UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


☒	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	for the quarterly period ended June 30, 2023

or

☐	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	for the transition period from to

Commission File Number: 001-34058

CAPRICOR THERAPEUTICS, INC.

(Exact Name Of Registrant As Specified In Its Charter)


Delaware		88-0363465
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

10865 Road to the Cure, Suite 150, San Diego, California 92121

(Address of principal executive offices including zip code)

(858) 727-1755

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
Common Stock, par value $0.001 per share	CAPR	The Nasdaq Capital Market

As of August 7, 2023, there were 25,776,867 shares of the registrant’s common stock, par value $0.001 per share, issued and outstanding.

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INDEX TO QUARTERLY REPORT ON FORM 10-Q


		PAGES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements		5
Condensed Consolidated Balance Sheets at June 30, 2023 and December 31, 2022		5
Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2023 and 2022		6
Condensed Consolidated Statements of Stockholders’ Equity for the Six Months Ended June 30, 2023 and 2022		7
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2023 and 2022		9
Notes to Unaudited Condensed Consolidated Financial Statements		10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		28
Item 3. Quantitative and Qualitative Disclosures about Market Risk		42
Item 4. Controls and Procedures		42

PART II. OTHER INFORMATION
Item 1. Legal Proceedings		43
Item 1A. Risk Factors		43
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		43
Item 3. Defaults Upon Senior Securities		43
Item 4. Mine Safety Disclosures		43
Item 5. Other Information		43
Item 6. Exhibits		44
Signatures		45

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:

●

how long we expect to maintain liquidity to fund our planned level of operations and our ability to obtain additional funds for our operations;

●

the development of our drug and vaccine candidates, including when we expect to undertake, initiate and complete clinical trials of our drug and vaccine candidates;

●

the expectation, plans, projections, initiation, timing, progress and results of our research and development programs, preclinical studies, any clinical trials, compassionate uses, Investigational New Drug (“IND”) filings, Clinical Trial Application (“CTA”) filings, New Drug Application (“NDA”) filings, Biologics License Application (“BLA”), and other regulatory submissions;

●

regulatory developments involving products, including the ability to obtain regulatory approvals or otherwise bring products to market;

●

the regulatory status of our drug and vaccine candidates, including our ability to obtain and maintain orphan drug, rare pediatric and Regenerative Medicine Advanced Therapy (“RMAT”) designations for our lead product candidate, CAP-1002;

●

our use of clinical research centers, third party manufacturers and other contractors;

●

our ability to find collaborative partners for research, development and commercialization of potential products and retain commercial rights for our product candidates in the collaborations;

●

our ability to manufacture products for clinical and commercial use;

●

our ability to procure materials necessary for the manufacture of our product candidates;

●

our ability to protect our patents and other intellectual property;

●

the potential impact of COVID-19 on our business, including our ability to conduct clinical trials and further product candidate development;

●

our ability to raise additional financing and the terms of any additional financing;

●

our ability to market any of our products;

●

the implementation of our business model and strategic plans for our business, technologies and product candidates;

●

our estimates of our expenses, ongoing losses, future revenue and capital requirements;

●

the impact of taxes on our business;

●

our ability to compete against other companies and research institutions;

●

our ability to expand our operations internationally;

●

the effect of potential strategic transactions on our business;

●

acceptance of our products by doctors, patients or payors and the availability of reimbursement for our product candidates;

●

our ability to attract and retain key personnel; and

●

the volatility of our stock price.

We caution you that the forward-looking statements highlighted above do not encompass all of the forward-looking statements made in this Quarterly Report on Form 10 - Q.

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and

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other factors. Moreover, we operate in a very competitive and challenging environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements. Additionally, final data may differ significantly from preliminary data reported in this document.

The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make, if any.

This Quarterly Report on Form 10-Q also contains data, estimates and forecasts that are based on independent industry publications or other publicly available information, as well as other information based on our internal sources. Although we believe that the third-party sources referred to in this Quarterly Report on Form 10-Q are reliable, we have not independently verified the information provided by these third parties. While we are not aware of any misstatements regarding any third-party information presented in this report, their estimates, in particular, as they relate to projections, involve numerous assumptions, are subject to risks and uncertainties, and are subject to change based on various factors.

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

CAPRICOR THERAPEUTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS



ASSETS
	June 30, 2023
	(unaudited)		December 31, 2022

CURRENT ASSETS
Cash and cash equivalents	$	9,837,133	$	9,603,242
Marketable securities		27,956,325		31,818,020
Receivables		547,580		547,580
Prepaid expenses and other current assets		583,835		919,892

TOTAL CURRENT ASSETS		38,924,873		42,888,734

PROPERTY AND EQUIPMENT, net		4,789,786		4,588,030

OTHER ASSETS
Lease right-of-use assets, net		2,028,367		2,349,974
Other assets		268,172		268,172

TOTAL ASSETS	$	46,011,198	$	50,094,910

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES
Accounts payable and accrued expenses	$	5,115,182	$	4,834,683
Accounts payable and accrued expenses, related party		18,628		89,234
Lease liabilities, current		707,425		682,039
Deferred revenue, current		29,312,439		17,980,599

TOTAL CURRENT LIABILITIES		35,153,674		23,586,555

LONG-TERM LIABILITIES
CIRM liability		3,376,259		3,376,259
Lease liabilities, net of current		1,518,173		1,878,070
Deferred revenue, net of current		3,231,929		9,467,932

TOTAL LONG-TERM LIABILITIES		8,126,361		14,722,261

TOTAL LIABILITIES		43,280,035		38,308,816

COMMITMENTS AND CONTINGENCIES (NOTE 6)

STOCKHOLDERS’ EQUITY
Preferred stock, $0.001 par value, 5,000,000 shares authorized, none issued and outstanding		—		—
Common stock, $0.001 par value, 50,000,000 shares authorized, 25,764,312 and 25,241,402 shares issued and outstanding, respectively		25,764		25,241
Additional paid-in capital		154,740,362		148,735,420
Accumulated other comprehensive income		179,693		105,244
Accumulated deficit		(152,214,656)		(137,079,811)

TOTAL STOCKHOLDERS’ EQUITY		2,731,163		11,786,094

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	46,011,198	$	50,094,910

See accompanying notes to the unaudited condensed consolidated financial statements.

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CAPRICOR THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(UNAUDITED)


	Three months ended June 30,				Six months ended June 30,
	2023		2022		2023		2022

REVENUE
Revenue	$	3,917,467	$	—	$	6,904,163	$	—

TOTAL REVENUE		3,917,467		—		6,904,163		—

OPERATING EXPENSES
Research and development		8,817,389		4,965,088		16,478,908		10,080,787
General and administrative		2,847,337		2,356,666		6,357,222		5,072,501

TOTAL OPERATING EXPENSES		11,664,726		7,321,754		22,836,130		15,153,288

LOSS FROM OPERATIONS		(7,747,259)		(7,321,754)		(15,931,967)		(15,153,288)

OTHER INCOME (EXPENSE)
Other income		—		190,582		—		190,582
Investment income		380,680		21,761		797,122		35,201

TOTAL OTHER INCOME (EXPENSE)		380,680		212,343		797,122		225,783

NET LOSS		(7,366,579)		(7,109,411)		(15,134,845)		(14,927,505)

OTHER COMPREHENSIVE INCOME (LOSS)
Net unrealized gain on marketable securities		84,707		22,830		74,449		22,830

COMPREHENSIVE LOSS	$	(7,281,872)	$	(7,086,581)	$	(15,060,396)	$	(14,904,675)

Net loss per share, basic and diluted	$	(0.29)	$	(0.29)	$	(0.60)	$	(0.61)
Weighted average number of shares, basic and diluted		25,335,342		24,324,156		25,291,591		24,303,564

See accompanying notes to the unaudited condensed consolidated financial statements.

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CAPRICOR THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)


	For the Six Months Ended June 30, 2023
						OTHER				TOTAL
	COMMON STOCK			ADDITIONAL PAID-		COMPREHENSIVE		ACCUMULATED		STOCKHOLDERS'
	SHARES	AMOUNT		IN CAPITAL		INCOME		DEFICIT		EQUITY


Balance at December 31, 2022	25,241,402	$	25,241	$	148,735,420	$	105,244	$	(137,079,811)	$	11,786,094

Stock-based compensation	—		—		2,194,784		—		—		2,194,784

Stock options exercised	13,752		14		3,881		—		—		3,895

Unrealized loss on marketable securities	—		—		—		(10,258)		—		(10,258)

Net loss	—		—		—		—		(7,768,266)		(7,768,266)

Balance at March 31, 2023	25,255,154	$	25,255	$	150,934,085	$	94,986	$	(144,848,077)	$	6,206,249

Issuance of common stock, net of fees	452,385		452		2,129,943		—		—		2,130,395

Stock-based compensation	—		—		1,618,712		—		—		1,618,712

Stock options exercised	56,773		57		57,622		—		—		57,679

Unrealized gain on marketable securities	—		—		—		84,707		—		84,707

Net loss	—		—		—		—		(7,366,579)		(7,366,579)

Balance at June 30, 2023	25,764,312	$	25,764	$	154,740,362	$	179,693	$	(152,214,656)	$	2,731,163

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	For the Six Months Ended June 30, 2022
						OTHER				TOTAL
	COMMON STOCK			ADDITIONAL PAID-		COMPREHENSIVE		ACCUMULATED		STOCKHOLDERS'
	SHARES	AMOUNT		IN CAPITAL		INCOME		DEFICIT		EQUITY


Balance at December 31, 2021	24,185,001	$	24,185	$	139,404,060	$	—	$	(108,060,279)	$	31,367,966

Stock-based compensation	—		—		1,065,329		—		—		1,065,329

Stock options exercised	139,155		139		27,326		—		—		27,465

Net loss	—		—		—		—		(7,818,094)		(7,818,094)

Balance at March 31, 2022	24,324,156	$	24,324	$	140,496,715	$	—	$	(115,878,373)	$	24,642,666

Stock-based compensation	—		—		1,157,904		—		—		1,157,904

Stock options exercised	10,796		11		14,995		—		—		15,006

Unrealized gain on marketable securities	—		—		—		22,830		—		22,830

Net loss	—		—		—		—		(7,109,411)		(7,109,411)

Balance at June 30, 2022	24,334,952	$	24,335	$	141,669,614	$	22,830	$	(122,987,784)	$	18,728,995

See accompanying notes to the unaudited condensed consolidated financial statements.

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CAPRICOR THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Six months ended June 30,
	2023		2022
Cash flows from operating activities:
Net loss	$	(15,134,845)	$	(14,927,505)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		484,803		204,501
Stock-based compensation		3,813,496		2,223,233
Changes in lease liabilities		(12,904)		145,466
Changes in operating assets and liabilities:
Receivables		—		(155,830)
Prepaid expenses and other current assets		336,057		500,668
Other assets		—		7,550
Accounts payable and accrued expenses		280,499		11,465
Accounts payable and accrued expenses, related party		(70,607)		(505,253)
Deferred revenue		5,095,837		30,000,000
Net cash provided by (used in) operating activities		(5,207,664)		17,504,295

Cash flows from investing activities:
Purchase of marketable securities		(52,863,856)		(49,012,053)
Proceeds from sales and maturities of marketable securities		56,800,000		14,012,000
Purchases of property and equipment		(483,563)		(748,575)
Payments for leasehold improvements		(202,995)		(289,345)
Net cash provided by (used in) investing activities		3,249,586		(36,037,973)

Cash flows from financing activities:
Net proceeds from sale of common stock		2,130,395		—
Proceeds from exercise of stock awards		61,574		42,471
Net cash provided by financing activities		2,191,969		42,471

Net increase (decrease) in cash and cash equivalents		233,891		(18,491,207)

Cash and cash equivalents balance at beginning of period		9,603,242		34,885,274

Cash and cash equivalents balance at end of period	$	9,837,133	$	16,394,067

Supplemental disclosures of cash flow information:
Interest paid in cash	$	—	$	—
Income taxes paid in cash	$	—	$	—

See accompanying notes to the unaudited condensed consolidated financial statements.

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CAPRICOR THERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Capricor Therapeutics, Inc., a Delaware corporation (referred to herein as “Capricor Therapeutics” or the “Company” or “we”), is a clinical-stage biotechnology company focused on the 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. (“Capricor”), a wholly-owned subsidiary of Capricor Therapeutics, was founded in 2005 as a Delaware corporation based on the innovative work of its founder, Eduardo Marbán, M.D., Ph.D. After completion of a merger between Capricor and a subsidiary of Nile Therapeutics, Inc., a Delaware corporation (“Nile”), on November 20, 2013, Capricor became a wholly-owned subsidiary of Nile and Nile formally changed its name to Capricor Therapeutics, Inc. Capricor Therapeutics, together with its subsidiary, Capricor, has multiple drug and vaccine candidates in various stages of development.

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements for Capricor Therapeutics and its wholly-owned subsidiary have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and with the instructions to Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of financial position, results of operations and cash flows in conformity with U.S. GAAP. In the Company’s opinion, all adjustments, consisting of normal and recurring adjustments, considered necessary for a fair presentation have been included. The accompanying financial information should be read in conjunction with the financial statements and the notes thereto in the Company’s most recent Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (the “SEC”) on March 17, 2023, from which the December 31, 2022 consolidated balance sheet has been derived. Interim results are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.

Basis of Consolidation

Our condensed consolidated financial statements include the accounts of the Company and our wholly-owned subsidiary. All intercompany transactions have been eliminated in consolidation.

Liquidity

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

Cash, cash equivalents, and marketable securities as of June 30, 2023 were approximately $37.8 million, compared to approximately $41.4 million as of December 31, 2022. In the first quarter of 2023, the Company received an upfront payment of $12.0 million from Nippon Shinyaku Co., Ltd. (“Nippon Shinyaku”), a Japanese corporation, in accordance with its Japan Exclusive Commercialization and Distribution Agreement (see Note 7 – “License and Distribution Agreements”). 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, sells shares of its common stock (see Note 2 - "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.

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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 our research and development activities, clinical trials and preclinical studies, including the enrollment and progress of our ongoing HOPE-3 Phase 3 clinical trial 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 our product candidates;

●

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

●

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

The Company’s options for raising additional capital include potentially seeking additional financing primarily from, but not limited to, the sale and issuance of equity or debt securities, the licensing or sale of its technology and other assets, potential distribution and other partnering opportunities, and from government grants.

The Company will require substantial additional capital to fund its operations. The Company cannot provide assurances that financing will be available when and as needed or that, if available, financing will be available on favorable or acceptable terms. If the Company is unable to obtain additional financing when and if required, it would have a material adverse effect on the Company’s business and results of operations. The Company would likely need to delay, curtail or terminate portions of its clinical trial programs. To the extent the Company issues additional equity securities, its existing stockholders would experience substantial dilution.

Business Uncertainty Related to the Coronavirus

The COVID-19 pandemic presented substantial public health and economic challenges around the world. Our business operations and financial condition and results have been impacted to varying degrees.

In light of past uncertainties due to COVID-19 and its economic and other impacts, 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 June 30, 2023, the Company has recorded a receivable for $547,580 for the remainder of funds expected to be received.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Management uses its historical records and knowledge of its business in making these estimates. Accordingly, actual results may differ from these estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of less than 30 days at the date of purchase to be cash equivalents.

Marketable Securities

The Company determines the appropriate classification of its marketable securities at the time of purchase and reevaluates such designation at each balance sheet date. All of the Company’s marketable securities are considered as available-for-sale and are carried at estimated fair values. Realized gains and losses on the sale of debt and equity securities are determined using the specific identification method. Unrealized gains and losses on available-for-sale securities are

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presented as other comprehensive income (loss) as a separate component of stockholders’ equity. As of June 30, 2023, marketable securities consist primarily of short-term United States treasuries.

Property and Equipment

Property and equipment are stated at cost. Repairs and maintenance costs are expensed in the period incurred. Depreciation is computed using the straight-line method over the related estimated useful life of the asset, which such estimated useful lives range from five to seven years. Leasehold improvements are depreciated on a straight-line basis over the shorter of the useful life of the asset or the lease term. Depreciation was $254,702 and $112,011 for the three months ended June 30, 2023 and 2022, respectively, and $484,803 and $204,501 for the six months ended June 30, 2023 and 2022, respectively.

Property and equipment, net consisted of the following:


	June 30,		December 31,
	2023		2022
Furniture and fixtures	$	143,573	$	139,336
Laboratory equipment		4,698,136		4,237,089
Leasehold improvements		1,596,225		1,393,230
		6,437,934		5,769,655
Less accumulated depreciation		(1,648,148)		(1,181,625)
Property and equipment, net	$	4,789,786	$	4,588,030

Leases

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. The assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of fixed lease payments over the lease term. ROU assets are evaluated for impairment using the long-lived assets impairment guidance.

Leases will be classified as financing or operating, which will drive the expense recognition pattern. 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 6 - “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. In addition, the Company’s lease agreements generally do not contain any residual value guarantees or restrictive covenants.

The interest rate implicit in lease contracts is typically not readily determinable. As a result, the Company utilizes its incremental borrowing rate, which reflects the fixed rate at which the Company could borrow on a collateralized basis the amount of the lease payments in the same currency, for a similar term, in a similar economic environment.

For real estate leases, the Company has elected the practical expedient under ASC 842 to account for the lease and non-lease components together for existing classes of underlying assets and allocates the contract consideration to the lease component only. This practical expedient is not elected for manufacturing facilities and equipment embedded in product supply arrangements.

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Revenue Recognition

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 (see Note 7 – “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 shares of product revenue. 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 shared revenue payments 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 condensed consolidated statements of operation and comprehensive loss. Typically, milestone payments and shared revenue payments 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 commercialization program. Milestones or shared revenue payments achieved after the Company’s performance obligations have been completed are recognized as revenue in the period the milestone or shared revenue payments 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 shared revenue 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

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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 condensed 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.

Under the Exclusive Commercialization and Distribution Agreement for the U.S. (the “U.S. Distribution Agreement”) with Nippon Shinyaku the transaction price consists of variable shared revenue payments 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, which is the estimated duration of 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.

Grant Income

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 (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 5 - “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 for the three and six months ended June 30, 2023 and 2022.

Research and Development

Costs relating to the design and development of new products are expensed as research and development as incurred in accordance with Financial Accounting Standards Board (“FASB”) ASC 730-10, Research and Development. Research and development (“R&D”) costs amounted to approximately $8.8 million and approximately $5.0 million for the three months ended June 30, 2023 and 2022, respectively, and approximately $16.5 million and approximately $10.1 million for the six months ended June 30, 2023 and 2022, respectively.

Comprehensive Income (Loss)

Comprehensive income (loss) generally represents all changes in stockholders’ equity during the period except those resulting from investments by, or distributions to, stockholders. The Company’s comprehensive loss was approximately $7.3 million and $7.1 million for the three months ended June 30, 2023 and 2022, respectively, and approximately $15.1 million and $14.9 million for the six months ended June 30, 2023 and 2022, respectively.

Clinical Trial Expense

As part of the process of preparing our condensed consolidated financial statements, we are required to estimate our accrued expenses. Our clinical trial accrual process is designed to account for expenses resulting from our obligations under contracts with vendors, consultants, 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 condensed consolidated financial statements by matching the appropriate expenses with the period in which services are provided and efforts are expended. We account for these expenses according to the progress of the trial as measured by patient progression and the timing of various aspects of the trial. We determine accrual estimates through financial models that take into account discussions with applicable personnel and outside service providers as to the progress or state of

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completion of trials, or the services completed. During the course of a clinical trial, we adjust our clinical expense recognition if actual results differ from our estimates. We make estimates of our accrued expenses as of each balance sheet date in our condensed consolidated financial statements based on the facts and circumstances known to us at that time. Our clinical trial accrual and prepaid assets are dependent, in part, upon the receipt of timely and accurate reporting from CROs and other third-party vendors. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in us reporting amounts that are too high or too low for any particular period.

Stock-Based Compensation

The Company accounts for stock-based employee compensation arrangements in accordance with guidance issued by the FASB, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees, consultants, and directors based on estimated fair values.

The Company estimates the fair value of stock-based compensation awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company’s statements of operations and comprehensive loss. The Company estimates the fair value of stock-based compensation awards using the Black-Scholes model. This model requires the Company to estimate the expected volatility and value of its common stock and the expected term of the stock options, all of which are highly complex and subjective variables. The variables take into consideration, among other things, actual and projected stock option exercise behavior. For employees and directors, the expected life was calculated based on the simplified method as described by the SEC Staff Accounting Bulletin No. 110, Share-Based Payment. For other service providers, the expected life was calculated using the contractual term of the award. The Company's estimate of expected volatility was based on the historical stock price of the Company. The Company has selected a risk-free rate based on the implied yield available on U.S. Treasury securities with a maturity equivalent to the expected term of the options.

Basic and Diluted Loss per Share

The Company reports earnings per share in accordance with FASB ASC 260-10, Earnings per Share. Basic earnings (loss) per share is computed by dividing income (loss) available to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is computed similarly to basic earnings (loss) per share except that the denominator is increased to include the number of additional shares of common stock that would have been outstanding if the potential shares of common stock had been issued and if the additional shares of common stock were dilutive.

For the three and six months ended June 30, 2023 and 2022, warrants and options to purchase 7,784,934 and 6,142,203 shares of common stock, respectively, have been excluded from the computation of potentially dilutive securities. Potentially dilutive shares of common stock, which primarily consist of stock options issued to employees, consultants, and directors as well as warrants issued, have been excluded from the diluted loss per share calculation because their effect is anti-dilutive. Because the impact of these items is anti-dilutive during periods of net loss, there was no difference between basic and diluted loss per share for the three and six months ended June 30, 2023 and 2022.

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Fair Value Measurements

Assets and liabilities recorded at fair value in the balance sheet are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The categories are as follows:


Level Input:		Input Definition:

Level I		Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.
Level II		Inputs, other than quoted prices included in Level I, that are observable for the asset or liability through corroboration with market data at the measurement date.
Level III		Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.

The following table summarizes fair value measurements by level at June 30, 2023 and December 31, 2022 for assets and liabilities measured at fair value on a recurring basis:


	June 30, 2023
	Level I		Level II		Level III		Total
Marketable Securities	$	27,956,325	$	—	$	—	$	27,956,325


	December 31, 2022
	Level I		Level II		Level III		Total
Marketable Securities	$	31,818,020	$	—	$	—	$	31,818,020

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. The carrying amounts of the Company’s marketable securities are based on market quotations from national exchanges at the balance sheet date. Interest and dividend income are recognized separately on the income statement based on classifications provided by the brokerage firm holding the investments. The fair value of borrowings is not considered to be significantly different from its carrying amount because the stated rates for such debt reflect current market rates and conditions. As of June 30, 2023 and December 31, 2022, the amortized cost for these marketable securities was $27,776,632 and $31,712,777, respectively.

Recent Accounting Pronouncements

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.

2. STOCKHOLDER’S EQUITY

ATM Program

The Company established an “at-the-market” program (the “ATM Program”) on June 21, 2021, with an aggregate offering price of up to $75.0 million, pursuant to a Common Stock Sales Agreement with Wainwright by which Wainwright has sold and may continue to sell our common stock at the market prices prevailing at the time of sale. Wainwright is entitled to compensation for its services at a commission rate of 3.0% of the gross sales price per share of common stock sold plus reimbursement of certain expenses.

From June 21, 2021 through June 30, 2023, the Company sold an aggregate of 2,550,718 shares of common stock under the ATM Program at an average price of approximately $5.74 per share for gross proceeds of approximately $14.6 million. The Company paid cash commissions on the gross proceeds, plus reimbursement of expenses to Wainwright, as

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well as legal and accounting fees in the aggregate amount of approximately $0.5 million. Additionally, subsequent to June 30, 2023, the Company sold shares under the ATM Program (see Note 9 – “Subsequent Events”).

Outstanding Shares

At June 30, 2023, the Company had 25,764,312 shares of common stock issued and outstanding.

3. STOCK AWARDS, WARRANTS AND OPTIONS

Warrants

The following table summarizes all warrant activity for the six months ended June 30, 2023:


		Weighted Average
	Warrants	Exercise Price
Outstanding at December 31, 2022	105,782	$	1.37
Granted	—		—
Exercised	—		—
Outstanding at June 30, 2023	105,782	$	1.37

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


		Warrants Outstanding
		June 30,	December 31,	Exercise Price		Expiration
Type	Grant Date	2023	2022	per Share		Date

Common Warrants	12/19/2019	40,782	40,782	$	1.10	12/19/2024
Common Warrants	3/27/2020	65,000	65,000	$	1.5313	3/27/2025
		105,782	105,782

Stock Options

The Company’s Board of Directors (the “Board”) has approved five stock option plans: (i) the 2006 Stock Option Plan, (ii) the 2012 Restated Equity Incentive Plan (which superseded the 2006 Stock Option Plan) (the “2012 Plan”), (iii) the 2012 Non-Employee Director Stock Option Plan (the “2012 Non-Employee Director Plan”), (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 and no longer issues options under the 2006 Stock Option Plan, the 2012 Plan, and the 2012 Non-Employee Director Plan.

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. Once the 2021 Plan was approved on June 11, 2021, no new shares were 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 the lesser of 5% of the outstanding shares of Common Stock as of the last day of the immediately preceding fiscal year or such number of shares determined by the compensation committee of the Board. On January 1, 2023 and 2022, 1,262,070 and 1,209,250 shares were added under the 2021 Plan, respectively.

As of June 30, 2023, 1,815,156 options remain available for issuance under the respective stock option plans.

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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. Each stock option granted will be designated in the award agreement as either an incentive stock option or a nonstatutory stock option. Notwithstanding such designation, however, to the extent that the aggregate fair market value of the shares with respect to which incentive stock options are exercisable for the first time by the participant during any calendar year (under all plans of the Company and any parent or subsidiary) exceeds $100,000, such options will be treated as nonstatutory stock options. Stock options are granted with an exercise price equal to the closing price of the Company’s common stock on the date of grant, and generally vest over a period of one to four years. The term of stock options granted under each of the plans cannot exceed ten years.

The estimated weighted average fair value of the options granted during the three months ended June 30, 2023 and 2022 were approximately $4.16 and $3.04 per share, respectively. The estimated weighted average fair value of the options granted during the six months ended June 30, 2023 and 2022 were approximately $3.55 and $2.90 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 six months ended June 30, 2023 and 2022:


	Six months ended June 30,
	2023		2022
Expected volatility	115 - 121	%	123 - 124	%
Expected term	5 - 7 years		6 - 7 years
Dividend yield	0	%	0	%
Risk-free interest rates	3.5 - 3.9	%	1.5 - 2.9	%

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


	Three months ended June 30,				Six months ended June 30,
	2023		2022		2023		2022

General and administrative	$	1,168,262	$	910,638	$	2,922,485	$	1,768,221
Research and development		450,450		247,266		891,011		455,012
Total	$	1,618,712	$	1,157,904	$	3,813,496	$	2,223,233

The Company does not recognize an income tax benefit as the Company believes that an actual income tax benefit may not be realized. For non-qualified stock options, the loss creates a timing difference, resulting in a deferred tax asset, which is fully reserved by a valuation allowance.

Common stock, stock options or other equity instruments issued to non-employees (including consultants) as consideration for goods or services received by the Company are accounted for based on the fair value of the equity instruments issued. The fair value of stock options is determined using the Black-Scholes option-pricing model. The Company calculates the fair value for non-qualified options as of the date of grant and expenses over the applicable vesting periods. The Company accounts for forfeitures upon occurrence.

As of June 30, 2023, the total unrecognized fair value compensation cost related to non-vested stock options was approximately $13.7 million, which is expected to be recognized over a weighted average period of approximately 1.4 years.

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The following is a schedule summarizing employee and non-employee stock option activity for the six months ended June 30, 2023:


	Number of	Weighted Average		Aggregate
	Options	Exercise Price		Intrinsic Value
Outstanding at December 31, 2022	5,776,839	$	2.97
Granted	2,505,479		4.00
Exercised	(147,819)		2.62	$	228,597
Expired/Cancelled	(455,347)		3.80
Outstanding at June 30, 2023	7,679,152	$	3.26	$	11,815,022
Exercisable at June 30, 2023	3,430,336	$	2.76	$	7,008,821

The aggregate intrinsic value represents the difference between the exercise price of the options and the estimated fair value of the Company’s common stock for each of the respective periods.

4. CONCENTRATIONS

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 maintains accounts at three 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 June 30, 2023, were approximately $37.5 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 t