What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2023-03-17 compared with 2022-03-11 · 264 added, 235 removed, 571 unchanged (47% of the section changed)

9 unchanged sentences

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Capricor Therapeutics, Inc.

To the Board of Directors and

Stockholders of Capricor Therapeutics, Inc.

and Subsidiary

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Critical Audit Matters

Critical audit matters are 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:

The critical audit matters communicated below are matters arising from the current period audit of the consolidated 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 judgments.

We determined that there are no critical audit matters.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Revenue Recognition – Revenue Recognized Over Tim e

Description of the Matter

As discussed in Note 1 and Note 8 to the Consolidated Financial Statements, the Company earns its revenue through an exclusive commercialization and distribution agreement.

For performance obligations related to services that are required to be recognized over time, the Company generally measures its progress to completion using an input measure of total costs for patient visits incurred divided by total costs expected to be incurred for all patient visits.

Auditing revenue recognition is complex and highly judgmental due to the variability and uncertainty associated with the Company’s assessment of measure of progress.

Changes in these estimates would have a significant effect on the amount of revenue recognized.

How We Addressed the Matter in Our Audit

To test the measures of progress used for performance obligations related to services that are required to be recognized over time, our audit procedures included, among others, evaluating the appropriateness of the Company’s accounting policy for each type of arrangement, testing the identified measure of performance by reading contracts with customers, including all amendments, and reviewing the contract analyses prepared by management.

We evaluated whether the selected measures of progress towards satisfaction of performance obligations were applied consistently.

We also tested the completeness and accuracy of the underlying data used for the measure of progress by testing and or analyzing the underlying data and conducting interviews of project personnel.

/s/ Rose, Snyder & Jacobs LLP

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Cash and cash equivalents

Marketable securities

Prepaid expenses and other current assets

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PROPERTY AND EQUIPMENT, net

Intangible assets, net of accumulated amortization of $ 259,682 and $ 257,517 , respectively

Lease right-of-use assets, net

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Accounts payable and accrued expenses, related party

Note payable, current

Lease liabilities, current

Deferred revenue, current

TOTAL CURRENT LIABILITIES

LONG-TERM LIABILITIES

Note payable, net of current

CIRM liability

Lease liabilities, net of current

Deferred revenue, net of current

TOTAL LONG-TERM LIABILITIES

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Additional paid-in capital

Accumulated other comprehensive income

Accumulated deficit

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Net unrealized gain on marketable securities

COMPREHENSIVE LOSS

COMPREHENSIVE INCOME (LOSS)

( 28,914,288 )

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STOCKHOLDERS'

INCOME (LOSS)

Balance at December 31, 2020

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Issuance of common stock, net of fees

Exercise of pre-funded common stock warrants

Exercise of common warrants

Issuance of shares in abeyance

Stock-based compensation

Stock options exercised

Unrealized gain on marketable securities

( 20,022,520 )

3 unchanged sentences

Issuance of common stock, net of fees

Exercise of common warrants

Stock-based compensation

Stock options exercised

Unrealized gain on marketable securities

( 29,019,532 )

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( 20,022,520 )

Adjustments to reconcile net loss to net cash used in operating activities:

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

Loss on disposal of fixed assets

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Forgiveness of debt

Non-cash lease expense

Change in assets - (increase) decrease:

Changes in lease liabilities

Changes in operating assets and liabilities:

Prepaid expenses and other current assets

Change in liabilities - increase (decrease):

Accounts payable and accrued expenses

Accounts payable and accrued expenses, related party

Operating lease liabilities

Net cash used in operating activities

( 16,809,324 )

Deferred revenue

Net cash provided by (used in) operating activities

( 16,809,324 )

5 unchanged sentences

( 2,000,243 )

Net cash provided by (used in) investing activities

( 1,196,286 )

Payments for leasehold improvements

( 1,359,488 )

Net cash used in investing activities

( 35,072,507 )

( 1,196,286 )

Cash flows from financing activities:

Net proceeds from sale of common stock

Proceeds from note payable

Proceeds from exercise of stock awards

Net cash provided by financing activities

Net increase in cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

( 25,282,032 )

Cash and cash equivalents balance at beginning of period

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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 Therapeutics, Inc., a Delaware corporation (referred to herein as “Capricor Therapeutics” or the “Company” or “we”), is a clinical-stage biotechnology company focused on the development of transformative cell and exosome-based therapeutics for treating Duchenne muscular dystrophy (“DMD”), a rare form of muscular dystrophy which results in muscle degeneration and premature death, and other diseases with high unmet medical needs.

Capricor, Inc.

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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 multiple active drug and vaccine candidates in various stages of development.

Capricor Therapeutics, together with its subsidiary, Capricor, has multiple drug and vaccine candidates in various stages of development.

Basis of Consolidation

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

The Company has historically financed its research and development activities as well as operational expenses from equity financings, government grants, a payment from a former collaboration partner, a loan award and a grant from the California Institute for Regenerative Medicine (“CIRM”).

Cash and cash equivalents as of December 31, 2021 were approximately $ 34.9 million, compared to approximately $ 32.7 million as of December 31, 2020.

The Company has entered into a Common Stock Sales Agreement with H.C.

The Company has historically financed its research and development activities as well as operational expenses primarily from equity financings, government grants, and payments from distribution agreements and collaboration partners.

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

In the first quarter of 2023, the Company expects to receive an upfront payment of $ 12.0 million from Nippon Shinyaku Co., Ltd., a Japanese corporation, (“Nippon Shinyaku”), in accordance with its Japan Exclusive Commercialization and Distribution Agreement (see Note 10 – “Subsequent Events”).

Additionally, the Company has a Common Stock Sales Agreement in place 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”).

LLC ("Wainwright") to create at-the-market equity programs under which the Company, from time to time, sells shares of its common stock (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 research and development activities, 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;

● the timing and costs associated with its research and development activities, clinical trials and preclinical studies, including the enrollment and progress of our ongoing HOPE-3 Phase III clinical study of CAP-1002 in DMD;

● the timing and costs associated with the manufacturing of our product candidates, including the expansion of our manufacturing capacity to support the potential commercialization of CAP-1002 for DMD;

● the timing and costs associated with potential commercialization of its product candidates;

● the number and scope of its research programs, including the expansion of our exosomes program;

● 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, potential partnering opportunities, 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

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, potential distribution and other partnering opportunities, and from government grants.

CAPRICOR THERAPEUTICS, INC.

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DECEMBER 31, 2022 AND 2021

of its clinical trial programs.

The Company will require substantial additional capital to fund its operations.

The Company cannot provide assurances that financing will be available when and as needed or that, if available, financing will be available on favorable or acceptable terms.

If the Company is unable to obtain additional financing when and if required, it would have a material adverse effect on the Company’s business and results of operations.

The Company would likely need to delay, curtail or terminate portions of its clinical trial programs.

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

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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.

Our business operations and financial condition and results have been impacted to varying degrees, and the impact may continue in future periods as we conduct our HOPE-3 trial and expand our exosomes-based research and development programs.

We are continuing to assess and plan our development for the ongoing and potential impact of COVID-19 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.

In addition, 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 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 (see Note 2 – “Note Payable”).

The Employee Retention Credit (“ERC”), a credit against certain payroll taxes allowed to an eligible employer for qualifying wages, was established by the CARES Act.

The Company recorded $ 548,207 in ERC as other income for the year ended December 31, 2021, of which $ 356,997 is recorded as a receivable as of December 31, 2021.

The Company may submit for additional credits under the CARES Act in the future, as applicable.

In light of 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 REGRESS and ALPHA trials as well as any potential equity and debt financings, the Company submitted for the Employee Retention Credit (“ERC”), a credit against certain payroll taxes allowed to an eligible employer for qualifying wages, which was established by the CARES Act.

The Company has submitted $ 738,778 in ERC for applicable 2020 and 2021 periods, receiving $ 191,199 in 2021.

As of December 31, 2022, the Company has recorded a receivable for $ 547,580 for the remainder of funds due.

Use of Estimates

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Estimates also affect the reported amounts of revenues and expenses during the reporting period.

The most sensitive estimates relate to the assumptions used to estimate stock-based compensation expense.

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

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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

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.

As of December 31, 2022, marketable securities consist primarily of short-term United States treasuries.

CAPRICOR THERAPEUTICS, INC.

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DECEMBER 31, 2022 AND 2021

excluded from net income (loss) and reported in accumulated other comprehensive income (loss) as a separate component of stockholders’ equity.

Property and Equipment

9 unchanged sentences

Less accumulated depreciation

( 1,181,625 )

Property and equipment, net

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Other intellectual property is expensed as incurred.

Total amortization expense was $ 2,165 and $ 4,330 for the years ended December 31, 2021 and 2020, respectively.

All capitalized intellectual property was fully amortized as of September 30, 2021.

Total amortization expense was zero and $ 2,165 for the years ended December 31, 2022 and 2021, respectively.

All capitalized intellectual property has been fully amortized as of September 30, 2021.

The Company reviews goodwill and intangible assets at least annually for possible impairment.

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No impairment related to long-lived assets was recorded for the years ended December 31, 2022 and 2021.

ASC Topic 842, “Leases” (“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 (“ROU asset”).

ASC Topic 842, “Leases” (“ASC 842”), requires lessees to recognize most leases on the balance sheet with a corresponding right-to-use asset (“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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The Company elects to exclude short-term leases if and when the Company has them.

The Company leases office and laboratory space, all of which are operating leases (see Note 7 - “Commitments and Contingencies”).

Most leases include the option to renew and the exercise of the renewal options is at the Company’s sole discretion.

Options to renew a lease are not included in the Company’s assessment unless there is reasonable certainty

CAPRICOR THERAPEUTICS, INC.

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DECEMBER 31, 2022 AND 2021

The Company leases office and laboratory space, all of which are operating leases (see Note 7 - “Commitments and Contingencies”).

Most leases include the option to renew and the exercise of the renewal options is at the Company’s sole discretion.

Options to renew a lease are not included in the Company’s assessment unless there is reasonable certainty that the Company will renew.

that the Company will renew.

In addition, the Company’s lease agreements generally do not contain any residual value guarantees or restrictive covenants.

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Revenue Recognition

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

Government Research Grants

The Company adopted 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 (see Note 8 – “License and 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.

CAPRICOR THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2022 AND 2021

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 transaction price consists of variable sales-based royalties and fixed components in the form of an upfront payment and milestones.

The timing of the fixed component of the transaction price is upfront, however, the performance obligation is satisfied over a period of time, the HOPE-3 clinical trial.

Therefore, upon receipt of the upfront payment, a contract liability is recorded which represents deferred revenue.

The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the related revenue recognition.

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 grant award from CIRM (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”).

Because the terms of the grant award (the “CIRM Award”) from the California Institute for Regenerative Medicine (“CIRM”) 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.

No grant income was recognized during the years ended December 31, 2022 and 2021.

Miscellaneous Income

Revenue is recognized in connection with the delivery of doses which were developed as part of our past R&D efforts.

Revenue is recognized in connection with the delivery of doses which were developed as part of our past research and development (“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”).

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Miscellaneous income is based on contracts with fixed transaction prices.

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

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.

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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.

As of December 31, 2021, the Company had federal net operating loss carryforwards of approximately $ 124.3 million, available to reduce future taxable income, of which $ 76.1 million will begin to expire in 2027 .

The post December 31, 2017 net operating losses generated of $ 48.2 million will carryforward indefinitely, but may be subject to an 80% limitation upon utilization.

As of December 31, 2021, the Company had state net operating loss carryforwards of approximately $ 121.1 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

CAPRICOR THERAPEUTICS, INC.

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DECEMBER 31, 2022 AND 2021

“Code”), and similar state laws based on ownership changes and the value of the Company’s stock.

As of December 31, 2022, the Company had federal net operating loss carryforwards of approximately $ 129.6 million, available to reduce future taxable income, of which $ 73.7 million will begin to expire in 2027 .

The post December 31, 2017 net operating losses generated of $ 55.9 million will carryforward indefinitely, but may be subject to an 80% limitation upon utilization.

As of December 31, 2022, the Company had state net operating loss carryforwards of approximately $ 143.8 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 $ 5.6 million of federal research and development credits and approximately $ 2.5 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 2033 and 2035 , respectively.

Additionally, the Company currently has approximately $ 1.7 million of California research and development credits available to offset future taxable income which will carryforward indefinitely.

Utilization of these credits could be limited under Section 383 of the Code and similar state laws based on ownership changes and the value of the Company’s stock.

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.

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The Company’s other comprehensive income (loss) is related to a net unrealized gain (loss) on marketable securities.

For the years ended December 31, 2021 and 2020, the Company’s other comprehensive income was zero and $ 757 , respectively.

For the years ended December 31, 2022 and 2021, the Company’s other comprehensive income was $ 105,244 and zero , respectively.

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.

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

CAPRICOR THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2022 AND 2021

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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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

CAPRICOR THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2021 AND 2020

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.

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.

Stock-Based Compensation

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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 were as follows:

December 31, 2021

December 31, 2020

( 20,022,520 )

( 13,657,028 )

Weighted-average number of shares of common stock outstanding

Dilutive effect of stock options

Common stock and common stock equivalents used for diluted loss per share

For the years ended December 31, 2022 and 2021, warrants and options to purchase 5,882,621 and 3,899,606 shares of common stock, respectively, have been excluded from the computation of potentially dilutive securities.

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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 table summarizes the fair value measurements by level at December 31, 2022 for assets and liabilities measured at fair value on a recurring basis:

December 31, 2022

Marketable Securities

Carrying amounts reported in the balance sheet of cash and cash equivalents, receivables, accounts payable and accrued expenses approximate fair value due to their relatively short maturity.

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Recent 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 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.

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 .

In 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 were 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"), had a two-year term, was set to mature on April 29, 2022, and was to bear interest at a rate of 1.0 % per annum.

Monthly principal and interest payments, less the amount of any potential forgiveness, were to commence 10 months after the end of the covered period for the borrower's loan forgiveness (either 8 or 24 weeks).

Loan payments were to be deferred for borrowers who apply for loan forgiveness until SBA remits the borrower's loan forgiveness amount to the lender.

Capricor did not provide

In the second quarter of 2021, the Loan was forgiven, and the Company recognized a gain of $ 318,160 on the forgiveness.

CAPRICOR THERAPEUTICS, INC.

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any collateral or guarantees for the Loan, nor did Capricor pay any facility charge to obtain the Loan.

The Promissory Note provided for customary events of default, including, among others, those relating to failure to make payment, bankruptcy, breaches of representations and material adverse events.

Capricor had the right to prepay the principal of the Loan at any time without incurring any prepayment charges.

The Company submitted a loan forgiveness application to CNB in the first quarter of 2021.

The Company was notified in April 2021 by the SBA that the Loan was forgiven.

The Company recognized a gain on forgiveness of the full amount in 2021.

STOCKHOLDERS’ EQUITY

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These programs are referred to below as the “May 2020 ATM Program” and the “June 2021 ATM Program” based on when each program was initiated.

In addition, the Company completed a warrant inducement offer in March 2020.

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.

The Company established the May 2020 ATM Program with an aggregate offering price of up to $ 40.0 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.

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On June 21, 2021, the Company initiated the June 2021 ATM Program.

The Company filed the June 2021 ATM with an aggregate offering price of up to $ 75.0 million.

The Company established the June 2021 ATM Program with an aggregate offering price of up to $ 75.0 million.

From June 21, 2021 through December 31, 2022, the Company 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.

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.

March 2020 Warrant Inducement

On March 25, 2020, the Company entered into a letter agreement (the “Exercise Agreement”) with a holder (the “Exercising Holder”) of then outstanding warrants to purchase Common Stock (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 (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 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

CAPRICOR THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2021 AND 2020

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 have a term of exercise of 5 1/2 years.

The exercise of Prior 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, amounted to approximately $ 0.4 million.

In connection with the Exercise Agreement, certain employees of the placement agent were issued new warrants (the “Placement Agent Warrants”) to purchase an aggregate of 200,000 shares of common stock.

The 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 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.

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

Outstanding Shares

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Outstanding at January 1, 2021

( 11,575,523 )

Outstanding at December 31, 2021

Outstanding at December 31, 2022

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2022 AND 2021

The following table summarizes all outstanding warrants to purchase shares of the Company’s common stock:

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(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”), (iv) the 2020 Equity Incentive Plan (the “2020 Plan”), and (v) the 2021 Equity Incentive Plan (the “2021 Plan”).

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

In September 2012, the Board approved the 2012 Non-Employee Director Plan, which authorized 269,731 shares of common stock, reserved for issuance of non-qualified options to members of the Board who are not employees of the Company.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2021 AND 2020

The 2012 Non-Employee Director Plan expired in September 2022, therefore, no additional stock option awards may be granted from the 2012 Non-Employee Director Plan.

In November 2012, the Board approved the 2012 Plan, which superseded the 2006 Stock Option Plan.

Under the 2012 Plan, the Company may grant stock options, stock appreciation rights, restricted stock awards, and performance/unit share awards to employees, consultants and other service providers.

Pursuant to the 2012 Plan, inclusive of annual evergreen provisions and amendments, the Company is authorized to issue 710,142 shares of common stock under the 2012 Plan.

Pursuant to the 2012 Plan, inclusive of annual evergreen provisions and amendments, the Company is authorized to issue 710,142 shares of common stock.

The 2012 Plan expired in November 2022.

In June 2020, the Company’s stockholders approved the 2020 Equity Incentive Plan (the “2020 Plan”), which authorized 2,500,000 shares of common stock to be issued and allows for the grant of stock options as well as other forms of equity-based compensation.

Pursuant to the “evergreen” provision, on January 1, 2021, 823,084 shares were added under the 2020 Plan.

Upon approval of the 2021 Plan on June 11, 2021, no new shares have been or will be added to the share reserve under the 2020 Plan pursuant to its “evergreen” provisions.

Once the 2021 Plan was approved on June 11, 2021, no new shares have been or will be added to the share reserve under the 2020 Plan pursuant to its “evergreen” provisions.

In June 2021, the Company’s stockholders approved the 2021 Plan, which authorized 3,500,000 shares of common stock reserved under the 2021 Plan for the issuance of stock awards.

The number of shares available for issuance under the 2021 Plan shall be automatically increased on January 1 of each year, commencing with January 1, 2022, by an amount equal to 5 % of the outstanding shares of Common Stock as of the last day of the immediately preceding fiscal year.

On January 1, 2022, 1,209,250 shares were added under the 2021 Plan.

As of December 31, 2021, 3,869,682 options remain available for future issuance under the respective stock option plans.

On January 1, 2023 and 2022, 1,262,070 and 1,209,250 shares were added under the 2021 Plan, respectively.

As of December 31, 2022, 2,603,218 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.

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The estimated weighted average fair value of the options granted during 2022 and 2021 were approximately $ 3.04 and $ 3.45 per share, respectively.

The Company estimates the fair value of each option award using the Black-Scholes option-pricing model.

The Company used the following assumptions to estimate the fair value of stock options issued in the years ended December 31, 2021 and 2020:

December 31, 2021

December 31, 2020

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2022 AND 2021

The Company estimates the fair value of each option award using the Black-Scholes option-pricing model, with the following assumptions:

Year ended December 31,

Expected volatility

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Employee and non-employee stock-based compensation expense was as follows:

Year ended December 31,

General and administrative

Research and development

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2021 AND 2020

The Company does not recognize an income tax benefit as the Company believes that an actual income tax benefit may not be realized.

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We account for forfeitures upon occurrence.

On February 12, 2020, 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, 2022:

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$ 4.37 - $ 6.30

Options Exercisable

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$ 4.37 - $ 6.30

As of December 31, 2022, the total unrecognized fair value compensation cost related to non-vested stock options was approximately $ 10.1 million, which is expected to be recognized over a weighted average period of approximately 1.3 years.

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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, 2021, the Company maintained approximately $ 34.4 million of uninsured deposits.

Concentration of Risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, principally consist of cash, cash equivalents, and marketable securities.

The Company has historically maintained accounts at two financial institutions.

These accounts are each insured by the Federal Deposit Insurance Corporation (the “FDIC”) for up to $ 250,000 .

The Company’s cash, cash equivalents, and marketable securities in excess of the FDIC insured limits as of December 31, 2022, were approximately $ 41.1 million.

Historically, the Company has not experienced any significant losses in such accounts and does not believe it is exposed to any significant credit risk due to the quality nature of the financial instruments in which the money is held.

GOVERNMENT GRANT AWARDS

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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

provided that the maturity

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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.

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.

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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, 2021, 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 United States 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 exosomes 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.

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 and 2021, Capricor’s liability balance for the CIRM Award was approximately $ 3.4 million.

COMMITMENTS AND CONTINGENCIES

Short-Term Operating 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.

Capricor leases office space in Beverly Hills, California from The Bubble Real Estate Company, LLC ("Bubble Real Estate") pursuant to a lease beginning in 2013.

Capricor subsequently entered into several amendments modifying certain terms of the lease.

Effective January 1, 2021, we entered into a month-to-month lease amendment with the Bubble Real Estate.

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In November 2021, Capricor entered into an amendment to the lease pursuant to which the square footage of the premises was reduced with a monthly lease payment of $ 5,548 per month commencing November 1, 2021.

In July 2022, Capricor added additional office space increasing the monthly lease payment to $ 7,869 per month.

The lease is terminable by either party upon 90 days ’ written notice to the other party.

Capricor leases facilities from Cedars-Sinai Medical Center (“CSMC”), a related party (see Note 9 – “Related Party Transactions”), 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 2021, Capricor exercised its option to extend the term of the Facilities Lease for an additional 12-month period through July 31, 2022 with a monthly lease payment of $ 10,707 .

Expenses incurred under the short-term operating leases to unrelated parties for the years ended December 31, 2021 and 2020 were $ 141,923 and $ 194,748 , respectively.

Expenses incurred under short-term operating leases to related parties for the years ended December 31, 2021 and 2020 were $ 164,168 and $ 189,660 , respectively.

Expenses incurred under short-term operating leases for the years ended December 31, 2022 and 2021 were $ 81,735 and $ 141,923 , respectively.

Long-Term Operating Leases

On July 16, 2021, the Company entered into a lease agreement with Altman Investment Co, LLC (“Altman”) for 9,396 square feet of office and laboratory space located at 10865 Road to the Cure, Suite 150, in San Diego, California.

Under the terms of the lease, the base rent will be approximately $ 0.6 million per year, which rent is subject to a 3.0 % annual rent increase during the initial lease term, plus certain operating expenses and taxes.

This lease term commenced on October 1, 2021 and will expire on October 15, 2026.

Capricor leases facilities in Los Angeles, California from Cedars-Sinai Medical Center (“CSMC”), a related party (see Note 9 – “Related Party Transactions”), pursuant to a lease (the “Facilities Lease”) beginning in 2014.

Capricor has subsequently entered into several amendments modifying certain terms of the lease.

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 .

In July 2021, Capricor exercised its option to extend the term of the Facilities Lease for an additional 12-month period through July 31, 2022 with a monthly lease payment of $ 10,707 .

In July 2022, we entered into an amendment for an additional 24-month period extending the term through July 31, 2024 with a monthly lease payment of $ 10,707 .

The Company entered into a lease agreement commencing October 1, 2021 with Altman Investment Co, LLC (“Altman”) for 9,396 square feet of office and laboratory space located at 10865 Road to the Cure, Suite 150, in San Diego, California.

Under the terms of the lease, the base rent will be $ 48,859 per month, for which the Company received certain rent abatements during the initial year.

Additionally, the rent is subject to a 3.0 % annual rent increase during the initial lease term of five years , plus certain operating expenses and taxes.

The lease contains an option for Capricor to renew for an additional term of five years .

The Company estimates the aggregate ROU asset and liability to be approximately $ 2.7 million relating to this lease as of the commencement date of October 1, 2021.

Effective July 1, 2022 the Company entered into an amendment to the lease increasing the square footage to 9,485 square feet with a monthly lease payment of $ 49,322 per month.

In November 2022, we entered into an amendment increasing the square footage to 9,605 square feet with a new monthly lease payment of $ 51,444 per month effective December 1, 2022.

Effective November 1, 2021, the Company entered into a vivarium agreement with Explora BioLabs, Inc.

(“Explora”), a Charles River Company, for vivarium space and services.

Under the terms of the agreement, the base rent will be $ 4,021 per month for an exclusive large vivarium room located in San Diego, California.

The lease term is for one-year and will automatically renew for additional successive one-year renewal terms unless either party provides the other

CAPRICOR THERAPEUTICS, INC.

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Effective November 1, 2021, the Company entered into a vivarium agreement with Explora BioLabs, Inc.

(“Explora”) for vivarium space and services.

Under the terms of the agreement, the base rent will be $ 4,021 per month for an exclusive large vivarium room.

The lease term is for one-year and will automatically renew for additional successive one-year renewal terms unless either party provides the other party with 60-day written notice prior to the end of the then-current term.

party with 60-day written notice prior to the end of the then-current term.

In December 2022, we were notified by Explora of a monthly rent escalation of 4.5 % for a base rent of approximately $ 4,202 per month effective January 1, 2023.

For ASC 842 purposes, we applied a lease term of five years .

The long-term real estate operating leases are included in “lease right-of-use assets, net” on the Company’s balance sheet and represents the Company’s right-to-use the underlying assets for the lease term.

The Company’s obligation to make lease payments are included in “lease liabilities, current” and “lease liabilities, net of current” on the Company’s balance sheet.

The long-term real estate operating leases are included in “lease right-of-use assets, net” on the Company’s Consolidated Balance Sheet and represent the Company’s right-to-use the underlying assets for the lease term.

The Company’s obligation to make lease payments are included in “lease liabilities, current” and “lease liabilities, net of current” on the Company’s Consolidated Balance Sheet.

The table below excludes short-term operating leases.

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Weighted average discount rate

Long-term operating lease costs recognized under ASC 842 for the year ended December 31, 2021 was $ 129,726 .

Long-term operating lease payments for the year ended December 31, 2021 was $ 81,331 .

The Company had no long-term leases pursuant to ASC 842 in 2020.

As of December 31, 2022, ROU assets for operating leases were approximately $ 2.3 million and operating lease liabilities were approximately $ 2.6 million.

The following table contains a summary of the lease costs recognized and lease payments pertaining to the Company’s operating leases under ASC 842 for the period indicated:

Year ended December 31,

Lease costs, unrelated parties

Lease costs, related parties

Lease payments, unrelated parties

Lease payments, related parties

Legal Contingencies

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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 specific 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 termination and the terms of the agreement.

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Additionally, the Company is a party to various agreements with contract research and/or manufacturing organizations that generally provide for termination upon notice, with the exact amounts owed in the event of termination to be based on the timing of termination and the terms of the agreement.

Employee Severances

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, in the event of termination of their employment, subject to certain conditions.

No liability has been recorded as of December 31, 2021.

LICENSE AGREEMENTS

No liability under these severance packages has been recorded as of December 31, 2022.

LICENSE AND DISTRIBUTION AGREEMENTS

Intellectual Property Rights for 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 (the” University of Rome”), Johns Hopkins University (“JHU”) and CSMC.

Capricor has also entered into an exclusive license agreement for intellectual property rights related to exosomes with CSMC and JHU as well as a non-exclusive license agreement with JHU related to the imaging-based serology technology for COVID-19.

Capricor has also entered into an exclusive license agreement for intellectual property rights related to exosomes with CSMC and JHU.

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

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Capricor and the University of Rome entered into a License Agreement, dated June 21, 2006 (the “Rome License Agreement”), which provides for the grant of an exclusive, world-wide, royalty-bearing license by the University of Rome to Capricor (with the right to sublicense) to develop and commercialize licensed products under the licensed patent rights in all fields.

Capricor has a right of first negotiation, for a certain period of time, to obtain a license to any new and separate patent applications owned by the University of Rome utilizing cardiac stem cells in cardiac care.

Pursuant to the Rome License Agreement, Capricor paid the University of Rome a license issue fee, is currently paying minimum annual royalties in the amount of 20,000 Euros per year, and is obligated to pay a lower-end of a mid-range double-digit percentage on all royalties received as a result of sublicenses granted, which are net of any royalties paid to third parties under a license agreement from such third party to Capricor.

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Capricor and JHU entered into an Exclusive License Agreement, effective June 22, 2006 (the “JHU License Agreement”), which provides for the grant of an exclusive, world-wide, royalty-bearing license by JHU to Capricor (with the right to sublicense) to develop and commercialize licensed products and licensed services under the licensed patent rights in all fields and a nonexclusive right to the know-how.

In May 2009, the JHU License Agreement was amended to add additional patent rights to the JHU License Agreement in consideration of a payment to JHU and reimbursement of patent costs.

Capricor and JHU executed a Second Amendment to the JHU License Agreement, effective as of December 20, 2013, pursuant to which, among other things, certain definitions were added or amended, the timing of certain obligations was revised and other obligations of the parties were clarified.

Various amendments were entered into to revise certain provisions of the JHU License Agreement.

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

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

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are creditable against a low single-digit running royalty on net sales of products and net service revenues, which Capricor is also required to pay under the JHU License Agreement, which running royalty may be subject to further reduction in the event that Capricor is required to pay royalties on any patent rights to third parties in order to make or sell a licensed product.

In addition, Capricor is required to pay a low double-digit percentage of the consideration received by it from sublicenses granted and is required to pay JHU certain defined development milestone payments upon the successful completion of certain phases of its clinical studies and upon receiving approval from the U.S.

Food and Drug Administration (the “FDA”).

The development milestones range from $ 100,000 upon successful completion of a full Phase I clinical study to $ 1,000,000 upon full FDA market approval and are fully creditable against payments owed by Capricor to JHU on account of sublicense consideration attributable to milestone payments received from a sublicensee.

the event that Capricor is required to pay royalties on any patent rights to third parties in order to make or sell a licensed product.

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 the Phase I study that was owed to JHU pursuant to the terms of the JHU License Agreement.

The Company recorded the $ 250,000 milestone payment for successful completion of a Phase II study in accounts payable and accrued expenses as of December 31, 2021.

Payment of this milestone is expected to be made in the first quarter of 2022.

In March 2022, Capricor paid the $ 250,000 development milestone related to the Phase II study pursuant to the terms of the JHU License Agreement.

The next milestone is triggered upon successful completion of a full Phase III study for which a payment of $ 500,000 will be due.

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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 (the “JHU Serology License Agreement”), effective January 6, 2021, 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.

The JHU Serology License Agreement is due to expire July 2022 and at this time, Capricor does not intend to convert it to an exclusive license or extend the JHU Serology License Agreement.

License Agreement for Exosome-based Vaccines and Therapeutics

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The JHU Exosome License Agreement may be terminated by Capricor upon 90 days ’ written notice in its discretion and with 60 days ’ notice with respect to any particular patent or application or as to any particular licensed product.

The JHU Exosome License Agreement may also be terminated by either party if it fails to perform or otherwise breaches any

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2021 AND 2020

of its obligations and fails to cure such breach within a 60-day cure period commencing upon notice.

The JHU Exosome License Agreement may also be terminated by either party if the other party fails to perform or otherwise breaches any of its obligations and fails to cure such breach within a 60-day cure period commencing upon notice.

A material breach by Capricor may include (a) a delinquency with respect to payment or reporting;

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In 2013, the Original CSMC License Agreement was amended twice resulting in, among other things, a reduction in the percentage of sublicense fees which would have been payable to CSMC.

Effective December 30, 2013, Capricor entered into an Amended and Restated Exclusive License Agreement with CSMC (the “Amended CSMC License Agreement”), which amended, restated, and superseded the Original CSMC License Agreement, pursuant to which, among other things, certain definitions were added or amended, the timing of certain obligations was revised and other obligations of the parties were clarified.

Effective December 30, 2013, Capricor entered into an Amended and Restated Exclusive License Agreement with CSMC (the “Amended CSMC License Agreement”), which amended, restated, and

CAPRICOR THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2022 AND 2021

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.

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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.

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Capricor reimbursed CSMC for certain attorneys’ fees and filing fees incurred in connection with the additional patent applications.

CAPRICOR THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2021 AND 2020

License Agreement for Exosomes

On May 5, 2014, Capricor entered into an Exclusive License Agreement with CSMC (the “Exosomes License Agreement”), for certain intellectual property rights related to exosomes technology.

On May 5, 2014, Capricor entered into an Exclusive License Agreement with CSMC (the “Exosomes License Agreement”), for certain intellectual property rights related to CDC-derived 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.

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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.

CAPRICOR THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2022 AND 2021

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.

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On April 1, 2020 we entered into a Sponsored Research Agreement (the “SRA”) with JHU pursuant to which researchers in the lab of Dr.

Stephen Gould are performing certain research activities in connection with our exosomes program.

Pursuant to the SRA, we are funding certain research activities and have the right to negotiate for exclusive or non-exclusive rights to intellectual property that may result from such research activities.

Unless renewed, the SRA is scheduled to expire on March 31, 2022.

Stephen Gould performed certain research activities in connection with our engineered exosomes program.

Pursuant to the SRA, we funded certain research activities.

This SRA expired in accordance with its terms on March 31, 2022.

Cell Line License Agreement with Life Technologies

On March 7, 2022, Capricor entered into a non-exclusive cell line license agreement with Life Technologies Corporation, a subsidiary of Thermo Fisher Scientific, Inc., for the supply of certain cells which we will use in connection with the development of our exosomes platform.

An initial license fee payment was made in the first quarter of 2022 and additional milestone fees may become due on the progress of our development program.

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.

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.

CAPRICOR THERAPEUTICS, INC.

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DECEMBER 31, 2022 AND 2021

The Company has evaluated the U.S.

Distribution Agreement in accordance with ASU 606, Revenue for Contracts from Customers .

At the inception, the Company identified one distinct performance obligation.

The Company determined that the performance obligation is the conduct of the HOPE-3, Phase III clinical study.

The Company determined the initial transaction price totaled $ 30.0 million, which was the upfront payment fee.

The Company has excluded any future milestones or royalties from this transaction price to date based on probability.

The Company has allocated the total $ 30.0 million initial transaction price to its one distinct performance obligation.

Revenue will be recognized using a proportional performance method in relation to the completion of the HOPE-3 clinical study to determine the extent of progress towards completion.

Under this method, the transaction price is recognized over the contract’s entire performance period using a cost percentage per patient visit relative to the total estimated costs of patient visits.

For the year ended December 31, 2022, the Company recognized approximately $ 2.6 million as revenue.

At the time of receipt of the upfront fee in March 2022, the Company recorded as a contract liability, which represent deferred revenue.

As of December 31, 2022, there were approximately $ 27.4 million of contract liabilities recorded as deferred revenue.

The Company had no opening or closing contract asset balances recognized.

The difference between the opening and closing balances of the Company’s contract liability results from the Company performance of services in connection to its performance obligation.

Transaction price allocated to remaining performance obligations represents contracted revenue that has not yet been recognized.

As of December 31, 2022, remaining performance obligations were approximately $ 27.4 million.

66% of the remaining performance obligations are expected to be recognized over the next 12 months, with the remainder recognized thereafter.

Remaining performance obligations estimates are subject to change.

RELATED PARTY TRANSACTIONS

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Eduardo Marbán, who is a stockholder of Capricor Therapeutics and has participated from time to time as an observer at the Company’s meetings of the Board of Directors, is the Director of the Cedars-Sinai Smidt Heart Institute, and co-founder of Capricor.

On April 1, 2013, Capricor entered into a sublease with Reprise Technologies, LLC, a limited liability company which is wholly owned by Dr.

Frank Litvack, the Company’s Executive Chairman and member of its Board of Directors, for $ 2,500 per month.

The sublease was on a month-to-month basis and was terminated effective September 1, 2020.

For the years ended December 31, 2021 and 2020, Capricor recognized zero and $ 20,000 , respectively, in sublease income from the related party.

Sublease income is recorded as a reduction to general and administrative expenses.

Consulting Agreements

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Eduardo Marbán whereby he was granted an option to purchase 50,000 shares of the Company's common stock.

In January 2022, Dr.

Additionally, in January 2022, Dr.

Eduardo Marbán was granted an additional option grant to purchase 50,000 shares of the Company’s common stock.

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As of December 31, 2022 and 2021, the Company had accounts payable and accrued expenses to related parties totaling $ 89,234 and $ 599,388 , respectively.

CSMC accounts for $ 589,388 and $ 8,972 of the total accounts payable and accrued expenses to related parties as of December 31, 2021 and 31, 2020, respectively.

CSMC accounts for $ 79,234 and $ 589,388 of the total accounts payable and accrued expenses to related parties as of December 31, 2022 and December 31, 2021, respectively.

CSMC expenses relate to clinical trial costs, research and development costs, license and patent fees, and facilities rent.

During the years ended December 31, 2021 and 2020, the Company paid CSMC approximately $ 341,000 and $ 307,000 , respectively, for such costs.

During the years ended December 31, 2022 and 2021, the Company paid CSMC approximately $ 794,000 and approximately $ 341,000 , respectively, for such costs.

CAPRICOR THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2022 AND 2021

Related Party Clinical Trials

5 unchanged sentences

In both studies, Capricor provided the necessary number of doses of cells and received a total of approximately $ 1.7 million of monetary compensation.

For the years ended December 31, 2021 and 2020, the Company recognized approximately $ 245,000 and $ 120,000 , respectively, as revenue.

As of December 31, 2021 and 2020, approximately zero and $ 56,000 , respectively, is outstanding and recorded in prepaid expenses and other current assets.

CSMC informed us that the enrollment of the REGRESS and ALPHA studies have been completed and as a result, we do not expect to receive any further material revenues from these trials.

For the year ended December 31, 2021, the Company recognized approximately $ 245,000 as revenue.

No revenue was recognized in 2022 as the Company received the requisite funds in connection with these trials in 2021.

SUBSEQUENT EVENTS

Commercialization and Distribution Agreement

On January 24, 2022, Capricor entered into an Exclusive Commercialization and Distribution Agreement (the “NS Distribution Agreement”) with Nippon Shinyaku, Co., Ltd., a Japanese corporation, (“Nippon Shinyaku”).

CAPRICOR THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2021 AND 2020

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.

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.

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

Stock Option Grants

In January 2023, the Company granted a total of 2,061,979 stock options to its employees, certain non-employee consultants, and directors.

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 $ 12.0 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.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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 8. Financial Statements and Supplementary Data