See accompanying notes to the unaudited condensed
consolidated financial statements.
See accompanying notes to the unaudited condensed
consolidated financial statements.
See accompanying notes to the unaudited condensed
consolidated financial statements.
See accompanying notes to the unaudited condensed
consolidated financial statements.
|
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”), is a clinical-stage
biotechnology company focused on the discovery, development and commercialization of innovative cell and exosome-based therapies
for the treatment of diseases, with a focus on Duchenne muscular dystrophy (“DMD”), and other rare disorders. Capricor,
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, have four drug candidates, two of which are in various stages of active 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 22, 2018, from
which the December 31, 2017 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, 2018.
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 from equity financings, government grants, a payment
from Janssen Biotech, Inc. (“Janssen”) pursuant to a Collaboration Agreement with Janssen and a loan award and a grant
from the California Institute for Regenerative Medicine (“CIRM”).
Cash, cash equivalents
and marketable securities as of September 30, 2018 were approximately $10.4 million, compared to approximately $14.1 million as
of December 31, 2017. On October 19, 2017, the Company entered into a Common Stock Sales Agreement (the “October Sales
Agreement”) with Wainwright to create an at-the-market equity program under which the Company from time to time may offer
and sell shares of its common stock, par value $0.001 per share, having an aggregate offering price of up to $14.0 million (the
“October 2017 ATM Program”) through Wainwright, as sales agent. As of November 13, 2018, the Company has sold an aggregate
of 5,417,750 common shares under the October 2017 ATM Program at an average price of approximately $1.75 per common share for net
proceeds of approximately $9.2 million (see Note 3 – “Stockholders’ Equity” and Note 10 – “Subsequent
Events”). Furthermore, as of November 13, 2018, the Company has approximately $4.5 million available for future issuance
under the October 2017 ATM Program until it expires in accordance with its terms.
The Company has been awarded
various grant and loan awards, which fund, in part, various pre-clinical and clinical activities (see Note 2 – “Loan
Payable” and Note 6 – “Government Grant Awards”). As of September 30, 2018, the Company has up to approximately
$4.4 million available under these grants and awards for disbursement, pursuant to the terms of each of the respective awards.
CAPRICOR THERAPEUTICS, INC.
Notes to CONDENSED CONSOLIDATED financial statements
(unaudited)
|
1.
|
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
|
The Company’s principal
uses of cash are for research and development expenses, general and administrative expenses, capital expenditures and other working
capital requirements.
The Company’s future
expenditures and capital requirements may be substantial and will depend on many factors, including, but not limited to, the following:
|
·
|
the timing and costs associated with its clinical trials and pre-clinical studies;
|
|
·
|
the timing and costs associated with the manufacturing of its product candidates;
|
|
·
|
the timing and costs associated with commercialization of its product candidates;
|
|
·
|
the number and scope of its research programs; and
|
|
·
|
the costs involved in prosecuting and enforcing patent claims and other intellectual property rights.
|
Based on the Company’s
current operating plan, the Company believes it has sufficient cash to fund operations into the second quarter of 2019. If necessary,
Capricor is able to make certain operational adjustments to further reduce expenses by slowing down certain R&D efforts, decreasing
headcount, and implementing further budget restrictions in order to preserve cash resources further. Based on the Company’s
available cash resources, the Company does not have sufficient cash on hand to support current operations for at least the next
twelve months from the date of filing this Report on Form 10-Q. Therefore, there is substantial doubt about the Company’s
ability to continue as a going concern.
The Company’s plan
to address its financial position may 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 from government grants. The accompanying
condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of
assets and satisfaction of liabilities in the ordinary course of business. The condensed consolidated financial statements do not
include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification
of liabilities that might result from the outcome of this uncertainty.
The Company will require
substantial additional capital to fund 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 or at all. 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 or curtail portions of its clinical trial programs. To the extent
the Company issues additional equity securities, its existing stockholders could experience substantial dilution.
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. The most sensitive
estimates relate to the recoverability and fair value of intangible assets and the assumptions used to estimate stock-based compensation
expense. Management uses its historical records and knowledge of its business in making these estimates. Accordingly, actual results
may differ from these estimates.
Cash, Cash Equivalents, and Restricted Cash
The Company considers all
highly liquid investments with a maturity of three months or less at the date of purchase to be cash equivalents.
The following table provides
a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that
total the same such amounts shown in the statement of cash flows.
CAPRICOR THERAPEUTICS, INC.
Notes to CONDENSED CONSOLIDATED financial statements
(unaudited)
|
1.
|
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Cash and cash equivalents
|
|
$
|
4,377,797
|
|
|
$
|
8,897,087
|
|
Restricted cash
|
|
|
421,718
|
|
|
|
610,175
|
|
Total cash, cash equivalents, and restricted cash shown in the statements of cash flows
|
|
$
|
4,799,515
|
|
|
$
|
9,507,262
|
|
During the year ended December
31, 2017, the Company had two awards from CIRM designated for specific use; a Loan Agreement with CIRM (the “CIRM Loan Agreement”)
entered into on February 5, 2013 (see Note 2 – “Loan Payable”) in connection with the ALLSTAR Phase II clinical
trial and the CIRM Award (see Note 6 – “Government Grant Awards”) related to the HOPE Phase I/II clinical trial.
Restricted cash represents funds received under these awards which are to be allocated to the research costs as incurred. In December
2017, the Company abandoned the CIRM funded project, and as a result approximately $15.7 million consisting of principal and accrued
interest was forgiven under the CIRM Loan Agreement. All reporting obligations were completed in the first quarter of 2018 (see
Note 2 - “Loan Payable”). Generally, a reduction of restricted cash occurs when the Company deems certain costs are
attributable to the respective award. The restricted cash balance was approximately $0.4 million and $0.7 million as of September
30, 2018 and December 31, 2017, respectively, and is entirely related to the CIRM Award.
Marketable Securities
The Company determines
the appropriate classification of its marketable securities at the time of purchase and reevaluates such designation at each balance
sheet date. All of the Company’s marketable securities are considered as available-for-sale and carried at estimated fair
values. Realized gains and losses on the sale of debt and equity securities are determined using the specific identification method.
Unrealized gains and losses on available-for-sale securities are excluded from net loss and reported in accumulated other comprehensive
income (loss) as a separate component of stockholders’ equity.
Property and Equipment
Property and equipment
are stated at cost. Repairs and maintenance costs are expensed in the period incurred. Depreciation is computed using the straight-line
method over the related estimated useful life of the asset, which such estimated useful lives range from five to seven years. Leasehold
improvements are depreciated on a straight-line basis over the shorter of the useful life of the asset or the lease term. Depreciation
was $81,900 and $73,034 for the nine months ended September 30, 2018 and 2017, respectively.
Property and equipment
consisted of the following as of September 30, 2018 and December 31, 2017:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Furniture and fixtures
|
|
$
|
46,709
|
|
|
$
|
46,709
|
|
Laboratory equipment
|
|
|
952,075
|
|
|
|
619,994
|
|
Leasehold improvements
|
|
|
47,043
|
|
|
|
47,043
|
|
|
|
|
1,045,827
|
|
|
|
713,746
|
|
Less accumulated depreciation
|
|
|
(423,550
|
)
|
|
|
(341,650
|
)
|
Property and equipment, net
|
|
$
|
622,277
|
|
|
$
|
372,096
|
|
CAPRICOR THERAPEUTICS, INC.
Notes to CONDENSED CONSOLIDATED financial statements
(unaudited)
|
1.
|
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
|
Intangible Assets
Amounts attributable to
intellectual property consist primarily of the costs associated with the acquisition of certain technologies, patents, pending
patents and related intangible assets with respect to research and development activities. Certain intellectual property assets
are stated at cost and are amortized on a straight-line basis over the respective estimated useful lives of the assets ranging
from five to fifteen years. Total amortization expense was $32,457 and $36,562 for the nine months ended September 30, 2018 and
2017, respectively. A summary of future amortization expense as of September 30, 2018 is as follows:
Years ended
|
|
Amortization Expense
|
|
2018 (3 months)
|
|
$
|
10,820
|
|
2019
|
|
|
43,276
|
|
2020
|
|
|
4,330
|
|
2021
|
|
|
2,165
|
|
The Company reviews goodwill
and intangible assets at least annually for possible impairment. Goodwill and intangible assets are reviewed for possible impairment
between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting
unit below its carrying value. No impairment was recorded for the nine months ended September 30, 2018 and 2017.
Revenue Recognition
For contracts completed
as of December 31, 2017, revenue was recognized in accordance with ASC 605 and other superseded standards. The company applied
ASU 606 using the modified retrospective approach for all contracts in process as of January 1, 2018.
Government Research Grants
Generally, government research
grants that provide funding for research and development activities are recognized as income when the related expenses are incurred,
as applicable. Because the terms of the CIRM Award granted in connection with the HOPE trial 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 reimbursement request. The transaction
price varies for grant income based on the expenses incurred under the awards.
Income from Collaborative Agreement
Revenue from nonrefundable,
up-front license or technology access payments under license and collaborative arrangements that are not dependent on any future
performance by the Company is recognized when such amounts are earned. If the Company has continuing obligations to perform under
the arrangement, such fees are recognized over the estimated period of the continuing performance obligation.
During 2017, the Company
accounted for multiple element arrangements, such as license and development agreements in which a customer may purchase several
deliverables, in accordance with FASB ASC Subtopic 605-25,
Multiple Element Arrangements
. For new or materially amended
multiple element arrangements, the Company identified the deliverables at the inception of the arrangement and each deliverable
within a multiple deliverable revenue arrangement was accounted for as a separate unit of accounting if both of the following criteria
are met: (1) the delivered item or items have value to the customer on a standalone basis and (2) for an arrangement
that includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is
considered probable and substantially in the Company’s control. The Company allocated revenue to each non-contingent element
based on the relative selling price of each element. When applying the relative selling price method, the Company determined the
selling price for each deliverable using vendor-specific objective evidence (“VSOE”) of selling price, if it exists,
or third-party evidence (“TPE”) of selling price, if it exists. If neither VSOE nor TPE of selling price exist for
a deliverable, then the Company uses the best estimated selling price for that deliverable. Revenue allocated to each element was
then recognized based on when the basic four revenue recognition criteria were met for each element.
CAPRICOR THERAPEUTICS, INC.
Notes to CONDENSED CONSOLIDATED financial statements
(unaudited)
|
1.
|
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
|
The Company determined
that the deliverables under its Collaboration Agreement with Janssen (see Note 8 – “License Agreements”) did
not meet the criteria to be considered separate accounting units for the purposes of revenue recognition. As a result, the Company
recognized revenue from non-refundable, upfront fees ratably over the term of its performance under the agreement with Janssen.
The upfront payments received, pending recognition as revenue, were recorded as deferred revenue and were classified as a short-term
or long-term liability on the condensed consolidated balance sheets of the Company and amortized over the estimated period of performance.
The Company periodically reviewed the estimated performance period of its contract based on the estimated progress of its project.
As of June 30, 2017, the full amount of income has been recognized under the Janssen Agreement and the Janssen Agreement terminated.
Other Income
Revenue is recognized in
connection with the delivery of doses which were developed as part of our past R&D efforts. Income is recorded when the Company
has satisfied the obligations as identified in the contracts with the customer (see Note 9 – “Related Party Transactions”).
Other income is due upon billing. Other income is based on contracts with fixed transaction prices.
Loan Payable
The Company accounted for
the funds advanced under the CIRM Loan Agreement as a loan payable as the eventual repayment of the loan proceeds or forgiveness
of the loan was contingent upon certain milestones being met and other conditions (see Note 2 – “Loan Payable”).
On November 17, 2017, the Company gave notice to CIRM that it was electing to abandon the CIRM-funded project pursuant to the Loan
Agreement and on December 11, 2017, Capricor and CIRM entered into Amendment No. 3 to the CIRM Notice of Loan Award whereby the
total loan balance under the CIRM Loan Agreement has been forgiven by CIRM thereby terminating Capricor and the Company’s
obligation to repay the loan balance.
Rent
Rent expense for the Company’s
leases, which generally have escalating rental amounts over the term of the lease, is recorded on a straight-line basis over the
lease term. The difference between the rent expense and rent paid has been recorded as deferred rent in the condensed consolidated
balance sheet under accounts payable and accrued expenses. Rent is amortized on a straight-line basis over the term of the applicable
lease, without consideration of renewal options.
Research and Development
Costs relating to the design
and development of new products are expensed as research and development as incurred in accordance with FASB ASC 730-10,
Research
and Development
. Research and development costs amounted to approximately $3.1 million and $1.9 million for the three months
ended September 30, 2018 and 2017, respectively, and approximately $9.2 million and $8.2 million for the nine months ended September
30, 2018 and 2017, 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 $4.1 million and $2.7 million for the
three months ended September 30, 2018 and 2017, respectively, and approximately $11.9 million and $9.9 million for the nine months
ended September 30, 2018 and 2017, respectively. The Company’s other comprehensive income (loss) is related to a net unrealized
gain (loss) on marketable securities. For the three months ended September 30, 2018 and 2017, the Company’s other comprehensive
income was $1,922 and $1,276, respectively. For the nine months ended September 30, 2018 and 2017, the Company’s other comprehensive
income was $8,587 and $5,069, respectively.
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.
CAPRICOR THERAPEUTICS, INC.
Notes to CONDENSED CONSOLIDATED financial statements
(unaudited)
|
1.
|
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
|
The Company estimates the
fair value of stock-based compensation awards on the date of grant using an option-pricing model. The value of the portion of the
award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company’s
statements of operations. The Company estimates the fair value of stock-based compensation awards using the Black-Scholes model.
This model requires the Company to estimate the expected volatility and value of its common stock and the expected term of the
stock options, all of which are highly complex and subjective variables. The variables take into consideration, among other things,
actual and projected stock option exercise behavior. For employees and directors, the expected life was calculated based on the
simplified method as described by the SEC Staff Accounting Bulletin No. 110, Share-Based Payment. For other service providers,
the expected life was calculated using the contractual term of the award. The Company's estimate of expected volatility was based
on the historical stock price of the Company. The Company has selected a risk-free rate based on the implied yield available on
U.S. Treasury securities with a maturity equivalent to the expected term of the options.
Earnings (Loss) per Share
The Company reports earnings
per share in accordance with FSAB ASC 260-10,
Earnings per Share.
Basic earnings (loss) per share is computed by dividing
income (loss) available to common shareholders by the weighted-average number of common shares 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 common shares that would have been outstanding if the potential common shares had been issued
and if the additional common shares were dilutive.
For the three and nine
months ended September 30, 2018 and 2017, warrants and options to purchase 8,368,703 and 8,014,863 shares of common stock, respectively,
have been excluded from the computation of potentially dilutive securities. Dilutive potential common shares, which primarily consist
of stock options issued to employees, consultants and directors as well as warrants issued, have been excluded from the diluted
loss per share calculation because their effect is anti-dilutive.
Fair Value Measurements
Assets and liabilities
recorded at fair value in the balance sheet are categorized based upon the level of judgment associated with the inputs used to
measure their fair value. The categories are as follows:
Level Input:
|
|
Input Definition:
|
|
|
|
Level I
|
|
Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.
|
Level II
|
|
Inputs, other than quoted prices included in Level I, that are observable for the asset or liability through corroboration with market data at the measurement date.
|
Level III
|
|
Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.
|
The following tables summarize
the fair value measurements by level for assets and liabilities measured at fair value on a recurring basis:
|
|
September 30, 2018
|
|
|
|
Level I
|
|
|
Level II
|
|
|
Level III
|
|
|
Total
|
|
Marketable Securities
|
|
$
|
5,994,120
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,994,120
|
|
|
|
December 31, 2017
|
|
|
|
Level I
|
|
|
Level II
|
|
|
Level III
|
|
|
Total
|
|
Marketable Securities
|
|
$
|
7,984,800
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,984,800
|
|
CAPRICOR THERAPEUTICS, INC.
Notes to CONDENSED CONSOLIDATED financial statements
(unaudited)
|
1.
|
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
|
Carrying amounts reported
in the balance sheet of cash and cash equivalents, grants receivable, accounts payable and accrued expenses approximate fair value
due to their relatively short maturity. The carrying amounts of the Company’s marketable securities are based on market quotations
from national exchanges at the balance sheet date. Interest and dividend income are recognized separately on the income statement
based on classifications provided by the brokerage firm holding the investments. The fair value of borrowings is not considered
to be significantly different from its carrying amount because the stated rates for such debt reflect current market rates and
conditions.
Recent Accounting Pronouncements
In May 2014, the FASB issued
Accounting Standards Update (“ASU”) 2014-09,
Revenue from Contracts with Customers
(
Topic 606)
(“ASU
2014-09”). ASU 2014-09 amended the existing accounting standards for revenue recognition. ASU 2014-09 establishes principles
for recognizing revenue based on the value of transferred goods or services as they occur in the contract. ASU 2014-09 also requires
additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts,
including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract.
The Company adopted ASU 2014-09 and all subsequent updates related to this topic in the first quarter of 2018 using the modified
retrospective approach. The adoption of this ASU was applied to only those contracts that were not completed upon the initial application.
The adoption of this update did not have a material impact on the Company’s financial statements.
In February 2016, the FASB
issued ASU 2016-02,
Leases (Topic 842)
(“ASU 2016-02”)
,
which supersedes existing guidance on accounting
for leases in
Leases (Topic 840)
and generally requires all leases to be recognized in the consolidated balance sheet. ASU
2016-02 is effective for annual and interim reporting periods beginning after December 15, 2018; early adoption is permitted. The
provisions of ASU 2016-02 are to be applied using a modified retrospective approach. The Company is currently evaluating the impact
of the adoption of this standard on its consolidated financial statements.
In June 2018, the FASB
issued ASU 2018-07,
Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
,
which simplifies several aspects of the accounting for nonemployee share-based payment transactions resulting from expanding the
scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The Company
early adopted ASU 2018-07 and all subsequent updates related to this topic on a prospective basis effective July 1, 2018. The adoption
of this update did not have a material impact on the Company’s financial statements.
In July 2018, the FASB
issued ASU 2018-10,
Codification Improvements to Topic 842, Leases.
The amendments in this Update affect the amendments
in Update 2016-02, which are not yet effective, but for which early adoption upon issuance is permitted. For entities that early
adopted Topic 842, the amendments are effective upon issuance of this Update, and the transition requirements are the same as those
in Topic 842. For entities that have not adopted Topic 842, the effective date and transition requirements will be the same as
the effective date and transition requirements in Topic 842. The provisions of ASU 2018-10 are to be applied using a modified retrospective
approach. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.
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 condensed
consolidated financial statement presentation or disclosures. For a more detailed listing of the Company’s significant accounting
policies, see Note 1 – “Organization and Summary of Significant Accounting Policies,” of the notes to the consolidated
financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, as filed
with the SEC on March 22, 2018.
CAPRICOR THERAPEUTICS, INC.
Notes to CONDENSED CONSOLIDATED financial statements
(unaudited)
On February 5, 2013, the
Company entered into the CIRM Loan Agreement, pursuant to which CIRM agreed to disburse approximately $19.8 million to the Company
over a period of approximately three and one-half years to support Phase II of our ALLSTAR clinical trial. Under the CIRM Loan
Agreement, the Company was required to repay the CIRM loan with interest at maturity. So long as the Company was not in default,
the Loan Agreement had provisions allowing for forgiveness of the debt after the end of the project period, if the Company elected
to abandon the project under certain circumstances.
On November 17, 2017, the
Company gave notice to CIRM that it was electing to abandon the CIRM-funded project pursuant to the Loan Agreement. On December
11, 2017, Capricor and CIRM entered into Amendment No. 3 to the CIRM Notice of Loan Award whereby the total loan balance consisting
of principal and accrued interest under the CIRM Loan Agreement has been forgiven by CIRM thereby terminating Capricor and the
Company’s obligation to repay the loan balance. The Company has classified the forgiveness of the loan payable consisting
of principal and accrued interest of approximately $15.7 million as “other income” in our Consolidated Statement of
Operations and Comprehensive Income (Loss) for the period ending December 31, 2017. The decision to terminate the Loan Award and
forgive the loan balance was due to the abandonment of the ALLSTAR project at the end of the project period in accordance with
Section 4.10 of the Loan Agreement and Article VII, Section I of the CIRM Loan Administration Policy.
For the three months ended
September 30, 2018 and 2017, interest expense under the CIRM loan was zero and $107,653, respectively. For the nine months ended
September 30, 2018 and 2017, interest expense under the CIRM loan was zero and $318,500, respectively.
March 2017 Common Stock Sales Agreement
On March 31, 2017, the
Company entered into a Sales Agreement with Wainwright, under which the Company from time to time, issued and sold shares of its
common stock through Wainwright as sales agent in an at-the-market offering under a prospectus supplement for aggregate sales proceeds
of $5.0 million (the “March 2017 ATM Program”). The common stock was distributed at the market prices prevailing at
the time of sale. The Company sold an aggregate of 2,589,078 common shares under the March 2017 ATM Program at an average price
of approximately $1.93 per common share for gross proceeds of approximately $5.0 million. The Company paid 3.0% cash commission
on the gross proceeds, plus reimbursement of expenses of the placement agent and legal fees in the aggregate amount of approximately
$0.2 million. The March 2017 ATM Program became fully utilized in October 2017.
May 2017 Financing
On May 5, 2017, the Company
entered into Subscription Agreements with certain accredited investors (the “Investors”), pursuant to which the Company
agreed to issue and sell to the investors, in a private placement (the “Private Placement”), an aggregate of 1,196,291
shares of its common stock, par value $0.001 per share, at a price per share of $3.10 for an aggregate purchase price of approximately
$3.7 million. This placement included participation from some of the Company’s directors.
In connection with the
Private Placement, the Company also entered into a Registration Rights Agreement with the Investors. Pursuant to the terms of the
Registration Rights Agreement, the Company was obligated (i) to prepare and file with the SEC a registration statement to register
for resale the shares issued in the Private Placement, and (ii) to use its reasonable best efforts to cause the registration statement
to be declared effective by the SEC as soon as practicable, in each case subject to certain deadlines. The Company will be required
to pay to each Investor liquidated damages equal to 1.0% of the aggregate purchase price paid by such Investor pursuant to the
Subscription Agreements for the shares per month (up to a cap of 10.0%) if it does not meet certain obligations with respect to
the registration of the shares, subject to certain conditions. Pursuant to its obligations under the Registration Rights Agreement,
the Company registered for resale the shares issued in the Private Placement pursuant to a registration statement on Form S-3 (File
No. 333-219188), which was filed with the SEC on July 7, 2017 and declared effective on July 17, 2017.
CAPRICOR THERAPEUTICS, INC.
Notes to CONDENSED CONSOLIDATED financial statements
(unaudited)
|
3.
|
STOCKHOLDER’S EQUITY (Continued)
|
October 2017 Common Stock Sales Agreement
On October 19, 2017, the
Company entered into the October Sales Agreement with Wainwright, establishing the October 2017 ATM Program. The common stock sold
in the October 2017 ATM Program will be distributed at the market prices prevailing at the time of sale. The October Sales Agreement
provides that Wainwright will be entitled to compensation for its services at a commission rate of 3.0% of the gross sales price
per share of common stock sold plus reimbursement of certain expenses. Through the first three quarters of 2018, the Company sold
an aggregate of 4,073,160 shares under the October 2017 ATM Program at an average price of approximately $1.57 per common share
for net proceeds of approximately $6.2 million. From the inception of the October 2017 ATM Program through November 13, 2018, the
Company sold an aggregate of 5,417,750 shares under the October 2017 ATM Program at an average price of approximately $1.75 per
common share for net proceeds of approximately $9.2 million (see Note 10 – “Subsequent Events”). The Company
paid 3.0% cash commission on the gross proceeds, plus reimbursement of expenses of the placement agent and legal fees in the aggregate
amount of approximately $0.3 million.
Outstanding Shares
At September 30, 2018, the Company had 30,748,872
shares of common stock issued and outstanding.
|
4.
|
STOCK AWARDS, WARRANTS AND OPTIONS
|
Warrants
The following table summarizes
all warrant activity for the period ended September 30, 2018:
|
|
Warrants
|
|
|
Weighted Average
Exercise Price
|
|
Outstanding at January 1, 2018
|
|
|
1,081,716
|
|
|
$
|
4.01
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding at September 30, 2018
|
|
|
1,081,716
|
|
|
$
|
4.01
|
|
The following table summarizes
all outstanding warrants to purchase shares of the Company’s common stock:
|
|
Warrants Outstanding
|
|
|
|
|
|
|
Grant Date
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
Exercise Price
per Share
|
|
|
Expiration
Date
|
11/20/2013
|
|
|
235,643
|
|
|
|
235,643
|
|
|
$
|
2.27
|
|
|
11/20/2018
|
3/16/2016
|
|
|
846,073
|
|
|
|
846,073
|
|
|
$
|
4.50
|
|
|
3/16/2019
|
|
|
|
1,081,716
|
|
|
|
1,081,716
|
|
|
|
|
|
|
|
Restricted Stock
In December 2017, the Company
entered into an agreement with a consulting firm pursuant to which the Company agreed to grant 12,500 shares of restricted stock,
which fully vested in February 2018 upon completion of services. In June 2018, the Company granted the consulting firm an additional
16,666 shares of restricted stock which was fully vested. The 29,166 shares of restricted stock issued by the Company was valued
at $46,250. The fair value of the restricted stock was determined using the Company’s closing stock price on the vesting
date. Furthermore, in June 2018, the Company agreed that at the end of December 2018, provided that the agreement has not been
terminated earlier by either party, Capricor will issue 4,166 shares of restricted stock for each full month during which services
were performed from and after June 2018.
CAPRICOR THERAPEUTICS, INC.
Notes to CONDENSED CONSOLIDATED financial statements
(unaudited)
|
4.
|
STOCK AWARDS, WARRANTS AND OPTIONS (Continued)
|
Stock Options
The Company’s Board
of Directors (the “Board”) has approved three 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”), and (iii) the 2012 Non-Employee
Director Stock Option Plan (the “2012 Non-Employee Director Plan”).
At the time the merger
between Capricor and Nile became effective, 4,149,710 shares of common stock were reserved under the 2012 Plan for the issuance
of stock options, stock appreciation rights, restricted stock awards and performance unit/share awards to employees, consultants
and other service providers. Included in the 2012 Plan are the shares of common stock that were originally reserved under the 2006
Stock Option Plan. Under the 2012 Plan, each stock option granted will be designated in the award agreement as either an incentive
stock option or a nonstatutory stock option. Notwithstanding such designation, however, to the extent that the aggregate fair market
value of the shares with respect to which incentive stock options are exercisable for the first time by the participant during
any calendar year (under all plans of the Company and any parent or subsidiary) exceeds $100,000, such options will be treated
as nonstatutory stock options.
On June 2, 2016 at the
Company’s annual stockholder meeting, the stockholders approved a proposal to amend the 2012 Plan, to, among other things,
increase the number of shares of common stock of the Company that may be issued under the 2012 Plan to equal the sum of 4,149,710
plus 2% of the outstanding shares of common stock as of December 31, 2015, with the number of shares that may be issued under the
2012 Plan automatically increasing thereafter on January 1 of each year, commencing with January 1, 2017, by 2% of the outstanding
shares of common stock as of the last day of the immediately preceding fiscal year (rounded down to the nearest whole share). Additionally,
in connection with the proposed increase in the total number of shares of common stock that may be issued under the 2012 Plan,
the Company increased the number of shares of common stock that may be issued pursuant to options that are intended to qualify
as incentive stock options from 4,149,710 shares to 4,474,809 shares. The Third Amendment to the 2012 Plan provided that an additional
325,099 shares be added to the 2012 Plan for the fiscal year 2016. In addition, for the fiscal years beginning on January 1, 2018
and 2017, the amount of shares that were added was equal to 525,409 and 427,980 shares, respectively.
At the time the merger
between Capricor and Nile became effective, 2,697,311 shares of common stock were reserved under the 2012 Non-Employee Director
Plan for the issuance of stock options to members of the Board who are not employees of the Company.
Each of the Company’s
stock option plans are administered by the Board, or a committee appointed by the Board, which determines the recipients and types
of awards to be granted, as well as the number of shares subject to the awards, the exercise price and the vesting schedule. Currently,
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 September 30, 2018 was approximately $1.05. No options
were granted during the three months ended September 30, 2017. The estimated weighted average fair value of the options granted
during the nine months ended September 30, 2018 and 2017 were approximately $1.31 and $1.91 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 during the nine months ended September 30, 2018 and 2017:
|
|
September 30, 2018
|
|
September 30, 2017
|
Expected volatility
|
|
137% - 145%
|
|
78% - 135%
|
Expected term
|
|
5 - 6 years
|
|
5 - 10 years
|
Dividend yield
|
|
0%
|
|
0%
|
Risk-free interest rates
|
|
2.3 - 3.0%
|
|
2.0% - 2.3%
|
CAPRICOR THERAPEUTICS, INC.
Notes to CONDENSED CONSOLIDATED financial statements
(unaudited)
|
4.
|
STOCK AWARDS, WARRANTS AND OPTIONS (Continued)
|
Employee and non-employee
stock-based compensation expense for the three and nine months ended September 30, 2018 and 2017 was as follows:
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
$
|
283,282
|
|
|
$
|
299,515
|
|
|
$
|
878,598
|
|
|
$
|
899,307
|
|
Research and development
|
|
|
147,151
|
|
|
|
127,967
|
|
|
|
409,932
|
|
|
|
398,055
|
|
Total
|
|
$
|
430,433
|
|
|
$
|
427,482
|
|
|
$
|
1,288,530
|
|
|
$
|
1,297,362
|
|
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. Historically, the Company periodically re-measured the fair value for non-qualified
option grants recording an expense over the applicable vesting periods. However, in the third quarter of 2018, the Company early
adopted ASU 2018-07. The Company calculates the fair value for non-qualified options as of the date of grant and expenses over
the applicable vesting periods. We account for estimated forfeitures at the date of grant.
The following is a schedule
summarizing employee and non-employee stock option activity for the nine months ended September 30, 2018:
|
|
Number of
Options
|
|
|
Weighted Average
Exercise Price
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding at January 1, 2018
|
|
|
6,873,903
|
|
|
$
|
1.62
|
|
|
$
|
-
|
|
Granted
|
|
|
994,678
|
|
|
|
1.42
|
|
|
|
|
|
Exercised
|
|
|
(376,055
|
)
|
|
|
0.37
|
|
|
|
|
|
Expired/Cancelled
|
|
|
(205,539
|
)
|
|
|
2.57
|
|
|
|
|
|
Outstanding at September 30, 2018
|
|
|
7,286,987
|
|
|
$
|
1.64
|
|
|
$
|
-
|
|
Exercisable at September 30, 2018
|
|
|
5,907,417
|
|
|
$
|
1.51
|
|
|
$
|
-
|
|
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.
The aggregate intrinsic
value of options exercised was $521,678 for the nine months ended September 30, 2018.
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 September 30, 2018, the Company
maintained approximately $10.5 million of uninsured deposits.
CAPRICOR THERAPEUTICS, INC.
Notes to CONDENSED CONSOLIDATED financial statements
(unaudited)
|
6.
|
GOVERNMENT GRANT AWARDS
|
CIRM Grant Award (HOPE)
On June 16, 2016, Capricor
entered into the CIRM Award with CIRM in the amount of approximately $3.4 million to fund, in part, Capricor’s Phase I/II
HOPE-Duchenne clinical trial investigating CAP-1002 for the treatment of Duchenne muscular dystrophy-associated cardiomyopathy.
Pursuant to terms of the CIRM Award, the disbursements were tied to the achievement of specified operational milestones. If CIRM
determines, in its sole discretion, that Capricor has not complied with the terms and conditions of the CIRM Award, CIRM may suspend
or permanently cease disbursements or pursue other remedies as allowed by law. In addition, the terms of the CIRM Award include
a co-funding requirement pursuant to which Capricor is required to spend approximately $2.3 million of its own capital to fund
the CIRM funded research project. If Capricor fails to satisfy its co-funding requirement, the amount of the CIRM Award may be
proportionately reduced. The CIRM Award is further subject to the conditions and requirements set forth in the CIRM Grants Administration
Policy for Clinical Stage Projects. Such requirements include, without limitation, the filing of quarterly and annual reports with
CIRM, the sharing of intellectual property pursuant to Title 17, California Code of Regulations (CCR) Sections 100600-100612, and
the sharing with the State of California of a fraction of licensing revenue received from a CIRM funded research project and net
commercial revenue from a commercialized product which resulted from the CIRM funded research as set forth in Title 17, CCR Section
100608. The maximum royalty on net commercial revenue that Capricor may be required to pay to CIRM is equal to nine times the total
amount awarded and paid to Capricor.
After completing the CIRM
funded research project and after the award period end date, estimated to be in 2019, Capricor has the right to convert the CIRM
Award into a loan, the terms of which will be determined based on various factors, including the stage of the research and development
of the program at the time the election is made. On June 20, 2016, Capricor entered into a Loan Election Agreement with CIRM whereby,
among other things, CIRM and Capricor agreed that if Capricor elects to convert the grant into a loan, the term of the loan would
be five years from the date of execution of the applicable loan agreement; provided that the term of the loan will not exceed ten
years from the date on which the CIRM Award was granted. Beginning on the date of the loan, the loan shall bear interest on the
unpaid principal balance, plus the interest that has accrued prior to the election point according to the terms set forth in CIRM’s
Loan Policy (the “New Loan Balance”), at a per annum rate equal to the LIBOR rate for a three-month deposit in U.S.
dollars, as published by the Wall Street Journal on the loan date, plus one percent. Interest shall be compounded annually on the
outstanding New Loan Balance commencing with the loan date and the interest shall be payable, together with the New Loan Balance,
upon the due date of the loan. If Capricor elects to convert the CIRM Award into a loan, certain requirements of the CIRM Award
will no longer be applicable, including the revenue sharing requirements. Capricor has not yet made its decision as to whether
it will elect to convert the CIRM Award into a loan. Since Capricor may be required to repay some or all of the amounts awarded
by CIRM, the Company accounts for this award as a liability rather than income.
In 2016, Capricor received
$3.1 million under the terms of the CIRM Award. In September 2017, the Company completed the second operational milestone tied
to the last patient completing one year of follow-up, for which approximately $0.3 million was received by Capricor in November
2017. As of September 30, 2018, the Company’s liability balance for the CIRM Award was $3.4 million, of which approximately
$0.4 million is recorded as restricted cash, due to the fact that Capricor is required to expend approved project costs in order
to use these funds.
On August 8, 2017, we entered
into an Amendment to the CIRM Notice of Award pursuant to which CIRM approved the Company’s request to use the remaining
estimated project funds of the CIRM Award for technology transfer activities in support of the manufacture of CAP-1002 to a designated
contract manufacturing organization (“CMO”) which will help enable Capricor to offer access to CAP-1002 to patients
from the control arm of the HOPE-Duchenne trial via an open-label extension protocol. On September 7, 2018, we entered into an
Amendment to the CIRM Notice of Award pursuant to which CIRM added an additional operational milestone which would be satisfied
by completion of certain activities related to technology transfer.
NIH Grant Award (HLHS)
In September 2016, Capricor
was approved for a grant from the NIH to study CAP-2003 (cardiosphere-derived cell exosomes) for hypoplastic left heart syndrome
(HLHS). Under the terms of the NIH grant, disbursements will be made to Capricor in an amount up to approximately $4.2 million,
subject to annual and quarterly reporting requirements as well as completion of the study objectives. As of September 30, 2018,
approximately $0.7 million has been incurred under the terms of the NIH grant award. At this time, we are continuing to evaluate
this program and have not yet made a determination as to whether we will continue into clinical development for this indication.
CAPRICOR THERAPEUTICS, INC.
Notes to CONDENSED CONSOLIDATED financial statements
(unaudited)
|
6.
|
GOVERNMENT GRANT AWARDS (Continued)
|
U.S. Department of Defense Grant Award
In September 2016, Capricor
was approved for a grant award from the Department of Defense in the amount of approximately $2.4 million to be used toward developing
a scalable, commercially-ready process to manufacture CAP-2003. Under the terms of the award, disbursements will be made to Capricor
over a period of approximately two years, subject to annual and quarterly reporting requirements. As of September 30, 2018, approximately
$1.5 million has been incurred under the terms of the award.
|
7.
|
COMMITMENTS AND CONTINGENCIES
|
Leases
Capricor leases space for
its corporate offices 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. On May 25, 2016, Capricor entered into a Third Amendment to Lease (the “Third
Lease Amendment”) with The Bubble Real Estate Company, LLC. Under the terms of the Third Lease Amendment, the lease term
extension commenced on July 1, 2016 and will end on December 31, 2018. The base rent increased to $22,995 per month for the first
twelve months of the term, commencing July 1, 2016, increased to $23,915 per month for the second twelve months of the term, commencing
July 1, 2017, and, thereafter, increased to $24,872 per month for the remainder of the lease term, commencing July 1, 2018. The
Company is currently in discussions with The Bubble Real Estate Company, LLC to extend the term of our current lease for an additional
one-year period.
The Facilities Lease which
Capricor entered into with CSMC is for a term of three years commencing June 1, 2014 and replaced the month-to-month lease that
was previously in effect between CSMC and Capricor. The monthly lease payment under the Facilities Lease was $15,461 per month
for the first six months of the term and increased to $19,350 per month for the remainder of the term. The amount of rent expense
is subject to annual adjustments according to increases in the Consumer Price Index. The Facilities Lease expired on May 31, 2017
and transitioned to a month-to-month tenancy. On August 10, 2017, the Company and CSMC entered into the First Amendment to the
Facilities Lease effective August 1, 2017 (the “First Amendment”) pursuant to which the term of the Facilities Lease
was extended for an additional 12-month period, and the Company was granted an option to further extend the term for an additional
12-month period thereafter through July 31, 2019. Under the First Amendment, the total monthly rent increased from $19,350 to $19,756.
In addition, pursuant to the First Amendment, the premises covered by the Facilities Lease now also include the manufacturing facility
currently being utilized by Capricor. In lieu of further increasing the monthly rental payment set forth in the First Amendment,
the Company has also agreed to provide doses of CAP-1002 for use in CSMC’s clinical trials for a negotiated amount of monetary
compensation. On July 19, 2018, the Company exercised its option to extend the term of the Facilities Lease with CSMC for an additional
12-month period through July 31, 2019. The monthly lease payment for the extended term will remain at $19,756. On September 7,
2018, Capricor entered into a Second Amendment to the CSMC Facilities Lease pursuant to which Capricor was granted two consecutive
1-year options to extend the term of the Facilities Lease through July 31, 2021.
In addition, the Company
entered into a month-to-month lease agreement with University Center Lane Tenant, LLC, pursuant to which the Company leases office
space located in San Diego, California. The lease commenced March 1, 2018 and the rental payment is currently $4,190 per month.
Included within the table
below, future minimum rental payments to related parties totaled $197,560. A summary of future minimum rental payments required
under operating leases as of September 30, 2018 is as follows:
Years ended
|
|
Operating Leases
|
|
2018 (3 months)
|
|
$
|
133,884
|
|
2019
|
|
|
138,292
|
|
Expenses incurred under
operating leases to unrelated parties was $83,785 and $71,215 for the three months ended September 30, 2018 and 2017, respectively,
and $244,835 and $213,646 for the nine months ended September 30, 2018 and 2017, respectively. Expenses incurred under operating
leases to related parties was $59,268 and $58,862 for the three months ended September 30, 2018 and 2017, respectively, and $177,804
and $171,721 for the nine months ended September 30, 2018 and 2017, respectively.
CAPRICOR THERAPEUTICS, INC.
Notes to CONDENSED CONSOLIDATED financial statements
(unaudited)
|
7.
|
COMMITMENTS AND CONTINGENCIES (Continued)
|
Legal Proceedings
The Company is not a party
to any material legal proceedings at this time. From time to time, the Company may become involved in various legal
proceedings that arise in the ordinary course of its business or otherwise.
Capricor’s Technology - CAP-1002, CAP-1001, CSps 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”), The Johns Hopkins University (“JHU”) and CSMC. In
addition, Capricor has filed patent applications related to the technology developed by its own scientists.
University of Rome License Agreement
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. The minimum annual royalties are creditable against future royalty payments.
The Rome License Agreement
will, unless extended or sooner terminated, remain in effect until the later of the last claim of any patent or until any patent
application comprising licensed patent rights has expired or been abandoned. Under the terms of the Rome License Agreement, either
party may terminate the agreement should the other party become insolvent or file a petition in bankruptcy. Either party may terminate
the agreement upon the other party’s material breach, provided that the breaching party will have up to 90 days to cure its
material breach. Capricor may also terminate for any reason upon 90 days’ written notice to the University of Rome.
The Johns Hopkins University License Agreement
Capricor and JHU entered
into an Exclusive License Agreement, effective June 22, 2006 (the “JHU License Agreement”), which provides for the
grant of an exclusive, world-wide, royalty-bearing license by JHU to Capricor (with the right to sublicense) to develop and commercialize
licensed products and licensed services under the licensed patent rights in all fields and a nonexclusive right to the know-how.
In May 2009, the JHU License Agreement was amended to add additional patent rights to the JHU License Agreement in consideration
of a payment to JHU and reimbursement of patent costs. Capricor and JHU executed a Second Amendment to the JHU License Agreement,
effective as of December 20, 2013, pursuant to which, among other things, certain definitions were added or amended, the timing
of certain obligations was revised and other obligations of the parties were clarified. Under the JHU License Agreement, Capricor
is required to exercise commercially reasonable and diligent efforts to develop and commercialize licensed products covered by
the licenses from JHU.
CAPRICOR THERAPEUTICS, INC.
Notes to CONDENSED CONSOLIDATED financial statements
(unaudited)
|
8.
|
LICENSE AGREEMENTS (Continued)
|
Pursuant to the JHU License
Agreement, JHU was paid an initial license fee and, thereafter, Capricor is required to pay minimum annual royalties on the anniversary
dates of the JHU License Agreement. The minimum annual royalties range from $5,000 on the first and second anniversary dates to
$20,000 on the tenth anniversary date and thereafter. The minimum annual royalties are creditable against a low single-digit running
royalty on net sales of products and net service revenues, which Capricor is also required to pay under the JHU License Agreement,
which running royalty may be subject to further reduction in the event that Capricor is required to pay royalties on any patent
rights to third parties in order to make or sell a licensed product. In addition, Capricor is required to pay a low double-digit
percentage of the consideration received by it from sublicenses granted, and is required to pay JHU certain defined development
milestone payments upon the successful completion of certain phases of its clinical studies and upon receiving approval from the
FDA. The development milestones range from $100,000 upon successful completion of a full Phase I clinical study to $1,000,000 upon
full FDA market approval and are fully creditable against payments owed by Capricor to JHU on account of sublicense consideration
attributable to milestone payments received from a sublicensee. The maximum aggregate amount of milestone payments payable under
the JHU License Agreement, as amended, is $1,850,000. In May 2015, Capricor paid the development milestone related to Phase I that
was owed to JHU pursuant to the terms of the JHU License Agreement.
The JHU License Agreement
will, unless sooner terminated, continue in effect in each applicable country until the date of expiration of the last to expire
patent within the patent rights, or, if no patents are issued, then for twenty years from the effective date. Under the terms of
the JHU License Agreement, either party may terminate the agreement should the other party become insolvent or file a petition
in bankruptcy, or fail to cure a material breach within 30 days after notice. In addition, Capricor may terminate for any reason
upon 60 days’ written notice.
Cedars-Sinai Medical Center License Agreements
License Agreement for CDCs
On January 4, 2010, Capricor
entered into an Exclusive License Agreement with CSMC (the “Original CSMC License Agreement”) for certain intellectual
property related to its CDC technology. In 2013, the Original CSMC License Agreement was amended twice resulting in, among other
things, a reduction in the percentage of sublicense fees which would have been payable to CSMC. 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.
The Amended CSMC License
Agreement provides for the grant of an exclusive, world-wide, royalty-bearing license by CSMC to Capricor (with the right to sublicense)
to conduct research using the patent rights and know-how and develop and commercialize products in the field using the patent rights
and know-how. In addition, Capricor has the exclusive right to negotiate for an exclusive license to any future rights arising
from related work conducted by or under the direction of Dr. Eduardo Marbán on behalf of CSMC. In the event the parties
fail to agree upon the terms of an exclusive license for any future rights, Capricor will have a non-exclusive license to such
future rights, subject to royalty obligations.
Pursuant to the Original
CSMC License Agreement, CSMC was paid a license fee and Capricor was obligated to reimburse CSMC for certain fees and costs incurred
in connection with the prosecution of certain patent rights. Additionally, Capricor is required to meet certain spending and development
milestones. The annual spending requirements ranged from $350,000 to $800,000 each year between 2010 and 2017 (with the exception
of 2014, for which there was no annual spending requirement).
Pursuant to the Amended
CSMC License Agreement, Capricor remains obligated to pay low single-digit royalties on sales of royalty-bearing products as well
as a low double-digit percentage of the consideration received from any sublicenses or other grant of rights. The above-mentioned
royalties are subject to reduction in the event Capricor becomes obligated to obtain a license from a third party for patent rights
in connection with the royalty-bearing product. In 2010, Capricor discontinued its research under some of the patents.
CAPRICOR THERAPEUTICS, INC.
Notes to CONDENSED CONSOLIDATED financial statements
(unaudited)
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8.
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LICENSE AGREEMENTS (Continued)
|
The Amended CSMC License
Agreement will, unless sooner terminated, continue in effect on a country by country basis until the last to expire of the patents
covering the patent rights or future patent rights. Under the terms of the Amended CSMC License Agreement, unless waived by CSMC,
the agreement shall automatically terminate: (i) if Capricor ceases, dissolves or winds up its business operations; (ii) in the
event of the insolvency or bankruptcy of Capricor or if Capricor makes an assignment for the benefit of its creditors; (iii) if
performance by either party jeopardizes the licensure, accreditation or tax exempt status of CSMC or the agreement is deemed illegal
by a governmental body; (iv) within 30 days for non-payment of royalties; (v) after 90 days’ notice from CSMC if Capricor
fails to undertake commercially reasonable efforts to exploit the patent rights or future patent rights; (vi) if a material breach
has not been cured within 90 days; or (vii) if Capricor challenges any of the CSMC patent rights. If Capricor fails to undertake
commercially reasonable efforts to exploit the patent rights or future patent rights, and fails to cure that breach after 90 days’
notice from CSMC, instead of terminating the license, CSMC has the option to convert any exclusive license to Capricor to a non-exclusive
or co-exclusive license. Capricor may terminate the agreement if CSMC fails to cure any material breach within 90 days after notice.
On March 20, 2015, Capricor
and CSMC entered into a First Amendment to the Amended CSMC License Agreement, pursuant to which the parties agreed to delete certain
patent applications from the list of scheduled patents which Capricor determined not to be material to the portfolio.
On August 5, 2016, Capricor
and CSMC entered into a Second Amendment to the Amended CSMC License Agreement (the “Second License Amendment”), pursuant
to which the parties agreed to add certain patent applications to the schedule of patent rights set forth in the agreement. Under
the Second License Amendment, (i) the description of scheduled patent rights has been replaced by a revised schedule that includes
six additional patent applications; (ii) Capricor paid an upfront fee of $2,500; and (iii) Capricor reimbursed CSMC approximately
$10,000 for attorneys’ fees and filing fees that were incurred in connection with the additional patent applications.
On December 26, 2017, Capricor
entered into a Third Amendment to the Amended CSMC License Agreement thereby amending the CDCs License (the “Third License
Amendment”). Under the Third License Amendment, (i) the description of scheduled patent rights has been replaced by
a revised schedule that includes seven additional patent applications; and (ii) Capricor is required to reimburse CSMC approximately
$50,000 for attorneys’ fees and filing fees that were incurred in connection with the additional patent rights.
On June 20, 2018, Capricor
and CSMC entered into a Fourth Amendment to the Amended CSMC License Agreement (the “Fourth License Amendment”).
Under
the Fourth License Amendment, the description of scheduled patent rights has been replaced by a revised schedule that includes
two additional patent applications.
License Agreement for Exosomes
On May 5, 2014, Capricor
entered into an Exclusive License Agreement with CSMC (the “Exosomes License Agreement”), for certain intellectual
property rights related to exosomes technology. The Exosomes License Agreement provides for the grant of an exclusive, world-wide,
royalty-bearing license by CSMC to Capricor (with the right to sublicense) in order to conduct research using the patent rights
and know-how and to develop and commercialize products in the field using the patent rights and know-how. In addition, Capricor
has the exclusive right to negotiate for an exclusive license to any future rights arising from related work conducted by or under
the direction of Dr. Eduardo Marbán on behalf of CSMC. In the event the parties fail to agree upon the terms of an exclusive
license, Capricor shall have a non-exclusive license to such future rights, subject to royalty obligations.
Pursuant to the Exosomes
License Agreement, CSMC was paid a license fee and Capricor reimbursed CSMC for certain fees and costs incurred in connection with
the preparation and prosecution of certain patent applications. Additionally, Capricor is required to meet certain non-monetary
development milestones and is obligated to pay low single-digit royalties on sales of royalty-bearing products as well as a single-digit
percentage of the consideration received from any sublicenses or other grant of rights. The above-mentioned royalties are subject
to reduction in the event Capricor becomes obligated to obtain a license from a third party for patent rights in connection with
the royalty bearing product.
CAPRICOR THERAPEUTICS, INC.
Notes to CONDENSED CONSOLIDATED financial statements
(unaudited)
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8.
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LICENSE AGREEMENTS (Continued)
|
The Exosomes License Agreement
will, unless sooner terminated, continue in effect on a country by country basis until the last to expire of the patents covering
the patent rights or future patent rights. Under the terms of the Exosomes License Agreement, unless waived by CSMC, the agreement
shall automatically terminate: (i) if Capricor ceases, dissolves or winds up its business operations; (ii) in the event of the
insolvency or bankruptcy of Capricor or if Capricor makes an assignment for the benefit of its creditors; (iii) if performance
by either party jeopardizes the licensure, accreditation or tax exempt status of CSMC or the agreement is deemed illegal by a governmental
body; (iv) within 30 days for non-payment of royalties; (v) after 90 days if Capricor fails to undertake commercially reasonable
efforts to exploit the patent rights or future patent rights; (vi) if a material breach has not been cured within 90 days; or (vii)
if Capricor challenges any of the CSMC patent rights. If Capricor fails to undertake commercially reasonable efforts to exploit
the patent rights or future patent rights, and fails to cure that breach after 90 days’ notice from CSMC, instead of terminating
the license, CSMC has the option to convert any exclusive license to Capricor to a non-exclusive or co-exclusive license. Capricor
may terminate the agreement if CSMC fails to cure any material breach within 90 days after notice.
On February 27, 2015, Capricor
and CSMC entered into a First Amendment to Exosomes License Agreement (the “First Exosomes License Amendment”). Under
the First Exosomes License Amendment, (i) the description of scheduled patent rights has been replaced by a revised schedule that
includes four additional patent applications; (ii) Capricor was required to pay CSMC an upfront fee of $20,000; (iii) Capricor
was required to reimburse CSMC approximately $34,000 for attorneys’ fees and filing fees that were incurred in connection
with the additional patent rights; and (iv) Capricor is required to pay CSMC certain defined product development milestone payments
upon reaching certain phases of its clinical studies and upon receiving approval for a product from the FDA. The product development
milestones range from $15,000 upon the dosing of the first patient in a Phase I clinical trial of a product to $75,000 upon receipt
of FDA approval for a product. The maximum aggregate amount of milestone payments payable under the Exosomes License Agreement,
as amended, is $190,000.
On June 10, 2015, Capricor
and CSMC entered into a Second Amendment to Exosomes License Agreement, thereby amending the Exosomes License Agreement further
to add an additional patent application to the Schedule of Patent Rights.
On August 5, 2016, Capricor
and CSMC entered into a Third Amendment to the Exosomes License Agreement (the “Third Exosomes License Amendment”),
pursuant to which the parties agreed to add certain patent applications to the schedule of patent rights under the agreement. Under
the Third Exosomes License Amendment, (i) the description of scheduled patent rights has been replaced by a revised schedule that
includes three additional patent applications; (ii) Capricor paid CSMC an upfront fee of $2,500; and (iii) Capricor reimbursed
CSMC approximately $16,000 for attorneys’ fees and filing fees that were incurred in connection with the additional patent
applications.
On December 26, 2017, Capricor
and CSMC entered into a Fourth Amendment to Exosomes License Agreement, thereby amending the Exosomes License (the “Fourth
Exosomes License Amendment”). Under the Fourth Exosomes License Amendment, (i) the description of scheduled patent rights
was replaced by a revised schedule that includes seven additional patent applications; (ii) Capricor is required to reimburse CSMC
approximately $50,000 for attorneys’ fees and filing fees that were incurred in connection with the additional patent rights;
and (iii) a schedule to the Exosomes License was modified to extend the milestone deadline for filing an IND for at least one product
to December 31, 2018.
On June 20, 2018, Capricor
and CSMC entered into a Fifth Amendment to the Exosomes License Agreement (the “Fifth License Amendment”). Under the
Fifth License Amendment, (i) the description of scheduled patent rights has been replaced by a revised schedule that includes four
additional patent applications; and (ii) Capricor is required to reimburse CSMC approximately $27,000 for attorneys’ fees
and filing fees that were incurred in connection with the additional patent rights.
On September 25, 2018,
Capricor and CSMC entered into a Sixth Amendment to the Exosomes License Agreement (the “Sixth License Amendment”).
Under the Sixth License Amendment, the milestone deadline for filing an IND for at least one product has been extended to December
31, 2019. If the Company does not file an IND by December 31, 2019, or negotiate an additional extension of the milestone deadline,
CSMC would have the option to convert the exclusive license to a non-exclusive license or to a co-exclusive license or terminate
the license under Title 35, Section 203 of the United States Code. Prior to exercising such option, Capricor has the opportunity
to cure the failure to file for a period of 90 days after its receipt of written notice from CSMC of its intent to exercise its
option.
CAPRICOR THERAPEUTICS, INC.
Notes to CONDENSED CONSOLIDATED financial statements
(unaudited)
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8.
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LICENSE AGREEMENTS (Continued)
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Collaboration Agreement with Janssen Biotech,
Inc.
On December 27, 2013, Capricor
entered into a Collaboration Agreement and Exclusive License Option (the “Janssen Agreement”) with Janssen, a wholly-owned
subsidiary of Johnson & Johnson. Under the terms of the Janssen Agreement, Capricor and Janssen agreed to collaborate on the
development of Capricor’s cell therapy program for cardiovascular applications, including its lead product candidate, CAP-1002.
Capricor and Janssen further agreed to collaborate on the development of cell manufacturing in preparation for future clinical
trials. Under the Janssen Agreement, Capricor was paid $12.5 million, and Capricor agreed to contribute to the development of a
chemistry, manufacturing and controls package. In addition, Janssen had the exclusive right to enter into an exclusive license
agreement pursuant to which Janssen would have received a worldwide, exclusive license to exploit CAP-1002 as well as certain CSps
and CDCs in the field of cardiology.
On June 30, 2017, Capricor
was informed by Janssen that Janssen would not be exercising its exclusive option right to exploit CAP-1002 as well as certain
CSps and CDCs in the field of cardiology. Capricor will retain full rights to CAP-1002 in all indications as a result of this decision.
Capricor will also have an irrevocable, fully paid-up non-exclusive license under patents controlled by Janssen utilized in the
production of the clinical trial materials manufactured pursuant to the CMC development plan between Capricor and Janssen and a
non-exclusive perpetual license to publish, disclose and use the information of Janssen that was utilized in the production of
the clinical trial materials manufactured pursuant to the CMC development plan. On August 7, 2018, the Company entered into an
Exclusive License Agreement with Janssen pursuant to which Janssen granted Capricor an exclusive worldwide license to all rights
to Janssen’s know-how to exploit CDC-cells and CDC-product in the field as described in the previous Janssen Agreement.
Company’s Technology - Cenderitide and CU-NP
The Company entered into
an exclusive license agreement for intellectual property rights related to natriuretic peptides with the Mayo Foundation for Medical
Education and Research (“Mayo”), a Clinical Trial Funding Agreement with Medtronic, Inc. (“Medtronic”),
and a Transfer Agreement with Medtronic, all of which also include certain intellectual property licensing provisions. In February
2017, we elected to terminate our former natriuretic peptide development program, consisting of Cenderitide (CD-NP) and CU-NP,
so as to more efficiently focus our resources and efforts on our CAP-1002 and CAP-2003 programs.
Medtronic Clinical Trial Funding Agreement
In February 2011, the Company
entered into a Clinical Trial Funding Agreement with Medtronic, related to the Company’s now discontinued Cenderitide program.
Pursuant to its terms, the agreement expired in February 2012. Although the Medtronic agreement expired, there are certain provisions
that survive the expiration of the agreement, including the obligation to pay royalties on products that might be covered by the
agreement. The Company and Medtronic subsequently entered into a Transfer Agreement, described below.
Medtronic Transfer Agreement
On October 8, 2014, the
Company entered into a Transfer Agreement (the “Transfer Agreement”) with Medtronic to acquire patent rights relating
to the Company’s now discontinued natriuretic peptides program. Pursuant to the Transfer Agreement, Medtronic assigned to
the Company all of its right, title and interest in all natriuretic peptide patents and patent applications previously owned by
Medtronic or co-owned by Medtronic and the Company (the “Natriuretic Peptide Patents”).
In light of the Company’s
decision to terminate its development program with respect to natriuretic peptides, the Company elected to cease prosecution of
all of the Natriuretic Peptide Patents and has offered to reassign to Medtronic rights to certain patent applications obtained
through the Transfer Agreement. Medtronic elected not to take a reassignment of the patent rights.
CAPRICOR THERAPEUTICS, INC.
Notes to CONDENSED CONSOLIDATED financial statements
(unaudited)
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9.
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RELATED PARTY TRANSACTIONS
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Lease and Sub-Lease Agreement
As noted above, Capricor
is a party to lease agreements with CSMC, which holds more than 10% of the outstanding capital stock of Capricor Therapeutics (see
Note 7 – “Commitments and Contingencies”), and CSMC has served as an investigative site in Capricor’s clinical
trials. Additionally, Dr. Eduardo Marbán, who holds more than 10% of the outstanding capital stock of Capricor Therapeutics
and participates as an observer at the Company’s meetings of the Board of Directors, is the Director of the Cedars-Sinai
Smidt Heart Institute, a co-founder of Capricor and the Chairman of the Company’s Scientific Advisory Board.
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 is on a month-to-month
basis. For each of the three month periods ended September 30, 2018 and 2017, Capricor recognized $7,500 in sublease income from
the related party. For each of the nine month periods ended September 30, 2018 and 2017, Capricor recognized $22,500 in sublease
income from the related party. Sublease income is recorded as a reduction to general and administrative expenses.
Consulting Agreements
Effective January 1, 2013,
Frank Litvack, the Company’s Executive Chairman and a member of its Board of Directors, entered into an oral Consulting Agreement
with Capricor whereby Capricor agreed to pay Dr. Litvack fees of $10,000 per month for consulting services. On March 24, 2014,
Capricor entered into a written Consulting Agreement with Dr. Litvack memorializing the $10,000 per month compensation arrangement
described above. The agreement is terminable upon 30 days’ notice. Additionally, beginning in 2016, Capricor retained the
services of Lit Digital Media, LLC whose sole member is Harry Litvack, the son of Frank Litvack. Lit Digital Media provides services
to the Company related to social media and public relations, and the Company pays Lit Digital Media approximately $1,500 per month
for such services.
Payables to Related Party
At September 30, 2018
and December 31, 2017, the Company had accounts payable and accrued expenses to related parties totaling $132,347 and $174,424,
respectively. CSMC accounts for $130,837 and $160,566 of the total accounts payable and accrued expenses to related parties as
of September 30, 2018 and December 31, 2017, respectively. CSMC expenses relate to research and development and clinical trial
costs. During the nine months ended September 30, 2018 and 2017, the Company paid CSMC approximately $570,000 and $1,002,000, respectively,
for research and development, clinical trial expenses, rent and other expenses.
Related Party Clinical Trials
Capricor has agreed to
provide cells for investigational purposes in two clinical trials sponsored by CSMC. These cells were developed as part of the
Company’s past research and development efforts. The first trial is known as “Regression of Fibrosis and Reversal of
Diastolic Dysfunction in HFpEF Patients Treated with Allogeneic CDCs.” Dr. Eduardo Marbán is the named principal investigator
under the study. The second trial is known as “Pulmonary Arterial Hypertension treated with Cardiosphere-derived Allogeneic
Stem Cells.” In both studies, Capricor will provide the necessary number of doses of cells and will receive a negotiated
amount of monetary compensation which is estimated to be approximately $2.1 million over several years. For the three months ended
September 30, 2018 and 2017, the Company recognized approximately $47,000 and $52,500, respectively, as other income. For the nine
months ended September 30, 2018 and 2017, the Company recognized approximately $257,000 and $52,500, respectively, as other income.
As of September 30, 2018 and December 31, 2017, approximately $59,000 and $122,500 was outstanding and recorded in prepaid expenses
and other current assets, respectively.
Related Party Agreement
On May 10, 2018, Capricor
and TrialTech Medical, Inc., a corporation in which Dr. Frank Litvack, our Executive Chairman and a director, is a co-founder,
shareholder and chairman, entered into an agreement whereby TrialTech Medical, Inc. will provide clinical trial services to Capricor
for its HOPE-2 clinical trial. The estimated costs to us are anticipated to be approximately $250,000 for the duration of the project.
October 2017 Common Stock Sales Agreement
Subsequent to September
30, 2018 and through November 13, 2018, the Company sold an aggregate of 318,487 common shares under the October 2017 ATM Program
at an average price of approximately $1.07 per common share for net proceeds of approximately $0.3 million. The Company paid 3.0%
cash commission on the gross proceeds, plus reimbursement of expenses of the placement agent in the aggregate amount of approximately
$11,200.