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.
Overview
Capricor Therapeutics, Inc. is a clinical-stage biotechnology company focused on
the discovery, development and commercialization of innovative cell and
exosome-based therapies for the treatment and prevention of diseases.
Duchenne Muscular Dystrophy Program
We recently completed HOPE-2, a Phase II clinical trial in the United States
with our product candidate, CAP-1002, a cardiac cell derived therapy which is
being used to treat patients with late-stage DMD. The 12-month final top-line
data showed improvements in multiple measures of upper limb, cardiac and
respiratory function. We have requested an End-of-Phase 2 meeting with FDA to
discuss this data, next steps and a pathway to approval of a Biologics
Application License, or BLA for CAP-1002 in DMD. On April 15, 2020, we filed an
IND with the FDA to investigate the use of CDC-Exosomes in patients with DMD. We
will determine the next steps for this program after receiving a response from
the FDA.
COVID-19 Program
Additionally, in March and April 2020, under a compassionate use protocol, six
patients with severe COVID-19 symptoms (five of six of whom were on ventilators)
were infused with our product candidate, CAP-1002, all of whom have survived
through May 13, 2020, with four of the six having been discharged. Two of the
patients remain hospitalized but are reported to be in clinically stable
condition as of May 13, 2020. There is no assurance that those patients will
ultimately survive. The efficacy of CAP-1002 in treating COVID-19 was not
necessarily demonstrated because the sample size was small, the six patients
were contemporaneously on other experimental medications, and no control group
was established. We have been approved by the FDA to treat up to an additional
20 patients under an IND expanded access protocol and have submitted a revised
protocol to add an additional 20 patients as a placebo arm totaling 40 patients
and move into a randomized, placebo-controlled trial to treat patients with
severe disease, subject to approval by the FDA. We hope to fund at least part of
this program with non-dilutive funding such as grants for which we are now
applying. We have also begun work on developing our exosomes platform technology
as a next-generation vaccine and therapeutic platform investigating a variety of
disorders.
Our executive offices are located at 8840 Wilshire Blvd., 2nd Floor, Beverly
Hills, California 90211. Our telephone number is (310) 358-3200 and our Internet
address is www.capricor.com.
Our Technologies
Cardiosphere-Derived Cells (CAP-1002)
Our core therapeutic technology is based on cardiosphere-derived cells, or CDCs,
a cardiac-derived cell therapy that was first identified in the academic
laboratory of Capricor's scientific founder, Dr. Eduardo Marbán. Since the
initial publication in 2007, CDCs have been the subject of over 100
peer-reviewed scientific publications and have been administered to over 150
human subjects across several clinical trials. CDCs have been shown to exert
potent immunomodulatory activity and to alter the immune system's activity to
encourage cellular regeneration. We have been developing allogeneic CDCs
(CAP-1002) as a product candidate for the treatment of Duchenne muscular
dystrophy, or DMD, and investigating their effects on skeletal and cardiac
function. Pre-clinical and clinical data support the therapeutic concept of
administering CDCs as a means to address conditions in which the heart or
skeletal muscle has been damaged.
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In a variety of preclinical experimental models of heart injury, CDCs have been
shown to stimulate cell proliferation and blood vessel growth and to inhibit
programmed cell death and scar formation. Published data by Cedars-Sinai Medical
Center, or CSMC, which tested the effectiveness of CDCs in a mouse model of DMD,
showed for the first time that the skeletal and cardiac improvements could be
directly attributed to treatment with CDCs. The data also provide further
evidence of the potential of CDCs to stimulate tissue repair and regeneration by
first reducing inflammation, which then enables new healthy muscle to form, as
was shown in the mouse model of DMD.
CDCs are derived from cardiospheres, or CSps, which are self-adherent
multicellular clusters derived from the heart. CDCs are sufficiently small that,
within acceptable dose limits, they can be infused into a coronary artery or
into the peripheral vasculature. Capricor has performed clinical studies to
establish the range of CDC dose levels that appear to be safe via intracoronary
administration or peripheral venous access.
While CDCs originate from either a deceased human donor (allogeneic source) or
from heart tissue taken directly from recipient patients themselves (autologous
source), the methods for manufacturing CDCs from either source are similar.
Capricor's proprietary manufacturing methods are focused on producing
therapeutic doses of CDCs to boost the regenerative capacity of the heart and
skeletal muscles, with the goal of improving cardiac and skeletal muscle
function. Capricor has exclusively licensed intellectual property covering CDCs
and CSps from three academic institutions and is also pursuing its own
intellectual property rights relating to CDCs as a product candidate.
Exosomes
Our preclinical data has shown that cardiosphere-derived cells mediate most of
their therapeutic activities through the secretion of extracellular vesicles.
Extracellular vesicles, including exosomes and microvesicles, are nano-scale,
membrane-enclosed vesicles which are secreted by most cells and contain
characteristic lipids, proteins and nucleic acids such as mRNA and microRNAs.
They can signal through the binding and activation of membrane receptors or
through the delivery of their cargo into the cytosol of target cells.
Exosomes act as messengers to regulate the functions of neighboring or distant
cells and have been shown to regulate functions such as cell survival,
proliferation, inflammation and tissue regeneration. Furthermore, pre-clinical
research has shown that exogenously-administered exosomes can modify cellular
activities, thereby supporting their therapeutic potential. Their size, low or
null immunogenicity and ability to communicate in native cellular language
potentially makes them an exciting new class of therapeutic agents with the
potential to expand our ability to address complex biological responses. Because
exosomes are a cell-free substance, they can be stored, handled, reconstituted
and administered in similar fashion to common biopharmaceutical products such as
antibodies.
CAP-1002 for the Treatment of Duchenne Muscular Dystrophy:
Based on our understanding of the mechanism of action of CAP-1002 which has been
seen in pre-clinical models of DMD, we believe that CAP-1002 has the potential
to decrease inflammation and muscle degeneration while exerting positive effects
on muscle regeneration, all of which may translate into patients retaining
muscle function for a longer period of time. Data supporting peripheral
intravenous route of administration of CAP-1002 in the DMD setting has been
provided by pre-clinical mouse studies where CDCs, the active ingredient in
CAP-1002, have been shown to increase exercise capacity and diaphragmatic
function.
We are currently developing CAP-1002 for the treatment of DMD. We completed the
positive HOPE-Duchenne Phase I/II trial in 2017 and then subsequently began the
HOPE-2 Phase II trial in 2018. We reported positive interim 6-month results from
HOPE-2 in the third quarter of 2019 and we recently reported final top-line
12-month results. Our further plans with respect to the clinical development of
CAP-1002 in DMD, including our decision to conduct a Phase III trial, will be
based on the final guidance received from the FDA, our ability to secure funding
necessary to conduct the trial should we decide to pursue that path and/or our
ability to partner with another company to advance the development of CAP-1002
for DMD, as well as other factors, some of which are not known at this time. We
have requested an End-of-Phase 2 meeting with FDA to discuss this data, next
steps and a pathway to approval of a Biologics Application License, or BLA for
CAP-1002 in DMD.
Phase II HOPE-2 Clinical Trial
HOPE-2 is a randomized, double-blind, placebo-controlled clinical trial which
was conducted at multiple sites located in the United States. We randomized 20
patients in our HOPE-2 clinical trial. Approximately 80% of the patients were
non-ambulant and all patients were on a stable regimen of steroids. Demographic
and baseline characteristics were similar between the two treatment groups. The
clinical trial was designed to evaluate the safety and efficacy of repeat,
intravenous, or IV, doses of CAP-1002, in boys and young men with evidence of
skeletal muscle impairment regardless of ambulatory status and who are on a
stable regimen of systemic glucocorticoids.
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While there are many clinical initiatives in DMD, HOPE-2 is one of the very few
to focus on non-ambulant patients. These boys and young men are looking to
maintain what function they have in their arms and hands, and Capricor's
previous study of a single intracoronary dose of CAP-1002 provided preliminary
evidence of efficacy that CAP-1002 may be able to help DMD patients retain or
slow the loss of upper limb function.
The primary efficacy endpoint of the HOPE-2 trial is the relative change in
patients' abilities to perform manual tasks that relate to activities of daily
living and are important to their quality of life. These abilities were measured
through the Performance of the Upper Limb, or PUL, test. In the HOPE-2 study we
have evaluated these through both the PUL 1.2 and 2.0 versions. Although the PUL
1.2 version for the mid-level was the primary endpoint established for the
trial, we also conducted an analysis using the PUL 2.0 version as the FDA
suggested the use of the updated PUL 2.0 version as the primary efficacy
endpoint in support of a Biologics License Application, or BLA. HOPE-2 focused
on the mid-level dimension of the PUL which assesses the ability to use muscles
from the elbow to the hand, which are essential for operating wheelchairs and
performing other daily functions. In HOPE-2, additional secondary and
exploratory endpoints such as cardiac function, pulmonary function, quality of
life and additional measures were included.
In July 2019, we reported interim top-line results from the HOPE-2 trial which
showed that a pre-specified interim analysis performed on 6-month data showed
meaningful results across several independent clinical measures.
In October 2019, we reported additional data from the interim analysis at the
24th Annual International Congress of the World Muscle Society. Data from a
total of 20 patients was analyzed (12 placebo and 8 treated) at the 3- and
6-month time-point in the intent to treat (ITT) population. The late breaking
podium presentation presented the top-line, 6-month results from the HOPE-2
clinical trial which showed meaningful results across several independent
clinical measures.
In May 2020, we reported final top-line 12-month results. The data showed
improvements in upper limb, cardiac and respiratory function with p-values of
less than p=0.05 in multiple measures. The 12-month data showed statistically
meaningful improvements in the PUL 2.0 in CAP-1002 treated patients (p=0.05)
with a mean change of 2.4 points over placebo patients. We also came very close
to significance with the PUL 1.2 mid-level with all the data (p=0.08) with a
mean change of 2.8 points over placebo patients. With the exception of steroids,
preservation of function in DMD is uncommon. The placebo patients declined
consistent with natural history, but in the treated group, most patients were
stable or improved throughout the one-year treatment period.
The data also showed global improvements in cardiac function as measured by
ejection fraction (p=0.004) and indexed volumes (LVESV, p=0.01, LVEDV p=0.07).
These are surrogate measures of cardiac function and are considered the "gold
standard" in terms of relevance to long term outcomes. Additionally, there was
also a reduction in the biomarker CK-MB, an enzyme that is only released when
there is cardiac muscle cell damage. In normal human subjects, there is
typically no CK-MB measurable in the blood. It is well accepted that continuous
muscle cell damage in DMD leads to pathologically high enzyme levels associated
with cardiac muscle cell loss. HOPE-2 demonstrated a reduction in CK-MB levels
as compared to placebo (p=0.006). This is the first ever study in DMD that
correlates cardiac functional stabilization with reduction of a biomarker of
cell damage.
To assess pulmonary function, investigators measured several clinically relevant
parameters. At 12 months, inspiratory flow reserve (absolute), a reflection of
diaphragmatic strength, showed an improvement. Additionally, an improvement was
observed at 12 months in peak expiratory flow (% predicted), another measure of
diaphragmatic strength.
Study Results
12-month Top-Line Efficacy Data:
12-month Time-point
CAP-1002 Placebo p-value
n=8 n=12
Upper Limb Function
Mid-level PUL (version 1.2) -2.1 (3.63) -4.9 (2.57) p=0.08
Shoulder + Mid + Distal PUL (version 1.2) -2.3 (3.86) -6.4 (3.84) p=0.03
Shoulder + Mid + Distal PUL (version 2.0) -1.3 (2.14) -3.7 (1.50) p=0.05
Cardiac
LV Ejection Fraction % -0.33 (2.01) -1.89 (2.23) p=0.004
LV End-Diastolic Volume, Indexed mL/m2 -7.35 (6.10) 0.00 (7.34) p=0.07
LV End-Systolic Volume, Indexed mL/m2 -3.10 (1.68) 1.70 (5.02) p=0.01
Creatine Kinase-MB (% of total CK) -0.50 (0.55) 2.00 (1.00) p=0.006
31
Mean Change from baseline to 12 months (standard deviation) shown.
ITT (intent to treat) population shown
P-values are nominal values unadjusted for multiple testing
Mixed model repeated measures analysis
Safety
CAP-1002 was generally safe and well tolerated throughout the study. With the
exception of hypersensitivity reactions which were mitigated with a common
pre-medication regimen, no safety signals were identified in the HOPE-2 trial.
Regulatory Developments
In June 2017, we had a meeting with the FDA to discuss potential clinical
endpoints that could be used for registration strategies for CAP-1002 in the DMD
indication. The minutes of the meeting indicated the FDA's willingness to accept
Capricor's proposal to use the PUL test as the basis for the primary efficacy
endpoint for clinical studies in support of a BLA. The PUL test is an outcome
instrument that was specifically designed to assess upper limb function in
ambulant and non-ambulant patients with DMD.
In December 2018, we met with the FDA as part of the expedited review afforded
under the RMAT designation. The agency stated that the trial would need to
provide evidence of clinically meaningful changes in the PUL, as well as other
evidence supportive of CAP-1002 efficacy for patients with advanced Duchenne
muscular dystrophy, in order to potentially serve as a registration trial.
In October 2019, we had a meeting with the FDA to discuss, among other things,
the results of the 6-month interim analysis of the HOPE-2 trial and our path
forward with our DMD program. During the meeting, we proposed the possibility of
accelerated approval. The FDA was not supportive of an accelerated approval
pathway at that time and noted that the HOPE-2 trial was designed as an
exploratory trial and that data from the HOPE-2 trial did not provide
substantial evidence of effectiveness to support a future biologics license
application, or BLA. The FDA did, however, indicate its support for conducting
a Phase III trial of CAP-1002 for the treatment of DMD. In addition, the FDA
reiterated that as part of our RMAT designation, they are willing to work with
us to further the clinical development of the therapy.
In a follow-up to the October 2019 meeting, Capricor requested an additional
meeting to clarify endpoints for future clinical trials. In a written response,
FDA supported the use of the full PUL 2.0 from baseline to twelve months as a
primary efficacy endpoint as long as clinical meaningfulness can be
demonstrated. They suggested that a 1.0 point difference appears suitable to
demonstrate product efficacy to support a BLA.
We have requested an End-of-Phase 2 meeting with FDA to discuss our final
12-month data, next steps and a pathway to approval of a Biologics Application
License, or BLA, for CAP-1002 in DMD. Additionally, we have initiated a
technology transfer with a leading global CMO to prepare for commercial
manufacturing of CAP-1002.
Additionally, we are in the planning stages of initiating an open-label
extension of all patients who participated in the HOPE-2 study which includes
those patients who received placebo.
Phase I/II HOPE-Duchenne Clinical Trial
We have completed the randomized, controlled, multi-center Phase I/II
HOPE-Duchenne clinical trial which was designed to evaluate the safety and
exploratory efficacy of CAP-1002 in patients with cardiomyopathy associated with
Duchenne muscular dystrophy, or DMD. Twenty-five patients were randomized in a
1:1 ratio to receive either CAP-1002 on top of usual care or usual care only. In
patients receiving CAP-1002, 25 million cells were infused into each of their
three main coronary arteries for a total dose of 75 million cells. It was a
one-time treatment, and the last patient was infused in September 2016. Patients
were observed over the course of 12 months. Efficacy was evaluated according to
several exploratory outcome measures. This study was funded in part through a
grant award from the California Institute for Regenerative Medicine, or CIRM. In
January 2019, this study was published in the online issue of Neurology, the
medical journal of the American Academy of Neurology.
32
We reported our 12-month data from the HOPE-Duchenne trial at a Late-Breaking
Science session of the American Heart Association Scientific Sessions 2017. As
shoulder function had already been lost in most of the HOPE participants,
investigators used the combined mid-distal PUL subscales to assess changes in
skeletal muscle function and found significant improvement in those treated with
CAP-1002 in a defined post-hoc analysis. Among the lower-functioning patients,
defined as patients with a baseline mid-distal PUL score < 55 out of 58,
investigators reported sustained or improved motor function at 12 months in 8 of
9 (89%) patients treated with CAP-1002 as compared to none (0%) of the usual
care participants (p=0.007). Additionally, we reported significant improvements
in systolic thickening of the left ventricular wall as well as reduction in
scarring of the heart muscle among those treated with CAP-1002 decreased
relative to the control group.
CAP-1002 was generally safe and well-tolerated in the HOPE-Duchenne trial. There
was no significant difference in the incidence of treatment-emergent adverse
events in either group. There were no early study discontinuations due to
adverse events.
Regulatory Designations for CAP-1002 for the treatment of DMD
In April 2015, the FDA granted Orphan Drug Designation to CAP-1002 for the
treatment of DMD. Orphan Drug Designation is granted by the FDA's Office of
Orphan Drug Products to drugs intended to treat a rare disease or condition
affecting fewer than 200,000 people in the United States or a disease or
condition that affects more than 200,000 people in the United States and for
which there is no reasonable expectation that the cost of developing and making
available in the United States a drug for this type of disease or condition will
be recovered from sales in the United States for that drug. This designation
confers special incentives to the drug developer, including tax credits on the
clinical development costs and prescription drug user fee waivers and may allow
for a seven-year period of market exclusivity in the United States upon FDA
approval.
In July 2017, the FDA granted Rare Pediatric Disease Designation to CAP-1002 for
the treatment of DMD. The FDA defines a "rare pediatric disease" as a serious or
life-threatening disease affecting individuals primarily aged from birth to 18
years and that affects fewer than 200,000 individuals in the United States.
Under the FDA's Rare Pediatric Disease Priority Review Voucher program, upon the
approval of a qualifying New Drug Application, or NDA, or BLA for the treatment
of a rare pediatric disease, the sponsor of such application would be eligible
for a Rare Pediatric Disease Priority Review Voucher that can be used to obtain
priority review for a subsequent NDA or BLA. The Priority Review Voucher may be
sold or transferred an unlimited number of times.
In February 2018, we were notified by the FDA Office of Tissues and Advanced
Therapies, that we were granted the Regenerative Medicine Advanced Therapy, or
RMAT, designation for CAP-1002 for the treatment of DMD. The FDA grants the RMAT
designation to regenerative medicine therapies intended to treat a serious
condition and for which preliminary clinical evidence indicates a potential to
address unmet medical needs for that condition. The RMAT designation makes
therapies eligible for the same actions to expedite the development and review
of a marketing application that are available to drugs that receive breakthrough
therapy designation - including increased meeting opportunities, early
interactions to discuss any potential surrogate or intermediate endpoints and
the potential to support accelerated approval. CAP-1002 is one of the few
therapies currently in development to help non-ambulant patients with DMD. To
receive the RMAT designation, we submitted data from the HOPE-Duchenne Trial.
CAP-1002 for the Treatment of Cardiac Conditions:
In previous years, we completed several trials investigating the use of CAP-1002
for the treatment of various cardiac conditions, including heart failure (the
DYNAMIC Trial) and post myocardial infarction (MI) with cardiac dysfunction
(ALLSTAR). Because of our decision to focus our efforts on DMD, we have decided
not to pursue those indications at this time, nor do we have any plans to
continue with the development of these programs although we are continuing to
evaluate certain cardiac measures in our HOPE-2 trial. We expect no further
material expenses in connection with these programs.
33
CAP-1002 - Investigator Sponsored 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. In March 2020, we were informed that the REGRESS
study was put on clinical hold by the FDA. The information we received suggested
that the issue was related to inadequate patient monitoring at the study site to
assess safety for certain patients who were experiencing adverse events after
receiving an intracoronary infusion of CAP-1002. Inadequate patient monitoring
and reporting was further discussed in additional correspondence from the FDA
which we have subsequently received from the study sponsor. It remains uncertain
as to when the FDA will release the clinical hold. It is worth noting that
Capricor did not use intracoronary infusions in its HOPE-2 trial. The second
trial is known as "Pulmonary Arterial Hypertension treated with
Cardiosphere-derived Allogeneic Stem Cells." In this trial, the investigational
product is infused into the venous system via catheter into the right atrium.
This trial is currently ongoing. In both studies, Capricor is providing 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. Due to the current COVID-19 pandemic, additional testing in the
ALPHA has been delayed and as a result, purchases of additional doses of
CAP-1002 have been delayed. Due to the clinical hold imposed on the REGRESS
trial, purchases of additional doses of CAP-1002 have been suspended.
Exosomes Program
Our exosomes program consists of exosomes derived from CDCs (CAP-2003) and
engineered exosomes, both of which are in various stages of preclinical
development. We have explored the use of our CDC-exosomes in pre-clinical
studies of inflammation and intense immune activation such as DMD, sepsis, Graft
versus-host disease (GVHD) and trauma. While CDC-exosomes are the initial
technology used in preclinical development, we have expanded Capricor's pipeline
to include additional exosome technologies. We are now focused on developing a
precision-engineered exosome platform technology that can carry defined sets of
effector molecules which exert their effects through defined mechanisms of
action. We have announced our planned expansion of our exosome platform
technology that potentially may be used for vaccine development, vesicle
mediated protein therapies and treatment of inherited diseases.
Engineered Exosomes Vaccine Platform for COVID-19
To build upon the natural ability of exosomes for intercellular communication,
we have initiated a program to engineer exosomes and load them with different
macromolecules. Our preliminary results demonstrated that it is possible to load
exosomes with specific miRNAs which pave the way to use our exosomes to
potentially deliver miRNAs to specific target tissue. We are now working on
developing exosome-based vaccines for COVID-19. While these efforts are still in
their early-stages, our exosome-based vaccine platform technology will aim to
combine the improved protection that comes from immunizing individuals with
multiple antigens in a manner that mimics the advantages of conventional virus
vaccines, with the superior safety profile of virus-free, vaccines. We are
currently designing exosome-based vaccines to elicit strong humoral and cellular
immune responses due to the simultaneous expression of antigens. We are
developing two exosome vaccine candidates. The first vaccine candidate is a
tripartite exosome/mRNA vaccine which is designed to elicit a protective,
long-lasting immune response to SARS-CoV-2 by targeting all 4
structural proteins of the virus. The second candidate is an exosomal antigen
vaccine which is a vesicle-based, nucleic acid-free formulation carrying all
structural proteins of SARS-CoV-2. We anticipate beginning animal studies using
our vaccine candidates in the second quarter 2020.
Additionally, we have entered into a Sponsored Research Agreement with Johns
Hopkins University pursuant to which researchers in the lab of Dr. Stephen Gould
will perform certain research activities in connection with our exosomes
program.
Other Indications for our Exosomes Technologies
We have promising pre-clinical data in several indications from studies done in
our labs as well as in collaboration with other companies and academic
institutions. Additionally, in July 2018, we entered into a Cooperative Research
and Development Agreement with the U.S. Army Institute of Surgical Research
(USAISR) pursuant to which we agreed to cooperate in research and development on
the evaluation of our CDC-exosomes for the treatment of trauma related injuries
and conditions which are now the third leading cause of death in the U.S.
On April 15, 2020, we filed an IND with the FDA to investigate the use of
CDC-Exosomes in patients with DMD. We will determine the next steps for this
program after receiving a response from the FDA. Our plans with respect to
commencing a trial, if approved, depend on various factors including the
availability of necessary resources and/or a partner to fund the trial.
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These programs represent our core technology and products.
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 FDA 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,
exosomes and our former product candidate, Cenderitide. As we proceed with the
clinical development of CAP-1002, and as we further develop exosomes, 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 major
sources of working capital to date have been proceeds from private and public
equity sales of securities, grants received from the NIH and the Department of
Defense, or DoD, a payment from Janssen under our now terminated Collaboration
Agreement, and a loan and grant award from CIRM. While we pursue our
pre-clinical and clinical programs, we continue to explore financing and other
strategic alternatives with respect to the Company as well as one or more of our
product candidates.
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 pre-clinical, 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 or 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 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.
Results of Operations
Revenue
Grant Income.Grant income for both of the three months ended March 31, 2020 and
2019 was approximately $0.1 million. Grant income for the first quarter of 2020
and 2019 related to the DoD Grant Award.
Miscellaneous Income. Miscellaneous income for both of the three months ended
March 31, 2020 and 2019 was approximately $0.1 million. The miscellaneous income
was related to providing cells for investigational purposes for clinical trials
sponsored by CSMC.
Operating Expenses
General and Administrative Expenses. G&A expenses for the three months ended
March 31, 2020 and 2019 were approximately $1.1 million and $1.0 million,
respectively. The increase of approximately $0.1 million in G&A expenses in the
first quarter of 2020 compared to the same period of 2019 is primarily
attributable to an increase in investor relations expenses.
35
Research and Development Expenses. R&D expenses for the three months ended March
31, 2020 and 2019 were approximately $1.2 million and $1.8 million,
respectively. The decrease of approximately $0.6 million in R&D expenses in the
first quarter of 2020 compared to the same period of 2019 is primarily due to
the timing of clinical development activities of CAP-1002 (HOPE-Duchenne, HOPE-2
and HOPE-OLE clinical trials). These activities resulted in a decrease in
expenses of approximately $0.7 million.
Products Under Active Development
CAP-1002 - CAP-1002 is in its developmental stages. We expect to spend
approximately $4.0 million to $6.0 million during 2020 on the further
development of CAP-1002 for DMD and COVID-19, which expenses are primarily
related to additional clinical, regulatory and manufacturing-related expenses.
These figures are largely dependent on the next steps in our DMD and COVID-19
program, our discussions with the FDA, our ability to secure additional funding
and our ability to secure a partner for the potential future further clinical
development of CAP-1002 for DMD, if necessary and various other factors.
Exosome Technologies - We expect to spend approximately $3.0 million to $6.0
million during 2020 on pre-clinical and other research expenses related to our
exosomes program. Capricor is currently engaged in pre-clinical testing of
exosomes as a potential vaccine for COVID-19. Additionally, we have entered into
a Sponsored Research Agreement with Johns Hopkins University for further
research related to our exosomes technologies. Further, on April 15, 2020 we
filed an IND with the FDA to investigate CAP-2003 in patients with DMD.
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;
· the costs of manufacturing our product candidates; and
· the costs, requirements and timing of, and the ability to secure, regulatory
approvals.
Liquidity and Capital Resources
The following table summarizes our liquidity and capital resources as of March
31, 2020 and December 31, 2019 and our net increase in cash, cash equivalents
and restricted cash for the three months ended March 31, 2020 and 2019, 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, 2020 December 31, 2019
Cash, cash equivalents and marketable securities $ 13,217 $ 9,885
Working capital $ 12,445 $ 9,647
Stockholders' equity $ 9,593 $ 6,839
Three months ended March 31,
Cash flow data 2020 2019
Cash provided by (used in):
Operating activities $ (1,218 ) $ (1,608 )
Investing activities 5,987 2,985
Financing activities 4,549 1,433
Net increase in cash, cash equivalents, and restricted cash $ 9,318 $ 2,810
36
Our total cash, cash equivalents and marketable securities as of March 31, 2020
was approximately $13.2 million compared to approximately $9.9 million as of
December 31, 2019. The increase in cash, cash equivalents and marketable
securities from December 31, 2019 as compared to March 31, 2020 is due to net
financing activities of approximately $4.5 million and a net loss of
approximately $2.1 million for the three months ended March 31, 2020. As of
March 31, 2020, we had approximately $4.7 million in total liabilities and
approximately $12.4 million in net working capital.
Cash used in operating activities was approximately $1.2 million and $1.6
million for the three months ended March 31, 2020 and 2019, respectively. The
difference of approximately $0.4 million in cash used in operating activities is
primarily due to a decrease of $0.4 million in net loss for the three months
ended March 31, 2020 as compared to the same period in 2019. Furthermore, there
was an increase of approximately $0.1 million in accounts payable and accrued
liabilities and a decrease of approximately $0.1 million in prepaid expenses and
other current assets for the three months ended March 31, 2020 as compared to
the same period in 2019. 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 pre-clinical
studies and clinical trials, we expect to continue incurring substantial losses,
which will generate negative net cash flows from operating activities.
We had cash flow provided by investing activities of approximately $6.0 million
and $3.0 million for the three months ended March 31, 2020 and 2019,
respectively. The increase in cash provided by investing activities for the
three months ended March 31, 2020 as compared to the same period of 2019 is
primarily due to the net effect from purchases, sales, and maturities of
marketable securities.
We had cash flow provided by financing activities of approximately $4.5 million
and $1.4 million for the three months ended March 31, 2020 and 2019,
respectively. The increase in cash provided by financing activities for the
three months ended March 31, 2020 is primarily due to the approximate $4.5
million in net proceeds received from the warrant inducement offer in March
2020.
From inception through March 31, 2020, we financed our operations primarily
through private and public sales of our equity securities, NIH and DoD grants, a
payment from Janssen, a CIRM loan and a CIRM grant award. As we have not
generated any revenue from the commercial sale of our products to date, and we
do not expect to generate revenue for several years, if ever, we will need to
raise substantial additional capital in order to fund our immediate general
corporate activities and, thereafter, 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. 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 pre-clinical and clinical development
activities;
· the progress of the development efforts of parties with whom we have entered
into research and development agreements;
· the costs of manufacturing our product candidates;
· 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.
37
As a result of the spread of the COVID-19 coronavirus, uncertainties have arisen
that could potentially impact enrollment of clinical trials, deliverables
related to contract performance, payments from trial sponsors, workforce
stability, supply chain disruptions or delays, timing of grant disbursements as
well as other potential business operations. While the disruption is currently
expected to be temporary, there is considerable uncertainty around its expected
duration. In addition to potential impact on grant disbursements, there may be
risks to the Company's ability to obtain financing from other sources, due to
the impact of the coronavirus. There could be other financial impacts on our
business of the coronavirus, the specifics of which are unknown at this time.
Financing Activities by the Company
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 July 2019 Sales Agreement, which 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 July 2019 ATM Program were issued pursuant to
our shelf registration statement on Form S-3 (File No. 333-227955), which was
initially filed with the SEC on October 24, 2018, amended on July 17, 2019 and
declared effective by the SEC on July 18, 2019. Since May 4, 2020 and through
the May 13, 2020, the Company has sold an aggregate of 1,800,000 shares of
common stock under the May 2020 ATM Program at an average price of approximately
$7.34 per share for gross proceeds of approximately $13.2 million. The Company
paid cash commissions on the gross proceeds, plus reimbursement of expenses of
the placement agent and legal fees in the aggregate amount of approximately $0.4
million.
March 2020 Warrant Inducement. On March 25, 2020, the Company entered into a
letter agreement, or the Exercise Agreement, with a holder of December 2019
Common Warrants (as defined below), or the Exercising Holder. Pursuant to the
Exercise Agreement, in connection with the exercise by the Exercising Holder of
the remaining 4,000,000 December 2019 Common Warrants held by the Exercising
Holder which had not been previously exercised, the Company agreed to issue
4,000,000 additional warrants, or the New Warrants, to purchase Common Stock.
The December 2019 Common Warrants had a per share exercise price of $1.10, and
pursuant to the Exercise Agreement, the Exercising Holder agreed to pay $1.225
per share to cover both the exercise price of the December 2019 Common Warrants
and a $0.125 per share purchase price for the New Warrants. The New Warrants
have an exercise price of $1.27 per share.
The New Warrants and the shares of Common Stock issuable upon the exercise of
the New Warrants have not been registered under the Securities Act of 1933, as
amended, or the Securities Act, and were offered pursuant to the exemption
provided in Section 4(a)(2) under the Securities Act or Rule 506(b) promulgated
thereunder. The New Warrants are exercisable immediately upon issuance, and have
a term of exercise of 5 1/2 years.
The Company received aggregate gross proceeds of approximately $4.9 million from
the exercise of the December 2019 Common Warrants by the Exercising Holder.
These gross proceeds were reduced by fees due and payable to the placement agent
for the transactions pursuant to the Exercise Agreement and New Warrants in the
amount of $343,000, and further reduced by reimbursements to the placement agent
for legal fees and other expenses. In addition, certain employees of the
placement agent received new warrant, or the March 2020 Placement Agent
Warrants, for shares of Common Stock equal to 5.0% of the New Warrants issued,
or 200,000 shares. These March 2020 Placement Agent Warrants are exercisable
immediately and have a term of exercise of 5 years. The holders of each of the
New Warrants and of the March 2020 Placement Agent Warrants have the option to
make a cashless exercise of such warrant if no resale registration statement
covering the shares of the Company's Common Stock underlying such warrant is
effective after six months.
December 2019 Public Offering. In December 2019, the Company completed a public
offering (the December Offering), pursuant to which the Company issued (i)
531,173 shares of its common stock, (ii) warrants, or the December 2019 Common
Warrants, to purchase up to 4,139,477 shares of common stock, and (iii)
pre-funded warrants to purchase up to 3,608,304 shares of common stock, at a
combined purchase price of $1.226 per share and associated common warrant and
$1.225 per pre-funded warrant and associated common warrant for an aggregate
purchase price of approximately $5.1 million. The Company issued (a) to each
purchaser of shares in the December Offering a common warrant to purchase a
number of shares of common stock equal to the number of shares purchased by such
purchaser in the December Offering, and (b) to each purchaser of pre-funded
warrants in the December Offering a common warrant to purchase a number of
shares of common stock equal to the number of pre-funded warrant shares
underlying the pre-funded warrants purchased by such purchaser in the December
Offering. All shares and warrants issued pursuant to the December Offering,
other than the Placement Agent Warrants, were issued pursuant to our
registration statement on Form S-1 (File No. 333-235358), which was initially
filed with the Securities and Exchange Commission, or the SEC, on December 5,
2019, amended on December 13, 2019 and declared effective by the SEC on December
17, 2019. Fees paid in conjunction with the deal, which included placement agent
commissions, management fees, legal costs, and other offering expenses, amount
to approximately $0.7 million in the aggregate and were recorded as a reduction
to additional paid-in capital, resulting in net proceeds of approximately $4.4
million. Since December 19, 2019 and through the date of this filing, all
3,608,304 pre-funded warrants and 78,304 common warrants have been exercised.
38
August 2019 ATM Program. On August 29, 2019, the Company initiated an
at-the-market offering under a prospectus supplement for aggregate sales
proceeds of up to $1.95 million, or the August 2019 ATM Program, with the common
stock to be distributed at the market prices prevailing at the time of sale. The
August 2019 ATM Program was established under a Common Stock Sales Agreement, or
the July 2019 Sales Agreement, with Wainwright under which we may, from time to
time, issue and sell shares of our common stock through Wainwright as sales
agent. The July 2019 Sales Agreement provides that Wainwright is entitled to
compensation for its services at a commission rate of 3.0% of the gross sales
price per share of common stock sold. All shares issued pursuant to the August
2019 ATM Program have been and will be issued pursuant to our shelf registration
statement on Form S-3 (File No. 333-227955), which was initially filed with the
SEC, on October 24, 2018, amended on July 17, 2019 and declared effective by the
SEC on July 18, 2019. Since August 29, 2019 and through the date of filing, the
Company has sold an aggregate of 360,316 shares of common stock under the August
2019 ATM Program at an average price of approximately $3.07 per share for gross
proceeds of approximately $1.1 million. The Company paid cash commissions on the
gross proceeds, plus reimbursement of expenses of the placement agent and legal
fees in the aggregate amount of approximately $0.1 million. As of May 4, 2020,
the August 2019 ATM Program has expired and been replaced with the May 2020 ATM
Program.
July 2019 ATM Program. On July 22, 2019, the Company initiated an at-the-market
offering under a prospectus supplement for aggregate sales proceeds of up to
$1.8 million, or the July 2019 ATM Program, with the common stock to be
distributed at the market prices prevailing at the time of sale. The July 2019
ATM Program was established under the July 2019 Sales Agreement, which 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 July 2019 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. As of the expiration of the July
2019 ATM Program, the Company sold an aggregate of 418,450 shares of common
stock under the July 2019 ATM Program at an average price of approximately $4.30
per share for gross proceeds of approximately $1.8 million. The Company paid
cash commissions on the gross proceeds, plus reimbursement of expenses of the
placement agent and legal fees in the aggregate amount of approximately $0.1
million.
October 2017 Common Stock Sales Agreement. On October 19, 2017, the Company
entered into a Common Stock Sales Agreement, or the October 2017 Sales
Agreement, with Wainwright, under which it could, from time to time, issue and
sell shares of our common stock through Wainwright as sales agent in an
at-the-market offering under a prospectus supplement for aggregate sales
proceeds of up to $14.0 million, or the October 2017 ATM Program. The common
stock was distributed at the market prices prevailing at the time of sale. The
October 2017 Sales Agreement provided that Wainwright would 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 October
2017 ATM Program were issued pursuant to our shelf registration statement on
Form S-3 (File No. 333-207149), which was initially filed with the SEC on
September 28, 2015 and declared effective by the SEC on October 26, 2015. As of
the expiration of the October 2017 ATM Program on April 23, 2019, the Company
sold an aggregate of 899,233 shares of common stock at an average price of
approximately $13.04 per share for gross proceeds of approximately $11.7
million. The Company paid cash commissions on the gross proceeds, plus
reimbursement of expenses of the placement agent and legal fees in the aggregate
amount of approximately $0.4 million.
Financing Activities by Capricor, Inc.
CIRM Grant Award
On June 16, 2016, Capricor entered into the CIRM Award with CIRM in the amount
of approximately $3.4 million to fund, in part, Capricor's Phase I/II
HOPE-Duchenne clinical trial investigating CAP-1002 for the treatment of
Duchenne muscular dystrophy-associated cardiomyopathy. 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.
39
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 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.
As of March 31, 2020, Capricor's liability balance for the CIRM Award was
approximately $3.4 million. 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.
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 June 30, 2019, approximately $0.7 million has been incurred under the
terms of the NIH grant award. In the second quarter of 2019, the award was
closed and all filings were completed with no additional expenses expected to be
incurred.
U.S. Department of Defense Grant Award
In September 2016, Capricor was approved for a grant award from the DoD 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
three years, subject to annual and quarterly reporting requirements. The Company
was granted a no-cost extension until September 29, 2020 to be able to continue
to utilize these funds. As of March 31, 2020, approximately $2.3 million has
been incurred under the terms of the award.
Contractual Obligations and Commitments
We are a smaller reporting company, as defined by Rule 12b-2 of the Securities
Exchange Act of 1934, as amended, and are not required to provide the
information required under this item.
Off-Balance Sheet Arrangements
There were no off-balance sheet arrangements as described by Item 303(a)(4) of
Regulation S-K as of March 31, 2020.
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.
40
Leases
Effective January 1, 2019, the Company adopted ASC 842, using the optional
transition method utilizing the effective date as its date of initial
application, for which prior periods are presented in accordance with the
previous guidance in ASC 840.
At the inception of an arrangement, the Company determines whether the
arrangement is or contains a lease based on the unique facts and circumstances
present in the arrangement. Leases with a term greater than 12 months are
recognized on the balance sheet as right of use assets and short-term and
long-term lease liabilities, as applicable. The Company has elected not to
recognize on the balance sheet leases with terms of 12 months or less. The
Company typically only includes an initial lease term in its assessment of a
lease arrangement. Options to renew a lease are not included in the Company's
assessment unless there is reasonable certainty that the Company will renew. The
Company monitors its plans to renew its leases no less than on a quarterly
basis. In addition, the Company's lease agreements generally do not contain any
residual value guarantees or restrictive covenants.
Operating lease liabilities and their corresponding right of use assets are
recorded based on the present value of future lease payments over the expected
remaining lease term at lease commencement. Lease cost for operating leases is
recognized on a straight-line basis over the lease term as an operating expense.
Certain adjustments to the right of use asset may be required for items such as
lease prepayments or incentives received. 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. In transition to ASC 842, the Company utilized the remaining lease
term of its leases in determining the appropriate incremental borrowing rate.
In accordance with ASC 842, components of a lease should be bifurcated between
lease components and non-lease components. The fixed and in-substance fixed
contract consideration identified must then be allocated based on the respective
relative fair values to the lease components and non-lease components. However,
ASC 842 provides a practical expedient that allows an accounting policy election
to not separate lease and non-lease components by class of underlying asset. In
using this expedient, the lease component and non-lease components are accounted
for together as a single component. For real estate leases, the Company has
elected 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
For contracts completed as of December 31, 2017, revenue was recognized in
accordance with ASC 605 and other standards which have been superseded for
subsequent fiscal years. The Company applied ASU 606 using the modified
retrospective approach for all contracts in process as of January 1, 2018.
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. 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.
41
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 pre-clinical, 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. 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 three stock option plans: (i)
the 2006 Stock Option Plan, (ii) the 2012 Restated Equity Incentive Plan (which
superseded the 2006 Stock Option Plan), and (iii) the 2012 Non-Employee Director
Stock Option Plan. In addition, the Board has approved the 2020 Equity Incentive
Plan, or the 2020 Plan; however, the 2020 Plan will not become effective unless
and until it is approved by the stockholders of the Company. We will submit the
2020 Plan for stockholder approval at the 2020 annual meeting.
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. 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.
42
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.
Restricted Cash
Prior to March 31, 2019, restricted cash represented funds received under the
CIRM Award. Restricted cash funds were allocated to the research costs as
incurred. Generally, a reduction of restricted cash occurs when the Company
deems certain costs are attributable to the respective award. The Company fully
utilized the CIRM Award in June 2019.
In April 2019, the Company entered into a letter of credit as a security deposit
for its lease agreement for corporate office space. The Company delivered to the
landlord a letter of credit in the amount of $232,803 to cover payments of rent
for the remainder of the 2019 lease term, which was subsequently cancelled and
the funds were returned to Capricor. As such, no restricted cash is recorded as
of March 31, 2020.
Clinical Trial Expense
As part of the process of preparing our consolidated financial statements, we
are required to estimate our accrued expenses. Our clinical trial accrual
process is designed to account for expenses resulting from our obligations under
contracts with vendors, consultants, and CROs and clinical site agreements in
connection with conducting clinical trials. The financial terms of these
contracts are subject to negotiations, which vary from contract to contract and
may result in payment flows that do not match the periods over which materials
or services are provided to us under such contracts. Our objective is to reflect
the appropriate clinical trial expenses in our consolidated financial statements
by matching the appropriate expenses with the period in which services are
provided and efforts are expended. We account for these expenses according to
the progress of the trial as measured by patient progression and the timing of
various aspects of the trial. We determine accrual estimates through financial
models that take into account discussion with applicable personnel and outside
service providers as to the progress or state of completion of trials, or the
services completed. 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 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic
808): clarifying the interaction between Topic 808 and Topic 606. The amendments
in the update clarifies that certain transactions between collaborative
arrangement participants should be accounted for as revenue under Topic 606 when
the collaborative arrangement participant is a customer in the context of a unit
of account; adds unit-of-account guidance in Topic 808 to align with the
guidance in Topic 606 when an entity is assessing whether the collaborative
arrangement or a party of the arrangement is within the scope of Topic 606;
requires that in a transaction with a collaborative arrangement participant that
is not directly related to sales to third parties, presenting the transaction
together with revenue recognized under Topic 606 is precluded if the
collaborative arrangement participant is not a customer. The amendments for this
update are effective for fiscal years beginning after December 15, 2019, and
interim periods within those fiscal years. The Company adopted ASU 2018-18 and
all subsequent updates related to this topic in the first quarter of 2020. The
adoption of this update did not have a material impact on the Company's
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 consolidated financial
statement presentation or disclosures.
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