Inmune Bio, Inc. 10-Q

Item 1. Financial Statements INMUNE BIO INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) (Unaudited) September 30, 2023 December 31, 2022 ASSETS CURRENT ASSETS Cash and cash equivalents $ 41,813 $ 52,153 Research and development tax credit receivable 2,087 8,099 Other tax receivable 176 362 Prepaid expenses and other current assets 1,535 4,027 Prepaid expenses – related party - 34 TOTAL CURRENT ASSETS 45,611 64,675 Operating lease – right of use asset 444 507 Other assets 129 99 Acquired in-process research and development intangible assets 16,514 16,514 TOTAL ASSETS $ 62,698 $ 81,795 LIABILITIES, REDEEMABLE COMMON STOCK AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES Accounts payable and accrued liabilities $ 3,675 $ 5,206 Accounts payable and accrued liabilities – related parties 79 9 Deferred liabilities 496 616 Current portion of long-term debt 10,000 5,000 Operating lease, current liabilities 106 87 TOTAL CURRENT LIABILITIES 14,356 10,918 Long-term debt, net 2,376 9,697 Long-term operating lease liabilities 430 526 Accrued liability – long-term 804 550 TOTAL LIABILITIES 17,966 21,691 COMMITMENTS AND CONTINGENCIES Redeemable common stock, $ 0.001 par value; 75,697 and 0 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively (Note 9) 799 - STOCKHOLDERS’ EQUITY Preferred stock, $ 0.001 par value, 10,000,000 shares authorized, 0 shares issued and outstanding - - Common stock, $ 0.001 par value, 200,000,000 shares authorized, 17,945,995 shares issued and outstanding 18 18 Additional paid-in capital 157,264 151,799 Accumulated other comprehensive loss ( 735 ) ( 699 ) Accumulated deficit ( 112,614 ) ( 91,014 ) TOTAL STOCKHOLDERS’ EQUITY 43,933 60,104 TOTAL LIABILITIES, REDEEMABLE COMMON STOCK AND STOCKHOLDERS’ EQUITY $ 62,698 $ 81,795 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 1 INMUNE BIO INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (In thousands, except share and per share amounts) (Unaudited) For the Three Months Ended September 30, For the Nine Months Ended September 30, 2023 2022 2023 2022 REVENUE $ 43 $ 98 $ 127 $ 277 OPERATING EXPENSES General and administrative 2,586 2,382 7,223 6,929 Research and development 5,985 5,159 14,266 13,657 Total operating expenses 8,571 7,541 21,489 20,586 LOSS FROM OPERATIONS ( 8,528 ) ( 7,443 ) ( 21,362 ) ( 20,309 ) OTHER EXPENSE, NET ( 35 ) ( 282 ) ( 238 ) ( 1,157 ) NET LOSS $ ( 8,563 ) $ ( 7,725 ) $ ( 21,600 ) $ ( 21,466 ) Net loss per common share – basic and diluted $ ( 0.48 ) $ ( 0.43 ) $ ( 1.20 ) $ ( 1.20 ) Weighted average common shares outstanding – basic and diluted 18,008,295 17,945,995 17,966,990 17,921,036 COMPREHENSIVE LOSS Net loss $ ( 8,563 ) $ ( 7,725 ) $ ( 21,600 ) $ ( 21,466 ) Other comprehensive loss – foreign currency translation ( 23 ) ( 441 ) ( 36 ) ( 1,143 ) Total comprehensive loss $ ( 8,586 ) $ ( 8,166 ) $ ( 21,636 ) $ ( 22,609 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 2 INMUNE BIO INC. CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023 (In thousands, except share amounts) (Unaudited) Accumulated Additional Other Total Common Stock Paid-In Comprehensive Accumulated Stockholders’ Shares Amount Capital Loss Deficit Equity Balance as of December 31, 2022 17,945,995 $ 18 $ 151,799 $ ( 699 ) $ ( 91,014 ) $ 60,104 Stock-based compensation - - 1,737 - - 1,737 Loss on foreign currency translation - - - ( 9 ) - ( 9 ) Net loss - - - - ( 6,536 ) ( 6,536 ) Balance as of March 31, 2023 17,945,995 18 153,536 ( 708 ) ( 97,550 ) 55,296 Stock-based compensation - - 1,863 - - 1,863 Loss on foreign currency translation - - - ( 4 ) - ( 4 ) Net loss - - - - ( 6,501 ) ( 6,501 ) Balance as of June 30, 2023 17,945,995 18 155,399 ( 712 ) ( 104,051 ) 50,654 Issuance of common stock for cash, net 75,697 - 775 - - 775 Reclassification to redeemable common stock ( 75,697 ) ( 799 ) ( 799 ) Stock-based compensation - - 1,889 - - 1,889 Loss on foreign currency translation - - - ( 23 ) - ( 23 ) Net loss - - - - ( 8,563 ) ( 8,563 ) Balance as of September 30, 2023 17,945,995 $ 18 $ 157,264 $ ( 735 ) $ ( 112,614 ) $ 43,933 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 (In thousands, except share amounts) (Unaudited) Accumulated Additional Other Total Common Stock Paid-In Comprehensive Accumulated Stockholders’ Shares Amount Capital Income (Loss) Deficit Equity Balance as of December 31, 2021 17,843,303 $ 18 $ 143,921 $ 1 $ ( 63,715 ) $ 80,225 Issuance of common stock for cash 82,900 - 699 - - 699 Exercise of warrants for cash 19,792 - 30 - - 30 Stock-based compensation - - 1,536 - - 1,536 Gain on foreign currency translation - - - 55 - 55 Net loss - - - - ( 6,903 ) ( 6,903 ) Balance as of March 31, 2022 17,945,995 18 146,186 56 ( 70,618 ) 75,642 Stock-based compensation - - 1,886 - - 1,886 Loss on foreign currency translation - - - ( 757 ) - ( 757 ) Net loss - - - - ( 6,838 ) ( 6,838 ) Balance as of June 30, 2022 17,945,995 18 148,072 ( 701 ) ( 77,456 ) 69,933 Stock-based compensation - - 1,939 - - 1,939 Loss on foreign currency translation - - - ( 441 ) - ( 441 ) Net loss - - - - ( 7,725 ) ( 7,725 ) Balance as of September 30, 2022 17,945,995 $ 18 $ 150,011 $ ( 1,142 ) $ ( 85,181 ) $ 63,706 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 INMUNE BIO INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) For the Nine Months Ended September 30, 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ ( 21,600 ) $ ( 21,466 ) Adjustments to reconcile net loss to net cash used in operating activities: Stock-based compensation 5,489 5,361 Accretion of debt discount 179 171 Impairment of operating lease – right of use asset - 89 Changes in operating assets and liabilities: Research and development tax credit receivable 6,012 496 Other tax receivable 186 477 Prepaid expenses 2,492 ( 2,321 ) Prepaid expenses – related party 34 ( 109 ) Other assets ( 30 ) - Accounts payable and accrued liabilities ( 1,531 ) ( 268 ) Accounts payable and accrued liabilities – related parties 70 ( 72 ) Deferred liabilities ( 120 ) 304 Accrued liability – long-term 254 264 Operating lease liabilities ( 14 ) 83 Net cash used in operating activities ( 8,579 ) ( 16,991 ) CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from sale of common stock 775 699 Repayments of debt ( 2,500 ) - Net proceeds from the exercise of warrants - 30 Net cash (used in) provided by financing activities ( 1,725 ) 729 Impact on cash from foreign currency translation ( 36 ) ( 1,143 ) NET DECREASE IN CASH AND CASH EQUIVALENTS ( 10,340 ) ( 17,405 ) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 52,153 74,810 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 41,813 $ 57,405 SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION: Cash paid for income taxes $ - $ - Cash paid for interest expense $ 1,394 $ 962 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 INMUNE BIO INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS INmune Bio Inc. (the “Company” or “INmune Bio”) was organized in the State of Nevada on September 25, 2015 and is a clinical stage biotechnology pharmaceutical company focused on developing and commercializing its product candidates to treat diseases where the innate immune system is not functioning normally and contributing to the patient’s disease. INmune Bio has two product platforms. The DN-TNF product platform utilizes dominant-negative technology to selectively neutralize soluble TNF, a key driver of innate immune dysfunction and mechanistic target of many diseases. DN-TNF is currently being developed for Alzheimer’s and treatment resistant depression (“XPro”) and cancer (“INB03”) and an out-licensing strategy for Duchenne’s Muscular Dystrophy (“DMD”). The Natural Killer Cell Priming Platform includes INKmune aimed at priming the patient’s NK cells to eliminate minimal residual disease in patients with cancer. INmune Bio’s product platforms utilize a precision medicine approach for the treatment of a wide variety of hematologic malignancies, solid tumors and chronic inflammation. NOTE 2 – LIQUIDITY As of September 30, 2023, the Company had an accumulated deficit of $ 112,614,000 and experienced losses since its inception. The Company had cash and cash equivalents of $ 41,813 ,000 as of September 30, 2023, and has not generated positive cash flows from operations. To date, the Company has funded its operations primarily through the sale of its common stock. Although it is difficult to predict the Company’s liquidity requirements, as of September 30, 2023, and based upon the Company’s current operating plan, the Company believes that it will have sufficient cash to meet its projected operating requirements for at least the next 12 months following the filing date of this Quarterly Report on Form 10-Q based on the balance of cash available as of September 30, 2023. Management expects operating losses to continue for the foreseeable future. There can be no assurance that the Company will ever earn revenues or achieve profitability, or if achieved, that they will be sustained on a continuing basis. In addition, the manufacturing, clinical and preclinical development activities as well as the commercialization of the Company’s products, if approved, will require significant additional financing. The Company may be unable to secure such financing when needed, or if available, such financings may be under terms that are unfavorable to the Company or the current stockholders. If the Company is unable to raise additional funds when needed, it may be required to delay, reduce the scope of, or eliminate development programs, which may adversely affect its business and operations. NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying financial statements are presented in U.S. dollars and have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”), and pursuant to the accounting and disclosure rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). The consolidated financial statements include the accounts of INmune Bio Inc. and its subsidiaries. Intercompany transactions and balances have been eliminated. In the opinion of management, the interim financial information includes all normal recurring adjustments necessary for a fair statement of the results for the interim periods. These unaudited consolidated interim financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2022, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 2, 2023. 6 Impact of Geopolitical and Macroeconomic Factors There may be significant uncertainty resulting from the impact of other geopolitical and macroeconomic factors, including the ongoing COVID-19 (coronavirus) pandemic, inflation, supply chain issues, rising interest rates, future bank failures, a potential US government shutdown, the impact of the conflicts in Russia/Ukraine and Israel, in addition to geopolitical, trade and investment tensions between the United States and China. Risks and Uncertainties The Company is subject to risks and uncertainties common to early-stage companies in the biotechnology industry, including, but not limited to, development by competitors of new technological innovations, protection of proprietary technology, dependence on key personnel, compliance with government regulations and the need to obtain additional financing to fund operations. Product candidates currently under development will require significant additional research and development efforts, including extensive preclinical studies, clinical trials and regulatory approval prior to commercialization. These efforts require significant amounts of additional resources, adequate personnel, infrastructure and extensive compliance and reporting. The Company’s product candidates are still in development and, to date, none of the Company’s product candidates have been approved for sale. There can be no assurance that the Company’s research and development will be successfully completed, that adequate protection for the Company’s intellectual property will be obtained or maintained, that any products developed will obtain necessary government regulatory approval or that any approved products will be commercially viable. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will generate any revenue from any of its products. The Company operates in an environment of rapid change in technology and substantial competition from other pharmaceutical and biotechnology companies. The Company relies and expects to continue to rely on a small number of vendors to manufacture supplies and materials for its use in the clinical trial programs. These programs could be adversely affected by a significant interruption in these manufacturing services. Use of Estimates Preparing financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Actual results and outcomes may differ from management’s estimates and assumptions. Fair Value of Financial Instruments The Company measures certain assets and liabilities in accordance with authoritative guidance which requires fair value measurements to be classified and disclosed in one of the following three categories: Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. Level 2: Observable prices that are based on inputs not quoted on active markets but corroborated by market data. Level 3: Unobservable inputs are used when little or no market data is available. Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels for certain assets or liabilities within the fair value hierarchy. The Company did not have any transfers of assets and liabilities between the levels of the fair value measurement hierarchy during the years presented. The carrying amounts of financial instruments such as cash and cash equivalents, research and development tax credit receivable, other receivable, prepaid expenses, and accounts payable and accrued liabilities approximate the related fair values due to the short-term maturities of these instruments. 7 Cash and Cash Equivalents The Company considers all short-term, highly liquid investments with an original maturity at the date of purchase of three months or less to be cash equivalents. The Company maintains cash balances that may be uninsured or in deposit accounts that exceed Federal Deposit Insurance Corporation limits. The Company maintains its cash deposits with major financial institutions. Research and Development Tax Incentive Receivable The Company, through its wholly owned subsidiary in Australia (“AUS”), participates in the Australian research and development tax incentive program, such that a percentage of our qualifying research and development expenditures are reimbursed by the Australian government, and such incentives are reflected as a reduction of research and development expense. The Australian research and development tax incentive is recognized when there is reasonable assurance that the incentive will be received, the relevant expenditure has been incurred and the amount of the consideration can be reliably measured. At each period end, management estimates the reimbursement available to the Company based on available information at the time. The Company, through its wholly owned subsidiary in the United Kingdom (“UK”), participates in the research and development program provided by the United Kingdom tax relief program, such that a percentage of our qualifying research and development expenditures are reimbursed by the United Kingdom government, and such incentives are reflected as a reduction of research and development expense. The United Kingdom research and development tax incentive is recognized when there is reasonable assurance that the incentive will be received, the relevant expenditure has been incurred and the amount of the consideration can be reliably measured. At each period end, management estimates the reimbursement available to the Company based on available information at the time. Intangible Assets The Company capitalizes costs incurred in connection with in-process research and development purchased from others if the asset has alternative uses and such uses are not restricted under applicable license agreements; patent applications (principally legal fees), patent purchases, and trademarks related to its cell line as intangible assets. Acquired in-process research and development costs that do not have alternative uses are expensed as incurred. When the assets are determined to have a finite life (upon completion of the development of the in-process research and development for its DN-TNF platform), the useful life will be determined and the in-process research and development intangible assets will be amortized. During the fourth quarter and if business factors indicate more frequently, the Company performs an assessment of the qualitative factors affecting the fair value of our in-process research and development. If the qualitative assessment suggests that impairment is more likely than not, a quantitative analysis is performed. The quantitative analysis involves a comparison of the fair value of the in-process research and development with the carrying amount. If the carrying amount of the in-process research and development exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. 8 Basic and Diluted Loss per Share Basic loss per share is computed by dividing net loss available to common shareholders by the weighted average number of outstanding common shares during the period. Diluted loss per share gives effect to all dilutive potential common shares outstanding during the period. Dilutive loss per share excludes all potential common shares if their effect is anti-dilutive. For all periods presented, there is no difference in the number of shares used to calculate basic and diluted shares outstanding due to the Company’s net loss position. At September 30, 2023 and 2022, the Company had potentially issuable shares as follows: September 30, 2023 2022 Stock options 5,501,000 4,851,000 Warrants 74,074 74,074 Total 5,575,074 4,925,074 Revenue Recognition The Company recognizes revenue when the customer obtains control of promised goods or services, in an amount that reflects the consideration the Company expects to receive in exchange for those goods or services. The Company recognizes revenue following the five-step model prescribed under ASC Topic 606: (1) identify contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenues when (or as) the Company satisfies the performance obligations. The Company records the expenses related to revenue in research and development expense, in the periods such expenses were incurred. The Company records deferred revenues when cash payments are received or due in advance of performance, including amounts which are refundable. Stock-Based Compensation The Company utilizes the Black-Scholes option pricing model to estimate the fair value of stock option awards at the date of grant, which requires the input of highly subjective assumptions, including expected volatility and expected life. Changes in these inputs and assumptions can materially affect the measure of estimated fair value of our share-based compensation. These assumptions are subjective and generally require significant analysis and judgment to develop. When estimating fair value, some of the assumptions will be based on, or determined from, external data and other assumptions may be derived from our historical experience with stock-based payment arrangements. The appropriate weight to place on historical experience is a matter of judgment, based on relevant facts and circumstances. The Company accounts for forfeitures of stock options as they occur. Research and Development Research and development (“R&D”) costs are expensed as incurred. Research and development credits are recorded by the Company as a reduction of research and development costs. Major components of research and development costs include cash compensation, stock-based compensation, costs of preclinical studies, clinical trials and related clinical manufacturing, costs of drug development, costs of materials and supplies, facilities cost, overhead costs, regulatory and compliance costs, and fees paid to consultants and other entities that conduct certain research and development activities on the Company’s behalf. The Company recognizes grants as contra research and development expense in the consolidated statement of operations on a systematic basis over the periods in which the entity recognizes as expenses the related costs for which the grants are intended to compensate. 9 Income Taxes The Company follows the liability method of accounting for income taxes. Under this method, deferred income tax assets and liabilities are recognized for the estimated tax consequences attributable to differences between the financial statement carrying values and their respective income tax basis (temporary differences). The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Foreign Currency Translation The Company’s financial statements are presented in the U.S. dollar (“$”), which is the Company’s reporting currency, while its functional currencies are the U.S. Dollar for its U.S. based operations, British Pound (“GBP”) for its United Kingdom-based operations and Australian Dollars (“AUD”) for its Australian-based operations. All assets and liabilities are translated at the exchange rate on the balance sheet date, stockholders’ equity is translated at historical rates and statement of operations items are translated at the weighted average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income. Gains and losses resulting from the translations of foreign currency transactions and balances are reflected in the statement of operations and comprehensive income (loss). Recently Adopted Accounting Pronouncements In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, as clarified in subsequent amendments. ASU 2016-13 changes the impairment model for certain financial instruments. The new model is a forward-looking expected loss model and will apply to financial assets subject to credit losses and measured at amortized cost and certain off-balance sheet credit exposures. This includes loans, held-to-maturity debt securities, loan commitments, financial guarantees and net investments in leases, as well as trade receivables. For available-for-sale debt securities with unrealized losses, credit losses will be measured in a manner similar to today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. In October 2019, the FASB voted to delay the effective date of this standard. Topic 326 became effective for the Company on January 1, 2023. Adoption of the ASU is on a modified retrospective basis. The Company adopted ASU 2013-13 on January 1, 2023, and the adoption of the ASU did not impact the Company’s financial position, results of operations, cash flows or net loss per share. Subsequent Events The Company evaluates events that have occurred after the balance sheet date of September 30, 2023, through the date which the financial statements are issued. NOTE 4 – RESEARCH AND DEVELOPMENT ACTIVITY According to UK tax law, the Company is allowed an R&D tax credit that reduces a company’s tax bill in the UK for expenses incurred in R&D subject to certain requirements. The Company’s UK subsidiary submits R&D tax credit requests annually for research and development expenses incurred. At September 30, 2023 and December 31, 2022, the Company recorded a research and development tax credit receivable in the amount of $ 0 and $ 2,690,000 , respectively. During the nine months ended September 30, 2023 and 2022, the Company received $ 2,710,000 and $ 0 , respectively, of R&D tax credit reimbursements from the UK. According to AUS tax law, the Company is allowed an R&D tax credit that reduces a company’s tax bill in AUS for expenses incurred in R&D subject to certain requirements. The Company’s Australian subsidiary submits R&D tax credit requests annually for research and development expenses incurred. At September 30, 2023 and December 31, 2022, the Company recorded a research and development tax credit receivable of $ 2,087,000 and $ 5,409,000 , respectively, for R&D expenses incurred in Australia. During the nine months ended September 30, 2023 and 2022, the Company received $ 3,763,000 and $ 0 , respectively, of R&D tax credit reimbursements from Australia. 10 Xencor, Inc. License Agreement On October 3, 2017, the Company entered into a license agreement (“Xencor License Agreement”) with Xencor, Inc. (“Xencor”), which discovered and developed a proprietary biological molecule that inhibits soluble tumor necrosis factor. On June 10, 2021, the Company and Xencor entered into a First Amendment to License Agreement pursuant to which, among other things, Section 3.2 of the Xencor License Agreement was amended to change the due diligence milestones. Pursuant to the Xencor License Agreement, Xencor granted the Company an exclusive worldwide, royalty-bearing license in licensed patent rights, licensed know-how and licensed materials (as defined in the license agreement) to make, develop, use, sell and import any pharmaceutical product that comprises, contains, or incorporates Xencor’s proprietary protein known as “XPro” that inhibits soluble tumor necrosis factor (or all modifications, formulations and variants of the licensed protein that specifically bind soluble tumor necrosis factor) alone or in combination with one or more active ingredients, in any dosage or formulation (“Licensed Products”). The Company believes the protein has numerous medical applications. Such additional alternative applications of the technology are available under the Xencor License Agreement. The Company also agreed to pay Xencor a 5 % royalty on Net Sales of all Licensed Products in a given calendar year, which are payable on a country-by- country and licensed product by licensed product basis until the date that is the later of (a) the expiration of the last to expire valid claim covering such Licensed Product in such country or (b) ten years following the first sale to a third party of the licensed product in such country. INKmune License Agreement On October 29, 2015, the Company entered into an exclusive license agreement (the “INKmune License Agreement”) with Immune Ventures, LLC (“Immune Ventures”). Pursuant to the INKmune License Agreement, the Company was granted exclusive worldwide rights to the patents, including rights to incorporate any improvements or additions to the patents that may be developed in the future. In consideration for the patent rights, the Company agreed to the following milestone payments: (in thousands) Each Phase I initiation $ 25 Each Phase II initiation $ 250 Each Phase III initiation $ 350 Each NDA/EMA filing $ 1,000 Each NDA/EMA awarded $ 9,000 In addition, the Company agreed to pay the licensor a royalty of 1 % of net sales during the life of each patent granted to the Company. The License is owned by Immune Ventures. RJ Tesi, the Company’s President and a member of our Board of Directors, David Moss, its Chief Financial Officer and Treasurer and Mark Lowdell, its Chief Scientific Officer, are the owners of Immune Ventures. No sales have occurred under this license. The term of the agreement began on October 29, 2015 and ends on a country-by-country basis on the date of the expiration of the last to expire patent rights where patent rights exists, unless terminated earlier in accordance with the agreement. Upon the termination of the agreement, we shall have a fully paid up, perpetual, royalty-free license without further obligation to Immune Ventures. The agreement can be terminated by Immune Ventures if, after 60 days from the Company’s receipt of notice that the Company has not made a payment under the agreement, and the Company still does not make this payment. On July 20, 2018 and October 30, 2020, the parties amended the agreement under which the Company was required achieve milestones pursuant to the agreement. On April 17, 2023, the parties executed an additional amendment to the agreement under which the Company removed the due diligence requirements to achieve reasonable commercial efforts to bring INKmune to market. This removed all requirements of clinical trial timelines and the filing timelines of an NDA or equivalent. All other provisions in the INKmune License Agreement shall continue in full force and effect. 11 University of Pittsburg License Agreement On October 3, 2017, the Company entered into an Assignment and Assumption Agreement with Immune Ventures related to intellectual property licensed from the University of Pittsburgh. Pursuant to the Assignment and Assumption Agreement (“Assignment Agreement”), Immune Ventures assigned all of its rights, obligations and liabilities under an Exclusive License Agreement between the University of Pittsburgh – Of the Commonwealth System of Higher Education (“Licensor”) and Immune Ventures to INmune Bio (“Licensee”), (the “PITT Agreement”). Consideration under the PITT Agreement includes: (i) annual maintenance fees, (ii) royalty payments based on the sale of products making use of the licensed technology, and (iii) milestone payments. Annual maintenance fees under the PITT Agreement include the following: (in thousands) June 26 of each year 2021-2022 $ 5 June 26 of each year 2023-2024 $ 10 June 26 of each year 2025 until first commercial sale $ 25 Upon first commercial sale of a product making use of the licensed technology under the PITT Agreement, the Licensee is required to pay royalties equal to 2.5 % of Net Sales each calendar quarter. Moreover, under the PITT Agreement the Licensee is required to make milestone payments as follows: (in thousands) Each Phase I initiation $ 50 Each Phase III initiation $ 500 First commercial sale of product making use of licensed technology $ 1,250 The Company had no amounts owed pursuant to the PITT Agreement as of September 30, 2023. The PITT Agreement expires upon the earlier of: (i) expiration of the last claim of the Patent Rights (as defined in the PITT Agreement) forming the subject matter of the PITT Agreement; or (ii) the date that is 20 years from the effective date of the agreement (June 26, 2037). The Licensee may terminate the PITT Agreement upon 3 months prior written notice provided all payments under the license are current. The Licensor may terminate the PITT Agreement upon written notice if: (i) Licensee defaults as to performance of material obligations which have not been cured within 60 days after receiving written notice; or (ii) Licensee ceases to carry out its business, becomes bankrupt or insolvent, applies for or consents to the appointment of a trustee, receiver or liquidator of its assets or seeks relief under any law for the aid of debtors. 12 NOTE 5 – FAIR VALUE MEASUREMENTS The following table presents the hierarchy for assets and liabilities measured at fair value on a recurring basis: (in thousands) Total Quoted Price in Active Market (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) September 30, 2023: Cash equivalents Money market funds $ 41,567 $ 41,567 $ - $ - Total cash equivalents $ 41,567 $ 41,567 $ - $ - (in thousands) Total Quoted Price in Active Market (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) December 31, 2022: Cash equivalents Money market fund $ 51,058 $ 51,058 $ - $ - Total cash equivalents $ 51,058 $ 51,058 $ - $ - NOTE 6 – LEASE The Company leases office space in Florida from a third party. The lease agreement has a 64-month term and commenced during the fourth quarter of 2021. Below is a summary of the Company’s right-of-use assets and liabilities: (in thousands, except years and rate) September 30, 2023 December 31, 2022 Right-of-use asset $ 444 $ 507 Operating lease, current liability $ 106 $ 87 Long-term operating lease liability $ 430 $ 526 Total lease liability $ 536 $ 613 Weighted-average remaining lease term 3.5 years 4.3 years Weighted-average discount rate 12.0 % 12.0 % 13 NOTE 7 – RELATED PARTY TRANSACTIONS UCL At September 30, 2023 and December 31, 2022, the Company owed UCL Consultants Limited (“UCL”) $ 9,000 in connection with medical research performed on behalf of the Company. During the nine months ended September 30, 2023 and 2022, the Company paid UCL $ 334,000 and $ 486,000 , respectively, for medical research performed on behalf of the Company. At September 30, 2023 and December 31, 2022, the Company recorded $ 0 and $ 34,000 , respectively, of prepaid expenses – related party for payments made to UCL in advance of services to be provided. UCL is a wholly owned subsidiary of the University of London. The Company’s Chief Scientific and Manufacturing Officer is a professor at the University of London. AmplifyBio At September 30, 2023 and December 31, 2022, the Company owed AmplifyBio $ 70,000 and $ 0 , respectively, in connection with medical research performed on behalf of the Company. The CEO of AmplifyBio is on the Board of Directors of the Company. During the nine months ended September 30, 2023 and 2022, the Company paid AmplifyBio $ 7,000 and $ 145,000 , respectively, for pre-clinical research performed on behalf of the Company. NOTE 8 – DEBT On June 10, 2021, the Company entered into a Loan and Security Agreement (the “Term Loan”) with Silicon Valley Bank and SVB Innovation Credit Fund VIII, L.P. The Term Loan provided for a $ 15.0 million term loan, of which the Company borrowed the entire amount on June 10, 2021, and is secured by the Company’s assets. On June 7, 2023, the Company entered into an amendment to the Term Loan pursuant to which, among other things, certain covenants to the Term Loan were amended. The term loan and debt discount are as follows as of September 30, 2023: (in thousands) Term Loan $ 12,500 Less: debt discount and financing costs, net ( 124 ) Less: current portion ( 10,000 ) Long-term debt $ 2,376 For the three and nine months ended September 30, 2023, the Company recognized interest expense of $ 568,000 and $ 1,811,000 , respectively, related to the Term Loan. For the three and nine months ended September 30, 2022, the Company recognized interest expense of $ 525,000 and $ 1,424,000 , respectively, related to the Term Loan. The Company is required to make interest and principal payments monthly through the maturity date of January 1, 2025 . All outstanding principal and accrued and unpaid interest will be due and payable on the maturity date. The Term Loan provides for an annual interest rate equal to the greater of (i) the prime rate then in effect as reported in The Wall Street Journal plus 4.50 % and (ii) 7.75 %. At September 30, 2023, the interest rate was 13.0 %. The Term Loan includes a final payment fee equal to 6.5 % of the original principal amount borrowed payable on the earlier of the repayment of the loan in full and the maturity date. The Company has the option to prepay the outstanding balance of the term loan in full, subject to a prepayment premium of 1 % of the original principal amount borrowed for any prepayment before the maturity date. The expected repayment of the Term loan principal is as follows as of September 30, 2023: (in thousands, except years) 2023 $ 2,500 2024 10,000 Total debt $ 12,500 Upon the occurrence of certain events, including but not limited to the Company’s failure to satisfy its payment obligations under the Term Loan, the breach of certain of its other covenants under the Term Loan, or the occurrence of a material adverse change, the Lenders will have the right, among other remedies, to declare all principal and interest immediately due and payable, and will have the right to receive the final payment fee and, if the payment of principal and interest is due prior to maturity, the applicable prepayment fee. The Company violated certain non-financial debt covenants as of December 31, 2022 and received a waiver from the Lenders waiving these debt covenant violations during the nine months ended September 30, 2023. The Company was in compliance with its debt covenants at September 30, 2023 and the filing date of these financial statements. 14 NOTE 9 – STOCKHOLDERS’ EQUITY Common Stock – At the Market Offering During March 2021, the Company entered into a sales agreement (“Sales Agreement”) with BTIG, LLC (“BTIG”), as sales agent, to establish an At-The-Market (“ATM”) offering program of up to $ 45 million of common stock, subject to certain limitations on the amount of common stock that may be offered and sold by the Company set forth in the sales agreement. During August 2023, the Company and BTIG entered into Amendment No. 1 to the Sales Agreement. The Company is required to pay BTIG a commission of 3 % of the gross proceeds from the sale of shares. During July 2023, the Company sold 75,697 shares of its common stock at an average price of $ 10.56 per share under the ATM program. The aggregate net proceeds were approximately $ 775,000 after offering expenses. These shares were inadvertently sold under a registration statement filed with the SEC that had in fact expired prior to the time the shares were sold. Consequently, the Company may be subject to claims for rescission by purchasers who purchased shares of common stock under the ATM program. Under Section 12(a)(1) of the Securities Act, a purchaser of security in a transaction made in violation of Section 5 of the Securities Act may obtain recovery of the consideration paid in connection with its purchase, plus statutory interest, or, if it had already sold the shares, recover damages resulting from its purchase. While the Company believes, it is unlikely that a successful claim will be asserted against the Company by any purchasers who purchased shares of common stock under the ATM Agreement in July 2023, the Company cannot guarantee that no such legal claims will be asserted against the Company by any purchasers. In addition, the Company could become subject to enforcement actions and/or penalties and fines by federal authorities, and the Company is unable to predict the likelihood of any such enforcement actions being brought, or the amount of any such potential penalties or fines. As of September 30, 2023, there have been no claims or demands to exercise such rights. As a result of these potential rescission rights, the Company reclassified 75,697 shares, with an aggregate purchase price of $ 799,000 of its common stock as temporary equity presented outside stockholders’ equity. The reclassification of these shares shall remain for a period of one year from transaction date. These shares have been treated as issued and outstanding for financial reporting purposes. At September 30, 2023, the Company has $ 28.7 million of common stock available under the ATM program. During September 2023, the Company and BTIG suspended the Sales Agreement. Common Stock – Issuance to Directors and Officers During the nine months ended September 30, 2022, directors and officers of the Company purchased 82,900 shares of the Company’s common stock from the Company at $ 8.43 per share (which was the closing price of the Company’s common stock on March 22, 2022) for gross proceeds of $ 699,000 . Stock options On June 1, 2023, the Company’s shareholders approved an amendment to the 2021 Incentive Stock Plan (“2021 Amended and Restated Incentive Stock Plan”) to increase the shares of the Company’s common stock available for issuance thereunder to 4,000,000 shares. During the nine months ended September 30, 2023, the Company granted certain employees and directors options to purchase 665,000 shares of its common stock pursuant to the 2017 and 2019 Incentive Stock Plans and 2021 Amended and Restated Incentive Stock Plan. The stock options had a fair value of approximately $ 4.9 million that was calculated using the Black-Scholes option-pricing model. Variables used in the Black-Scholes option-pricing model include: (1) discount rate of 3.84 % – 3.99 % based on the applicable US Treasury bill rate (2) expected life of 6.0 – 6.25 years, (3) expected volatility of approximately 91 % based on the trading history of similar companies, and (4) zero expected dividends. The following table summarizes stock option activity during the nine months ended September 30, 2023: (in thousands, except share and per share amounts) Number of Shares Weighted- average Exercise Price Weighted- average Remaining Contractual Term (years) Aggregate Intrinsic Value Outstanding at January 1, 2023 4,841,417 $ 8.60 6.28 $ 4,155 Options granted 665,000 $ 9.69 - - Options exercised - $ - - - Options cancelled ( 5,417 ) $ 15.48 - - Outstanding at September 30, 2023 5,501,000 $ 8.73 6.53 $ 4,891 Exercisable at September 30, 2023 4,190,104 $ 7.99 5.86 $ 4,880 During the three and nine months ended September 30, 2023, the Company recognized stock-based compensation expense of approximately $ 1.9 million and $ 5.5 million, respectively, related to the vesting of stock options. During the three and nine months ended September 30, 2022, the Company recognized stock-based compensation expense of approximately $ 1.9 million and $ 5.4 million, respectively, related to the vesting of stock options. As of September 30, 2023, there was approximately $ 10.5 million of total unrecognized compensation cost related to non-vested stock options which is expected to be recognized over a weighted-average period of 1.98 years. 15 Warrants The Company issued warrants to the Company’s lenders upon obtaining its loan in June 2021. The warrants have a 10 -year term and an exercise price of $ 14.05 . At September 30, 2023, 45,386 of these warrants are outstanding and the intrinsic value of these warrants is $ 0 . The Company issued warrants to its placement agents in connection with its February 2019 initial public offering. The warrants are exercisable until December 19, 2023, and have an exercise price of $ 9.60 . At September 30, 2023, 28,688 of these warrants are outstanding and the intrinsic value is $ 0 . During the nine months ended September 30, 2022, a third party exercised 19,792 warrants for cash proceeds of approximately $ 30,000 . Stock-based Compensation by Class of Expense The following summarizes the components of stock-based compensation expense in the consolidated statements of operations for the nine months ended September 30, 2023 and 2022 respectively: (in thousands) Three Months Ended September 30, 2023 Three Months Ended September 30, 2022 Nine Months Ended September 30, 2023 Nine Months Ended September 30, 2022 Research and development $ 705 $ 725 $ 2,043 $ 1,971 General and administrative 1,184 1,214 3,446 3,390 Total $ 1,889 $ 1,939 $ 5,489 $ 5,361 Shareholder Rights Agreement On December 30, 2020, the Board of Directors (the “Board”) of the Company approved and adopted a Rights Agreement, dated as of December 30, 2020, by and between the Company and VStock Transfer, LLC, as rights agent, pursuant to which the Board declared a dividend of one preferred share purchase right (each, a “Right”) for each outstanding share of the Company’s common stock held by stockholders as of the close of business on January 11, 2021. When exercisable, each right initially would represent the right to purchase from the Company one one-thousandth of a share of a newly designated series of preferred stock, Series A Junior Participating Preferred Stock, par value $ 0.001 per share, of the Company, at an exercise price of $ 300.00 per one one-thousandth of a Series A Junior Participating Preferred Share, subject to adjustment. Subject to various exceptions, the Rights become exercisable in the event any person (excluding certain exempted or grandfathered persons) becomes the beneficial owner of twenty percent or more of the Company’s common stock without the approval of the Board. On December 20, 2021, the Company entered into Amendment No. 1 to the Rights Agreement (“Amendment No. 1”) to extend the expiration of the Rights Agreement to December 30, 2022. On December 9, 2022, the Company and VStock Transfer, LLC entered into Amendment No. 2 to Rights Agreement (“Amendment No. 2”). Pursuant to Amendment No. 2, the Rights Agreement extended the expiration of the Rights Agreement to December 30, 2023. The Rights are in all respects subject to and governed by the provisions of the Rights Agreement, as amended by the Amendment No.1 and Amendment No. 2. NOTE 10 – COLLABORATIVE AGREEMENTS During September 2020, the Company was awarded a grant of up to $ 2.9 million from the National Institutes of Health (“NIH”). The grant will support a Phase 2 study of XPro1595 in patients with treatment resistant depression. As of September 30, 2023, the Company has not received any proceeds pursuant to this grant. 16 NOTE 11 – COMMITMENTS Lease During September 2021, the Company signed a lease agreement with a third party for office space in Boca Raton, Florida. The lease agreement has a 64-month term and commenced during the fourth quarter of 2021. Future minimum payments pursuant to the leases are as follows: (in thousands, except years) 2023 $ 31 2024 187 2025 192 2026 198 2027 51 Total lease payments 659 Less: imputed interest ( 123 ) Present value of future lease payments 536 Less: operating lease, current liabilities ( 106 ) Long-term operating lease liabilities $ 430 During the three and nine months ended September 30, 2023, the Company recognized $ 41,000 and $ 123,000 , respectively, in operating lease expense, which is included in general and administrative expenses in the Company’s consolidated statement of operations. During the three and nine months ended September 30, 2022, the Company recognized $ 45,000 and $ 162,000 , respectively, in operating lease expense, which is included in general and administrative expenses in the Company’s consolidated statement of operations Litigation The Company is subject to claims and suits that arise from time to time in the ordinary course of our business. Although management currently believes that resolving claims against the Company, individually or in aggregate, will not have a material adverse impact in the Company’s consolidated financial statements, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future. 17