CAPRICOR THERAPEUTICS, INC. 10-K

ITEM 8. Financial Statements and Supplementary Data CAPRICOR THERAPEUTICS, INC. Index to Financial Statements Page Report of Independent Registered Public Accounting Firm 91 Consolidated Balance Sheets 92 Consolidated Statements of Operations and Comprehensive Loss 93 Consolidated Statements of Stockholders’ Equity 94 Consolidated Statements of Cash Flows 95 Notes to Consolidated Financial Statements 96 90 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Capricor Therapeutics, Inc. and Subsidiary Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Capricor Therapeutics, Inc. 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 These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe 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 that: (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 Rose, Snyder & Jacobs LLP We have served as the Company’s auditor since 2011. Encino, California March 15, 2021 91 CAPRICOR THERAPEUTICS, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2020 AND 2019 ASSETS December 31, 2020 December 31, 2019 CURRENT ASSETS Cash and cash equivalents $ 32,665,874 $ 3,899,328 Marketable securities - 5,986,050 Grant receivable - 87,968 Prepaid expenses and other current assets 1,011,209 571,382 TOTAL CURRENT ASSETS 33,677,083 10,544,728 PROPERTY AND EQUIPMENT, net 850,847 442,806 OTHER ASSETS Intangible assets, net of accumulated amortization of $257,517 and $253,187, respectively 2,165 6,495 Other assets 88,701 119,608 TOTAL ASSETS $ 34,618,796 $ 11,113,637 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses $ 2,724,593 $ 897,992 Note payable, current 246,689 - TOTAL CURRENT LIABILITIES 2,971,282 897,992 LONG-TERM LIABILITIES Note payable, net of current 71,471 - CIRM liability 3,376,259 3,376,259 TOTAL LONG-TERM LIABILITIES 3,447,730 3,376,259 TOTAL LIABILITIES 6,419,012 4,274,251 COMMITMENTS AND CONTINGENCIES (NOTE 7) STOCKHOLDERS' EQUITY 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, 20,577,123 and 5,227,398 shares issued and outstanding, respectively 20,577 5,227 Additional paid-in capital 116,216,966 81,215,647 Accumulated other comprehensive income (loss) - (757 ) Accumulated deficit (88,037,759 ) (74,380,731 ) TOTAL STOCKHOLDERS' EQUITY 28,199,784 6,839,386 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 34,618,796 $ 11,113,637 See accompanying notes to the audited consolidated financial statements. 92 CAPRICOR THERAPEUTICS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019 Years ended December 31, 2020 2019 REVENUE Revenue $ 310,250 $ 1,005,028 TOTAL REVENUE 310,250 1,005,028 OPERATING EXPENSES Research and development 8,457,000 5,141,805 General and administrative 5,543,221 3,597,111 TOTAL OPERATING EXPENSES 14,000,221 8,738,916 LOSS FROM OPERATIONS (13,689,971 ) (7,733,888 ) OTHER INCOME (EXPENSE) Investment income 32,943 94,791 Loss on disposal of fixed asset - (2,720 ) TOTAL OTHER INCOME (EXPENSE) 32,943 92,071 NET LOSS (13,657,028 ) (7,641,817 ) OTHER COMPREHENSIVE INCOME (LOSS) Net unrealized gain (loss) on marketable securities 757 (13,150 ) COMPREHENSIVE LOSS $ (13,656,271 ) $ (7,654,967 ) Net loss per share, basic and diluted $ (0.88 ) $ (2.06 ) Weighted average number of shares, basic and diluted 15,571,056 3,711,333 See accompanying notes to the audited consolidated financial statements. 93 CAPRICOR THERAPEUTICS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE PERIOD FROM DECEMBER 31, 2018 THROUGH DECEMBER 31, 2020 COMMON STOCK ADDITIONAL OTHER TOTAL PAID-IN COMPREHENSIVE ACCUMULATED STOCKHOLDERS' SHARES AMOUNT CAPITAL INCOME (LOSS) DEFICIT EQUITY Balance at December 31, 2018 3,138,748 $ 3,138 $ 71,338,970 $ 12,393 $ (66,738,914 ) $ 4,615,587 Issuance of common stock, net of fees 1,637,849 1,638 9,173,115 - - 9,174,753 Exercise of pre-funded common stock warrants 450,000 450 - - - 450 Stock-based compensation - - 700,984 - - 700,984 Fractional shares eliminated pursuant to reverse stock split (27 ) - (193 ) - - (193 ) Unrealized loss on marketable securities - - - (13,150 ) - (13,150 ) Stock options exercised 828 1 2,771 - - 2,772 Net loss - - - - (7,641,817 ) (7,641,817 ) Balance at December 31, 2019 5,227,398 $ 5,227 $ 81,215,647 $ (757 ) $ (74,380,731 ) $ 6,839,386 Issuance of common stock, net of fees 4,173,478 4,174 27,338,895 - - 27,343,069 Exercise of pre-funded common stock warrants 3,158,304 3,158 - - - 3,158 Exercise of common warrants 4,417,219 4,417 5,680,943 - - 5,685,360 Issuance of shares in abeyance 3,555,500 3,556 (3,556 ) - - - Stock-based compensation - - 1,952,679 - - 1,952,679 Stock options exercised 45,224 45 32,358 - - 32,403 Unrealized gain on marketable securities - - - 757 - 757 Net loss - - - - (13,657,028 ) $ (13,657,028 ) Balance at December 31, 2020 20,577,123 $ 20,577 $ 116,216,966 $ - $ (88,037,759 ) $ 28,199,784 See accompanying notes to the audited consolidated financial statements. 94 CAPRICOR THERAPEUTICS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019 Years ended December 31, 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (13,657,028 ) $ (7,641,817 ) Adjustments to reconcile net loss to net cash used in operating activities: Loss on disposal of fixed asset - 2,720 Depreciation and amortization 143,890 171,956 Stock-based compensation 1,952,679 700,984 Change in assets - (increase) decrease: Receivables 87,968 116,900 Prepaid expenses and other current assets (439,827 ) 152,802 Other assets 30,907 32,180 Change in liabilities - increase (decrease): Accounts payable and accrued expenses 1,826,601 (357,226 ) NET CASH USED IN OPERATING ACTIVITIES (10,054,810 ) (6,821,501 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of marketable securities (6,130,193 ) (6,002,050 ) Proceeds from sales and maturities of marketable securities 12,117,000 3,000,000 Purchases of property and equipment (547,601 ) - NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 5,439,206 (3,002,050 ) CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from sale of common stock 27,343,069 9,174,753 Proceeds from note payable 318,160 - Proceeds from exercise of warrants 5,688,518 450 Repurchase of fractional shares pursuant to reverse stock split - (193 ) Proceeds from stock options 32,403 2,772 NET CASH PROVIDED BY FINANCING ACTIVITIES 33,382,150 9,177,782 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 28,766,546 (645,769 ) Cash and cash equivalents balance at beginning of period 3,899,328 4,545,097 Cash and cash equivalents balance at end of period $ 32,665,874 $ 3,899,328 SUPPLEMENTAL DISCLOSURES: Interest paid in cash $ - $ - Income taxes paid in cash $ - $ - See accompanying notes to the audited consolidated financial statements. 95 CAPRICOR THERAPEUTICS, INC. Notes to CONSOLIDATED financial statements DECEMBER 31, 2020 AND 2019 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business Capricor Therapeutics, Inc., a Delaware corporation (referred to herein as “Capricor Therapeutics” or the “Company” or “we”), is a 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. 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. Liquidity The Company has historically financed its research and development activities as well as operational expenses from equity financings, government grants, a payment 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, 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 (see Note 3 – “Stockholders’ Equity”). The Company’s principal uses of cash are for research and development expenses, general and administrative expenses, capital expenditures and other working capital requirements. 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 preclinical studies; · the timing and costs associated with the manufacturing of its product candidates; · the timing and costs associated with commercialization of its product candidates; · the number and scope of its research programs; and · the costs involved in prosecuting and enforcing patent claims and other intellectual property rights. The Company’s options for raising additional capital include potentially seeking additional financing primarily from, but not limited to, the sale and issuance of equity or debt securities, the licensing or sale of its technology and other assets, and from government grants. The Company will require substantial additional capital to fund its operations, in particular if it elects to expand its clinical programs as contemplated by its current business plan. The Company cannot provide assurances that financing will be available when and as needed or that, if available, financing will be available on favorable or acceptable terms. If the Company is unable to obtain additional financing when and if required, it would have a material adverse effect on the Company’s business and results of operations. The Company would likely need to delay, curtail or terminate all or portions of its clinical trial programs. To the extent the Company issues additional equity securities, its existing stockholders would experience substantial dilution. 96 CAPRICOR THERAPEUTICS, INC. Notes to CONSOLIDATED financial statements DECEMBER 31, 2020 AND 2019 1. 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 of Amendment to the Company’s Certificate of Incorporation filed with the Secretary of State of the State of Delaware. The reverse stock split was reflected on the Nasdaq Capital Market (“Nasdaq”) beginning with the opening of trading on June 5, 2019. 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. The number of authorized shares of the Company’s common stock remained unchanged. The reverse stock split affected all issued and outstanding shares of the Company’s common stock, and the respective numbers of shares of common stock underlying outstanding stock options, outstanding warrants and the Company’s equity incentive plans were proportionately adjusted. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the 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 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. Marketable Securities The Company determines the appropriate classification of its marketable securities at the time of purchase and reevaluates such designation at each balance sheet date. All of the Company’s marketable securities are considered as available-for-sale and carried at estimated fair values. Realized gains and losses on the sale of debt and equity securities are determined using the specific identification method. Unrealized gains and losses on available-for-sale securities are excluded from net income (loss) and reported in accumulated other comprehensive income (loss) as a separate component of stockholders’ equity. Property and Equipment Property and equipment are stated at cost. Repairs and maintenance costs are expensed in the period incurred. Depreciation is computed using the straight-line method over the related estimated useful life of the asset, which such estimated useful lives range from five to seven years. Leasehold improvements are depreciated on a straight-line basis over the shorter of the useful life of the asset or the lease term. Depreciation was $139,560 and $128,680 for the years ended December 31, 2020 and 2019, respectively. 97 CAPRICOR THERAPEUTICS, INC. Notes to CONSOLIDATED financial statements DECEMBER 31, 2020 AND 2019 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Property and equipment, net consisted of the following at December 31: 2020 2019 Furniture and fixtures $ 48,676 $ 43,617 Laboratory equipment 1,473,708 931,166 Leasehold improvements 47,043 47,043 1,569,427 1,021,826 Less accumulated depreciation (718,580 ) (579,020 ) Property and equipment, net $ 850,847 $ 442,806 Intangible Assets Amounts attributable to intellectual property consist primarily of the costs associated with the acquisition of certain technologies, patents, pending patents and related intangible assets with respect to research and development activities. Certain intellectual property assets are stated at cost and are amortized on a straight-line basis over the respective estimated useful lives of the assets ranging from five to fifteen years. Total amortization expense was $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: Years ended Amortization Expense 2021 2,165 The Company reviews goodwill and intangible assets at least annually for possible impairment. Goodwill and intangible assets are reviewed for possible impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value. No impairment was recorded for the years ended December 31, 2020 and 2019. Long-Lived Assets The Company accounts for the impairment and disposition of long-lived assets in accordance with guidance issued by the FASB. Long-lived assets to be held and used are reviewed for events or changes in circumstances that indicate that their carrying value may not be recoverable, or annually. No impairment related to long-lived assets was recorded for the years ended December 31, 2020 and 2019. Leases Effective January 1, 2019, the Company adopted ASC Topic 842, “Leases” (“ASC 842”), using the optional transition method utilizing the effective date as its date of initial application, for which prior periods are presented in accordance with the previous guidance in ASC Topic 840, “Leases” (“ASC 840”). At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present in the arrangement. Leases with a term greater than 12 months are recognized on the balance sheet as right of use assets and short-term and long-term lease liabilities, as applicable. The Company has elected not to recognize on the balance sheet leases with terms of 12 months or less. The Company typically only includes an initial lease term in its assessment of a lease arrangement. Options to renew a lease are not included in the Company’s assessment unless there is reasonable certainty that the Company will renew. The Company monitors its plans to renew its leases no less than on a quarterly basis. In addition, the Company’s lease agreements generally do not contain any residual value guarantees or restrictive covenants. 98 CAPRICOR THERAPEUTICS, INC. Notes to CONSOLIDATED financial statements DECEMBER 31, 2020 AND 2019 1. 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 For contracts completed as of December 31, 2017, revenue was recognized in accordance with ASC 605 and other superseded standards. The company applied ASU 606 using the modified retrospective approach for all contracts in process as of January 1, 2018. Government Research Grants Generally, government research grants that provide funding for research and development activities are recognized as income when the related expenses are incurred, as applicable. Because the terms of the CIRM Award allow Capricor to elect to convert the grant into a loan after the end of the project period, the CIRM Award is being classified as a liability rather than income (see Note 6 - “Government Grant Awards”). Grant income is due upon submission of a reimbursement request. The transaction price varies for grant income based on the expenses incurred under the awards. Miscellaneous Income Revenue is recognized in connection with the delivery of doses which were developed as part of our past R&D efforts. Income is recorded when the Company has satisfied the obligations as identified in the contracts with the customer (see Note 9 – “Related Party Transactions”). Miscellaneous income is due upon billing. Miscellaneous income is based on contracts with fixed transaction prices. Income Taxes 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 issued by the FASB that clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements and prescribes a recognition threshold of more likely than not and a measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In making this assessment, a company must determine whether it is more likely than not that a tax position will be sustained upon examination, based solely on the technical merits of the position, and must assume that the tax position will be examined by taxing authorities. 99 CAPRICOR THERAPEUTICS, INC. Notes to CONSOLIDATED financial statements DECEMBER 31, 2020 AND 2019 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) As of December 31, 2020, the Company had federal net operating loss carryforwards of approximately $107.6 million, available to reduce future taxable income, of which $76.1 million will begin to expire in 2026. The post December 31, 2017 net operating losses generated of $31.5 million will carryforward indefinitely, but may be subject to an 80% limitation upon utilization. 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. 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. 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 policy is to include interest and penalties related to unrecognized tax benefits in income tax expense. The Company incurred no 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. Research and Development Costs relating to the design and development of new products are expensed as research and development as incurred in accordance with Financial Accounting Standards Board (“FASB”) ASC 730-10, Research and Development . Research and development costs amounted to approximately $8.5 million and $5.1 million for the years ended December 31, 2020 and 2019, respectively. Comprehensive Income (Loss) Comprehensive income (loss) generally represents all changes in stockholders’ equity during the period except those resulting from investments by, or distributions to, stockholders. The Company’s comprehensive loss was approximately $13.7 million and $7.7 million for the years ended December 31, 2020 and 2019, respectively. The Company’s other comprehensive income (loss) is related to a net unrealized gain (loss) on marketable securities. For the years ended December 31, 2020 and 2019, the Company’s other comprehensive income (loss) was $757 and $(13,150), respectively. 100 CAPRICOR THERAPEUTICS, INC. Notes to CONSOLIDATED financial statements DECEMBER 31, 2020 AND 2019 1. 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 (“CROs”), and clinical site agreements in connection with conducting clinical trials. The financial terms of these contracts are subject to negotiations, which vary from contract to contract and may result in payment flows that do not match the periods over which materials or services are provided to us under such contracts. Our objective is to reflect the appropriate clinical trial expenses in our consolidated financial statements by matching the appropriate expenses with the period in which services are provided and efforts are expended. We account for these expenses according to the progress of the trial as measured by patient progression and the timing of various aspects of the trial. We determine accrual estimates through financial models that take into account discussion with applicable personnel and outside service providers as to the progress or state of completion of trials, or the services completed. During the course of a clinical trial, we adjust our clinical expense recognition if actual results differ from our estimates. We make estimates of our accrued expenses as of each balance sheet date in our consolidated financial statements based on the facts and circumstances known to us at that time. Our clinical trial accrual and prepaid assets are dependent, in part, upon the receipt of timely and accurate reporting from CROs and other third-party vendors. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in us reporting amounts that are too high or too low for any particular period. Business Uncertainty Related to the Coronavirus As a result of the spread of the COVID-19 coronavirus, uncertainties have arisen that could potentially impact enrollment of and the ability to conduct clinical trials, deliverables related to contract performance, payments from trial sponsors including Cedars-Sinai Medical Center, as we describe further below, workforce stability, supply chain disruptions or delays, timing of grant disbursements as well as other potential business operations. While the disruption is currently expected to be temporary, there is considerable uncertainty around its expected duration and as a result, the Company is considering the impact of COVID-19 on its ability to conduct both 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. The Company utilized the funds for covered payroll costs, all which the Company believes were in accordance with the relevant terms and conditions of the CARES Act (see Note 2 – “Note Payable”). Stock-Based Compensation The Company accounts for stock-based employee compensation arrangements in accordance with guidance issued by the FASB, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees, consultants, and directors based on estimated fair values. 101 CAPRICOR THERAPEUTICS, INC. Notes to CONSOLIDATED financial statements DECEMBER 31, 2020 AND 2019 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The Company estimates the fair value of stock-based compensation awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company’s statements of operations. The Company estimates the fair value of stock-based compensation awards using the Black-Scholes model. This model requires the Company to estimate the expected volatility and value of its common stock and the expected term of the stock options, all of which are highly complex and subjective variables. The variables take into consideration, among other things, actual and projected stock option exercise behavior. For employees and directors, the expected life was calculated based on the simplified method as described by the SEC Staff Accounting Bulletin No. 110, Share-Based Payment. For other service providers, the expected life was calculated using the contractual term of the award. The Company's estimate of expected volatility was based on the historical stock price of the Company. The Company has selected a risk-free rate based on the implied yield available on U.S. Treasury securities with a maturity equivalent to the expected term of the options. Basic and Diluted Loss per Share The Company reports earnings per share in accordance with FASB ASC 260-10, Earnings per Share. Basic earnings (loss) per share is computed by dividing income (loss) available to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is computed similarly to basic earnings (loss) per share except that the denominator is increased to include the number of additional shares of common stock that would have been outstanding if the potential shares of common stock had been issued and if the additional shares of common stock were dilutive. The components of basic and diluted earnings (loss) per share for the years ended December 31, 2020 and 2019 were as follows: December 31, 2020 December 31, 2019 Numerator Net loss $ (13,657,028 ) $ (7,641,817 ) Denominator Weighted-average number of shares of common stock outstanding 15,571,056 3,711,333 Dilutive effect of stock options - - Common stock and common stock equivalents used for diluted loss per share 15,571,056 3,711,333 For 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. 102 CAPRICOR THERAPEUTICS, INC. Notes to CONSOLIDATED financial statements DECEMBER 31, 2020 AND 2019 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Fair Value Measurements Assets and liabilities recorded at fair value in the balance sheet are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The categories are as follows: Level Input: Input Definition: Level I Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date. Level II Inputs, other than quoted prices included in Level I, that are observable for the asset or liability through corroboration with market data at the measurement date. Level III Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The following tables summarize the fair value measurements by level for assets and liabilities measured at fair value on a recurring basis: December 31, 2019 Level I Level II Level III Total Marketable Securities $ 5,986,050 $ - $ - $ 5,986,050 Carrying amounts reported in the balance sheet of cash and cash equivalents, grants receivable, accounts payable and accrued expenses approximate fair value due to their relatively short maturity. The carrying amounts of the Company’s marketable securities are based on market quotations from national exchanges at the balance sheet date. Interest and dividend income are recognized separately on the income statement based on classifications provided by the brokerage firm holding the investments. The fair value of borrowings is not considered to be significantly different from its carrying amount because the stated rates for such debt reflect current market rates and conditions. Recent Accounting Pronouncements In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): clarifying the interaction between Topic 808 and Topic 606. The amendments in the update clarify that certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the context of a unit of account; adds unit-of-account guidance in Topic 808 to align with the guidance in Topic 606 when an entity is assessing whether the collaborative arrangement or a party to the arrangement is within the scope of Topic 606; requires that in a transaction with a collaborative arrangement participant that is not directly related to sales to third parties, presenting the transaction together with revenue recognized under Topic 606 is precluded if the collaborative arrangement participant is not a customer. The amendments for this update are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company adopted ASU 2018-18 and all subsequent updates related to this topic in the first quarter of 2020. The adoption of this update did not have a material impact on the Company’s financial statements. 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. The Company believes that the adoption of this new accounting guidance will not have a material impact on its financial statements and footnote disclosures. Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the SEC, did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statement presentation or disclosures. 103 CAPRICOR THERAPEUTICS, INC. Notes to CONSOLIDATED financial statements DECEMBER 31, 2020 AND 2019 2. NOTE PAYABLE 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 24 weeks). 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. 3. STOCKHOLDER’S EQUITY ATM Programs 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 initiated. In addition, the Company completed a public offering of its common stock in December 2019 and a warrant inducement offer in March 2020. July 2019 ATM Program From July 22, 2019 through expiration of the July 2019 ATM Program on August 23, 2019, the Company sold an aggregate of 418,450 shares of common stock under the July 2019 ATM Program at an average price of approximately $4.30 per share for gross proceeds of approximately $1.8 million. The Company paid cash commissions on the gross proceeds, plus reimbursement of expenses of Wainwright and legal fees in the aggregate amount of approximately $0.1 million. August 2019 ATM Program On August 29, 2019, the Company initiated the August 2019 ATM Program. From August 29, 2019 through May 4, 2020, the Company sold an aggregate of 360,316 shares of common stock under the August 2019 ATM Program at an average price of approximately $3.07 per share for gross proceeds of approximately $1.1 million. The Company paid cash commissions on the gross proceeds, plus reimbursement of expenses of Wainwright and legal fees in the aggregate amount of approximately $0.1 million. As of May 4, 2020, the August 2019 ATM Program has expired and been replaced with the May 2020 ATM Program described below. 104 CAPRICOR THERAPEUTICS, INC. Notes to CONSOLIDATED financial statements DECEMBER 31, 2020 AND 2019 3. 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 In December 2019, the Company completed a public offering pursuant to which the Company issued (i) 531,173 shares of its common stock, (ii) warrants (the “December 2019 Common Warrants”) to purchase up to 4,139,477 shares of common stock, and (iii) pre-funded warrants to purchase up to 3,608,304 shares of common stock, at a combined purchase price of $1.226 per share and associated common warrant and $1.225 per pre-funded warrant and associated common warrant, for an aggregate purchase price of approximately $5.1 million. The Company issued (a) to each purchaser of shares in the offering a common warrant to purchase a number of shares of common stock equal to the number of shares purchased by such purchaser in the offering, and (b) to each purchaser of pre-funded warrants in the offering a common warrant to purchase a number of shares of common stock equal to the number of pre-funded warrant shares underlying the pre-funded warrants purchased by such purchaser in the offering. In connection with the offering, the Company issued to designees of Wainwright, the placement agent for the offering, warrants (the “December 2019 Placement Agent Warrants”) to purchase an aggregate of 203,915 shares of common stock. The December 2019 Placement Agent Warrants have an exercise price of $1.5325 per share, are immediately exercisable and expire in December 2024. Fees paid in conjunction with the deal, which included placement agent commissions, management fees, legal costs, and other offering expenses, amount to approximately $0.7 million in the aggregate and were recorded as a reduction to additional paid-in capital, resulting in net proceeds of approximately $4.4 million. As of 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. In the second quarter of 2020, the Company issued all shares that were being held in abeyance. The New Warrants and the shares of Common Stock issuable upon the exercise of the New Warrants were not registered under the Securities Act of 1933, as amended (the “Securities Act”), and were offered pursuant to the exemption provided in Section 4(a)(2) under the Securities Act or Rule 506(b) promulgated thereunder. The New Warrants are exercisable immediately upon issuance, and have a term of exercise of 5 1/2 years. 105 CAPRICOR THERAPEUTICS, INC. Notes to CONSOLIDATED financial statements DECEMBER 31, 2020 AND 2019 3. 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 six months. On May 7, 2020, the Company filed a resale registration statement on Form S-3 for the shares underlying the New Warrants and March 2020 Placement Agent Warrants, and that resale registration statement was declared effective by the SEC on May 19, 2020. As of December 31, 2020, 65,000 March 2020 Placement Agent Warrants remained outstanding under the March 2020 Warrant Inducement. Outstanding Shares At December 31, 2020, the Company had 20,577,123 shares of common stock issued and outstanding. 4. STOCK AWARDS, WARRANTS AND OPTIONS Warrants The following table summarizes all warrant activity for the years ended December 31, 2020 and 2019: Warrants Weighted Average Exercise Price Outstanding at January 1, 2019 84,607 $ 45.00 Expired (84,607 ) 45.00 Granted 7,951,696 0.61 Exercised (450,000 ) 0.001 Outstanding at December 31, 2019 7,501,696 $ 0.65 Granted 4,200,000 1.28 Exercised (11,575,523 ) 0.87 Outstanding at December 31, 2020 126,173 $ 1.32 The following table summarizes all outstanding warrants to purchase shares of the Company’s common stock: Type Grant Date December 31, 2020 December 31, 2019 Exercise Price per Share Expiration Date Common Warrants 12/19/2019 61,173 4,139,477 $ 1.10 12/19/2024 Common Warrants 12/19/2019 - 203,915 $ 1.5325 12/17/2024 Pre-Funded Warrants 12/19/2019 - 3,158,304 $ 0.001 N/A Common Warrants 3/27/2020 65,000 - $ 1.5313 3/27/2025 126,173 7,501,696 106 CAPRICOR THERAPEUTICS, INC. Notes to CONSOLIDATED financial statements DECEMBER 31, 2020 AND 2019 4. STOCK AWARDS, WARRANTS AND OPTIONS (Continued) Stock Options The Company’s Board of Directors (the “Board”) has approved four stock option plans: (i) the 2006 Stock Option Plan, (ii) the 2012 Restated Equity Incentive Plan (which superseded the 2006 Stock Option Plan) (the “2012 Plan”), (iii) the 2012 Non-Employee Director Stock Option Plan (the “2012 Non-Employee Director Plan”), and (iv) the 2020 Equity Incentive Plan (the “2020 Plan”). At the time the merger between Capricor and Nile became effective, 414,971 shares of common stock were reserved under the 2012 Plan for the issuance of stock options, stock appreciation rights, restricted stock awards and performance unit/share awards to employees, consultants and other service providers. Included in the 2012 Plan are the shares of common stock that were originally reserved under the 2006 Stock Option Plan. Under the 2012 Plan, each stock option granted will be designated in the award agreement as either an incentive stock option or a nonstatutory stock option. Notwithstanding such designation, however, to the extent that the aggregate fair market value of the shares with respect to which incentive stock options are exercisable for the first time by the participant during any calendar year (under all plans of the Company and any parent or subsidiary) exceeds $100,000, such options will be treated as nonstatutory stock options. On June 2, 2016, at the Company’s annual stockholder meeting, the stockholders approved a proposal to amend the 2012 Plan, to, among other things, increase the number of shares of common stock of the Company that may be issued under the 2012 Plan to equal the sum of 414,971 plus 2% of the outstanding shares of common stock as of December 31, 2015, with the number of shares that may be issued under the 2012 Plan automatically increasing thereafter on January 1 of each year, commencing with January 1, 2017, by 2% of the outstanding shares of common stock as of the last day of the immediately preceding fiscal year (rounded down to the nearest whole share). For the fiscal years beginning on January 1, 2020 and 2019, the number of shares added was equal to 104,547 and 62,775 shares, respectively. At the time the merger between Capricor and Nile became effective, 269,731 shares of common stock were reserved under the 2012 Non-Employee Director Plan for the issuance of stock options to members of the Board who are not employees of the Company. On June 5, 2020, at the Company’s annual stockholder meeting, the stockholders approved the 2020 Plan with 2,500,000 shares of common stock reserved under the 2020 Plan for the issuance of stock awards. The number of Shares available for issuance under the 2020 Plan shall be automatically increased on January 1 of each year, commencing with January 1, 2021, by an amount equal to the lesser of (i) four percent (4%) of the outstanding shares of Common Stock as of the last day of the immediately preceding fiscal year or (ii) such number of shares of Common Stock determined by the Compensation Committee in its sole discretion. 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 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 grant, and generally vest over a period of one to four years. The term of stock options granted under each of the plans cannot exceed ten years. The estimated weighted average fair value of the options granted during 2020 and 2019 were approximately $3.93 and $2.73 per share, respectively. 107 CAPRICOR THERAPEUTICS, INC. Notes to CONSOLIDATED financial statements DECEMBER 31, 2020 AND 2019 4. STOCK AWARDS, WARRANTS AND OPTIONS (Continued) The Company estimates the fair value of each option award using the Black-Scholes option-pricing model. The Company used the following assumptions to estimate the fair value of stock options issued in the years ended December 31, 2020 and 2019: December 31, 2020 December 31, 2019 Expected volatility 104% – 124% 106% – 128% Expected term 5 – 6 years 5 – 6 years Dividend yield 0% 0% Risk-free interest rates 0.4 – 1.5% 1.4 – 1.6% Employee and non-employee stock-based compensation expense for the years ended December 31, 2020 and 2019 was as follows: 2020 2019 General and administrative $ 1,705,477 $ 509,212 Research and development 247,202 191,772 Total $ 1,952,679 $ 700,984 The Company does not recognize an income tax benefit as the Company believes that an actual income tax benefit may not be realized. For non-qualified stock options, the loss creates a timing difference, resulting in a deferred tax asset, which is fully reserved by a valuation allowance. Common stock, stock options or other equity instruments issued to non-employees (including consultants) as consideration for goods or services received by the Company are accounted for based on the fair value of the equity instruments issued. The fair value of stock options is determined using the Black-Scholes option-pricing model. The Company calculates the fair value for non-qualified options as of the date of grant and expenses over the applicable vesting periods. We account for forfeitures upon occurrence. On February 12, 2020, pursuant to the authority granted to it under the 2012 Restated Equity Incentive Plan and the 2012 Non-Employee Director Stock Option Plan, the board of directors of the Company approved a program under which outstanding options and other awards granted under the 2012 Plan and the 2012 Director Plan to employees, officers and directors and designated service providers of the Company were repriced to their then current fair market value. There were 662,968 outstanding options which were repriced to $1.39 per share, which was the market price of our common stock on the date of the approval of the repricing. The effect of the modification generated a total incremental cost of approximately $178,000, of which approximately $171,000 was recognized in the first quarter of 2020 stock-based compensation expense with the remainder to be expensed over the remaining unvested period terms. The following table summarizes information about stock options outstanding and exercisable at December 31, 2020: Options Outstanding Range of Ex. Prices Options Outstanding Weighted Average Term (yrs.) Weighted Average Exercise Price $ 1.18 48,000 9.16 $ 1.18 $ 1.39 1,995,876 7.46 $ 1.39 $1.50 - $12.10 317,997 9.43 $ 5.12 2,361,873 $ 1.89 Options Exercisable Range of Ex. Prices Options Exercisable Weighted Average Term (yrs.) Weighted Average Exercise Price $ 1.18 18,000 9.16 $ 1.18 $ 1.39 866,183 5.35 $ 1.39 $1.50 - $12.10 29,068 7.76 $ 4.97 913,251 $ 1.50 108 CAPRICOR THERAPEUTICS, INC. Notes to CONSOLIDATED financial statements DECEMBER 31, 2020 AND 2019 4. STOCK AWARDS, WARRANTS AND OPTIONS (Continued) As of December 31, 2020, the total unrecognized fair value compensation cost related to non-vested stock options was approximately $5.7 million, which is expected to be recognized over a weighted average period of approximately 1.6 years. The following is a 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 Outstanding at January 1, 2019 701,287 $ 16.18 $ - Granted 130,000 3.20 Exercised (828 ) 3.35 $ 1,987 Expired/Cancelled (75,546 ) 29.48 Outstanding at December 31, 2019 754,913 $ 12.63 $ - Granted 1,878,058 2.14 Exercised (63,774 ) 3.19 $ 329,035 Expired/Cancelled (207,324 ) 5.73 Outstanding at December 31, 2020 2,361,873 $ 1.89 $ 4,236,737 Exercisable at December 31, 2020 913,251 $ 1.50 $ 1,813,910 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. 5. CONCENTRATIONS Cash Concentration The Company has historically maintained checking accounts at two financial institutions. These accounts are each insured by the Federal Deposit Insurance Corporation for up to $250,000. Historically, the Company has not experienced any significant losses in such accounts and believes it is not exposed to any significant credit risk on cash, cash equivalents and marketable securities. As of December 31, 2020, the Company maintained approximately $32.2 million of uninsured deposits. 6. GOVERNMENT GRANT AWARDS CIRM Grant Award (HOPE) On June 16, 2016, Capricor entered into the CIRM Award with CIRM in the amount of approximately $3.4 million to fund, in part, Capricor’s Phase I/II HOPE-Duchenne clinical trial investigating CAP-1002 for the treatment of Duchenne muscular dystrophy-associated cardiomyopathy. Pursuant to terms of the CIRM Award, the disbursements were tied to the achievement of specified operational milestones. In addition, the terms of the CIRM Award included a co-funding requirement pursuant to which Capricor was required to spend approximately $2.3 million of its own capital to fund the CIRM funded research project. The CIRM Award is further subject to the conditions and requirements set forth in the CIRM Grants Administration Policy for Clinical Stage Projects. Such requirements include, without limitation, the filing of quarterly and annual reports with CIRM, the sharing of intellectual property pursuant to Title 17, California Code of Regulations (CCR) Sections 100600-100612, and the sharing with the State of California of a fraction of licensing revenue received from a CIRM funded research project and net commercial revenue from a commercialized product which resulted from the CIRM funded research as set forth in Title 17, CCR Section 100608. The maximum royalty on net commercial revenue that Capricor may be required to pay to CIRM is equal to nine times the total amount awarded and paid to Capricor. 109 CAPRICOR THERAPEUTICS, INC. Notes to CONSOLIDATED financial statements DECEMBER 31, 2020 AND 2019 6. GOVERNMENT GRANT AWARDS (Continued) After completing the CIRM funded research project and at any time after the award period end date (but no later than the ten-year anniversary of the date of the award), Capricor has the right to convert the CIRM Award into a loan, the terms of which will be determined based on various factors, including the stage of the research and development of the program at the time the election is made. On June 20, 2016, Capricor entered into a Loan Election Agreement with CIRM whereby, among other things, CIRM and Capricor agreed that if Capricor elects to convert the grant into a loan, the term of the loan could be up to five years from the date of execution of the applicable loan agreement; provided that the maturity date of the loan will not surpass the ten-year anniversary of the grant date of the CIRM Award. Beginning on the date of the loan, the loan shall bear interest on the unpaid principal balance, plus the interest that has accrued prior to the election point according to the terms set forth in CIRM’s Loan Policy (the “New Loan Balance”), at a per annum rate equal to the LIBOR rate for a three-month deposit in U.S. dollars, as published by the Wall Street Journal on the loan date, plus one percent. Interest shall be compounded annually on the outstanding New Loan Balance commencing with the loan date and the interest shall be payable, together with the New Loan Balance, upon the due date of the loan. If Capricor elects to convert the CIRM Award into a loan, certain requirements of the CIRM Award will no longer be applicable, including the revenue sharing requirements. Capricor has not yet made its decision as to whether it will elect to convert the CIRM Award into a loan. If we elect to do so, Capricor would be required to repay some or all of the amounts awarded by CIRM; therefore, the Company accounts for this award as a liability rather than income. In June 2019, Capricor completed all milestones associated with the CIRM Award and expended all funds received. In the third quarter of 2019, Capricor completed all final close-out documentation associated with this award. As of December 31, 2020, Capricor’s liability balance for the CIRM Award was approximately $3.4 million. NIH Grant Award (HLHS) In September 2016, Capricor was approved for a grant from the NIH to study CAP-2003 (cardiosphere-derived cell exosomes) for hypoplastic left heart syndrome (HLHS). Under the terms of the NIH grant, Capricor is eligible to receive disbursements in an amount up to approximately $4.2 million, subject to annual and quarterly reporting requirements as well as completion of the study objectives. The Company 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. U.S. Department of Defense Grant Award In September 2016, Capricor was approved for a grant award from the Department of Defense in the amount of approximately $2.4 million to be used toward developing a scalable, commercially-ready process to manufacture CAP-2003. Under the terms of the award, disbursements were made to Capricor over a period of approximately four years, subject to annual and quarterly reporting requirements. The Company was granted a no-cost extension until September 29, 2020 to be able to utilize these funds. The Company utilized approximately $2.3 million under the terms of the award. We are currently completing all close-out documentation associated with this award. 7. COMMITMENTS AND CONTINGENCIES Leases Capricor leases space for its corporate offices from The Bubble Real Estate Company, LLC (“Bubble Real Estate”) pursuant to a lease that was originally effective for a two-year period beginning July 1, 2013 with an option to extend the lease for an additional twelve months. Capricor subsequently entered into several amendments extending the term of the lease and modifying its terms. 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. 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. 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 of $15,805. 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. 110 CAPRICOR THERAPEUTICS, INC. Notes to CONSOLIDATED financial statements DECEMBER 31, 2020 AND 2019 7. COMMITMENTS AND CONTINGENCIES (Continued) Included within the 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: Years ended Operating Leases 2021 $ 110,635 Expenses incurred under 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. Legal Contingencies The Company is not a party to any material legal proceedings at this time. From time to time, the Company may become involved in various legal proceedings that arise in the ordinary course of its business or otherwise. Accounts Payable Over the normal course of business, disputes with vendors may arise. If a vendor dispute payment is probable and able to be estimated, we will record an estimated liability. 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 In the event of a termination, subject to certain conditions, the Board of Directors approved severance packages for specific full-time employees based on their length of service and position ranging up to six months of their base salaries. No liability has been recorded as of December 31, 2020. 8. LICENSE AGREEMENTS Capricor’s Technology - CAP-1002 and Exosomes Capricor has entered into exclusive license agreements for intellectual property rights related to certain cardiac-derived cells with Università Degli Studi Di Roma La Sapienza, 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, 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, for a certain period of time, to obtain a license to any new and separate patent applications owned by the University of Rome utilizing cardiac stem cells in cardiac care. 111 CAPRICOR THERAPEUTICS, INC. Notes to CONSOLIDATED financial statements DECEMBER 31, 2020 AND 2019 8. LICENSE AGREEMENTS (Continued) Pursuant to the Rome License Agreement, Capricor paid the University of Rome a license issue fee, is currently paying minimum annual royalties in the amount of 20,000 Euros per year, and is obligated to pay a lower-end of a mid-range double-digit percentage on all royalties received as a result of sublicenses granted, which are net of any royalties paid to third parties under a license agreement from such third party to Capricor. The minimum annual royalties are creditable against future royalty payments. The Rome License Agreement will, unless extended or sooner terminated, remain in effect until the later of the last claim of any patent or until any patent application comprising licensed patent rights has expired or been abandoned. Under the terms of the Rome License Agreement, either party may terminate the agreement should the other party become insolvent or file a petition in bankruptcy. Either party may terminate the agreement upon the other party’s material breach, provided that the breaching party will have up to 90 days to cure its material breach. Capricor may also terminate for any reason upon 90 days’ written notice to the University of Rome. The Johns Hopkins University License Agreements License Agreement for CDCs Capricor and JHU entered 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. In May 2009, the JHU License Agreement was amended to add additional patent rights to the JHU License Agreement in consideration of a payment to JHU and reimbursement of patent costs. Capricor and JHU executed a Second Amendment to the JHU License Agreement, effective as of December 20, 2013, pursuant to which, among other things, certain definitions were added or amended, the timing of certain obligations was revised and other obligations of the parties were clarified. Under the JHU License Agreement, Capricor is required to exercise commercially reasonable and diligent efforts to develop and commercialize licensed products covered by the licenses from JHU. Pursuant to the JHU License Agreement, JHU was paid an initial license fee and, thereafter, Capricor is required to pay minimum annual royalties on the anniversary dates of the JHU License Agreement. The minimum annual royalties 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, 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. The next milestone is triggered upon successful completion of a full Phase II study for which a payment of $250,000 will be due. At this time, it is uncertain as to whether the $250,000 milestone payment will become due. The JHU License Agreement will, unless sooner terminated, continue in effect in each applicable country until the date of expiration of the last to expire patent within the patent rights, or, if no patents are issued, then for twenty years from the effective date. Under the terms of the JHU License Agreement, either party may terminate the agreement should the other party become insolvent or file a petition in bankruptcy, or fail to cure a material breach within 30 days after notice. In addition, Capricor may terminate for any reason upon 60 days’ written notice. 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. 112 CAPRICOR THERAPEUTICS, INC. Notes to CONSOLIDATED financial statements DECEMBER 31, 2020 AND 2019 8. LICENSE AGREEMENTS (Continued) Cedars-Sinai Medical Center License Agreements License Agreement for CDCs On January 4, 2010, Capricor entered into an Exclusive License Agreement with CSMC, 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, 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 Agreement provides for the grant of an exclusive, world-wide, royalty-bearing license by CSMC to Capricor (with the right to sublicense) to conduct research using the patent rights and know-how and develop and commercialize products in the field using the patent rights and know-how. In addition, Capricor has the exclusive right to negotiate for an exclusive license to any future rights arising from related work conducted by or under the direction of Dr. Eduardo Marbán on behalf of CSMC. In the event the parties fail to agree upon the terms of an exclusive license for any future rights, Capricor will have a non-exclusive license to such future rights, subject to royalty obligations. Pursuant to the Original CSMC License Agreement, CSMC was paid a license fee and Capricor was obligated to reimburse CSMC for certain fees and costs incurred in connection with the prosecution of certain patent rights. Additionally, Capricor is required to meet certain spending and development milestones. Pursuant to the Amended CSMC License Agreement, Capricor remains obligated to pay low single-digit royalties on sales of royalty-bearing products as well as a low double-digit percentage of the consideration received from any sublicenses or other grant of rights. The above-mentioned royalties are subject to reduction in the event Capricor becomes obligated to obtain a license from a third party for patent rights in connection with the royalty-bearing product. In 2010, Capricor discontinued its research under some of the patents. The Amended CSMC License Agreement will, unless sooner terminated, continue in effect on a country by country basis until the last to expire of the patents covering the patent rights or future patent rights. Under the terms of the Amended CSMC License Agreement, unless waived by CSMC, the agreement shall automatically terminate: (i) if Capricor ceases, dissolves or winds up its business operations; (ii) in the event of the insolvency or bankruptcy of Capricor or if Capricor makes an assignment for the benefit of its creditors; (iii) if performance by either party jeopardizes the licensure, accreditation or tax exempt status of CSMC or the agreement is deemed illegal by a governmental body; (iv) within 30 days for non-payment of royalties; (v) after 90 days’ notice from CSMC if Capricor fails to undertake commercially reasonable efforts to exploit the patent rights or future patent rights; (vi) if a material breach has not been cured within 90 days; or (vii) if Capricor challenges any of the CSMC patent rights. If Capricor fails to undertake commercially reasonable efforts to exploit the patent rights or future patent rights, and fails to cure that breach after 90 days’ notice from CSMC, instead of terminating the license, CSMC has the option to convert any exclusive license to Capricor to a non-exclusive or co-exclusive license. Capricor may terminate the agreement if CSMC fails to cure any material breach within 90 days after notice. On March 20, 2015, 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, 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 of Dr. Eduardo Marbán on behalf of CSMC. In the event the parties fail to agree upon the terms of an exclusive license, Capricor shall have a non-exclusive license to such future rights, subject to royalty obligations. 113 CAPRICOR THERAPEUTICS, INC. Notes to CONSOLIDATED financial statements DECEMBER 31, 2020 AND 2019 8. LICENSE AGREEMENTS (Continued) Pursuant to the Exosomes License Agreement, CSMC was paid a license fee and Capricor reimbursed CSMC for certain fees and costs incurred in connection with the preparation and prosecution of certain patent applications. Additionally, Capricor is required to meet certain non-monetary development milestones and is obligated to pay low single-digit royalties on sales of royalty-bearing products as well as a single-digit percentage of the consideration received from any sublicenses or other grant of rights. The above-mentioned royalties are subject to reduction in the event Capricor becomes obligated to obtain a license from a third party for patent rights in connection with the royalty bearing product. The Exosomes License Agreement will, unless sooner terminated, continue in effect on a country by country basis until the last to expire of the patents covering the patent rights or future patent rights. Under the terms of the Exosomes License Agreement, unless waived by CSMC, the agreement shall automatically terminate: (i) if Capricor ceases, dissolves or winds up its business operations; (ii) in the event of the insolvency or bankruptcy of Capricor or if Capricor makes an assignment for the benefit of its creditors; (iii) if performance by either party jeopardizes the licensure, accreditation or tax exempt status of CSMC or the agreement is deemed illegal by a governmental body; (iv) within 30 days for non-payment of royalties; (v) after 90 days if Capricor fails to undertake commercially reasonable efforts to exploit the patent rights or future patent rights; (vi) if a material breach has not been cured within 90 days; or (vii) if Capricor challenges any of the CSMC patent rights. If Capricor fails to undertake commercially reasonable efforts to exploit the patent rights or future patent rights, and fails to cure that breach after 90 days’ notice from CSMC, instead of terminating the license, CSMC has the option to convert any exclusive license to Capricor to a non-exclusive or co-exclusive license. Capricor may terminate the agreement if CSMC fails to cure any material breach within 90 days after notice. On February 27, 2015, 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 Agreement. 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. Sponsored Research Agreement with Johns Hopkins University On April 1, 2020 we entered into a Sponsored Research Agreement, or the SRA, with JHU pursuant to which researchers in the lab of Dr. Stephen Gould will perform certain research activities in connection with our exosomes program. Pursuant to the SRA, we have agreed to fund certain research activities and will have the right to negotiate for exclusive or non-exclusive rights to intellectual property that may result from such research activities. 9. RELATED PARTY TRANSACTIONS Lease and Sub-Lease Agreement As noted above, Capricor is a party to lease agreements with CSMC(see Note 7 – “Commitments and Contingencies”), and CSMC has served as an investigative site in Capricor’s clinical trials. Additionally, Dr. Eduardo Marbán, who is a stockholder of Capricor Therapeutics and has participated from time to time as an observer at the Company’s meetings of the Board of Directors, is the Director of the Cedars-Sinai Smidt Heart Institute, and co-founder of Capricor. On April 1, 2013, Capricor entered into a sublease with Reprise Technologies, LLC, a limited liability company which is wholly owned by Dr. Frank Litvack, the Company’s Executive Chairman and member of its Board of Directors, for $2,500 per month. The sublease was on a month-to-month basis and was terminated effective September 1, 2020. F or the years ended December 31, 2020 and 2019, Capricor recognized $20,000 and $30,000, respectively, in sublease income from the related party. Sublease income is recorded as a reduction to general and administrative expenses. 114 CAPRICOR THERAPEUTICS, INC. Notes to CONSOLIDATED financial statements DECEMBER 31, 2020 AND 2019 9. RELATED PARTY TRANSACTIONS (Continued) Consulting Agreements In 2013, Capricor entered into a Consulting Agreement with Dr. Frank Litvack, the Company’s Executive Chairman and a member of its Board of Directors, whereby Capricor agreed to pay Dr. Litvack $10,000 per month for consulting services. The agreement is terminable upon 30 days’ notice. In July 2020, Capricor entered into an Advisory Services Agreement with Dr. Eduardo Marbán whereby he was granted an option to purchase 50,000 shares of the Company’s common stock. Payables to Related Party As of December 31, 2020 and 2019, the Company had accounts payable and accrued expenses to related parties totaling $8,972 and $22,315, respectively. CSMC accounts for $8,972 and $12,315 of the total accounts payable and accrued expenses to related parties as of December 31, 2020 and 31, 2019, respectively. CSMC expenses relate to research and development costs, license and patent fees, and facilities rent. During the years ended December 31, 2020 and 2019, the Company paid CSMC approximately $307,000 and $336,000, respectively, for such costs. Related Party Clinical Trials Capricor has agreed to provide CAP-1002 for investigational purposes in two clinical trials sponsored by CSMC. This product was developed as part of the Company’s past research and development efforts. The first trial is known as “Regression of Fibrosis and Reversal of Diastolic Dysfunction in HFpEF Patients Treated with Allogeneic CDCs”, or REGRESS. Dr. Eduardo Marbán is the named principal investigator under the study. The second trial is known as “Pulmonary Arterial Hypertension treated with Cardiosphere-derived Allogeneic Stem Cells” or ALPHA. In both studies, Capricor is providing the necessary number of doses of cells and will receive a negotiated amount of monetary compensation which is estimated to be approximately $2.1 million over several years. For the years ended December 31, 2020 and 2019, the Company recognized approximately $120,000 and $460,000, respectively, as revenue. As of December 31, 2020, and 2019, approximately $56,000 and $58,000, respectively, is outstanding and recorded in prepaid expenses and other current assets. As of December 31, 2020, there remains approximately $0.6 million to be received by the Company, subject to enrollment and certain conditions under the agreements. Due to the current COVID-19 pandemic, additional testing in each of the ALPHA and REGRESS trials has been delayed and as a result, purchases of additional doses of CAP-1002 have been delayed. 10. SUBSEQUENT EVENTS Corporate Offices Lease Amendment Effective January 1, 2021, the Company entered into a Sixth Amendment with the Bubble Real Estate Company, LLC pursuant to which we extended our lease for an additional year ending December 31, 2021 and reduced the square footage. The monthly rental payment is $13,073 for this annual period. Stock Option Grants In January 2021, the Company granted a total of 1,333,824 stock options to its employees, certain non-employee consultants, and directors. Additional Sales Under May 2020 ATM Program Subsequent to December 31, 2020 and through March 12, 2021, the Company sold an aggregate of 2,281,874 common shares under the May 2020 ATM Program at an average price of approximately $5.85 per common share for gross proceeds of approximately $13.0 million. The Company paid cash commissions on the gross proceeds, plus reimbursement of expenses of the placement agent and legal fees in the aggregate amount of approximately $0.4 million. 115 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None.