CAPRICOR THERAPEUTICS, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

The following discussion of our financial condition and results of operations
should be read in conjunction with the condensed consolidated financial
statements and the condensed consolidated notes to those statements included
elsewhere in this Quarterly Report on Form 10-Q. This discussion includes
forward-looking statements that involve risks and uncertainties. As a result of
many factors, our actual results may differ materially from those anticipated in
these forward-looking statements.

As used in this Quarterly Report on Form 10-Q, references to “Capricor
Therapeutics
,” the “Company,” “we,” “us,” “our” or similar terms include
Capricor Therapeutics, Inc. and its wholly-owned subsidiary. References to
“Capricor” are with respect to Capricor, Inc., our wholly-owned subsidiary.

Company Overview

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

Since our inception, we have devoted substantial resources to developing
CAP-1002 and our other product candidates including our exosomes platform,
developing our manufacturing processes, staffing our company and providing
general and administrative support for these operations. We do not have any
products approved for sale. Our ability to eventually generate any product
revenue sufficient to achieve profitability will depend on the successful
development, approval and eventual commercialization of CAP-1002 for the
treatment of DMD and our other product candidates. If successfully developed and
approved, we intend to commercialize CAP-1002 in the United States with our
partner, Nippon Shinyaku, and may enter into additional licensing agreements or
strategic collaborations in other markets. If we generate product sales or enter
into licensing agreements or strategic collaborations, or further distribution
relationships, we expect that any revenue we generate will fluctuate from
quarter-to-quarter and year-to-year as a result of the timing and amount of any
product sales, license fees, milestone payments and other payments. If we fail
to complete the development of our product candidates in a timely manner, our
ability to generate future revenue, and our results of operations and financial
position, would be materially adversely affected.

A summary description of our key product candidates, is as follows:

CAP-1002 for the treatment of DMD (Phase 3): Our core cell therapy technology,

CAP-1002, is comprised of allogeneic cardiosphere-derived cells, or CDCs. The

ability of CAP-1002 to slow disease progression in DMD lies in the

immunomodulatory, anti-inflammatory, and anti-fibrotic actions of CDCs, which

are mediated by secreted exosomes laden with bioactive cargo. Among the cargo

elements known to be bioactive in CDC exosomes are microRNAs. Collectively,

these non-coding RNA species alter gene expression in macrophages and other

target cells, dialing down generalized inflammation and stimulating tissue

regeneration in DMD (and in a variety of other inflammatory diseases). This

mechanism of action, which is consistent with the changes observed in clinical

studies to date in circulating inflammatory biomarkers, contrasts with that of

exon-skipping oligonucleotides and gene therapy approaches, which aim to

restore dystrophin expression. DMD is a rare form of muscular dystrophy which

results in muscle degeneration and premature death. Additionally, the absence

? of dystrophin in muscle cells leads to significant cell damage and ultimately

causes muscle cell death and fibrotic replacement. The annual cost of care for

patients with DMD is very high and increases with disease progression. We

therefore believe that DMD represents a significant market opportunity for our

product candidate, CAP-1002. To date, we have completed several promising

clinical trials, investigating CAP-1002 for DMD. We are now initiating the

HOPE-3, Phase 3 clinical study investigating CAP-1002 for the treatment of

late-stage DMD patients for the potential approval of CAP-1002 in the United

States. HOPE-3 is a randomized, double-blind, placebo-controlled study which

will aim to enroll approximately 70 patients at approximately 20-30 sites in

the United States. The primary outcome measure will be the Performance of the

Upper Limb, or PUL, 2.0. There are other secondary cardiac and exploratory

outcome measures. We are in the process of site initiation and have begun

screening patients. We anticipate enrolling our first patient in the second

   quarter of 2022.


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Exosome-Based Therapeutics and Vaccines (Preclinical): We are focused on

developing a precision-engineered exosome platform technology that has the

ability to deliver defined sets of effector molecules which exert their effects

through defined mechanisms of action. At this time, we are developing

? therapeutics and vaccines for infectious diseases, monogenic diseases and other

potential indications. Our platform builds on advances in fundamental RNA and

protein science, targeting technology and manufacturing, providing us the

opportunity to potentially build a broad pipeline of new therapeutic

candidates.

CAP-1002 for the treatment of cytokine storm associated with COVID-19 (Phase

2): In the fourth quarter of 2021, we announced completion of enrollment of our

INSPIRE, Phase 2 clinical study. In March 2022, we announced topline data from

? this study. We reported that the primary endpoint of safety was met and the

results suggest that CAP-1002 was safe, well tolerated and consistent with the

historically observed safety profile of this therapy. At this time, we do not

anticipate any further material expenses and have decided not to move forward

with further clinical development for this indication.

Due to our significant research and development expenditures, and general
administrative costs associated with our operations, we have generated
substantial operating losses in each period since our inception. Our net losses
were $7.8 million and $5.2 million, for the three months ended March 31, 2022
and 2021, respectively. As of March 31, 2022, we had an accumulated deficit of
approximately $115.9 million. We expect to incur significant expenses and
operating losses for the foreseeable future.

Cash and cash equivalents as of March 31, 2022 were approximately $58.3 million
which we estimate will fund our operating expenses and capital expenditure
requirements into at least the second quarter of 2024. During 2021, we sold
3,566,349 shares pursuant to a sales agreement by and between us and H.C.
Wainwright & Co. LLC
, or Wainwright, resulting in net proceeds of $20.2 million.
No shares have been sold under this sales agreement during the three months
ended March 31, 2022.

In January 2022 we entered into a Commercialization and Distribution Agreement,
or the NS Distribution Agreement, with Nippon Shinyaku for the exclusive
commercialization and distribution of CAP-1002 for DMD in the US. Under the
terms of the NS Distribution Agreement, we will be responsible for the conduct
of the HOPE-3 trial as well as for the manufacturing of CAP-1002. Nippon
Shinyaku will be responsible for the distribution of CAP-1002 in the United
States
. Pursuant to the NS Distribution Agreement, we have the obligation to
sell commercial product to Nippon Shinyaku, subject to regulatory approval, and
in addition will have the right to receive a meaningful, double-digit share of
product revenue and additional development and sales-based milestone payments,
if achieved. We received an upfront payment of $30.0 million in the first
quarter of 2022 with potential additional milestone payments of up to $705.0
million
.

In March 2022, we announced that the final one-year results from our HOPE-2,
Phase 2 clinical trial were published in The Lancet showing that the trial met
its primary efficacy endpoint of mid-level PUL v1.2 (p=0.01) and additional
positive endpoints of full PUL v2.0 (p=0.04) and cardiac endpoint of ejection
fraction (p=0.002). CAP-1002 was generally safe and well-tolerated throughout
the study. With the exception of hypersensitivity reactions early in the
clinical trial, which were mitigated with a common pre-medication regimen, there
were no serious safety signals identified by the HOPE-2 Data and Safety
Monitoring Board, or DSMB. Additionally, we are currently conducting an open
label extension study of the HOPE-2 trial in which currently 12 patients have
elected to continue treatment of CAP-1002.

As we seek to develop and commercialize CAP-1002 or any other product candidates
including those related to our exosomes program, we anticipate that our expenses
will increase significantly and that we will need substantial additional funding
to support our continuing operations. Until such time when we can generate
significant revenue from product sales, if ever, we expect to finance our
operations through a combination of public or private equity financings, debt
financings or other sources, which may include licensing agreements or strategic
collaborations or other distribution agreements. We may be unable to raise
additional funds or enter into such agreements or arrangements when needed on
favorable terms, if at all. If we fail to raise capital or enter into such
agreements as and when needed, we may have to significantly delay, scale back or
discontinue the development or commercialization of CAP-1002 or our other
product candidates.


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The COVID-19 pandemic has presented a substantial public health and economic
challenge around the world. Our business operations and financial condition and
results have been impacted to varying degrees, and we expect the impact will
continue in future quarters.

We are continuing to assess and plan our development for the ongoing and
potential impact of the COVID-19 pandemic on our business, operations and
financial condition and results. Despite careful tracking and planning, however,
we are unable to accurately predict the extent of the impact of the pandemic on
our business, results of operations and financial condition due to the
uncertainty of future developments involving the pandemic and its impact on our
employees and operations. The full extent to which the COVID-19 pandemic will
directly or indirectly impact our business, results of operations and financial
condition will depend on future developments that are highly uncertain and
cannot be accurately predicted, including new information that may emerge
concerning COVID-19, the actions taken to contain it or treat its impact and the
economic impact on local, regional, national and international markets.

Financial Operations Overview

We have no commercial product sales to date and will not have the ability to
generate any commercial product revenue until after we have received approval
from the U.S. Food and Drug Administration or equivalent foreign regulatory
bodies to begin selling our pharmaceutical product candidates. Developing
pharmaceutical products is a lengthy and very expensive process. Even if we
obtain the capital necessary to continue the development of our product
candidates, whether through a strategic transaction or otherwise, we do not
expect to complete the development of a product candidate for several years, if
ever. To date, most of our development expenses have related to our product
candidates, consisting of CAP-1002 and our exosome technologies. As we proceed
with the clinical development of CAP-1002, and as we further develop our exosome
technologies, our expenses will further increase. Accordingly, our success
depends not only on the safety and efficacy of our product candidates, but also
on our ability to finance the development of our products and our clinical
programs. Our recent major sources of working capital have been primarily
proceeds from public equity sales of securities and a payment pursuant to our NS
Distribution Agreement with Nippon Shinyaku. While we pursue our preclinical and
clinical programs, we continue to explore potential partnerships for the
development of one or more of our product candidates in the US and in other
territories across the world.

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

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

Our results have included non-cash compensation expense due to the issuance of
stock options and warrants, as applicable. We expense the fair value of stock
options and warrants over their vesting period as applicable. When more precise
pricing data is unavailable, we determine the fair value of stock options using
the Black-Scholes option-pricing model. The terms and vesting schedules for
share-based awards vary by type of grant and the employment status of the
grantee. Generally, the awards vest based upon time-based conditions. They may
also vest based on performance-based conditions. Performance-based conditions
generally include the attainment of goals related to our financial performance
and product development. Stock-based compensation expense is included in the
condensed consolidated statements of operations under G&A or R&D expenses, as
applicable. We expect to record additional non-cash compensation expense in the
future, which may be significant.

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Results of Operations

Revenue

Miscellaneous Income. Miscellaneous income for the three months ended
March 31, 2022 and 2021 was zero and approximately $41,000, respectively. The
miscellaneous income was related to providing CAP-1002 for investigational
purposes for clinical trials sponsored by Cedars-Sinai Medical Center, or CSMC.
The decrease in miscellaneous income is due to the clinical trials sponsored by
CSMC completing or ceasing enrollment in 2021.

Operating Expenses

General and Administrative Expenses. G&A expenses for the three months ended
March 31, 2022 and 2021 were approximately $2.7 million and $1.9 million,
respectively. The increase of approximately $0.8 million in G&A expenses in the
first quarter of 2022 compared to the same period of 2021 is primarily
attributable to an increase in headcount, salaries and recruiting costs of $0.3
million
. Furthermore, there was an increase of approximately $0.2 million in
stock-based compensation expense, approximately $0.2 for investor relations
expenses, and approximately $0.1 million related to other general expenses.

Research and Development Expenses. R&D expenses for the three months ended
March 31, 2022 and 2021 were approximately $5.1 million and $3.3 million,
respectively. The increase of approximately $1.8 million in R&D expenses in the
first quarter of 2022 compared to the same period of 2021 is due to an increase
in research and development expenses related to our exosomes program. These
activities resulted in an increase of approximately $1.0 million. Furthermore,
there was an increase of approximately $0.5 million across our clinical
development activities of CAP-1002 (DMD and COVID-19 clinical trials) and a net
increase of approximately $0.3 million in our technology transfer and
manufacturing related activities of CAP-1002. Lastly, we saw an increase of
approximately $0.1 million in stock-based compensation expenses allocable to R&D
for the quarter ended March 31, 2022 as compared to the quarter ended March 31,
2021
.

Products Under Active Development

CAP-1002 for the treatment of DMD – We are initiating a Phase 3 pivotal study
for DMD for which we expect to spend approximately $8.0 million to $12.0 million
in 2022. The expenses for our DMD program will include costs for clinical,
regulatory and manufacturing-related expenses, including expenses related to the
scale-up for potential commercial scale manufacturing.

Exosome-Based Therapeutics and Vaccines – Our exosome platform is in early-stage
development. We expect to spend approximately $5.0 million to $7.0 million
during 2022 on development expenses related to our exosomes program, which
includes personnel, preclinical studies and manufacturing related expenses for
these technologies. Our expenses for this program are primarily focused on the
expansion of our engineered exosomes platform.

Our expenditures on current and future clinical development programs,
particularly our CAP-1002 and exosomes programs, cannot be predicted with any
significant degree of certainty as they are dependent on the results of our
current trials and our ability to secure additional funding and a strategic
partner. Further, we cannot predict with any significant degree of certainty the
amount of time which will be required to complete our clinical trials, the costs
of completing research and development projects or whether, when and to what
extent we will generate revenues from the commercialization and sale of any of
our product candidates. The duration and cost of clinical trials may vary
significantly over the life of a project as a result of unanticipated events
arising during manufacturing and clinical development and as a result of a
variety of other factors, including:

? the number of trials and studies in a clinical program;

? the number of patients who participate in the trials;

? the number of sites included in the trials;

? the rates of patient recruitment and enrollment;

? the duration of patient treatment and follow-up;


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? the costs of manufacturing our product candidates;

? the availability of necessary materials required to make our product

candidates;

? the costs, requirements and timing of, and the ability to secure, regulatory

approvals; and

? additional delays caused by the COVID-19 pandemic.

Liquidity and Capital Resources

The following table summarizes our liquidity and capital resources as of
March 31, 2022 and December 31, 2021 and our net increase in cash and cash
equivalents for the three months ended March 31, 2022 and 2021 and is intended
to supplement the more detailed discussion that follows. The amounts stated in
the tables below are expressed in thousands.


Liquidity and capital resources    March 31, 2022      December 31, 2021
Cash and cash equivalents          $        58,334    $            34,885
Working capital                    $        46,432    $            32,304
Stockholders' equity               $        24,643    $            31,368


                                                Three months ended March 31,
Cash flow data                                    2022                2021
Cash provided by (used in):
Operating activities                         $       24,047      $       (3,329)
Investing activities                                  (625)                 (37)
Financing activities                                     27               12,580

Net increase in cash and cash equivalents $ 23,449 $ 9,214

Our total cash and cash equivalents as of March 31, 2022 were approximately
$58.3 million compared to approximately $34.9 million as of December 31, 2021.
The increase in cash and cash equivalents from December 31, 2021 to March 31,
2022
is due to the upfront payment of $30.0 million from Nippon Shinyaku. As of
March 31, 2022, we had approximately $40.3 million in total liabilities, of
which $30.0 million relates to deferred revenue, and approximately $46.4 million
in net working capital.

Cash provided by operating activities was approximately $24.0 million and cash
used in operating activities was approximately $3.3 million for the three months
ended March 31, 2022 and 2021, respectively. The difference of approximately
$27.3 million in cash from operating activities is due to the upfront payment of
$30.0 million from Nippon Shinyaku. Furthermore, there was a decrease of
approximately $0.4 million in the change in accounts payable and accrued
liabilities and an increase of approximately $0.3 million in stock-based
compensation for the three months ended March 31, 2022 as compared to the same
period in 2021. To the extent we obtain sufficient capital and/or long-term debt
funding and are able to continue developing our product candidates, including if
we expand our technology portfolio, engage in further research and development
activities, and, in particular, conduct preclinical studies and clinical trials,
we expect to continue incurring substantial losses.

We had cash flow used in investing activities of approximately $0.6 million and
$36,912 for the three months ended March 31, 2022 and 2021, respectively. The
increase in cash used in investing activities for the three months ended March
31, 2022
as compared to the same period of 2021 is due to the increase in
purchases of property and equipment and leasehold improvements in connection
with the build-out of our San Diego laboratory space.

We had cash flow provided by financing activities of $27,465 and approximately
$12.6 million for the three months ended March 31, 2022 and 2021, respectively.
The decrease in cash provided by financing activities for the three months ended
March 31, 2022 as compared to the three months ended March 31, 2021 is primarily
due to the decrease in the proceeds from issuance of stock in connection to the
ATM Programs (as described below) in the three months ended March 31, 2022 as
compared with the three months ended March 31, 2021.

From inception through March 31, 2022, we financed our operations primarily
through private and public sales of our equity securities, government grants and
payments from collaboration partners. As we have not generated any revenue from
the commercial sale of our products to date, and we do not expect to generate
revenue for several years, if


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ever, we will need to raise substantial additional capital to fund our research
and development, including our long-term plans for clinical trials and new
product development. We may seek to raise additional funds through various
potential sources, such as equity and debt financings, government grants, or
through strategic collaborations and license agreements. We can give no
assurances that we will be able to secure such additional sources of funds to
support our operations, complete our clinical trials or if such funds become
available to us, that such additional financing will be sufficient to meet our
needs. Moreover, to the extent that we raise additional funds by issuing equity
securities, our stockholders may experience significant dilution, and debt
financing, if available, may involve restrictive covenants. To the extent that
we raise additional funds through collaboration and licensing arrangements, it
may be necessary to relinquish some rights to our technologies or our product
candidates or grant licenses on terms that may not be favorable to us.

Our estimates regarding the sufficiency of our financial resources are based on
assumptions that may prove to be wrong. We may need to obtain additional funds
sooner than planned or in greater amounts than we currently anticipate. At this
time, we believe our cash resources are sufficient to fund our operations for at
least the next twelve months. The actual amount of funds we will need to operate
is subject to many factors, some of which are beyond our control. These factors
include the following:

? the progress of our research activities;

? the number and scope of our research programs;

? the progress and success of our preclinical and clinical development

activities;

? the progress of the development efforts of parties with whom we have entered

into research and development agreements;

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

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

? the costs of manufacturing our product candidates, and the progress of efforts

with parties with whom we may enter into commercial manufacturing agreements;

? our ability to maintain current research and development programs and to

establish new research and development and licensing arrangements;

? additional costs associated with maintaining licenses and insurance;

? the costs involved in prosecuting and enforcing patent claims and other

intellectual property rights; and

? the costs and timing of regulatory approvals.

As a result of the spread of the COVID-19 coronavirus, uncertainties have arisen
that have impacted enrollment of clinical trials, deliverables related to
contract performance, payments from trial sponsors, workforce stability, supply
chain disruptions or delays, timing of grant disbursements as well as other
potential business operations. While the disruption is currently expected to be
temporary, there is considerable uncertainty around its expected duration. In
addition to potential impact on grant availability, there may be risks to the
Company’s ability to obtain financing from other sources, due to the impact of
the coronavirus. There could be other financial impacts on our business from the
coronavirus, the specifics of which are unknown at this time.

Financing Activities by the Company

Commercialization and Distribution Agreement with Nippon Shinyaku

In January 2022, Capricor entered into the NS Distribution Agreement with Nippon
Shinyaku. Under the terms of the NS Distribution Agreement, Capricor appointed
Nippon Shinyaku as its exclusive distributor in the United States for CAP-1002,
the Company’s lead product candidate, for the treatment of DMD.

Under the terms of the NS Distribution Agreement, Capricor will be responsible
for the conduct of the HOPE-3 trial as well as the manufacturing of CAP-1002.
Nippon Shinyaku will be responsible for the distribution of CAP-1002 in the
United States
. Pursuant to the NS Distribution Agreement, Capricor has the
obligation to sell commercial product to Nippon Shinyaku, subject to regulatory
approval, and in addition will have the right to receive a meaningful,
double-digit share of product revenue and additional development and sales-based
milestone payments, if achieved. In the first quarter


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of 2022, Capricor received an upfront payment of $30.0 million. Pursuant to the
terms of the NS Distribution Agreement there are potential additional sales and
development milestone payments of up to $705.0 million.

June 2021 ATM Program

On June 21, 2021, the Company initiated an at-the-market offering under a
prospectus supplement for aggregate sales proceeds of up to $75.0 million, or
the June 2021 ATM Program, with the common stock to be distributed at the market
prices prevailing at the time of sale. The June 2021 ATM Program was established
under a Common Stock Sales Agreement, or the Sales Agreement, with Wainwright,
under which we may, from time to time, issue and sell shares of our common stock
through Wainwright as sales agent. The Sales Agreement provides that Wainwright
will be entitled to compensation for its services at a commission rate of 3.0%
of the gross sales price per share of common stock sold. All shares issued
pursuant to the June 2021 ATM Program were issued pursuant to our shelf
registration statement on Form S-3 (File No. 333-254363), which was initially
filed with the Securities and Exchange Commission, or the SEC, on March 16,
2021
, amended on June 15, 2021 and declared effective by the SEC on June 16,
2021
. From June 21, 2021 through September 30, 2021, the Company has sold an
aggregate of 1,267,475 shares of common stock under the June 2021 ATM Program at
an average price of approximately $5.89 per share for gross proceeds of
approximately $7.5 million. Approximately $67.5 million of common stock may
still be sold pursuant to the June 2021 ATM Program. The Company paid cash
commissions on the gross proceeds, plus reimbursement of expenses to Wainwright,
as well as legal and accounting fees in the aggregate amount of approximately
$0.3 million. No shares were sold in the fourth quarter of 2021 or the first
quarter of 2022 under the June 2021 ATM Program.

May 2020 ATM Program

On May 4, 2020, the Company initiated an at-the-market offering under a
prospectus supplement for aggregate sales proceeds of up to $40.0 million, or
the May 2020 ATM Program, with the common stock to be distributed at the market
prices prevailing at the time of sale. The May 2020 ATM Program was established
under the Sales Agreement. All shares issued pursuant to the May 2020 ATM
Program were issued pursuant to our shelf registration statement on Form S-3
(File No. 333-227955), which was initially filed with the SEC on October 24,
2018
, amended on July 17, 2019 and declared effective by the SEC on July 18,
2019
. From May 4, 2020 through June 21, 2021, the Company has sold an aggregate
of 6,027,852 shares of common stock under the May 2020 ATM Program at an average
price of approximately $6.15 per share for gross proceeds of approximately $37.1
million
. The Company paid cash commissions on the gross proceeds, plus
reimbursement of expenses to Wainwright, as well as legal and accounting fees in
the aggregate amount of approximately $1.2 million. As of June 21, 2021, the May
2020
ATM Program expired and was replaced with the June 2021 ATM Program.

CIRM Grant Award

On June 16, 2016, Capricor entered into an award, or the CIRM Award, with the
California Institute for Regenerative Medicine, or CIRM, in the amount of
approximately $3.4 million to fund, in part, Capricor’s Phase I/II HOPE-Duchenne
clinical trial investigating CAP-1002 for the treatment of Duchenne muscular
dystrophy-associated cardiomyopathy. Pursuant to terms of the CIRM Award, the
disbursements were tied to the achievement of specified operational milestones.
In addition, the terms of the CIRM Award included a co-funding requirement
pursuant to which Capricor was required to spend approximately $2.3 million of
its own capital to fund the CIRM funded research project. The CIRM Award is
further subject to the conditions and requirements set forth in the CIRM Grants
Administration Policy for Clinical Stage Projects. Such requirements include,
without limitation, the filing of quarterly and annual reports with CIRM, the
sharing of intellectual property pursuant to Title 17, California Code of
Regulations (CCR) Sections 100600-100612, and the sharing with the State of
California
of a fraction of licensing revenue received from a CIRM funded
research project and net commercial revenue from a commercialized product which
resulted from the CIRM funded research as set forth in Title 17, CCR
Section 100608. The maximum royalty on net commercial revenue that Capricor may
be required to pay to CIRM is equal to nine times the total amount awarded and
paid to Capricor.

After completing the CIRM funded research project and at any time after the
award period end date (but no later than the ten-year anniversary of the date of
the award), Capricor has the right to convert the CIRM Award into a loan, the
terms of which will be determined based on various factors, including the stage
of the research and development of the


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program at the time the election is made. On June 20, 2016, Capricor entered
into a Loan Election Agreement with CIRM whereby, among other things, CIRM and
Capricor agreed that if Capricor elects to convert the grant into a loan, the
term of the loan could be up to five years from the date of execution of the
applicable loan agreement; provided that the maturity date of the loan will not
surpass the ten-year anniversary of the grant date of the CIRM Award. Beginning
on the date of the loan, the loan shall bear interest on the unpaid principal
balance, plus the interest that has accrued prior to the election point
according to the terms set forth in CIRM’s Loan Policy, or the New Loan Balance,
at a per annum rate equal to the LIBOR rate for a three-month deposit in U.S.
dollars, as published by the Wall Street Journal on the loan date, plus one
percent. Interest shall be compounded annually on the outstanding New Loan
Balance commencing with the loan date and the interest shall be payable,
together with the New Loan Balance, upon the due date of the loan. If Capricor
elects to convert the CIRM Award into a loan, certain requirements of the CIRM
Award will no longer be applicable, including the revenue sharing requirements.
Capricor has not yet made its decision as to whether it will elect to convert
the CIRM Award into a loan. If we elect to do so, Capricor would be required to
repay some or all of the amounts awarded by CIRM, therefore the Company accounts
for this award as a liability rather than income.

In June 2019, Capricor completed all milestones associated with the CIRM Award
and expended all funds received. In the third quarter of 2019, Capricor
completed all final close-out documentation associated with this award. As of
March 31, 2022, Capricor’s liability balance for the CIRM Award was
approximately $3.4 million.

Off-Balance Sheet Arrangements

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

Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with generally accepted
accounting principles. The preparation of these financial statements requires us
to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, expenses and related disclosures. We evaluate our
estimates and assumptions on an ongoing basis, including research and
development and clinical trial accruals, and stock-based compensation estimates.
Our estimates are based on historical experience and various other assumptions
that we believe to be reasonable under the circumstances. Our actual results
could differ from these estimates. We believe the following critical accounting
policies reflect the more significant judgments and estimates used in the
preparation of our financial statements and accompanying notes.

Leases

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


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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.

Revenue Recognition

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

Clinical Development Income

Income is recorded over time as the Company satisfies distinct performance
obligations outlined in the contracts with the customer or partner. The
transaction price of the income includes the upfront payment. Additional
payments due upon achievement of milestones and targets as defined in the
contract may increase the transaction price to be recognized.

Grant Income

The determination as to when income is earned is dependent on the language in
each specific grant. Generally, we recognize grant income in the period in which
the expense is incurred for those expenses that are deemed reimbursable under
the terms of the grant. Grant income is due upon submission of reimbursement
request. The transaction price varies for grant income based on the expenses
incurred under the awards.

Miscellaneous Income

Revenue is recognized in connection with the delivery of doses which were
developed as part of our past R&D efforts. Income is recorded when the Company
has satisfied the obligations as identified in the contracts with the customer.
Miscellaneous income is due upon billing. Miscellaneous income is based on
contracts with fixed transaction prices.

CIRM Grant Award

Capricor accounts for the disbursements under its CIRM Award as long-term
liabilities. Capricor recognizes the CIRM grant disbursements as a liability as
the principal is disbursed rather than recognizing the full amount of the grant
award. After completing the CIRM funded research project and after the award
period end date, 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 the stage of development at the time the election is
made. In June 2016, Capricor entered into a Loan Election Agreement with CIRM
whereby, among other things, CIRM and Capricor agreed that if Capricor elects to
convert the grant into a loan, the term of the loan could be up to five years
from the date of execution of the applicable loan agreement; provided that the
maturity date of the loan will not surpass the ten-year anniversary of the grant
date of the CIRM Award. 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.

Research and Development Expenses and Accruals

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

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


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Related contracts vary significantly in length and may be for a fixed amount, a
variable amount based on actual costs incurred, capped at a certain limit, or
for a combination of fixed, variable and capped amounts. Activity levels are
monitored through close communication with the CROs and other clinical trial
vendors, including detailed invoice and task completion review, analysis of
expenses against budgeted amounts, analysis of work performed against approved
contract budgets and payment schedules, and recognition of any changes in scope
of the services to be performed. Certain CRO and significant clinical trial
vendors provide an estimate of costs incurred but not invoiced at the end of
each quarter for each individual trial. These estimates are reviewed and
discussed with the CRO or vendor as necessary, and are included in R&D expenses
for the related period. For clinical study sites which are paid periodically on
a per-subject basis to the institutions performing the clinical study, we accrue
an estimated amount based on subject screening and enrollment in each quarter.
All estimates may differ significantly from the actual amount subsequently
invoiced, which may occur several months after the related services were
performed.

In the normal course of business, we contract with third parties to perform
various R&D activities in the on-going development of our product candidates.
The financial terms of these agreements are subject to negotiation, vary from
contract to contract and may result in uneven payment flows. Payments under the
contracts depend on factors such as the achievement of certain events, the
successful enrollment of patients, and the completion of portions of the
clinical trial or similar conditions. The objective of the accrual policy is to
match the recording of expenses in the financial statements to the actual
services received and efforts expended. As such, expense accruals related to
clinical trials and other R&D activities are recognized based on our estimates
of the degree of completion of the event or events specified in the applicable
contract.

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

Stock-Based Compensation

Our results include non-cash compensation expense as a result of the issuance of
stock, stock options and warrants, as applicable. We have issued stock options
to employees, directors and consultants under our five stock option plans:
(i) the 2006 Stock Option Plan, (ii) the 2012 Restated Equity Incentive Plan
(which superseded the 2006 Stock Option Plan), (iii) the 2012 Non-Employee
Director Stock Option Plan, (iv) the 2020 Equity Incentive Plan, and (v) the
2021 Equity Incentive Plan.

We expense the fair value of stock-based compensation over the vesting period.
When more precise pricing data is unavailable, we determine the fair value of
stock options using the Black-Scholes option-pricing model. This valuation model
requires us to make assumptions and judgments about the variables used in the
calculation. These variables and assumptions include the weighted-average period
of time that the options granted are expected to be outstanding, the volatility
of our common stock, and the risk-free interest rate. We account for forfeitures
upon occurrence.

Stock options or other equity instruments to non-employees (including
consultants) issued as consideration for goods or services received by us 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 terms and vesting schedules for share-based awards vary by type of grant and
the employment status of the grantee. Generally, the awards vest based upon
time-based or performance-based conditions. Performance-based conditions
generally include the attainment of goals related to our financial and
development performance. Stock-based compensation expense is included in general
and administrative expense or research and development expense, as applicable,
in the Statements of Operations and Comprehensive Income (Loss). We expect to
record additional non-cash compensation expense in the future, which may be
significant.

Clinical Trial Expense

As part of the process of preparing our consolidated financial statements, we
are required to estimate our accrued expenses. Our clinical trial accrual
process is designed to account for expenses resulting from our obligations under
contracts with vendors, consultants, CROs and clinical site agreements in
connection with conducting clinical trials. The


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financial terms of these contracts are subject to negotiations, which vary from
contract to contract and may result in payment flows that do not match the
periods over which materials or services are provided to us under such
contracts. Our objective is to reflect the appropriate clinical trial expenses
in our consolidated financial statements by matching the appropriate expenses
with the period in which services are provided and efforts are expended. We
account for these expenses according to the progress of the trial as measured by
patient progression and the timing of various aspects of the trial. We determine
accrual estimates through financial models that take into account discussions
with applicable personnel and outside service providers as to the progress or
state of completion of trials, or the services completed. During the course of a
clinical trial, we adjust our clinical expense recognition if actual results
differ from our estimates. We make estimates of our accrued expenses as of each
balance sheet date in our consolidated financial statements based on the facts
and circumstances known to us at that time. Our clinical trial accrual and
prepaid assets are dependent, in part, upon the receipt of timely and accurate
reporting from CROs and other third-party vendors. Although we do not expect our
estimates to be materially different from amounts actually incurred, our
understanding of the status and timing of services performed relative to the
actual status and timing of services performed may vary and may result in us
reporting amounts that are too high or too low for any particular period.

Recently Issued or Newly Adopted Accounting Pronouncements

In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic
832), which requires business entities to disclose information about
transactions with a government entity that are accounted for by applying a grant
or contribution model by analogy. For transactions within scope, the new
standard requires the disclosure of information about the nature of the
transaction, including significant terms and conditions, as well as the amounts
and specific financial statement line items affected by the transaction. The new
guidance is effective for annual reporting periods beginning after December 15,
2021
. The Company adopted ASU 2021-10 in the first quarter of 2022. The adoption
of this update did not have a material impact on the Company’s financial
statements and footnote disclosures.

Other recent accounting pronouncements issued by the FASB, including its
Emerging Issues Task Force, the American Institute of Certified Public
Accountants
, and the SEC, did not or are not believed by management to have a
material impact on the Company’s present or future consolidated financial
statement presentation or disclosures.

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