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Item 7. Management’s Discussion and Analysis

2023-03-17 compared with 2022-03-11 · 240 added, 139 removed, 195 unchanged (66% of the section changed)

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Capricor Therapeutics, Inc.

is a clinical-stage biotechnology company focused on the development of transformative cell and exosome-based therapeutics for the treatment and prevention of a broad spectrum of diseases and disorders.

is a clinical-stage biotechnology company focused on the development of transformative cell and exosome-based therapeutics for treating Duchenne muscular dystrophy, or DMD, a rare form of muscular dystrophy which results in muscle degeneration and premature death, and other diseases with high unmet medical needs.

Since our inception, we have devoted substantial resources to developing CAP-1002 and our other product candidates including our exosomes platform, developing our manufacturing processes, staffing our company and providing general and administrative support for these operations.

We do not have any products approved for sale.

Our ability to eventually generate any product revenue sufficient to achieve profitability will depend on the successful development, approval and eventual commercialization of CAP-1002 and our other product candidates.

If successfully developed and approved, we intend to commercialize CAP-1002 in the United States with our partner, Nippon Shinyaku, and may enter into additional licensing agreements or strategic collaborations in other markets.

If successfully developed and approved, we intend to commercialize CAP-1002 in the United States and Japan with our partner, Nippon Shinyaku, and may enter into additional licensing agreements or strategic collaborations in other markets.

If we generate product sales or enter into licensing agreements or strategic collaborations, or further distribution relationships, we expect that any revenue we generate will fluctuate from quarter-to-quarter and year-to-year as a result of the timing and amount of any product sales, license fees, milestone payments and other payments.

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● CAP-1002 for the treatment of DMD (Phase III):

Our core cell therapy technology, CAP-1002, is based on cardiosphere-derived cells, or CDCs, which have been shown in pre-clinical and clinical studies to exert potential immunomodulatory activity and is being investigated for its potential to modify the immune system’s activity to encourage cellular regeneration.

Our core program is focused on the development and commercialization of a cell therapy (referred herein as CAP-1002) comprised CDCs, which are an endogenous population of stromal cells isolated from donated cells of healthy human hearts, for the treatment of DMD.

CAP-1002 is designed to slow disease progression in DMD through the immunomodulatory, anti-inflammatory, and anti-fibrotic actions of CDCs, which are mediated by secreted exosomes laden with bioactive cargo.

Among the cargo elements known to be bioactive in CDC-exosomes are microRNAs.

Collectively, these non-coding RNA species alter gene expression in macrophages and other target cells, dialing down generalized inflammation and stimulating tissue regeneration in DMD (and in a variety of other inflammatory diseases).

This mechanism of action, which is consistent with the changes observed in clinical studies to date in circulating inflammatory biomarkers, contrasts with that of exon-skipping oligonucleotides and gene therapy approaches which aim to restore dystrophin expression.

DMD is a rare form of muscular dystrophy which results in muscle degeneration and premature death.

Additionally, the absence of dystrophin in muscle cells leads to significant cell damage and ultimately causes muscle cell death and fibrotic replacement.

The annual cost of care for patients with DMD is very high and increases with disease progression.

We therefore believe that DMD represents a significant market opportunity for our product candidate, CAP-1002.

To date, we have completed two promising clinical trials investigating CAP-1002 for DMD.

We are initiating HOPE-3, a Phase III pivotal study for the potential approval of CAP-1002 in the United States in this indication.

● CAP-1002 for the treatment of cytokine storm associated with COVID-19 (Phase II):

In the fourth quarter of 2021, we announced completion of enrollment of our INSPIRE, Phase II trial and plan to have top-line data available by the end of the first quarter of 2022.

Following receipt of this data, we will discuss next steps for the program with FDA and evaluate an appropriate path forward.

Data from the first trial, a Phase I/II trial named HOPE-Duchenne, suggested improvements in skeletal and cardiac endpoints.

In HOPE-2, a Phase II clinical trial conducted in the United States, CAP-1002 was used to treat patients with late-stage DMD.

In March 2022, we announced that the final one-year results from HOPE-2 were published in The Lancet showing that the trial met its primary efficacy endpoint of the mid-level dimension of the PUL v1.2 (p=0.01) and additional positive endpoints of full PUL v2.0 (p=0.04) and a cardiac endpoint of left ventricular ejection fraction (p=0.002).

CAP-1002 was generally safe and well-tolerated throughout the studies.

Additionally, we are conducting an OLE study of the HOPE-2 trial in which 12 patients have elected to continue treatment of CAP-1002.

We recently announced positive one-year and 18-month results from this ongoing OLE study.

Data from the OLE study suggests disease modification with statistically significant differences in the PUL v2.0 scale in the CAP-1002 original treatment group when compared to the original placebo group from HOPE-2.

In addition, disease progression was attenuated equally in both

groups once patients began treatment in the OLE.

CAP-1002 treatment during the OLE portion of the study continues to yield a consistent safety profile and has been well-tolerated throughout the study.

We are currently enrolling the HOPE-3, Phase III clinical study investigating CAP-1002 for the treatment of late-stage DMD patients for the potential approval of CAP-1002 in the United States.

HOPE-3 is a muti-center, randomized, double-blind, placebo-controlled study currently designed to treat up to 68 subjects at approximately 15-20 investigative sites in the United States.

The primary outcome measure will be the full PUL v2.0 at one-year.

HOPE-3 will also measure various secondary endpoints including cardiac function assessments.

We have currently treated over 30% of the patients in the currently designed study and have 11 active sites.

At this time, our plans to conduct an interim analysis for sample size re-estimation and analysis of conditional power remain unchanged and we anticipate that these results will be available in the fourth quarter of this year.

Under our RMAT designation, we recently met with the FDA in a Type-B CMC meeting where we discussed our manufacturing plans in anticipation of a potential BLA application.

In the meeting, we discussed our plans with respect to commercial manufacturing activities, including our potency assay and other product release criteria to support commercialization.

We are awaiting the meeting minutes from the FDA, but at this time, we believe that we will need to add some patients to HOPE-3 who will be treated with product manufactured at our new San Diego facility, in order to support a potential BLA application.

Our San Diego facility is designed to produce commercial-scale GMP CAP-1002 product and we believe that it will be available to manufacture CAP-1002 doses by the third quarter of 2023.

We plan to request a follow-on Type B clinical meeting with FDA and expect to have further clarity following that meeting on this topic.

Furthermore, at the request of the FDA, we have submitted the interim results from our HOPE-2 OLE for their review and we continue to discuss our pathway towards potential registration.

The regulatory pathway for CAP-1002 is supported by RMAT designation as well as orphan drug designation.

If Capricor were to receive market approval for CAP-1002 by the FDA, Capricor would be eligible to receive a Priority Review Voucher based on its designation as a rare pediatric disease.

Capricor has entered into two Commercialization and Distribution Agreements with Nippon Shinyaku appointing Nippon Shinyaku as its exclusive distributor of CAP-1002 in the United States and Japan.

● Exosome-Based Therapeutics and Vaccines (Preclinical):

We are focused on developing a precision-engineered exosome platform technology that has the ability to deliver defined sets of effector molecules which exert their effects through defined mechanisms of action.

At this time, we are developing therapeutics and vaccines for infectious diseases, monogenic diseases and other potential indications.

Our platform builds on advances in fundamental RNA science, targeting technology and manufacturing, providing us the opportunity to potentially build a broad pipeline of new therapeutic candidates.

We recently presented new preclinical data on our StealthX TM platform showing the rapid development of a recombinant protein-based vaccine for immunization and prevention against SARS-CoV-2, the virus causing COVID-19.

At this time, we are developing vaccines and therapeutics for infectious diseases, monogenic diseases and other potential indications.

Our platform builds on advances in fundamental RNA and protein science, targeting technology and manufacturing, providing us the opportunity to potentially build a broad pipeline of new therapeutic candidates.

As of December 31, 2022, we had cash, cash equivalents, and marketable securities totaling approximately $41.4 million.

Additionally, under the terms of our Japan Distribution Agreement with Nippon Shinyaku, we expect to receive an upfront payment of $12.0 million in the first quarter of 2023 We estimate this will fund our operating expenses and capital expenditure requirements into the fourth quarter of 2024.

This expectation excludes any potential additional milestone payments under our commercialization and distribution agreements with Nippon Shinyaku.

We have not generated any revenues from the commercial sale of products.

We will not be able to generate any product revenues until, and only if, we receive approval to sell our drug candidates from the FDA or other regulatory authorities.

Due to our significant research and development expenditures, and general administrative costs associated with our operations, we have generated substantial operating losses in each period since our inception.

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We expect to incur significant expenses and operating losses for the foreseeable future.

During the year ended December 31, 2021, we sold 3,566,349 shares pursuant to a sales agreement by and between us and H.C.

During the year ended December 31, 2022, we sold 830,858 shares of common stock at an average price of approximately $5.97 per share pursuant to a sales agreement by and between us and H.C.

Wainwright & Co.

LLC, or Wainwright, resulting in net proceeds of $20.2 million.

In January 2022 we entered into a Commercialization and Distribution Agreement with Nippon Shinyaku for the exclusive commercialization and distribution of CAP-1002 for DMD in the US.

Under the terms of the NS Distribution Agreement, we will be responsible for the conduct of the HOPE-3 trial as well as for the manufacturing of CAP-1002.

Nippon Shinyaku will be responsible for the distribution of CAP-1002 in the United States.

We will sell commercial product to Nippon Shinyaku and in addition will receive a meaningful, double-digit share of product revenue and additional development and sales-based milestone payments.

We expect to receive an upfront payment of $30.0 million with potential additional milestone payments of up to $705.0 million.

We recently moved our corporate and research headquarters to San Diego, California.

In order to attract scientific talent and grow efficiently, this relocation allows us to continue this growth as our programs continue to develop.

LLC (“Wainwright”), resulting in net proceeds of $4.8 million.

Recent Operational Developments

● We recently completed construction in our San Diego Research and Development Facility of a new GMP pilot manufacturing facility as we prepare for potential commercial launch.

This facility is being designed to be compliant with U.S., European Medicines Agency (“EMA”), and other international standards.

This facility is designed to produce commercial-scale GMP CAP-1002 product for further clinical and potential commercial use.

● In February 2023 we entered into a Commercialization and Distribution Agreement (the “Japan Distribution Agreement”) with Nippon Shinyaku for the exclusive commercialization and distribution of CAP-1002 for DMD in Japan.

Under the terms of the Japan Distribution Agreement, we will be responsible for the development of the clinical program in Japan required to obtain manufacturing and marketing approval for CAP-1002 as well as for the manufacturing of CAP-1002.

Pursuant to the Japan Distribution Agreement, we have the obligation to sell commercial product to Nippon Shinyaku, subject to regulatory approval, and in addition, Capricor will have the right to receive a meaningful, double-digit share of product revenue and additional development and sales-based milestone payments, if achieved.

We are entitled to receive an upfront payment of $12.0 million which is expected to be received in the first quarter of 2023 and have the potential to receive additional milestone payments of up to approximately $89 million, subject to foreign currency exchange rates.

● We are conducting an OLE study of the HOPE-2 trial in which 12 patients have elected to continue treatment of CAP-1002.

In June 2022, we announced positive one-year results from this ongoing OLE study.

In February 2023, we announced positive 18-month results from this ongoing OLE Study.

The one year and 18-month data from this OLE study showed statistically significant improvements on the PUL v2.0 for patients on CAP-1002 testing three different hypotheses of treatment benefit during the open label extension.

We plan to report the 24-month OLE data in the second quarter of this year.

● In March 2022, we announced that the final one-year results from our HOPE-2, Phase II clinical trial were published in The Lancet showing that the trial met its primary efficacy endpoint of mid-level PUL v1.2 (p=0.01) and additional positive endpoints of full PUL v2.0 (p=0.04) and cardiac endpoint of ejection fraction (p=0.002).

CAP-1002 was generally safe and well-tolerated throughout the study.

With the exception of hypersensitivity reactions early in the clinical trial, which were mitigated with a common pre-medication regimen, there were no serious safety signals identified by the HOPE-2 DSMB.

● In January 2022 we entered into the U.S.

Distribution Agreement with Nippon Shinyaku for the exclusive commercialization and distribution of CAP-1002 for DMD in the United States.

Under the terms of the U.S.

Distribution Agreement, we will be responsible for the conduct of the HOPE-3 trial as well as for the manufacturing of CAP-1002.

NS Pharma, Inc., a subsidiary of Nippon Shinyaku, will be responsible for the distribution of CAP-1002 in the United States.

Pursuant to the U.S.

Distribution Agreement, we have the obligation to sell commercial product to Nippon Shinyaku, subject to regulatory approval, and in addition, Capricor will have the right to receive a meaningful, double-digit share of product revenue and additional development and sales-based milestone payments, if achieved.

We received an upfront payment of $30.0 million in the first quarter of 2022 and have the potential to receive additional milestone payments of up to $705.0 million.

As we seek to develop and commercialize CAP-1002 or any other product candidates including those related to our exosomes program, we anticipate that our expenses will increase significantly and that we will need substantial additional funding to support our continuing operations.

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The COVID-19 pandemic has presented a substantial public health and economic challenge around the world.

Our business operations and financial condition and results have been impacted to varying degrees, and we expect the impact will continue in future quarters.

We are continuing to assess and plan our development for the ongoing and potential impact of the COVID-19 pandemic on our business, operations and financial condition and results.

Despite careful tracking and planning, however, we are unable to accurately predict the extent of the impact of the pandemic on our business, results of operations and financial condition due to the uncertainty of future developments involving the pandemic and its impact on our employees and operations.

The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact and the economic impact on local, regional, national and international markets.

Our business operations and financial condition and results have been impacted to varying degrees, and we expect the impact will continue in future quarters particularly in connection with supply chain constraints.

For additional information on the various risks posed by the COVID-19 pandemic, refer to Part I, Item 1A.

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Accordingly, our success depends not only on the safety and efficacy of our product candidates, but also on our ability to finance the development of our products and our clinical programs.

Our recent major sources of working capital have been primarily proceeds from private and public equity sales of securities.

Our recent major sources of working capital have been primarily proceeds from public equity sales of securities and an upfront payment pursuant to our U.S.

Distribution Agreement with Nippon Shinyaku.

While we pursue our preclinical and clinical programs, we continue to explore potential partnerships for the development of one or more of our product candidates in the US and in other territories across the world.

Research and development, or R&D, expenses consist primarily of salaries and related personnel costs, supplies, clinical trial costs, patient treatment costs, rent for laboratories and manufacturing facilities, consulting fees, costs of personnel and supplies for manufacturing, costs of service providers for preclinical, clinical and manufacturing, and certain legal expenses resulting from intellectual property prosecution, stock compensation expense and other expenses relating to the design, development, testing and enhancement of our product candidates.

Except for certain capitalized intangible assets, R&D costs are expensed as incurred.

General and administrative, or G&A, expenses consist primarily of salaries and related expenses for executive, finance and other administrative personnel, stock compensation expense, accounting, legal and other professional fees, consulting expenses, rent for corporate offices, business insurance and other corporate expenses.

Our results have included non-cash compensation expense due to the issuance of stock options and warrants, as applicable.

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The terms and vesting schedules for share-based awards vary by type of grant and the employment status of the grantee.

Generally, the awards vest based upon time-based or performance-based conditions.

Performance-based conditions generally include the attainment of goals related to our financial performance and product development.

Generally, the awards vest based upon time-based conditions.

Stock-based compensation expense is included in the consolidated statements of operations under G&A or R&D expenses, as applicable.

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Results of Operations for the fiscal years ended December 31, 2022 and 2021

Grant Income.

Grant income for the years ended December 31, 2021 and 2020 was zero and approximately $0.2 million, respectively.

The decrease in grant income of approximately $0.2 million in 2021 as compared to 2020 is due to the timing of grant activities.

The DoD grant award came to completion during the third quarter of 2020.

Clinical Development Income.

Clinical development income for the years ended December 31, 2022 and 2021 was approximately $2.6 million and zero, respectively.

The Company started recognizing the $30.0 million upfront payment received from Nippon Shinyaku in the third quarter of 2022.

Revenue is ratably recognized using a proportional performance method in relation to the completion of the HOPE-3 clinical study.

Miscellaneous Income .

Miscellaneous income for the years ended December 31, 2021 and 2020 was approximately $0.2 million and $0.1 million, respectively.

Miscellaneous income for the years ended December 31, 2022 and 2021 was zero and $0.2 million, respectively.

The miscellaneous income was related to providing CAP-1002 for investigational purposes for clinical trials sponsored by CSMC.

The clinical trials sponsored by CSMC experienced delays caused by the COVID-19 pandemic in 2020.

The decrease in miscellaneous income is due to the clinical trials sponsored by CSMC completing or ceasing enrollment in 2021.

Operating Expenses

General and Administrative Expenses .

G&A expenses for the years ended December 31, 2021 and 2020 were approximately $7.6 million and $5.5 million, respectively.

The increase of approximately $2.1 million in G&A expenses in the year ended December 31, 2021 compared to the year ended December 31, 2020 is attributable to an approximately $0.9 million increase in stock-based compensation expense, an approximately $0.5 million increase in salaries and recruiting related expenses, an approximately $0.4 million increase in other general corporate expenses, and an approximately $0.4 million increase in insurance costs.

Research and Development Expenses .

R&D expenses for the years ended December 31, 2021 and 2020 were approximately $13.6 million and $8.5 million, respectively.

The increase of approximately $5.1 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020 is due to an approximate $2.5 million increase in research and development expenses primarily related to our exosomes program and an increase of approximately $2.3 million in technology transfer and manufacturing related activities of CAP-1002.

Furthermore, there was a net increase of approximately $0.1 million due to clinical development activities of CAP-1002 (DMD and COVID-19 clinical trials).

Lastly, there was an increase of approximately $0.2 million in stock-based compensation expenses allocable to R&D for the year ended December 31, 2021 as compared to December 31, 2020.

Research and development (“R&D”) expenses consist primarily of compensation and other related personnel costs, supplies, clinical trial costs, patient treatment costs, rent for laboratories and manufacturing facilities, consulting fees, costs of personnel and supplies for manufacturing, costs of service providers for preclinical, clinical and manufacturing, certain legal expenses resulting from intellectual property prosecution, stock-based compensation expense and other expenses relating to the design, development, testing and enhancement of our product candidates.

The following table summarizes our R&D expenses by category for each of the periods indicated:

Year ended December 31,

Compensation and other personnel expenses

Duchenne muscular dystrophy (CAP-1002)

Exosomes platform research

Facility expenses

Stock-based compensation

Research and other projects

Total research and development expenses

R&D expenses for 2022 increased by approximately $8.2 million, or 61%, compared to 2021.

The increase was primarily driven by the following:

● $4.4 million increase in compensation and other personnel expenses primarily due to increases in headcount;

● $3.5 million increase in DMD (CAP-1002) program primarily due to the commencement of our HOPE-3 clinical trial in 2022, continuation of our HOPE-2 OLE clinical program, and our expanded manufacturing production efforts for CAP-1002;

● $0.2 million increase in exosomes platform research primarily due to our continued development efforts;

● $0.7 million increase in facility expenses primarily due to our San Diego expansion efforts;

● $0.4 million increase in stock-based compensation expense primarily due to increases in headcount and stock price;

● $0.2 million increase in depreciation expense primarily related to increased equipment purchases and capital improvements primarily due to the San Diego manufacturing cleanroom buildout;

● $1.1 million decrease in research and other projects primarily due to the close-out of our INSPIRE program.

General and Administrative Expenses .

General and administrative (“G&A”) expenses consist primarily of compensation and other related personnel expenses for executive, finance and other administrative personnel, stock-based compensation expense, accounting, legal and other professional fees, consulting expenses, rent for corporate offices, business insurance and other corporate expenses.

The following table summarizes our G&A expenses by category for each of the periods indicated:

Year ended December 31,

Stock-based compensation

Compensation and other personnel expenses

Professional services

Facility expenses

Other corporate expenses

Total general and administrative expenses

G&A expenses for 2022 increased by approximately $2.8 million, or 37%, compared to 2021.

The increase was primarily driven by the following:

● $1.1 million increase in stock-based compensation expense primarily due to increases in headcount;

● $1.0 million increase in compensation and other personnel expenses primarily due to increases in headcount;

● $0.3 million increase in professional service expenses primarily due to an increase in business insurance and investor relations expenses;

● $0.2 million increase in facility related expenses primarily due to our continuing expansion efforts;

● $0.3 million increase in other corporate expenses primarily related to accounting fees and other general corporate expenses related to increases in headcount.

Other Income .

Other income for the years ended December 31, 2021 and 2020 was approximately $0.5 million and zero, respectively.

Other income for 2021 was related to the Employer Retention Credit under the CARES Act.

Other income for the years ended December 31, 2022 and 2021 was approximately $0.2 million and $0.5 million, respectively.

Other income was related to the Employer Retention Credit under the CARES Act.

Investment Income .

Investment income for the years ended December 31, 2021 and 2020 was $57,460 and $32,943, respectively.

The increase in investment income in 2021 as compared to 2020 is due to increased interest rates and the higher principal balance in our savings and money market fund accounts.

Investment income for the years ended December 31, 2022 and 2021 was approximately $0.5 million and $57,460, respectively.

The increase in investment income in 2022 as compared to 2021 is due to increased interest rates and the higher principal balance in our marketable securities, savings and money market fund accounts.

Products Under Active Development

CAP-1002 for the treatment of DMD – We are initiating a Phase III pivotal study for DMD for which we expect to spend approximately $10.0 million to $14.0 million in 2022.

The expenses for our DMD program will include costs for

clinical, regulatory and manufacturing-related expenses, including expenses related to the scale-up for commercial scale manufacturing.

We expect to receive a $30.0 million upfront payment under the terms of our NS Distribution Agreement with Nippon Shinyaku which will support these endeavors.

CAP-1002 for the treatment of COVID-19 – Following the receipt of our INSPIRE data, we will discuss the program with FDA and evaluate an appropriate path forward.

At this time, it is difficult to estimate our future expenses until our development becomes more clear.

Exosome-Based Therapeutics and Vaccines – Our exosome platform is in early-stage development.

We expect to spend approximately $5.0 million to $7.0 million during 2022 on development expenses related to our exosomes program, which includes preclinical and manufacturing related expenses for these technologies.

Our expenses for this program are primarily focused on the expansion of our engineered exosomes platform.

Our expenditures on current and future clinical development programs, particularly our CAP-1002 and exosomes programs, cannot be predicted with any significant degree of certainty as they are dependent on the results of our current trials and our ability to secure additional funding and additional strategic partners.

CAP-1002 for the treatment of DMD – We are currently conducting our HOPE-3, Phase III study for DMD and our ongoing OLE study of HOPE-2 for which we expect to spend approximately $12.5 million to $17.5 million in 2023.

The expenses for our DMD program will include costs for personnel, clinical, regulatory and manufacturing-related expenses, including expenses related to the scale-up for potential commercial scale manufacturing.

Exosome-Based Therapeutics and Vaccines – Our exosome platform is in early-stage preclinical development.

We expect to spend approximately $4.0 million to $6.0 million during 2023 on development expenses related to our exosomes program, which includes personnel, preclinical studies and manufacturing related expenses for these technologies.

Our expenses for this program are primarily focused on the expansion of our engineered exosomes platform including the conduct of IND-enabling studies.

Further, we cannot predict with any significant degree of certainty the amount of time which will be required to complete our clinical trials, the costs of completing research and development projects or whether, when and to what extent we will generate revenues from the commercialization and sale of any of our product candidates.

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● the costs of manufacturing our product candidates;

● the availability of necessary materials required to make our product candidates;

● the costs, requirements and timing of, and the ability to secure, regulatory approvals;

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Liquidity and Capital Resources for the fiscal years ended December 31, 2022 and 2021

The following table summarizes our liquidity and capital resources as of and for each of our last two fiscal years, and our net increase (decrease) in cash and cash equivalents as of and for each of our last two fiscal years and is intended to supplement the more detailed discussion that follows.

The following table summarizes our liquidity and capital resources as of and for each of our last two fiscal years, and our net increase (decrease) in cash, cash equivalents, and marketable securities as of and for each of our last two fiscal years and is intended to supplement the more detailed discussion that follows.

The amounts stated in the tables below are expressed in thousands.

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Cash and cash equivalents

Marketable securities

Working capital

Stockholders’ equity

Years ended December 31,

Year ended December 31,

Cash flow data

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Financing activities

Net increase in cash and cash equivalents

Our total cash and cash equivalents as of December 31, 2021 was approximately $34.9 million compared to approximately $32.7 million as of December 31, 2020.

The increase in cash and cash equivalents from December 31, 2021 as compared to December 31, 2020 was primarily due to net financing activities of approximately $20.2 million which were partially offset by the net loss of approximately $20.0 million in 2021.

As of December 31, 2021, we had approximately $10.0 million in total liabilities, of which approximately $2.9 million related to lease liabilities in connection with our operating lease right-of-use assets.

Net increase (decrease) in cash and cash equivalents

Our total cash, cash equivalents, and marketable securities as of December 31, 2022 was approximately $41.4 million compared to approximately $34.9 million as of December 31, 2021.

The increase in cash, cash equivalents and marketable securities from December 31, 2022 as compared to December 31, 2021 is primarily due to the upfront payment of $30.0 million from Nippon Shinyaku.

As of December 31, 2022, we had approximately $38.3 million in total liabilities, of which approximately $27.4 million relates to deferred revenue and approximately $2.6 million related to lease liabilities in connection with our operating lease right-of-use assets.

As of December 31, 2022, we had approximately $19.3 million in net working capital.

We had a net loss of approximately $29.0 million for the year ended December 31, 2022.

Cash used in operating activities was approximately $16.8 million and $10.1 million for the years ended December 31, 2021 and 2020, respectively.

The difference of approximately $6.7 million in cash from operating activities is primarily due to an increase of approximately $6.4 million in net loss for the year ended December 31, 2021 as compared to the same period in 2020.

Furthermore, there was a change of approximately $1.0 million in stock-based compensation expense, a net change of approximately $0.8 million in accounts payable and accrued expenses, which includes related party accounts payable and accrued expenses, and a change of approximately $0.5 million in receivables for the year ended December 31, 2021 as compared to the same period in 2020.

Cash provided by operating activities was approximately $4.9 million and cash used in operating activities was approximately $16.8 million for the years ended December 31, 2022 and 2021, respectively.

The difference of approximately $21.7 million in cash from operating activities is primarily due to the upfront payment of $30.0 million from Nippon Shinyaku.

Furthermore, there was an increase of approximately $1.5 million in stock-based compensation and an increase in net loss of approximately $9.0 million for the year ended December 31, 2022 as compared to the same period in 2021.

Furthermore, there was a net change of approximately $0.2 million in accounts payable and accrued expenses, which includes related party accounts payable and accrued expenses, and a change of approximately $0.2 million in receivables for the year ended December 31, 2022 as compared to the same period in 2021.

To the extent we obtain sufficient capital and/or long-term debt funding and are able to continue developing our product candidates, including if we expand our technology portfolio, engage in further research and development activities, and, in particular, conduct preclinical studies and clinical trials, we expect to continue incurring substantial losses, which will generate negative net cash flows from operating activities.

We had cash flow provided by (used in) investing activities of approximately $(1.2) million and $5.4 million for the years ended December 31, 2021 and 2020, respectively.

The decrease in cash flow by investing activities for the year ended December 31, 2021 as compared to the same period of 2020 is primarily due to the net effect from purchases, sales, and maturities of marketable securities as well as purchases of property and equipment.

We had cash flow used in investing activities of approximately $(35.1) million and $(1.2) million for the years ended December 31, 2022 and 2021, respectively.

The change in cash flow by investing activities for the year ended December 31, 2022 as compared to the same period of 2021 is primarily due to the net effect from purchases, sales, and maturities of marketable securities as well as purchases of property and equipment and leasehold improvements.

We had cash flow provided by financing activities of approximately $4.9 million and $20.2 million for the years ended December 31, 2022 and 2021, respectively.

The decrease in cash provided by financing activities for the year ended December 31, 2022 as compared to the same period of 2021 is primarily due to the net proceeds from the sale of common stock.

During 2021 we received net proceeds from the sale of stock options, warrants, and equities of approximately $20.2 million compared to approximately $33.1 million over the same period of 2020.

Furthermore, we received $0.3 million under the SBA Paycheck Protection Program of the CARES Act in 2020.

From inception through December 31, 2021, we financed our operations primarily through private and public sales of our equity securities, NIH and DoD grants, a payment from a former collaboration partner, a CIRM loan and a CIRM grant award.

During 2022 we received net proceeds from the sale of stock of approximately $4.8 million compared to approximately $20.2 million over the same period of 2021.

From inception through December 31, 2022, we financed our operations primarily through private and public sales of our equity securities, government grants, and payments from distribution agreements and collaboration partners.

As we have not generated any revenue from the commercial sale of our products to date, and we do not expect to generate revenue for several years, if ever, we will need to raise substantial additional capital to fund our research and development, including our long-term plans for clinical trials and new product development.

We may seek to raise additional funds through various potential sources, such as equity and debt financings, government grants, or through strategic collaborations and license agreements.

We may seek to raise additional funds through various potential sources, such as equity and debt financings, government grants, or through strategic collaborations and license agreements or other distribution agreements.

We can give no assurances that we will be able to secure such additional sources of funds to support our operations, complete our clinical trials or if such funds become available to us, that such additional financing will be sufficient to meet our needs.

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At this time, we believe our cash resources are sufficient to fund our operations for at least the next twelve months.

The actual amount of funds we will need to operate is subject to many factors, some of which are beyond our control.

actual amount of funds we will need to operate is subject to many factors, some of which are beyond our control.

These factors include the following:

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● the progress of the development efforts of parties with whom we have entered into research and development agreements;

● the costs of manufacturing our product candidates, and the progress of efforts with parties with whom we may enter into commercial manufacturing agreements;

● our ability to successfully manufacture product for our clinical trials;

● the availability of materials necessary to manufacture our product candidates;

● the costs of manufacturing our product candidates, and the progress of efforts with parties with whom we may enter into commercial manufacturing agreements, if necessary;

● our ability to maintain current research and development programs and to establish new research and development and licensing arrangements;

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● the costs and timing of regulatory approvals.

As a result of the spread of the COVID-19 coronavirus, uncertainties have arisen that could potentially impact enrollment of clinical trials, deliverables related to contract performance, payments from trial sponsors, workforce stability, supply chain disruptions or delays, timing of grant disbursements as well as other potential business operations.

As a result of the spread of the COVID-19 coronavirus, uncertainties have arisen that have impacted enrollment of clinical trials, deliverables related to contract performance, payments from trial sponsors, workforce stability, supply chain disruptions or delays, timing of grant disbursements as well as other potential business operations.

While the disruption is currently expected to be temporary, there is considerable uncertainty around its expected duration.

In addition to potential impact on grant disbursements, there may be risks to the Company’s ability to obtain financing from other sources, due to the impact of the coronavirus.

There could be other financial impacts on our business of the coronavirus, the specifics of which are unknown at this time.

Financing Activities by the Company

Commercialization and Distribution Agreement with Nippon Shinyaku

In January 2022, Capricor entered into an Exclusive Commercialization and Distribution Agreement (the “NS Distribution Agreement”) with Nippon Shinyaku.

Under the terms of the NS Distribution Agreement, Capricor appointed Nippon Shinyaku as its exclusive distributor for the United States of CAP-1002, the Company’s lead product candidate, for the treatment of DMD.

Under the terms of the NS Distribution Agreement, Capricor will be responsible for the conduct of HOPE-3 as well as the manufacturing of CAP-1002.

In addition to potential impact on grant availability, 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 from the coronavirus, the specifics of which are unknown at this time.

Collaborations

Commercialization and Distribution Agreement with Nippon Shinyaku (Territory:

United States)

On January 24, 2022, Capricor entered into an Exclusive Commercialization and Distribution Agreement (the “U.S.

Distribution Agreement”) with Nippon Shinyaku, a Japanese corporation.

Under the terms of the U.S.

Distribution Agreement, Capricor appointed Nippon Shinyaku as its exclusive distributor in the United States of CAP-1002 for the treatment of DMD.

Under the terms of the U.S.

Distribution Agreement, Capricor will be responsible for the conduct of the HOPE-3 trial as well as the manufacturing of CAP-1002.

Nippon Shinyaku will be responsible for the distribution of CAP-1002 in the United States.

Capricor will sell commercial product to Nippon Shinyaku and in addition will receive a meaningful, double-digit share of product revenue and additional development and sales-based milestone payments.

We expect to receive an upfront payment of $30.0 million with potential additional sales and development milestone payments of up to $705.0 million.

Pursuant to the U.S.

Distribution Agreement, Capricor has the obligation to sell commercial product to Nippon Shinyaku, subject to regulatory approval, and in addition Capricor will have the right to receive a meaningful, double-digit share of product revenue and additional development and sales-based milestone payments, if achieved.

In the first quarter of 2022, Capricor received an upfront payment of $30.0 million.

Pursuant to the terms of the U.S.

Distribution Agreement, there are potential additional sales and development milestone payments of up to $705.0 million.

Commercialization and Distribution Agreement with Nippon Shinyaku (Territory:

On February 10, 2023, Capricor entered into an Exclusive Commercialization and Distribution Agreement (the “Japan Distribution Agreement”) with Nippon Shinyaku.

Under the terms of the Japan Distribution Agreement, Capricor appointed Nippon Shinyaku as its exclusive distributor in Japan of CAP-1002 for the treatment of DMD.

Under the terms of the Japan Distribution Agreement, Capricor expects to receive an upfront payment of $12 million and in addition, Capricor will potentially receive additional development and sales-based milestone payments of up to approximately $89 million, subject to foreign currency exchange rates, and a meaningful double-digit share of product revenue.

Nippon Shinyaku will be responsible for the distribution of CAP-1002 in Japan.

Capricor will be responsible for the conduct of clinical development in Japan, as may be required, as well as the manufacturing of CAP-1002.

Capricor will sell commercial product to Nippon Shinyaku.

In addition, Capricor or its designee will hold the Marketing Authorization in Japan if the product is approved in that territory.

Financing Activities by the Company

June 2021 ATM Program

On June 21, 2021, the Company initiated an at-the-market offering under a prospectus supplement for aggregate sales proceeds of up to $75.0 million, or the June 2021 ATM Program, with the common stock to be distributed at the market prices prevailing at the time of sale.

The June 2021 ATM Program was established under a Common Stock Sales Agreement, or the Sales Agreement, with H.C.

Wainwright & Co.

LLC, or Wainwright, under which we may, from time to time, issue and sell shares of our common stock through Wainwright as sales agent.

On June 21, 2021, the Company initiated an at-the-market offering under a prospectus supplement for aggregate sales proceeds of up to $75.0 million (the “June 2021 ATM Program”), with the common stock to be distributed at the market prices prevailing at the time of sale.

The June 2021 ATM Program was established under a Common Stock Sales Agreement (the “Sales Agreement”) with Wainwright, under which we may, from time to time, issue and sell shares of our common stock through Wainwright as sales agent.

The Sales Agreement provides that Wainwright will be entitled to compensation for its services at a commission rate of 3.0% of the gross sales price per share of common stock sold.

All shares issued pursuant to the June 2021 ATM Program were issued pursuant to our shelf registration statement on Form S-3 (File No.

333-254363), which was initially filed with the Securities and Exchange Commission, or the SEC, on March 16, 2021, amended on June 15, 2021 and declared effective by the SEC on June 16, 2021.

From June 21, 2021 through December 31, 2021, the Company sold an aggregate of 1,267,475 shares of common stock under the June 2021 ATM Program at an average price of approximately $5.89 per share for gross proceeds of approximately $7.5 million.

333-254363), which was initially filed with the SEC on March 16, 2021, amended on June 15, 2021 and declared effective by the SEC on June 16, 2021.

From June 21, 2021 through December 31, 2022, the Company has sold an aggregate of 2,098,333 shares of common stock under the June 2021 ATM Program at an average price of approximately $5.93 per share for gross proceeds of approximately $12.4 million.

Approximately $62.6 million of common stock may still be sold pursuant to the June 2021 ATM Program.

The Company paid cash commissions on the gross proceeds, plus reimbursement of expenses to Wainwright, as well as legal and accounting fees in the aggregate amount of approximately $0.4 million.

Subsequent to December 31, 2022 and through the date of this filing, no additional shares have been sold under the June 2021 ATM Program.

May 2020 ATM Program

On May 4, 2020, the Company initiated an at-the-market offering under a prospectus supplement for aggregate sales proceeds of up to $40.0 million, or the May 2020 ATM Program, with the common stock to be distributed at the market prices prevailing at the time of sale.

The May 2020 ATM Program was established under the Sales Agreement with Wainwright, under which we may, from time to time, issue and sell shares of our common stock through Wainwright as sales agent.

The July 2019 Sales Agreement provides that Wainwright will be entitled to compensation for its services at a commission rate of 3.0% of the gross sales price per share of common stock sold.

All shares issued pursuant to the May 2020 ATM Program were issued pursuant to our shelf registration statement on Form S-3 (File No.

On May 4, 2020, the Company initiated an at-the-market offering under a prospectus supplement for aggregate sales proceeds of up to $40.0 million (the “May 2020 ATM Program”), with the common stock to be distributed at the market prices prevailing at the time of sale.

The May 2020 ATM Program was established under the Sales Agreement.

All shares issued pursuant to the May 2020 ATM Program were issued pursuant to our shelf registration statement on Form

S-3 (File No.

333-227955), which was initially filed with the SEC on October 24, 2018, amended on July 17, 2019 and declared effective by the SEC on July 18, 2019.

Since May 4, 2020 and through June 21, 2021, the Company sold an aggregate of 6,027,852 shares of common stock under the May 2020 ATM Program at an average price of approximately $6.15 per share for gross proceeds of approximately $37.1 million.

The Company paid cash commissions on the gross proceeds, plus reimbursement of expenses of Wainwright, as well as legal and accounting fees in the aggregate amount of approximately $1.2 million.

From May 4, 2020 through June 21, 2021, the Company sold an aggregate of 6,027,852 shares of common stock under the May 2020 ATM Program at an average price of approximately $6.15 per share for gross proceeds of approximately $37.1 million.

The Company paid cash commissions on the gross proceeds, plus reimbursement of expenses to Wainwright, as well as legal and accounting fees in the aggregate amount of approximately $1.2 million.

As of June 21, 2021, the May 2020 ATM Program expired and was replaced with the June 2021 ATM Program.

March 2020 Warrant Inducement.

On March 25, 2020, the Company entered into a letter agreement, or the Exercise Agreement, with a holder, or the Exercising Holder, or then outstanding warrants to purchase shares of Common Stock, or the Prior Warrants.

Pursuant to the Exercise Agreement, in connection with the exercise by the Exercising Holder

of the remaining 4,000,000 Prior Warrants held by the Exercising Holder which had not been previously exercised, the Company agreed to issue 4,000,000 additional warrants, or the New Warrants, to purchase Common Stock.

The Prior 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 Prior Warrants and a $0.125 per share purchase price for the New Warrants.

The New Warrants had an exercise price of $1.27 per share.

The New Warrants and the shares of Common Stock issuable upon the exercise of the New Warrants were not registered under the Securities Act of 1933, as amended, or the Securities Act, and were offered pursuant to the exemption provided in Section 4(a)(2) under the Securities Act or Rule 506(b) promulgated thereunder.

The New Warrants were exercisable immediately upon issuance, and had a term of exercise of 5 1/2 years.

The Company received aggregate gross proceeds of approximately $4.9 million from the exercise of the Prior Warrants by the Exercising Holder.

These gross proceeds were reduced by fees due and payable to the placement agent for the transactions pursuant to the Exercise Agreement and New Warrants in the amount of $343,000, and further reduced by reimbursements to the placement agent for legal fees and other expenses.

In addition, certain employees of the placement agent received new warrants, or the Placement Agent Warrants, for shares of Common Stock equal to 5.0% of the New Warrants issued, or 200,000 shares.

These Placement Agent Warrants are exercisable immediately and have a term of exercise of 5 years.

The holders of each of the New Warrants and of the Placement Agent Warrants had 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 Placement Agent Warrants, and that resale registration statement was declared effective by the SEC on May 19, 2020.

As of December 31, 2021, 65,000 Placement Agent Warrants and no New Warrants remained outstanding.

CIRM Grant Award

On June 16, 2016, Capricor entered into the CIRM Award with CIRM in the amount of approximately $3.4 million to fund, in part, Capricor’s Phase I/II HOPE-Duchenne clinical trial investigating CAP-1002 for the treatment of Duchenne muscular dystrophy-associated cardiomyopathy.

On June 16, 2016, Capricor entered into an award (the “CIRM Award”) with the California Institute for Regenerative Medicine (“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.

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provided that the maturity date of the loan will not surpass the ten-year anniversary of the grant date of the CIRM Award.

Beginning on the date of the loan, the loan shall bear interest on the unpaid principal balance, plus the interest that has accrued prior to the election point according to the terms set forth in CIRM’s Loan Policy, or the New Loan Balance, at a per annum rate equal to the LIBOR rate for a three-month deposit in U.S.

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.

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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.

In 2019, Capricor completed all milestones and close-out activities associated with the CIRM Award and expended all funds received.

As of December 31, 2022, Capricor’s liability balance for the CIRM Award was approximately $3.4 million.

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, commercial-ready process to manufacture CAP-2003, Capricor’s exosome product candidate.

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 utilized approximately $2.3 million under the terms of the award.

No revenue was recognized in 2021 in relation to this award.

In the third quarter of 2021, Capricor completed all final close-out documentation associated with this award.

Off-Balance Sheet Arrangements

During the periods presented, we did not have, nor do we currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

Critical Accounting Policies and Estimates

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We evaluate our estimates and assumptions on an ongoing basis, including research and development and clinical trial accruals, and stock-based compensation estimates.

Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances.

Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the

circumstances.

Our actual results could differ from these estimates.

We believe the following critical accounting policies reflect the more significant judgments and estimates used in the preparation of our financial statements and accompanying notes.

ASC 842, as adopted in the first quarter of 2019, requires lessees to recognize most leases on the balance sheet with a corresponding right-to-use asset, or ROU asset.

ASC 842, requires lessees to recognize most leases on the balance sheet with a corresponding right-to-use (“ROU”) asset.

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease.

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Revenue Recognition

The Company applies ASU 606, Revenue from Contracts with Customers , for all contracts.

The Company applies ASU 606, Revenue for Contracts from Customers , which amended revenue recognition principles and provides a single, comprehensive set of criteria for revenue recognition within and across all industries.

The Company has not yet achieved commercial sales of its drug candidates to date, however, the new standard is applicable to its distribution agreements.

The revenue standard provides a five-step framework for recognizing revenue as control of promised goods or services is transferred to a customer at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

To determine revenue recognition for arrangements that it determines are within the scope of the revenue standard, the Company performs the following five steps:

(i) identify the contract;

(ii) identify the performance obligations;

(iii) determine the transaction price;

(iv) allocate the transaction price to the performance obligations in the contract;

and (v) recognize revenue when (or as) the Company satisfies a performance obligation.

At contract inception, the Company assesses whether the goods or services promised within each contract are distinct and, therefore, represent a separate performance obligation, or whether they are not distinct and are combined with other goods and services until a distinct bundle is identified.

The Company then determines the transaction price, which typically includes upfront payments and any variable consideration that the Company determines is probable to not cause a significant reversal in the amount of cumulative revenue recognized when the uncertainty associated with the variable consideration is resolved.

The Company then allocates the transaction price to each performance obligation and recognizes the associated revenue when, or as, each performance obligation is satisfied.

The Company’s distribution agreements may entitle it to additional payments upon the achievement of milestones or royalties on sales.

The milestones are generally categorized into three types:

development milestones, regulatory milestones and sales-based milestones.

The Company evaluates whether it is probable that the consideration associated with each milestone or royalty will not be subject to a significant reversal in the cumulative amount of revenue recognized.

Amounts that meet this threshold are included in the transaction price using the most likely amount method, whereas amounts that do not meet this threshold are excluded from the transaction price until they meet this threshold.

At the end of each subsequent reporting period, the Company re-evaluates the probability of a significant reversal of the cumulative

revenue recognized for its milestones and royalties, and, if necessary, adjusts its estimate of the overall transaction price.

Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues and net income (loss) in the Company’s consolidated statements of operation and comprehensive loss.

Typically, milestone payments and royalties are achieved after the Company’s performance obligations associated with the distribution agreements have been completed and after the customer has assumed responsibility for the respective clinical program.

Milestones or royalties achieved after the Company’s performance obligations have been completed are recognized as revenue in the period the milestone or royalty was achieved.

If a milestone payment is achieved during the performance period, the milestone payment would be recognized as revenue to the extent performance had been completed at that point, and the remaining balance would be recorded as deferred revenue.

The revenue standard requires the Company to assess whether a significant financing component exists in determining the transaction price.

The Company performs this assessment at the onset of its distribution agreements.

Typically, a significant financing component does not exist because the customer is paying for services in advance with an upfront payment.

Additionally, future royalty payments are not substantially within the control of the Company or the customer.

Whenever the Company determines that goods or services promised in a contract should be accounted for as a combined performance obligation over time, the Company determines the period over which the performance obligations will be performed and revenue will be recognized.

Revenue is recognized using either the proportional performance method or on a straight-line basis if efforts will be expended evenly over time.

Percentage of completion of patient visits in clinical trials are used as the measure of performance.

The Company feels this method of measurement to be the best depiction of the transfer of services and recognition of revenue.

Significant management judgment is required in determining the level of effort required under an arrangement and the period over which the Company is expected to complete its performance obligations.

If the Company determines that the performance obligation is satisfied over time, any upfront payment received is initially recorded as deferred revenue on its consolidated balance sheets.

Certain judgments affect the application of the Company’s revenue recognition policy.

For example, the Company records short-term (less than one year) and long-term (over one year) deferred revenue based on its best estimate of when such revenue will be recognized.

This estimate is based on the Company’s current operating plan and, the Company may recognize a different amount of deferred revenue over the next 12-month period if its plan changes in the future.

The determination as to when income is earned is dependent on the language in each specific grant.

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Except for certain capitalized intangible assets, R&D costs are expensed as incurred.

Our cost accruals for clinical trials and other R&D activities are based on estimates of the services received and efforts expended pursuant to contracts with numerous clinical trial centers and contract research organizations, or CROs, clinical study sites, laboratories, consultants or other clinical trial vendors that perform activities in connection with a trial.

Our cost accruals for clinical trials and other R&D activities are based on estimates of the services received and efforts expended pursuant to contracts with numerous clinical trial centers and contract research organizations (“CROs”), clinical study sites, laboratories, consultants or other clinical trial vendors that perform activities in connection with a trial.

Related contracts vary significantly in length and may be for a fixed amount, a variable amount based on actual costs incurred, capped at a certain limit, or for a combination of fixed, variable and capped amounts.

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The objective of the accrual policy is to match the recording of expenses in the financial statements to the actual services received and efforts expended.

As such, expense accruals related to clinical trials and other R&D

activities are recognized based on our estimates of the degree of completion of the event or events specified in the applicable contract.

As such, expense accruals related to clinical trials and other R&D activities are recognized based on our estimates of the degree of completion of the event or events specified in the applicable contract.

No adjustments for material changes in estimates have been recognized in any period presented.

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(i) the 2006 Stock Option Plan, (ii) the 2012 Restated Equity Incentive Plan (which superseded the 2006 Stock Option Plan), (iii) the 2012 Non-Employee Director Stock Option Plan, (iv) the 2020 Equity Incentive Plan, and (v) the 2021 Equity Incentive Plan.

At this time, the Company only issues options under the 2020 Plan and the 2021 Plan.

We expense the fair value of stock-based compensation over the vesting period.

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The terms and vesting schedules for share-based awards vary by type of grant and the employment status of the grantee.

Generally, the awards vest based upon time-based or performance-based conditions.

Performance-based conditions generally include the attainment of goals related to our financial and development performance.

Stock-based compensation expense is included in general and administrative expense or research and development expense, as applicable, in the Statements of Operations and Comprehensive Loss.

Generally, the awards vest based upon time-based conditions.

Stock-based compensation expense is included in general and administrative expense or research and development expense, as applicable, in the Statements of Operations

and Comprehensive Income (Loss).

We expect to record additional non-cash compensation expense in the future, which may be significant.

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

Our clinical trial accrual process is designed to account for expenses resulting from our obligations under contracts with vendors, consultants, and CROs and clinical site agreements in connection with conducting clinical trials.

Our clinical trial accrual process is designed to account for expenses resulting from our obligations under contracts with vendors, consultants, 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.

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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.

We determine accrual estimates through financial models that take into account discussions 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.

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Recently Issued or Newly Adopted Accounting Pronouncements

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 adopted ASU 2019-12 in the first quarter of 2021.

The adoption of this update did not have a material impact on the Company’s financial statements and footnote disclosures.

In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832) , which requires business entities to disclose information about transactions with a government that are accounted for by applying a grant or contribution model by analogy.

In November 2021, the Financial Accounting Standards Board (“FASB”) issued ASU 2021-10, Government Assistance (Topic 832) , which requires business entities to disclose information about transactions with a government entity that are accounted for by applying a grant or contribution model by analogy.

For transactions within scope, the new standard requires the disclosure of information about the nature of the transaction, including significant terms and conditions, as well as the amounts and specific financial statement line items affected by the transaction.

The new guidance is effective for annual reporting periods beginning after December 15, 2021.

The Company does not expect that the adoption of this standard will have an impact on its consolidated financial statements.

The Company adopted ASU 2021-10 in the first quarter of 2022.

The adoption of this update did not have a material impact on the Company’s 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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis