Overview

Capricor Therapeutics, Inc. (CAPR) is a clinical-stage biotechnology company focused on the discovery, development and commercialization of first-in-class biological therapies for the treatment of diseases, with a focus on Duchenne muscular dystrophy, or DMD, and other medical conditions.

Capricor Therapeutics was originally incorporated in Delaware in August 2005 under the name Nile Pharmaceuticals, Inc. and the company changed its name to Nile Therapeutics, Inc., or Nile, in January 2007. On November 20, 2013, pursuant to that certain Agreement and Plan of Merger and Reorganization dated as of July 7, 2013, as amended by that certain First Amendment to Agreement and Plan of Merger and Reorganization dated as of September 27, 2013, or as amended, the Merger Agreement, by and among Nile, Nile’s wholly-owned subsidiary, Bovet Merger Corp., a Delaware corporation, or Merger Sub, and Capricor, Inc., or Capricor, Merger Sub merged with and into Capricor and Capricor became a wholly-owned subsidiary of Nile (referred to herein as the Merger). Immediately prior to the effective time of the merger, and in connection therewith, Nile filed certain amendments to its certificate of incorporation which, among other things  effected a 1-for-50 reverse split of its common stock, (ii) changed its corporate name from “Nile Therapeutics, Inc.” to “Capricor Therapeutics, Inc.,” and (iii) effected a reduction in the total number of authorized shares of common stock from 100,000,000 to 50,000,000, and a reduction in the total number of authorized shares of preferred stock from 10,000,000 to 5,000,000.

Capricor, its wholly-owned subsidiary, was founded in 2005 as a Delaware corporation based on the innovative work of its founder, Eduardo Marbán, M.D., Ph.D., and his collaborators. First located in Baltimore, Maryland, adjacent to The Johns Hopkins University, or JHU, where Dr. Marbán was chief of cardiology, Capricor moved to Los Angeles, California in 2007 when Dr. Marbán became Director of the Heart Institute at Cedars-Sinai Medical Center, or CSMC. Capricor’s laboratories and manufacturing facilities are located in space that Capricor leases from CSMC.

Strategy

The company's strategy is to discover, develop and commercialize first-in-class biological therapies for the treatment of diseases. The company's drug candidates in active development consist of CAP-1002 (allogeneic cardiosphere-derived cells, or CDCs) and CAP-2003 (CDC extracellular vesicles, including exosomes).

Capricor Therapeutics is currently developing CAP-1002 for the treatment of DMD. To date, Capricor Therapeutics has completed the HOPE-Duchenne Phase I/II clinical trial in subjects with DMD, the DYNAMIC trial, a Phase I clinical trial of CAP-1002 in subjects with advanced heart failure, and the ALLSTAR trial, a Phase I/II clinical trial of CAP-1002 in subjects who have suffered a myocardial infarction, or MI, which is commonly known as a heart attack.

Capricor Therapeutics is developing CAP-2003 for the treatment of certain cardiac and inflammatory conditions. CAP-2003 is currently in pre-clinical development.

Programs represent its core technology and products.

Background on Duchenne Muscular Dystrophy

DMD is a rare form of muscular dystrophy which results in muscle degeneration and premature death. DMD affects approximately 1 in 3,600 male infants worldwide, and it is estimated that approximately 15,000 to 20,000 boys and young men are living with the disease in the United States. DMD results from the lack of functional dystrophin protein caused by a gene mutation. The lack of dystrophin, an important structural component of muscle cells, causes them to have increased susceptibility to damage and to progressively die. Additionally, the absence of dystrophin in muscle cells leads to significant cell damage and ultimately causes muscle cell death and fibrotic replacement. In DMD patients, heart muscle cells progressively die and are replaced with scar tissue. This cardiomyopathy eventually leads to heart failure, which is currently the leading cause of death among those with DMD.

Patients with DMD experience progressive muscle weakness starting at an early age, generally loss of ambulation occurs after the first decade of life, and eventual respiratory and cardiac failure. Their lifespan is abbreviated and averages less than three decades. The annual cost of care for patients with DMD is very high and increases with disease progression. The company therefore believe that DMD represents a significant market opportunity for its lead product candidate.

Technologies

Cardiosphere-Derived Cells

The company's core therapeutic technology is based on the cardiosphere-derived cell, or CDC, a type of cardiac progenitor cell that composes a minor fraction of the cardiac muscle cell population and was first identified in the academic laboratory of Capricor’s scientific founder, Dr. Eduardo Marbán. Since the initial report in 2007, CDCs have been the subject of over 100 peer-reviewed scientific publications and have been administered to approximately 140 human subjects across several clinical trials. CDCs have been shown to exert potent immunomodulatory activity and alters the immune system’s activity to encourage cellular regeneration. Capricor Therapeutics is currently developing allogeneic CDCs (CAP-1002) as a product candidate for the treatment of Duchenne muscular dystrophy 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.

In a variety of experimental models of heart injury, CDCs have been shown to stimulate cell proliferation and blood vessel growth, to inhibit programmed cell death and scar formation, and to attract native progenitor cells to the site of injury. Recently 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 seen in Capricor’s HOPE-Duchenne Phase I/II trial 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-assembling multicellular clusters which contain both primitive cells and committed progenitors for the three major cell types present in the heart. The relatively large size of CSps makes them less suitable than CDCs for intracoronary or intravenous route of administration. 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. Additionally, in pre-clinical studies, it has been shown that intravenous administration of CDCs increases exercise capacity and diaphragmatic function in an animal model of DMD.

While CSps and their respective CDCs may 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 methods are focused on producing therapeutic doses of CDCs to boost the regenerative capacity of the heart and skeletal muscle, 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 these product candidates.

Cardiosphere-Derived Cell Exosomes

Extracellular vesicles, is an all-encompassing term for cell-derived vesicles, including exosomes and microvesicles, as well as the polynucleotides contained therein. Exosomes are nano-sized, membrane-enclosed vesicles, or “bubbles” that are secreted by essentially all cells and contain bioactive molecules, including proteins, RNAs and microRNAs. They act as messengers to regulate the functions of neighboring cells, and pre-clinical research has shown that exogenously-administered exosomes can direct or, in some cases, re-direct cellular activity, thereby supporting their therapeutic potential. Their size, ease of crossing cell membranes, and ability to communicate in native cellular language makes them an exciting, emerging class of potential therapeutic agents. Exosomes are a cell-free substance and may be stored, handled, reconstituted, and administered in similar fashion to common biopharmaceutical products such as antibodies.

Exosomes secreted by CDCs, or CDC exosomes, are capable of producing the effects observed with CDCs themselves, including anti-inflammatory, pro-angiogenic, anti-apoptotic, and anti-fibrotic effects. In pre-clinical models of ischemic heart disease, CDC exosomes prompt myocardial regeneration as well as various structural and functional improvements within the heart. These findings suggest that CDC exosomes may serve as a critical mediator of the actions of CDCs, and support the concept of their development as a therapeutic agent. Capricor Therapeutics is currently engaged in pre-clinical studies investigating the use of CDC extracellular vesicles as a potential product candidate for the treatment of certain cardiac and inflammatory conditions.

Drug Candidates

Product Candidates

The company currently have four drug candidates, two of which are in various stages of active development. The company's current research and development efforts are focused on CAP-1002 and CAP-2003. CAP-1002 is the subject of three clinical trials, in which the patients are in long-term follow-up. CAP-1002 is also currently being investigated in two additional trials sponsored by CSMC, which are the REGRESS trial investigating heart failure with preserved ejection fraction and the ALPHA trial investigating pulmonary arterial hypertension. Although, Capricor Therapeutics is not the sponsor of these trials, Capricor Therapeutics is providing the CAP-1002 investigational product for use in the trials. Capricor Therapeutics is now enrolling a new clinical trial of CAP-1002 in patients with DMD called HOPE-2. Capricor Therapeutics is evaluating CAP-2003 in pre-clinical studies for the treatment of various indications. CAP-1001 (autologous CDCs) was the subject of the CSMC and JHU-sponsored Phase I CADUCEUS trial and is not in active development. Both CAP-1002 and CAP-1001 are derived from cardiospheres, or CSps, and the company do not plan to develop CSps as a therapeutic.

CAP-1002

CAP-1002 for the Treatment of Duchenne Muscular Dystrophy

Based on its understanding of the mechanism of action of CAP-1002 which has been seen in pre-clinical models of DMD, the company 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 to 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, has been shown to increase exercise capacity and diaphragmatic function.

Phase II HOPE-2 Clinical Trial

Capricor Therapeutics has recently initiated enrollment of its HOPE-2 clinical trial. The clinical trial will 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 on a stable regimen of systemic glucocorticoids.

HOPE-2 is a randomized, double-blind, placebo-controlled clinical trial which will be conducted at approximately 10-15 sites located in the United States. It will enroll approximately 84 boys and young men with Duchenne muscular dystrophy. Participants will receive four doses of CAP-1002 or placebo – once every three months – over a one-year period.

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.

In June 2017, the company 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 Biologics License Application, or BLA.

The primary efficacy endpoint will be 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 will be measured through a validated test for skeletal muscle function in DMD called the Performance of the Upper Limb, or PUL, test. The PUL test is an outcomes instrument that was specifically designed to assess upper limb function in ambulant and non-ambulant patients with DMD. HOPE-2 will focus on the mid-level dimension of the PUL – or the ability to use muscles from the elbow to the fingers, which are essential for operating wheelchairs and performing other daily functions. HOPE-2 will measure the change from the beginning of the trial, or baseline, to Month 12. In HOPE-2, the company also include additional secondary and exploratory endpoints which include cardiac function, pulmonary function testing, quality of life and additional measures. Enrollment commenced in April 2018. An interim analysis is planned to assess futility. The 12-month results are anticipated to be available in the first half of 2020. The timing of both analyses will be dependent on enrollment rates and various other factors.

Phase I/II HOPE-Duchenne Clinical Trial

Capricor Therapeutics has 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 is being funded in part through a grant award from the California Institute for Regenerative Medicine, or CIRM.

The company commenced the HOPE-Duchenne trial in February 2016 and completed enrollment in September 2016. In April 2017, the company reported positive top-line results from a pre-specified six-month interim analysis of this study, which showed that CAP-1002 was generally safe and well-tolerated over the initial six-month follow-up period. The six-month results were presented at the 22nd Annual International Congress of the World Muscle Society in October 2017.

In exploratory efficacy analyses, observed changes from baseline to Month 6 significantly differed by treatment group for systolic thickening of the inferior wall of the heart as measured by MRI (p=0.03). In a post-hoc analysis of function of the mid- and distal-level upper limb in which a responder was defined as a patient who demonstrated a 10% improvement from baseline in score on the PUL test, CAP-1002 patients were more likely to be responders than patients in usual care (p=0.045) at Week 6. In addition, numerical results in some other cardiac and skeletal muscle measures, including cardiac scar (p=0.09), were consistent with a treatment effect although differences between treatment groups were not statistically significant. The observed clinical results appear to generally corroborate a large body of pre-clinical data from studies in DMD animal models.

The company reported its 12-month data 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). 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).

To assess cardiac structure and function, investigators used magnetic resonance imaging, or MRI. They found significant improvements in systolic thickening of the left ventricular wall among those patients treated with CAP-1002. Systolic wall thickening is the component of myocardial contraction ultimately responsible for ejection of blood from the left ventricle. Preservation or enhancement of systolic wall thickening may potentially be the result of the reversal of fibrosis.

In the inferior wall, they recorded a mean (SD) 31.2% (47.0%) increase in thickening six months after treatment and a mean 25.8% (46.7%) increase in thickening 12 months after treatment. In comparison, the usual care group showed a mean 8.8% (27.7%) decrease at six months and a mean 1.6% (37.9%) increase at 12 months in the systolic thickening of the inferior wall. The difference between the groups in absolute change from baseline to six months achieved statistical significance (p=0.04) and trended in favor of CAP-1002 treatment group (p=0.09) from baseline to 12 months.

Investigators also found that scarring of the heart muscle among those treated with CAP-1002 decreased relative to the control group. Progressive cardiac scarring eventually impairs the heart's pumping ability and is currently the leading cause of death in Duchenne muscular dystrophy. At the 12-month follow-up, those treated with CAP-1002 had a mean (SD) 7.1% (10.3%) reduction in scar size, in contrast to a mean 4.8% (22.3%) increase in scar size in the usual care group, a difference that achieved statistical significance using non-parametric analysis to account for outliers (p=0.03).

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. Those patients who did not receive CAP-1002 during the HOPE-Duchenne trial may be eligible to receive CAP-1002 as part of the open label extension now that all participants have completed the controlled portion of the trial.

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, the company were notified by the FDA Office of Tissues and Advanced Therapies, that the company 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 Duchenne muscular dystrophy. To receive the RMAT designation, the company submitted data from the HOPE-Duchenne Trial.

CAP-1002 for the Treatment of Cardiac Conditions

Phase I/II ALLSTAR Clinical Trial

The Phase I portion of the ALLSTAR trial was a 14-patient, open-label, dose-escalation study that was conducted to evaluate the clinical safety of CAP-1002 in patients who had experienced a large heart attack and who had residual cardiac dysfunction. Each patient received a single infusion of CAP-1002 into the coronary artery most closely associated with the location of their MI, at a dose level of either 12.5 million or 25 million cells. The primary safety endpoints focused on the potential adverse effects of CAP-1002 delivery, including potential immunologic consequences of infusing cells that had originated from an unrelated donor. Event rates observed for each of the four pre-specified safety endpoints (acute myocarditis possibly attributable to CAP-1002; death due to ventricular tachycardia or ventricular fibrillation; sudden death; and major adverse cardiac events) were 0% over one and 12 months following CAP-1002 infusion.

This Phase I study was funded in large part by a grant received from the National Institutes of Health, or NIH.

Capricor began enrollment of the Phase II ALLSTAR study in the first quarter of 2014. This randomized, double-blind, placebo-controlled trial was designed to determine if treatment with CAP-1002 can reduce scar size in patients who have suffered an MI and other endpoints. At the time of randomization, patients were stratified into one of two cohorts according to the time since the occurrence of their MI (either 30 to 90 days after the MI, or greater than 90 days up to one-year after the MI). Following infusion, patients were to be followed for periodic evaluations over the course of one year. Patients were randomized in a 2:1 ratio to receive an infusion of CAP-1002 (25 million cells) or placebo, respectively, into the coronary artery most closely associated with the region of their MI. The trial was powered to detect a reduction in scar size, relative to placebo, as measured by MRI at the 12-month follow-up. In addition to evaluating CAP-1002 according to changes in scar size, ALLSTAR also evaluated CAP-1002 according to a variety of clinical and quality of life endpoints. The Phase II portion of the ALLSTAR trial was funded in large part through the support of CIRM.

In October 2016, the company announced completion of enrollment of the Phase II portion of the ALLSTAR trial in which 142 subjects were randomized to the active or control treatment groups in a 2:1 ratio, respectively, and of whom 134 received a single infusion of either CAP-1002 or placebo into the infarct-associated coronary artery. Patients in the trial were enrolled at approximately 30 centers in the United States and in Canada.

In May 2017, the company announced that a pre-specified administrative interim analysis performed on six-month follow-up data from the ALLSTAR trial demonstrated a low probability (futility) of achieving a statistically-significant difference in the 12-month primary efficacy endpoint of percent change from baseline infarct size as a percentage of left ventricular mass, measured by cardiac MRI. At six months, a near-statistically-significant (p=0.05) reduction of mean end-diastolic volume, as well as a trend of reduction of mean end-systolic volume, were seen in the CAP-1002 treatment group. There was no notable difference between treatment groups with respect to the change in ejection fraction. There were no safety signals in the CAP-1002 treatment cohort. Based on the results of the interim analysis, the company elected to forego further MRI analyses and transition all patients in ALLSTAR to long-term follow-up.

Phase I/II DYNAMIC Clinical Trial

The Phase I/II DYNAMIC trial, of which the Phase I portion has concluded, was designed to evaluate the safety and efficacy of CAP-1002 in the treatment of patients with advanced heart failure resulting from dilated cardiomyopathy of either ischemic or non-ischemic origin. This condition is characterized by chronic structural and functional abnormalities present throughout the heart’s contractile tissue. In the DYNAMIC trial, CAP-1002 was infused into all three main coronary arteries to obtain broad exposure. Following infusion, patients were followed for one year. The trial was funded in part through a grant award from the NIH.

The company initiated the open-label, dose-escalating Phase I portion of the DYNAMIC trial in December 2014 at a single center, CSMC, and in April 2015, completed enrollment with 14 patients with New York Heart Association, or NYHA, Class III heart failure. Each patient was administered CAP-1002 via a one-time, triple coronary infusion at one of several evenly-divided dose levels (37.5 million, 50 million, 62.5 million, or 75 million cells total). Initial top-line six-month results were presented at the American Heart Association’s Annual Scientific Sessions in November 2015. Multi-vessel intracoronary infusion of CAP-1002 in subjects with dilated cardiomyopathy was shown to be safe in this study with no major adverse cardiac events reported at one month or at six months post-infusion. Although this trial was intended as a safety study, the six-month data demonstrated encouraging and congruent preliminary efficacy signals in multiple parameters, including ejection fraction, ventricular volumes, exercise capacity and subjective well-being.

In June 2016, Capricor reported positive 12-month data from the DYNAMIC study. For the 12 patients available for follow-up at one year, improvements from baseline in key cardiac function and dimensional indices that had been observed at six months were directionally maintained. Importantly, the change in median left ventricular ejection fraction from baseline to 12 months maintained its level of statistical significance that was shown at six months (p=0.02 at both time points) and, on an absolute basis, continued to improve from six to 12 months. Of the five NYHA Class III subjects who received the highest dose of CAP-1002 (75 million cells), two subjects improved by two Classes (to Class I) and three improved by one Class (to Class II) at six months. At 12 months, three of these five subjects were assessed as Class I and two as Class II, demonstrating further improvement and indicating durability of the benefit of CAP-1002 on heart failure status for as long as one year following administration. CAP-1002 infusion was well-tolerated in DYNAMIC. Two of the 14 patients, who were in the lower two of the four dose cohorts, died from progressive heart failure approximately one and three months prior to study conclusion. Although Capricor Therapeutics has designed a Phase II study to evaluate CAP-1002 in the heart failure population, at this time, Capricor Therapeutics has no plans to conduct the Phase II portion of the DYNAMIC trial.

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. The second trial is known as “Pulmonary Arterial Hypertension treated with Cardiosphere-derived Allogeneic Stem Cells.” In both studies, Capricor will provide the necessary number of doses of cells and will receive a negotiated amount of monetary compensation which is estimated to be approximately $2.1 million over several years.

CAP-2003:

Exosomes, a form of extracellular vesicles, are nano-scale, membrane-enclosed extracellular vesicles, or “bubbles” that are secreted by cells and contain bioactive molecules, including proteins, RNAs and microRNAs. They act as messengers to regulate the functions of neighboring cells, and pre-clinical research has shown that exogenously-administered exosomes can direct or, in some cases, re-direct cellular activity, supporting their therapeutic potential. Their size, ease of crossing cell membranes, and ability to communicate in native cellular language makes them an exciting class of potential therapeutic agents.

CAP-2003 is comprised of exosomes secreted by CDCs which are believed to mediate many of the effects that are observed with the CDCs, including anti-inflammatory, pro-angiogenic, anti-apoptotic, and anti-fibrotic effects. Capricor Therapeutics is currently conducting studies in pre-clinical models of cardiac, inflammatory and other conditions to explore the possible therapeutic benefits that CAP-2003 may possess. Capricor Therapeutics is evaluating CAP-2003 in pre-clinical studies that would potentially enable an IND for the treatment of various indications, including hypoplastic left heart syndrome, or HLHS. It is unknown at this time when an IND will be submitted for any particular indication.

Inactive or Discontinued Product Candidates

CAP-1001:

CAP-1001 consists of autologous CDCs. This product candidate was evaluated in the randomized, double-blind, placebo-controlled Phase I CADUCEUS clinical trial in patients who had recently experienced an MI. The study was sponsored and conducted by CSMC in collaboration with JHU. At present, there is no plan for another clinical trial for CAP-1001.

CSps:

CSps are a 3D micro-tissue from which CDCs are derived, and have shown significant healing effects in pre-clinical models of heart failure. While the company consider CSps an important asset, at present there is no plan to develop CSps as a therapeutic agent.

Natriuretic Peptides:

In February 2017, the company elected to terminate its former natriuretic peptide development program, consisting of Cenderitide (CD-NP) and CU-NP, so as to more efficiently focus its resources and efforts on its CAP-1002 and CAP-2003 programs.

Financial Operations Overview

Capricor Therapeutics has no commercial product sales to date and will not have the ability to generate any commercial product revenue until after Capricor Therapeutics has received approval from the FDA or equivalent foreign regulatory bodies to begin selling its pharmaceutical product candidates. Developing pharmaceutical products is a lengthy and very expensive process. Even if the company obtain the capital necessary to continue the development of its product candidates, whether through a strategic transaction or otherwise, the company do not expect to complete the development of a product candidate for several years, if ever. To date, most of its development expenses have related to its product candidates, consisting of CAP-1002, CAP-2003 and its former product candidate, Cenderitide. As the company proceed with the clinical development of CAP-1002, and as the company further develop CAP-2003 and other additional products, its expenses will further increase. To the extent that Capricor Therapeutics is successful in acquiring additional product candidates for its development pipeline, its need to finance further research and development activities will continue to increase. Accordingly, its success depends not only on the safety and efficacy of its product candidates, but also on its ability to finance the development of the products and its clinical programs. The company's major sources of working capital to date have been proceeds from private and public equity sales, grants received from the NIH and the Department of Defense, or DoD, a payment from Janssen and a loan and grant award from CIRM.

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 its 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.

The company's results have included non-cash compensation expense due to the issuance of stock options and warrants, as applicable. The company expense the fair value of stock options and warrants over their vesting period as applicable. When more precise pricing data is unavailable, the company 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 its 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. The company expect to record additional non-cash compensation expense in the future, which may be significant.

Liquidity and Capital Resources

The company's total cash and cash equivalents, not including restricted cash, as of March 31, 2018 was approximately $7.2 million compared to approximately $6.1 million as of December 31, 2017. The increase in cash and cash equivalents from December 31, 2017 as compared to March 31, 2018 is due to the approximately $2.5 million received as a result of its October 2017 ATM Program along with an allocation of marketable securities to cash and cash equivalents. Furthermore, the company received proceeds from exercise of stock options of $139,140 in the first quarter of 2018. Total marketable securities, consisting primarily of U.S. treasuries, were approximately $6.0 million as of March 31, 2018, as compared to approximately $8.0 million as of December 31, 2017. As of March 31, 2018, the company had approximately $4.9 million in total liabilities. As of March 31, 2018, the company had approximately $13.1 million in net working capital. The company incurred a net loss of approximately $3.7 million for both the three months ended March 31, 2018 and 2017.

Cash used in operating activities was approximately $3.4 million and $4.7 million for the three months ended March 31, 2018 and 2017, respectively. The difference of approximately $1.3 million in cash from operating activities is primarily due to an increase of approximately $0.4 million from a change in accounts payable and accrued liabilities and an increase of approximately $0.7 million in the change in deferred revenue for the three months ended March 31, 2018 as compared to the same period in 2017. To the extent the company obtain sufficient capital and/or long-term debt funding and are able to continue developing its product candidates, including as the company expand its technology portfolio, engage in further research and development activities, and, in particular, conduct pre-clinical studies and clinical trials, the company expect to continue incurring substantial losses, which will generate negative net cash flows from operating activities.

The company had cash flow provided by investing activities of approximately $1.8 million and $4.0 million for the three months ended March 31, 2018 and 2017, respectively. The decrease in cash provided by investing activities for the three months ended March 31, 2018 as compared to the same period of 2017 is primarily due to the net effect from purchases, sales, and maturities of marketable securities.

The company had cash flow provided by financing activities of approximately $2.5 million and zero for the three months ended March 31, 2018 and 2017, respectively. The increase in cash provided by financing activities for the three months ended March 31, 2018 as compared to the same period of 2017 is primarily due to the net proceeds from the sale of common stock.

Phase II of Capricor’s ALLSTAR trial was funded in large part through a loan award from CIRM. On November 17, 2017, the company gave notice to CIRM that the company were electing to abandon the CIRM-funded project pursuant to the Loan Agreement and on December 11, 2017, Capricor and CIRM entered into Amendment No. 3 whereby the total loan balance and all accrued interest under the CIRM Loan Agreement has been forgiven by CIRM thereby terminating Capricor and the Company’s obligation to repay the loan balance.

The company's Phase I/II HOPE-Duchenne trial of CAP-1002 in DMD-associated cardiomyopathy is being funded in part through a grant award from CIRM for approximately $3.4 million, which was entered into in June 2016.

From inception through March 31, 2018, the company financed its operations primarily through private and public sales of its equity securities, NIH and DoD grants, a payment from Janssen, a CIRM loan and a CIRM grant award. As Capricor Therapeutics has not generated any revenue from the commercial sale of its products to date, and the company do not expect to generate revenue for several years, if ever, the company will need to raise substantial additional capital in order to fund its immediate general corporate activities and, thereafter, to fund its research and development, including its long-term plans for clinical trials and new product development. The company may seek to raise additional funds through various potential sources, such as equity and debt financings, or through strategic collaborations and license agreements. The company can give no assurances that the company will be able to secure such additional sources of funds to support its operations, or if such funds become available to it, that such additional financing will be sufficient to meet its needs. Moreover, to the extent that the company raise additional funds by issuing equity securities, its stockholders may experience significant dilution, and debt financing, if available, may involve restrictive covenants. To the extent that the company raise additional funds through collaboration and licensing arrangements, it may be necessary to relinquish some rights to its technologies or its product candidates or grant licenses on terms that may not be favorable to it.

The company's estimates regarding the sufficiency of its financial resources are based on assumptions that may prove to be wrong. The company may need to obtain additional funds sooner than planned or in greater amounts than the company currently anticipate. The actual amount of funds the company will need to operate is subject to many factors, some of which are beyond its control. These factors include the following:

• the progress of its research activities;
• the number and scope of its research programs;
• the progress and success of its pre-clinical and clinical development activities;
• the progress of the development efforts of parties with whom Capricor Therapeutics has entered into research and development agreements;
• the costs of manufacturing its product candidates;
• our ability to maintain current research and development programs and to establish new research and development and licensing arrangements;
• the costs involved in prosecuting and enforcing patent claims and other intellectual property rights; and
• the costs and timing of regulatory approvals.

Financing Activities by the Company

October 2017 Common Stock Sales Agreement. On October 19, 2017, the Company entered into a Common Stock Sales Agreement, or the October Sales Agreement, with Wainwright under which the company may, from time to time, issue and sell shares of its common stock through Wainwright as sales agent in an at-the-market offering under a prospectus supplement for aggregate sales proceeds of up to $14.0 million, or the October 2017 ATM Program. The common stock will be distributed at the market prices prevailing at the time of sale. The October Sales Agreement provides that Wainwright will be entitled to compensation for its services at a commission rate of 3.0% of the gross sales price per share of common stock sold. Any shares issued pursuant to the October 2017 ATM Program will be issued pursuant to its 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. A prospectus supplement relating to the October 2017 ATM Program was filed with the SEC on October 19, 2017.

As of May 10, 2018, the Company has sold an aggregate of 3,477,110 common shares under the October 2017 ATM Program at an average price of approximately $1.97 per common share for gross proceeds of approximately $6.8 million.

May 2017 Financing. On May 5, 2017, the Company entered into subscription agreements with certain accredited investors, or the 2017 Investors, pursuant to which the Company agreed to issue and sell to the investors, in a private placement, or the 2017 Private Placement, an aggregate of 1,196,291 shares of its common stock, par value $0.001 per share, at a price per share of $3.10 for an aggregate purchase price of approximately $3.7 million.

In connection with the 2017 Private Placement, the Company also entered into a Registration Rights Agreement with the 2017 Investors. Pursuant to the terms of the Registration Rights Agreement, the Company was obligated  to prepare and file with the SEC a registration statement to register for resale the shares issued in the 2017 Private Placement, and (ii) to use its reasonable best efforts to cause the registration statement to be declared effective by the SEC as soon as practicable, in each case subject to certain deadlines. The Company will be required to pay to each 2017 Investor liquidated damages equal to 1.0% of the aggregate purchase price paid by such 2017 Investor pursuant to the Subscription Agreements for the shares per month (up to a cap of 10.0%) if it does not meet certain obligations with respect to the registration of the shares, subject to certain conditions. Pursuant to its obligations under the Registration Rights Agreement, the Company registered for resale the shares issued in the 2017 Private Placement pursuant to a registration statement on Form S-3 (File No. 333-219188), which was filed with the SEC on July 7, 2017 and declared effective on July 17, 2017. The 2017 Private Placement included participation from certain of the Company’s directors.

March 2017 Common Stock Sales Agreement. On March 31, 2017, the Company entered into a Common Stock Sales Agreement, or the March Sales Agreement with Wainwright under which the company could, from time to time, issue and sell shares of its common stock through Wainwright as sales agent in an at-the-market offering under a prospectus supplement for aggregate sales proceeds of up to $5.0 million, or the March 2017 ATM Program. The common stock was distributed at the market prices prevailing at the time of sale. The March 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 March 2017 ATM Program were issued pursuant to its 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. A prospectus supplement relating to the March 2017 ATM Program was filed with the SEC on April 3, 2017.

The Company sold an aggregate of 2,589,078 common shares under the March 2017 ATM Program at an average price of approximately $1.93 per common share for gross proceeds of approximately $5.0 million. The March 2017 ATM Program became fully utilized in October 2017.

Financing Activities by Capricor, Inc.

CIRM Loan Agreement

Pursuant to the terms of the CIRM Loan Agreement, CIRM agreed to disburse $19,782,136 to Capricor over a period of approximately three and one-half years to support Phase II of Capricor’s ALLSTAR clinical trial. Under this award, the company received approximately $14.4 million in principal. So long as the company were not in default, the Loan Agreement had provisions allowing for forgiveness of the debt after the end of the project period, if the company elected to abandon the project under certain circumstances.

On November 17, 2017, the company gave notice to CIRM that the company were electing to abandon the CIRM-funded project pursuant to the Loan Agreement and on December 11, 2017, Capricor and CIRM entered into Amendment No. 3 to the CIRM Notice of Loan Award whereby the total loan balance under the CIRM Loan Agreement has been forgiven by CIRM thereby terminating Capricor and the Company’s obligation to repay the loan balance. The Company classified the forgiveness of the loan payable, consisting of principal and accrued interest, of approximately $15.7 million as “other income” in its Consolidated Statement of Operations and Comprehensive Income (Loss) for the period ending December 31, 2017. The decision to terminate the Loan Award and forgive the loan balance was due to the abandonment of the ALLSTAR project at the end of the project period in accordance with Section 4.10 of the Loan Agreement and Article VII, Section I of the CIRM Loan Administration Policy.

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. If CIRM determines, in its sole discretion, that Capricor has not complied with the terms and conditions of the CIRM Award, CIRM may suspend or permanently cease disbursements or pursue other remedies as allowed by law. In addition, the terms of the CIRM Award include a co-funding requirement pursuant to which Capricor is required to spend approximately $2.3 million of its own capital to fund the CIRM funded research project. If Capricor fails to satisfy its co-funding requirement, the amount of the CIRM Award may be proportionately reduced. The CIRM Award is further subject to the conditions and requirements set forth in the CIRM Grants Administration Policy for Clinical Stage Projects. Such requirements include, without limitation, the filing of quarterly and annual reports with CIRM, the sharing of intellectual property pursuant to Title 17, California Code of Regulations (CCR) Sections 100600-100612, and the sharing with the State of California of a fraction of licensing revenue received from a CIRM funded research project and net commercial revenue from a commercialized product which resulted from the CIRM funded research as set forth in Title 17, CCR Section 100608. The maximum royalty on net commercial revenue that Capricor may be required to pay to CIRM is equal to nine times the total amount awarded and paid to Capricor.

After completing the CIRM funded research project and after the award period end date, estimated to be in 2018, Capricor has the right to convert the CIRM Award into a loan, the terms of which will be determined based on various factors, including the stage of the research and development of the program at the time the election is made. On June 20, 2016, Capricor entered into a Loan Election Agreement with CIRM whereby, among other things, CIRM and Capricor agreed that if Capricor elects to convert the grant into a loan, the term of the loan would be five years from the date of execution of the applicable loan agreement; provided that the term of the loan will not exceed ten years from the date on which the CIRM Award was granted. Beginning on the date of the loan, the loan shall bear interest on the unpaid principal balance, plus the interest that has accrued prior to the election point according to the terms set forth in CIRM’s Loan Policy (the “New Loan Balance”), at a per annum rate equal to the LIBOR rate for a three-month deposit in U.S. dollars, as published by the Wall Street Journal on the loan date, plus one percent. Interest shall be compounded annually on the outstanding New Loan Balance commencing with the loan date and the interest shall be payable, together with the New Loan Balance, upon the due date of the loan. If Capricor elects to convert the CIRM Award into a loan, certain requirements of the CIRM Award will no longer be applicable, including the revenue sharing requirements. Capricor has not yet made its decision as to whether it will elect to convert the CIRM Award into a loan. Since Capricor may be required to repay some or all of the amounts awarded by CIRM, the Company accounts for this award as a liability rather than income.

In 2016, Capricor received $3.1 million under the terms of the CIRM Award. In September 2017, the Company completed the second operational milestone tied to the last patient completing one year of follow-up, for which approximately $0.3 million was received by Capricor in November 2017. As of March 31, 2018, the Company’s liability balance for the CIRM Award was $3.4 million, of which approximately $0.6 million is recorded as restricted cash, due to the fact that Capricor is required to expend approved project costs in order to use these funds.

On August 8, 2017, the company entered into an Amendment to the CIRM Notice of Award pursuant to which CIRM approved the Company’s request to use the remaining estimated project funds of the CIRM Award for technology transfer activities in support of the manufacture of CAP-1002 to a designated contract manufacturing organization, or CMO, which will enable Capricor to offer access to CAP-1002 to patients from the control arm of the HOPE-Duchenne trial via an open-label extension protocol.

NIH Grant Award (HLHS)

In September 2016, Capricor was approved for a grant from the NIH to study CAP-2003 for 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 March 31, 2018, approximately $0.6 million has been incurred under the terms of the NIH grant award.

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 two years, subject to annual and quarterly reporting requirements. As of March 31, 2018, approximately $1.1 million has been incurred under the terms of the award.

References

1. https://fintel.io/doc/sec-capr-capricor-therapeutics-10k-2018-march-22-17963
2. http://capricor.com