statements of operations and comprehensive income (loss), stockholders’

equity (deficit), and cash flows

for each of the years in the two-year period ended December 31, 2020, and the related notes (collectively referred to as the

consolidated financial statements).

In our opinion, the consolidated financial statements present fairly, in all material respects,

the consolidated financial position of the Company as of December 31, 2020 and 2019, and the consolidated results of its operations

and its cash flows for each of the years in the two-year period ended December 31, 2020, in conformity with accounting principles

generally accepted in the United States of America.

Basis for Opinion

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that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

Critical audit matters arising from the

current period audit of the financial statements that were communicated or required to be communicated to the audit committee and

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially

challenging, subjective, or complex judgements.

We determined that there are no critical audit matters.

/s/ Rose, Snyder & Jacobs LLP

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31, 2020 AND 2019

December 31, 2019

December 31, 2018

CURRENT ASSETS

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Marketable securities

Restricted cash

Grant receivable

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Accounts payable and accrued expenses

Accounts payable and accrued expenses, related party

Note payable, current

TOTAL CURRENT LIABILITIES

LONG-TERM LIABILITIES

Note payable, net of current

CIRM liability

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Preferred stock, $0.001 par value, 5,000,000 shares authorized, none issued and outstanding

Common stock, $0.001 par value, 50,000,000 shares authorized, 5,227,398

and 3,138,748 shares issued and outstanding, respectively

Common stock, $0.001 par value, 50,000,000 shares authorized, 20,577,123 and 5,227,398 shares issued and outstanding, respectively

Additional paid-in capital

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THE YEARS ENDED DECEMBER 31, 2020 AND 2019

Years ended December 31,

ended December 31,

TOTAL REVENUE

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THE PERIOD FROM DECEMBER 31, 2018 THROUGH DECEMBER 31, 2020

ADDITIONAL PAID-

COMPREHENSIVE

INCOME (LOSS)

STOCKHOLDERS'

at December 31, 2017

INCOME (LOSS)

Balance at December 31, 2018

$ (66,738,914 )

of common stock, net of fees

gain on marketable securities

options exercised

Issuance of common stock, net of fees

Exercise of pre-funded common stock warrants

Stock-based compensation

Fractional shares eliminated pursuant to reverse stock split

Unrealized loss on marketable securities

Stock options exercised

Balance at December 31, 2019

$ (74,380,731 )

Issuance of common stock, net of fees

Exercise of pre-funded common stock warrants

Exercise of common warrants

Issuance of shares in abeyance

Stock-based compensation

Stock options exercised

Unrealized gain on marketable securities

(13,657,028 )

at December 31, 2018

$ (13,657,028 )

of common stock, net of fees

of pre-funded common stock warrants

shares eliminated pursuant to reverse stock split

loss on marketable securities

options exercised

at December 31, 2019

Balance at December 31, 2020

$ 116,216,966

$ (88,037,759 )

See accompanying notes to the audited consolidated

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CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2019

THE YEARS ENDED DECEMBER 31, 2020 AND 2019

Years ended December 31,

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Accounts payable and accrued expenses

Accounts payable and accrued expenses, related party

NET CASH USED IN OPERATING ACTIVITIES

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Purchase of marketable securities

(18,011,577 )

Proceeds from sales and maturities of marketable securities

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Net proceeds from sale of common stock

Proceeds from exercise of pre-funded common stock warrants

Proceeds from note payable

Proceeds from exercise of warrants

Repurchase of fractional shares pursuant to reverse stock split

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NET CASH PROVIDED BY FINANCING ACTIVITIES

NET DECREASE IN CASH, CASH EQUIVALENTS,

AND RESTRICTED CASH

Cash, cash equivalents, and restricted cash balance at beginning of period

Cash, cash equivalents, and restricted cash balance at end of period

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

Cash and cash equivalents balance at beginning of period

Cash and cash equivalents balance at end of period

SUPPLEMENTAL DISCLOSURES:

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financial statements.

CAPRICOR THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019 AND 2018

THERAPEUTICS, INC.

to CONSOLIDATED financial statements

31, 2020 AND 2019

AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Capricor Therapeutics,

Inc., a Delaware corporation (referred to herein as “Capricor Therapeutics”

or the “Company”), is a clinical-stage

biotechnology company focused on the discovery, development and commercialization of innovative cell and exosome-based therapies

for the treatment of diseases, with a focus on Duchenne muscular dystrophy (“DMD”) and other rare disorders.

(“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.

Therapeutics, Inc., a Delaware corporation (referred to herein as “Capricor Therapeutics”

or the “Company”

or “we”), 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.

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 Consolidation

Our consolidated financial

statements include the accounts of the Company and our wholly-owned subsidiary, Capricor.

All intercompany transactions have been

eliminated in consolidation.

statements include the accounts of the Company and our wholly-owned subsidiary.

All intercompany transactions have been eliminated

in consolidation.

Reclassification

Certain reclassification of prior period amounts has been made to conform to the current year presentation.

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”).

from a former collaboration partner and a loan award and a grant from the California Institute for Regenerative Medicine (“CIRM”).

Cash, cash equivalents,

and marketable securities as of December 31, 2019 were approximately $9.9 million, compared to approximately $7.3 million as of

December 31, 2018.

In December 2019, the Company closed an offering for gross proceeds of approximately $5.1 million comprised

of common stock and warrants.

The Company issued 531,173 shares of common stock, pre-funded warrants to purchase 3,608,304 shares

of common stock, and common warrants to purchase up to 4,139,477 shares of common stock (see Note 2 –

“Stockholders’

Equity”).

and marketable securities as of December 31, 2020 were approximately $32.7 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.

From October 19, 2017 to December 31, 2019, through the use of these programs, the Company has raised

gross proceeds of approximately $14.6 million (see Note 2 –

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”).

Additionally, the Company

has been awarded various grant and loan awards, which fund, in part, various pre-clinical and clinical activities (see Note 5 –

“Government Grant Awards”).

As of December 31, 2019, the Company has approximately $0.2 million remaining available

under its grants and awards for disbursement, pursuant to the terms of the awards.

The Company’s

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other working capital requirements.

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;

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 preclinical studies;

the timing and costs associated with the manufacturing of its product candidates;

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the costs involved in prosecuting and enforcing patent claims and other intellectual property rights.

CAPRICOR THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019 AND 2018

AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Based on the Company’s

current estimates, recent warrant exercise (see Note 9 –

“Subsequent Events”) and largely dependent on our decision

with respect to our DMD program, the Company believes it has sufficient cash to fund operations through at least the end of the

The Company’s

options to address its financial position 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

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.

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.

the extent the Company issues additional equity securities, its existing stockholders would experience substantial dilution.

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.

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.

THERAPEUTICS, INC.

to CONSOLIDATED financial statements

31, 2020 AND 2019

ORGANIZATION AND SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

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.

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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 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.

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.

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 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.

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

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financial statements in conformity with U.S.

generally accepted accounting principles (“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 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

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 consolidated financial

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

Management uses its historical records and knowledge of its business in making these estimates.

Accordingly, actual results

may differ from these estimates.

Cash and Cash Equivalents

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 CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019 AND 2018

AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The following table

provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that total

the same such amounts shown in the statement of cash flows.

Cash and cash equivalents

Restricted cash

Total cash, cash equivalents, and restricted

cash shown in the statements of cash flows

For the year ended

December 31, 2018, restricted cash represents funds received under a CIRM award (the “CIRM Award”) (See Note 5 –

“Government Grant Awards”).

Restricted cash funds are to be allocated to the research costs as incurred.

a reduction of restricted cash occurs when the Company deems certain costs are attributable to the respective award.

As of December

31, 2019, the Company had no restricted funds.

Marketable Securities

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was $139,560 and $128,680 for the years ended December 31, 2020 and 2019, respectively.

THERAPEUTICS, INC.

to CONSOLIDATED financial statements

31, 2020 AND 2019

ORGANIZATION AND SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Property and equipment,

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Property and equipment, net

CAPRICOR THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019 AND 2018

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

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 approximately $43,276 for both the years ended December 31, 2019 and

Total amortization expense was $4,330 and $43,276 for the years ended December 31, 2020 and 2019,

respectively.

A summary of future amortization expense as of December 31, 2020 is as follows:

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No impairment related to long-lived assets was recorded for the years ended December 31, 2020 and 2019.

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

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.

THERAPEUTICS, INC.

to CONSOLIDATED financial statements

31, 2020 AND 2019

ORGANIZATION AND SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.

Revenue Recognition

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ASU 606 using the modified retrospective approach for all contracts in process as of January 1, 2018.

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 5 - “Government

Grant Awards”).

Grant income is due upon submission of reimbursement request.

The transaction price varies for grant income

based on the expenses incurred under the awards.

Government Research Grants

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 8 –

“Related Party

Transactions”).

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

Income taxes are recognized

for the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets are recognized for the

future tax consequences of transactions that have been recognized in the Company's financial statements or tax returns.

allowance is provided when it is more likely than not that some portion or the entire deferred tax asset will not be realized.

CAPRICOR THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019 AND 2018

AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Miscellaneous income is based on contracts with fixed

transaction prices.

Income taxes are recognized for the amount

of taxes payable or refundable for the current year and deferred tax liabilities and assets are recognized for the future tax consequences

of transactions that have been recognized in the Company’s financial statements or tax returns.

A valuation allowance is

provided when it is more likely than not that some portion or the entire deferred tax asset will not be realized.

The Company uses guidance

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of the position, and must assume that the tax position will be examined by taxing authorities.

THERAPEUTICS, INC.

to CONSOLIDATED financial statements

31, 2020 AND 2019

ORGANIZATION AND SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

As of December 31,

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$31.5 million will carryforward indefinitely, but may be subject to an 80% limitation upon utilization.

As of December 31, 2019, the

Company had state net operating loss carryforwards of approximately $92.5 million, available to reduce future taxable income, which

will begin to expire in 2028.

Utilization of these net operating losses could be limited under Section 382 of the Internal Revenue

Code of 1986, as amended (the “Code”), and similar state laws based on ownership changes and the value of the Company’s

Additionally, currently, the Company has approximately $1.4 million of federal research and development credits and approximately

$2.7 million of federal orphan drug credits, available to offset future taxable income.

These federal research and development

and orphan drug credits begin to expire in 2027 and 2035, respectively.

Under Section 382 of

the Code, the Company’s ability to utilize NOL carryforwards or other tax attributes, such as federal tax credits, in any

taxable year may be limited if the Company has experienced an “ownership change.”

Generally, a Section 382 ownership

change occurs if one or more stockholders or groups of stockholders who owns at least 5% of a corporation’s stock increases

its ownership by more than 50 percentage points over its lowest ownership percentage within a specified testing period.

rules may apply under state tax laws.

We have experienced an ownership change that we believe under Section 382 of the Code will

result in limitation in our ability to utilize net operating losses and credits.

In addition, the Company may experience future

ownership changes as a result of future offerings or other changes in ownership of its stock.

As a result, the amount of the NOLs

and tax credit carryforward presented in the financial statement could be limited and may expire unutilized.

The Company’s

net operating loss carryforwards are subject to Internal Revenue Service (“IRS”) examination until they are fully utilized

and such tax years are closed.

As of December 31,

2020, the Company had state net operating loss carryforwards of approximately $103.7 million, available to reduce future taxable

income, which will begin to expire in 2028.

Utilization of these net operating losses could be limited under Section 382 of

the Internal Revenue Code of 1986, as amended (the “Code”), and similar state laws based on ownership changes and the

value of the Company’s stock.

Additionally, currently, the Company has approximately $1.4 million of federal research and

development credits and approximately $3.1 million of federal orphan drug credits, available to offset future taxable income.

federal research and development and orphan drug credits begin to expire in 2027 and 2035, respectively.

Under Section 382

of the Code, the Company’s ability to utilize NOL carryforwards or other tax attributes, such as federal tax credits, in

any taxable year may be limited if the Company has experienced an “ownership change.”

Generally, a Section 382

ownership change occurs if one or more stockholders or groups of stockholders who owns at least 5% of a corporation’s

stock increases its ownership by more than 50 percentage points over its lowest ownership percentage within a specified testing

Similar rules may apply under state tax laws.

We have experienced an ownership change that we believe under Section 382

of the Code will result in limitation in our ability to utilize net operating losses and credits.

In addition, the Company may

experience future ownership changes as a result of future offerings or other changes in ownership of its stock.

As a result, the

amount of the NOLs and tax credit carryforward presented in the financial statement could be limited and may expire unutilized.

The Company’s net operating loss carryforwards are subject to Internal Revenue Service (“IRS”) examination until

they are fully utilized and such tax years are closed.

The Company’s

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interest or penalties for the years ended December 31, 2020 and 2019.

The Company files income tax returns with the IRS and the

California Franchise Tax Board.

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.

The Company files income tax returns with the IRS and

the California Franchise Tax Board.

Research and Development

Costs relating to the

design and development of new products are expensed as research and development as incurred in accordance with FASB ASC 730-10,

Research and Development .

Research and development costs amounted to approximately $5.1 million and $12.1 million for the

years ended December 31, 2019 and 2018, respectively.

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

$8.5 million and $5.1 million for the years ended December 31, 2020 and 2019, respectively.

Comprehensive Income (Loss)

7 unchanged sentences

to a net unrealized gain (loss) on marketable securities.

For the years ended December 31, 2019 and 2018, the Company’s other

comprehensive gain (loss) was $(13,150) and $773, respectively.

CAPRICOR THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019 AND 2018

AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

For the years ended December 31, 2020 and 2019, the Company’s

other comprehensive income (loss) was $757 and $(13,150), respectively.

THERAPEUTICS, INC.

to CONSOLIDATED financial statements

31, 2020 AND 2019

ORGANIZATION AND SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 contract

research organizations, or 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.

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.

part of the process of preparing our consolidated financial statements, we are required to estimate our accrued expenses.

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.

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

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

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

preclinical 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 delays 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 2020 (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.

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

3 unchanged sentences

on estimated fair values.

THERAPEUTICS, INC.

to CONSOLIDATED financial statements

31, 2020 AND 2019

ORGANIZATION AND SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The Company estimates

19 unchanged sentences

The Company reports

earnings per share in accordance with FSAB ASC 260-10, Earnings per Share.

earnings per share in accordance with FASB ASC 260-10, Earnings per Share.

Basic earnings (loss) per share is computed by

5 unchanged sentences

earnings (loss) per share for the years ended December 31, 2020 and 2019 were as follows:

CAPRICOR THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019 AND 2018

AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

December 31, 2020

4 unchanged sentences

Dilutive effect of stock options

Common stock and common stock equivalents used

for diluted loss per share

For the years ended

December 31, 2019 and 2018, warrants and options to purchase 8,256,609 and 785,894 shares, respectively, have been excluded from

the computation of potentially dilutive securities.

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 years ended December 31, 2019 and 2018.

Common stock and common

stock equivalents used for diluted loss per share

the years ended December 31, 2020 and 2019, warrants and options to purchase 2,488,046 and 8,256,609 shares of common stock,

respectively, have been excluded from the computation of potentially dilutive securities.

Potentially d ilutive 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 years ended

December 31, 2020 and 2019.

THERAPEUTICS, INC.

to CONSOLIDATED financial statements

31, 2020 AND 2019

ORGANIZATION AND SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Fair Value Measurements

4 unchanged sentences

Input Definition:

Inputs are unadjusted, quoted prices for identical assets or liabilities in

active markets at the measurement date.

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.

Unobservable inputs that reflect management’s best estimate of what

market participants would use in pricing the asset or liability at the

measurement date.

Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.

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.

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

2 unchanged sentences

Marketable Securities

December 31, 2018

Marketable Securities

Carrying amounts reported

7 unchanged sentences

to be significantly different from its carrying amount because the stated rates for such debt reflect current market rates and

CAPRICOR THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019 AND 2018

AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements

In February 2016, the

FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”) , which supersedes existing guidance on accounting

for leases in Leases (Topic 840) and issued additional clarification throughout 2018.

Under the new guidance, a lessee should

recognize assets and liabilities that arise from its leases and disclose qualitative and quantitative information about its leasing

arrangements.

The Company elected the optional transition method to apply the standard as of January 1, 2019 as the effective date

and therefore, did not apply the standard to comparative periods.

The Company did not apply the recognition requirements to short-term

leases and recognized those lease payments in the Consolidated Statements of Operations and Comprehensive Loss on a straight-line

basis over the lease term.

The Company also elected the available package of practical expedients in transition which allowed us

to not re-assess whether existing or expired arrangements contain a lease, the lease classification of existing or expired leases,

or whether previous initial direct costs would qualify for capitalization under the new lease standard.

The adoption of this update

did not have a material impact on the Company’s financial statements.

In June 2018, the FASB

issued ASU 2018-07, Compensation –

Stock Compensation (Topic 718):

Improvements to Nonemployee Share-Based Payment Accounting ,

which simplifies several aspects of the accounting for nonemployee share-based payment transactions resulting from expanding the

scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees.

early adopted ASU 2018-07 and all subsequent updates related to this topic on a prospective basis effective July 1, 2018.

of this update did not have a material impact on the Company’s financial statements.

In November 2018, the

FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808):

In November 2018,

the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808):

clarifying the interaction between Topic 808 and Topic

The amendments in the update clarifies 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

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.

Early adoption is permitted.

The Company is currently evaluating the impact of the new guidance on our Consolidated financial statements.

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.

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.

In October 2019,

the FASB issued ASU 2019-12, which affects general principles within Topic 740, Income Taxes.

The amendments of ASU 2019-12 are

meant to simplify and reduce the cost of accounting for income taxes.

For public business entities, the amendments in this Update

are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020.

believes that the adoption of this new accounting guidance will not have a material impact on its financial statements and footnote

Other recent accounting

2 unchanged sentences

financial statement presentation or disclosures.

STOCKHOLDER’S

Common Stock Sales Agreements

Since October 2017,

the Company has entered into multiple Common Stock Sales Agreements with Wainwright establishing ATM programs by which Wainwright

sold and may continue to sell 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

These programs are referred to below as the “October 2017 ATM Program,”

the “July 2019 ATM Program,”

and the “August 2019 ATM Program”

based on when each program was initiated.

In addition, the Company completed a public

offering of its common stock in December 2019.

October 2017 ATM Program

From October 19, 2017

through expiration of the October 2017 ATM Program on April 23, 2019, the Company sold an aggregate of 899,233 shares of common

stock at an average price of approximately $13.04 per share for gross proceeds of approximately $11.7 million.

The Company paid

3.0% cash commission on the gross proceeds, plus reimbursement of expenses of Wainwright and legal fees in the aggregate amount

of approximately $0.4 million.

CAPRICOR THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019 AND 2018

THERAPEUTICS, INC.

to CONSOLIDATED financial statements

31, 2020 AND 2019

Paycheck Protection Program Loan

In the second quarter

of 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.

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 10 months after the end of the covered period for the borrower’s loan forgiveness (either 8 or

Loan payments are deferred for borrowers who apply for loan forgiveness until SBA remits the borrower’s loan forgiveness

amount to the lender.

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 submitted a loan forgiveness

application to CNB in the first quarter of 2021.

CNB has 60 days to review and comment on the loan forgiveness application, otherwise,

it will be sent to the SBA, who has 90 days to review from date of submission from CNB.

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.

STOCKHOLDER’S

EQUITY (Continued)

Since July 2019,

the Company has established multiple “at-the-market”, or ATM, programs pursuant to a Common Stock Sales Agreement with

Wainwright 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

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,

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.

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

1 unchanged sentence

2019, the Company initiated the August 2019 ATM Program.

Since August 29, 2019 and through the date of this filing, the Company has 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.

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.

THERAPEUTICS, INC.

to CONSOLIDATED financial statements

31, 2020 AND 2019

STOCKHOLDER’S

EQUITY (Continued)

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 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.

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.

December 2019 Financing

1 unchanged sentence

the Company completed a public offering pursuant to which the Company issued (i) 531,173 shares of its common stock, (ii) 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 “Placement Agent Warrants”) to purchase an aggregate of 203,915 shares of common stock.

The 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.

Since December 19, 2019 and through March 26, 2020, all 3,608,304 pre-funded

warrants and 78,304 common warrants have been exercised (see Note 9 - "Subsequent Events").

(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

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 December 31, 2020, 61,173 December 2019 Common Warrants remained outstanding under

the December 2019 Financing.

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.

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.

THERAPEUTICS, INC.

to CONSOLIDATED financial statements

31, 2020 AND 2019

STOCKHOLDER’S

EQUITY (Continued)

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

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.

Outstanding Shares

1 unchanged sentence

20,577,123 shares of common stock issued and outstanding.

STOCK AWARDS,

WARRANTS AND OPTIONS

STOCK AWARDS, WARRANTS

The following table

summarizes all warrant activity for the years ended December 31, 2020 and 2019:

Weighted Average

Exercise Price

Weighted Average Exercise Price

Outstanding at January 1, 2019

Outstanding at December 31, 2019

(11,575,523 )

Outstanding at December 31, 2020

CAPRICOR THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019 AND 2018

STOCK AWARDS,

WARRANTS AND OPTIONS (Continued)

The following table

6 unchanged sentences

Common Warrants

Pre-Funded Warrants

Common Warrants

THERAPEUTICS, INC.

to CONSOLIDATED financial statements

31, 2020 AND 2019

STOCK AWARDS, WARRANTS

AND OPTIONS (Continued)

Stock Options

The Company’s

Board of Directors (the “Board”) has approved three stock option plans:

Board of Directors (the “Board”) has approved four stock option plans:

(i) the 2006 Stock Option Plan, (ii) the

Restated Equity Incentive Plan (which superseded the 2006 Stock Option Plan) (the “2012 Plan”), and (iii) the 2012

Non-Employee Director Stock Option Plan (the “2012 Non-Employee Director Plan”).

In addition, subsequent to December

31, 2019, the Board has approved the 2020 Equity Incentive Plan (the “2020 Plan”), however the 2020 Plan will not become

effective unless and until it is approved by the stockholders of the Company.

The Company intends to seek stockholder approval

for the 2020 Plan at its 2020 annual stockholders’

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

10 unchanged sentences

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).

the fiscal years beginning on January 1, 2020 and 2019, the amount of shares that were added was equal to 104,547 and 62,775 shares,

respectively.

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

1 unchanged sentence

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.

For the fiscal year beginning on January 1, 2021, the number of shares added was equal to 823,084 shares.

As of December 31,

2020, 999,887 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 a committee appointed by 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.

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.

Stock options are granted with an exercise price equal to the closing price of the Company’s common stock on the date of

4 unchanged sentences

average fair value of the options granted during 2020 and 2019 were approximately $3.93 and $2.73 per share, respectively.

THERAPEUTICS, INC.

to CONSOLIDATED financial statements

31, 2020 AND 2019

STOCK AWARDS, WARRANTS

AND OPTIONS (Continued)

The Company estimates

2 unchanged sentences

estimate the fair value of stock options issued in the years ended December 31, 2020 and 2019:

CAPRICOR THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019 AND 2018

STOCK AWARDS,

WARRANTS AND OPTIONS (Continued)

December 31, 2020

17 unchanged sentences

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 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.

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.

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

The following table

2 unchanged sentences

Options Outstanding

Weighted Average Term (yrs.)

Weighted Average Exercise Price

$1.90 - $3.25

$11.40 - $35.80

Weighted Average

Exercise Price

$1.50 - $12.10

1 unchanged sentence

Options Exercisable

Weighted Average Term (yrs.)

Weighted Average Exercise Price

$1.90 - $3.25

$11.40 - $35.80

Weighted Average

Exercise Price

$1.50 - $12.10

CAPRICOR THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019 AND 2018

STOCK AWARDS,

WARRANTS AND OPTIONS (Continued)

THERAPEUTICS, INC.

to CONSOLIDATED financial statements

31, 2020 AND 2019

STOCK AWARDS, WARRANTS

AND OPTIONS (Continued)

As of December 31,

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schedule summarizing employee and non-employee stock option activity for the years ended December 31, 2020 and 2019:

Number of Options

Weighted Average Exercise Price

Aggregate Intrinsic Value

Weighted Average

Exercise Price

Intrinsic Value

Outstanding at January 1, 2019

4 unchanged sentences

Exercisable at December 31, 2020

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.

In February 2020, the

board of directors of the Company approved an option repricing program (see Note 9 –

“Subsequent Events”).

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.

CONCENTRATIONS

8 unchanged sentences

maintained approximately $32.2 million of uninsured deposits.

GOVERNMENT GRANT

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.

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.

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

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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 CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019 AND 2018

GOVERNMENT GRANT

AWARDS (Continued)

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.

THERAPEUTICS, INC.

to CONSOLIDATED financial statements

31, 2020 AND 2019

GOVERNMENT GRANT AWARDS

After completing the

20 unchanged sentences

therefore, the Company accounts for this award as a liability rather than income.

June 2019, Capricor completed all milestones associated with the CIRM Award and expended all funds received.

quarter of 2019, Capricor completed all final close-out documentation associated with this award.

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)

4 unchanged sentences

$4.2 million, subject to annual and quarterly reporting requirements as well as completion of the study objectives.

30, 2019, approximately $0.7 million had been 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.

utilized approximately $0.7 million under the terms of the NIH grant award.

In the second quarter of 2019, the award was closed,

and all filings were completed.

Department of Defense Grant Award

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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.

was granted a no-cost extension until September 29, 2020 to be able to utilize these funds.

As of December 31, 2019, approximately

$2.2 million has been incurred under the terms of the award.

COMMITMENTS AND

CONTINGENCIES

Capricor leases space

for its corporate offices from The Bubble Real Estate Company, LLC 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 Company, LLC.

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 and funds returned to Capricor.

Effective January 1,

2020, the Company entered into an amendment with the Bubble Real Estate Company, LLC pursuant to which Capricor extended the lease

for an additional year ending December 31, 2020 and reduced the square footage.

The monthly rental payment is $16,229 for this

annual period (see Note 9 –

“Subsequent Events”).

CAPRICOR THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019 AND 2018

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.

March 1, 2019, the square footage of the leased premises was reduced, resulting in a rent reduction of approximately $4,000 per

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.

The Company has a further option to extend the Facilities Lease

through July 31, 2021.

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 under the terms of the award.

We are currently completing all close-out documentation associated with this award.

COMMITMENTS AND CONTINGENCIES

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

Effective January 1, 2021, we entered into an amendment with the Bubble Real Estate Company, LLC pursuant

to which we extended our lease for an additional year ending December 31, 2021.

The lease is terminable by either party upon

90 days’

written notice to the other party.

The monthly rental payment is $13,073 for this annual period.

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.

In July 2020, Capricor exercised its option to

extend the term of the Facilities Lease for an additional 12-month period through July 31, 2021 with a monthly lease payment

The Company has a further option to extend the Facilities Lease with respect to a portion of the leased premises through

July 31, 2022 and a monthly lease payment of $10,707.

At this time, we are actively considering new facilities for our research,

development and/or manufacturing activities or the possible extension of our current lease.

THERAPEUTICS, INC.

to CONSOLIDATED financial statements

31, 2020 AND 2019

COMMITMENTS AND CONTINGENCIES

Included within the

table below, future minimum rental payments to related parties totaled approximately $110,635.

A summary of future minimum rental

payments required under operating leases as of December 31, 2019 is as follows:

table below, future minimum rental payments to related parties totaled $110,635.

A summary of future minimum rental payments required

under operating leases as of December 31, 2020 is as follows:

Operating Leases

Expenses incurred under

operating leases to unrelated parties for the years ended December 31, 2019 and 2018 were approximately $317,404 and $332,640,

operating leases to unrelated parties for the years ended December 31, 2020 and 2019 were $194,748 and $317,404, respectively.

Expenses incurred under operating leases to related parties for the years ended December 31, 2020 and 2019 were $189,660 and

$197,562, respectively.

Expenses incurred under operating leases to related parties for each of the years ended December 31, 2019 and 2018

were approximately $197,562 and $237,072, respectively.

Legal Contingencies

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an estimated liability.

Other Funding Commitments

The Company is a party to various agreements,

principally relating to licensed technology, that require future payments relating to milestones that may be met in subsequent

periods or royalties on future sales of specified products (see Note 8 –

“License Agreements”).

Additionally, the Company is a party to various agreements with

contract research organizations and contract manufacturers that generally provide for termination upon notice, with the exact amounts

owed in the event of termination to be based on the timing of the termination and the terms of the agreement.

Employee Severances

4 unchanged sentences

LICENSE AGREEMENTS

Capricor’s Technology - CAP-1002, CAP-1001, CSps and

Capricor’s Technology - CAP-1002

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.

University of Rome License Agreement

Degli Studi Di Roma La Sapienza, or the University of Rome, JHU and CSMC.

Capricor has also entered into an exclusive license agreement

for intellectual property rights related to exosomes with CSMC and a non-exclusive license agreement with JHU related to the imaging-based

serology technology for COVID-19.

In addition, Capricor has filed patent applications related to the technology developed by its

own scientists.

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.

of Rome entered into a License Agreement, dated June 21, 2006, or 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,

1 unchanged sentence

cardiac stem cells in cardiac care.

CAPRICOR THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019 AND 2018

LICENSE AGREEMENTS

THERAPEUTICS, INC.

to CONSOLIDATED financial statements

31, 2020 AND 2019

LICENSE AGREEMENTS (Continued)

Pursuant to the Rome

15 unchanged sentences

The Johns Hopkins University License

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

into an Exclusive License Agreement, effective June 22, 2006, or 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.

7 unchanged sentences

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.

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.

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 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

Food and Drug Administration, or 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.

milestone is triggered upon successful completion of a full Phase II study for which a payment of $250,000 will be due.

time, it is uncertain as to whether the $250,000 milestone payment will become due.

The JHU License Agreement

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written notice.

CAPRICOR THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019 AND 2018

LICENSE AGREEMENTS

License Agreement

for Serology Diagnostic

Capricor and JHU entered

into a Nonexclusive License Agreement, effective January 6, 2021, or the JHU Serology License Agreement, which provides for

the grant of a non-exclusive, world-wide, non-royalty-bearing license by JHU to Capricor to develop and commercialize licensed

products under the licensed patent rights for COVID-19.

THERAPEUTICS, INC.

to CONSOLIDATED financial statements

31, 2020 AND 2019

LICENSE AGREEMENTS (Continued)

Cedars-Sinai Medical Center License Agreements

1 unchanged sentence

On January 4,

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.

2010, Capricor entered into an Exclusive License Agreement with CSMC, or 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,

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

Capricor entered into an Amended and Restated Exclusive License Agreement with CSMC, or 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

12 unchanged sentences

Additionally, Capricor is required to meet certain spending and development

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

11 unchanged sentences

(i) if Capricor ceases, dissolves or winds up its business operations;

event of the insolvency or bankruptcy of Capricor or if Capricor makes an assignment for the benefit of its creditors;

the event of the insolvency or bankruptcy of Capricor or if Capricor makes an assignment for the benefit of its creditors;

performance by either party jeopardizes the licensure, accreditation or tax exempt status of CSMC or the agreement is deemed illegal

2 unchanged sentences

(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;

notice from CSMC if

Capricor fails to undertake commercially reasonable efforts to exploit the patent rights or future patent rights;

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.

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 has been 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 CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019 AND 2018

LICENSE AGREEMENTS

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 has been 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”).

the Fourth License Amendment, the description of scheduled patent rights has been replaced by a revised schedule that includes

two additional patent applications.

August 5, 2016, December 26, 2017, and June 20, 2018, Capricor and CSMC entered into a number of amendments to the

Amended CSMC License Agreement, pursuant to which the parties agreed to add and delete certain patent applications from the list

of scheduled patents.

Capricor reimbursed CSMC for certain attorneys’

fees and filing fees incurred in connection with the

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.

On May 5, 2014,

Capricor entered into an Exclusive License Agreement with CSMC, or 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

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.

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.

THERAPEUTICS, INC.

to CONSOLIDATED financial statements

31, 2020 AND 2019

LICENSE AGREEMENTS (Continued)

Pursuant to the Exosomes

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(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

the event of the insolvency or bankruptcy of Capricor or if Capricor makes an assignment for the benefit of its creditors;

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;

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.

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 has been 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 CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019 AND 2018

LICENSE AGREEMENTS

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.

the Third Exosomes License Amendment, (i) the description of scheduled patent rights has been 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

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”).

Fifth License Amendment, (i) the description of scheduled patent rights has been replaced by a revised schedule that includes four

additional patent applications;

and (ii) Capricor is required to reimburse CSMC approximately $27,000 for attorneys’

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”).

Sixth License Amendment, the milestone deadline for filing an IND for at least one product has been extended to December 31, 2019.

If the Company does not file an IND by December 31, 2019, or negotiate an additional extension of the milestone deadline, CSMC would

have 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 has 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 is cured by April 19, 2020, the Exosomes License Agreement will automatically terminate.

intends to file an IND in advance of the April 19, 2020 deadline in order to avoid the termination of the license, or alternatively

negotiate an extension of the deadline with CSMC.

Such intent has been communicated to CSMC.

RELATED PARTY

(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’

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.

February 27, 2015, June 10, 2015, August 5, 2016, December 26, 2017, June 20, 2018, September 25,

2018, August 19, 2020, and August 28, 2020 Capricor and CSMC entered into a number of amendments to the Exosomes License

These amendments added additional patent applications and patent families to the Exosomes License Agreement, added certain

defined product development milestone payments, modified certain milestone deadlines, and added 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.

These amendments also obligated Capricor to reimburse CSMC for certain

attorneys’

fees and filing fees in connection with the additional patent applications and patent families.

What changed 10-K

Item 8. Financial Statements and Supplementary Data