Inmune Bio, Inc. 10-K

Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page AUDITED FINANCIAL STATEMENTS: REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (PCAOB ID Number 688 ) F-2 CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2023 AND 2022 F-3 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022 F-4 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022 F-5 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022 F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7 F- 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors of INmune Bio Inc. Boca Raton, Florida Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of INmune Bio Inc. (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America Explanatory Paragraph – Going Concern The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the Company has incurred significant net losses, negative cash flows from its operating activities and requires additional funds to sustain its operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Marcum llp Marcum llp We have served as the Company’s auditor since 2017. Houston, Texas March 28, 2024 F- 2 INMUNE BIO INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) December 31, 2023 December 31, 2022 ASSETS CURRENT ASSETS Cash and cash equivalents $ 35,848 $ 52,153 Research and development tax credit receivable 1,905 8,099 Other tax receivable 537 362 Prepaid expenses and other current assets 1,510 4,027 Prepaid expenses – related party 142 34 TOTAL CURRENT ASSETS 39,942 64,675 Operating lease – right of use asset 414 507 Other assets 131 99 Acquired in-process research and development intangible assets 16,514 16,514 TOTAL ASSETS $ 57,001 $ 81,795 LIABILITIES, REDEEMABLE COMMON STOCK AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES Accounts payable and accrued liabilities $ 7,901 $ 5,206 Accounts payable and accrued liabilities – related parties 35 9 Deferred liabilities 489 616 Current portion of long-term debt, net 9,921 5,000 Operating lease, current liability 119 87 TOTAL CURRENT LIABILITIES 18,465 10,918 Long-term debt, net - 9,697 Long-term operating lease liability 397 526 Accrued liability – long-term - 550 TOTAL LIABILITIES 18,862 21,691 COMMITMENTS AND CONTINGENCIES Redeemable common stock, $ 0.001 par value; 75,697 and 0 shares issued and outstanding, 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, 17,950,776 and 17,945,995 shares issued and outstanding, respectively 18 18 Additional paid-in capital 159,143 151,799 Accumulated other comprehensive loss ( 799 ) ( 699 ) Accumulated deficit ( 121,022 ) ( 91,014 ) TOTAL STOCKHOLDERS’ EQUITY 37,340 60,104 TOTAL LIABILITIES, REDEEMABLE COMMON STOCK AND STOCKHOLDERS’ EQUITY $ 57,001 $ 81,795 See accompanying notes to these consolidated financial statements. F- 3 INMUNE BIO INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022 ( In thousands, except share and per share amounts) 2023 2022 REVENUE $ 155 $ 374 OPERATING EXPENSES General and administrative 9,623 9,258 Research and development 20,273 17,067 Total operating expenses 29,896 26,325 LOSS FROM OPERATIONS ( 29,741 ) ( 25,951 ) OTHER EXPENSE, NET Other expense, net ( 267 ) ( 1,348 ) Total other expense, net ( 267 ) ( 1,348 ) NET LOSS $ ( 30,008 ) $ ( 27,299 ) Net loss per common share – basic and diluted $ ( 1.67 ) $ ( 1.52 ) Weighted average number of common shares outstanding – basic and diluted 17,980,791 17,927,327 COMPREHENSIVE LOSS Net loss $ ( 30,008 ) $ ( 27,299 ) Other comprehensive loss – foreign currency translation ( 100 ) ( 700 ) Total comprehensive loss $ ( 30,108 ) $ ( 27,999 ) See accompanying notes to these consolidated financial statements. F- 4 INMUNE BIO INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022 (In thousands, except share amounts) Common Stock Additional Paid-In Accumulated Other Comprehensive Accumulated Total Stockholders’ Shares Amount Capital Income (loss) Deficit Equity Balance as of January 1, 2022 17,843,303 $ 18 $ 143,921 $ 1 $ ( 63,715 ) $ 80,225 Issuance of common stock for cash, net 82,900 - 699 - - 699 Exercise of warrants for cash 19,792 - 30 - - 30 Stock-based compensation - - 7,149 - - 7,149 Loss on foreign currency translation - - - ( 700 ) - ( 700 ) Net loss - - - - ( 27,299 ) ( 27,299 ) Balance as of December 31, 2022 17,945,995 18 151,799 ( 699 ) ( 91,014 ) 60,104 Issuance of common stock for cash 75,697 - 775 - - 775 Reclassification to redeemable common stock ( 75,697 ) - ( 799 ) - - ( 799 ) Cashless exercise of warrants 4,781 - - - - - Stock-based compensation - - 7,368 - - 7,368 Loss on foreign currency translation - - - ( 100 ) - ( 100 ) Net loss - - - - ( 30,008 ) ( 30,008 ) Balance as of December 31, 2023 17,950,776 $ 18 $ 159,143 $ ( 799 ) $ ( 121,022 ) $ 37,340 See accompanying notes to these consolidated financial statements. F- 5 INMUNE BIO INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022 (In thousands) 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ ( 30,008 ) $ ( 27,299 ) Adjustments to reconcile net loss to net cash used in operating activities: Stock-based compensation 7,368 7,149 Impairment of right of use asset - 89 Accretion of debt discount 224 239 Changes in operating assets and liabilities: Research and development tax credit receivable 6,194 ( 3,186 ) Other tax receivable ( 175 ) 229 Prepaid expenses and other current assets 2,517 ( 1,749 ) Prepaid expenses – related party ( 108 ) ( 20 ) Other assets ( 32 ) - Accounts payable and accrued liabilities 2,695 1,473 Accounts payable and accrued liabilities – related parties 26 ( 71 ) Deferred liabilities ( 127 ) 142 Accrued liability – long-term ( 550 ) 351 Operating lease liability ( 4 ) ( 33 ) Net cash used in operating activities ( 11,980 ) ( 22,686 ) CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from sale of common stock 775 699 Repayment of debt ( 5,000 ) - Net proceeds from the exercise of warrants - 30 Net cash (used in) provided by financing activities ( 4,225 ) 729 Impact on cash from foreign currency translation ( 100 ) ( 700 ) NET DECREASE IN CASH ( 16,305 ) ( 22,657 ) CASH AT BEGINNING OF YEAR 52,153 74,810 CASH AT END OF YEAR $ 35,848 $ 52,153 SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION: Cash paid for income taxes $ - $ - Cash paid for interest expense $ 1,778 $ 1,372 See accompanying notes to these consolidated financial statements. F- 6 INMUNE BIO INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION Organization and Business Overview 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. 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. Basis of Presentation and Principles of Consolidation The accompanying consolidated financial statements of the Company have been prepared in accordance with Generally Accepted Accounting Principles (“US GAAP”) in the United States of America and the rules of the Securities and Exchange Commission (“SEC”). The consolidated financial statements herein have been prepared in accordance with US GAAP and include the accounts of INmune Bio, its wholly-owned UK subsidiary, and its wholly-owned Australia subsidiary (collectively, the “Company”). All significant intercompany accounts and transactions have been eliminated. NOTE 2 – GOING CONCERN These consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred significant losses and negative cash flows from operations since inception and expects to incur additional losses until such time that it can generate significant revenue from the commercialization of its product candidates. The Company had net losses of approximately $ 30.0 million and $ 27.3 million and negative cash flows from operating activities of approximately $ 12.0 million and $ 22.7 million for the years ended December 31, 2023 and 2022, respectively, and an accumulated deficit of approximately $ 121.0 million and $ 91.0 million as of December 31, 2023 and 2022, respectively. Given the Company’s projected operating requirements and its existing cash and cash equivalents, the Company is projecting insufficient liquidity to sustain its operations through one year following the date that the financial statements are issued. These conditions and events raise substantial doubt about the Company’s ability to continue as a going concern. In response to these conditions, management is currently evaluating different strategies to obtain the required funding of future operations. Financing strategies may include, but are not limited to, the public or private sale of equity, debt financings or funds from other capital sources, such as government funding, collaborations, strategic alliances, divestment of non-core assets, or licensing arrangements with third parties. There can be no assurances that the Company will be able to secure additional financing, or if available, that it will be sufficient to meet its needs or on favorable terms. Because management’s plans have not yet been finalized and are not within the Company’s control, the implementation of such plans cannot be considered probable. As a result, the Company has concluded that management’s plans do not alleviate substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty. F- 7 NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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. 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. Cash and Cash Equivalents The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. The Company holds cash in banks in excess of Federal Deposit Insurance Corporation insurance limits. However, the Company believes risk of loss is minimal as the cash is held by large, highly-rated financial institutions. F- 8 Research and Development Tax Incentive Receivable The Company, through its wholly-owned subsidiary in Australia, 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, 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. During the years ended December 31, 2023 and 2022, the Company performed a qualitative assessment of its in-process research and development and determined that there were no indicators of impairment. 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 December 31, 2023, the Company had 5,496,000 potentially issuable shares of common stock upon the exercise of stock options and 45,386 potentially issuable shares of common stock upon the exercise of warrants. At December 31, 2022, the Company had 4,841,417 potentially issuable shares of common stock upon the exercise of stock options and 74,074 potentially issuable shares of common stock upon the exercise of warrants. F- 9 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. The Company’s 2023 and 2022 revenue was from the sale of MSC’s to one customer and was recognized when the MSC’s were delivered to the customers. 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, clinical trials and related clinical manufacturing, costs of drug development, costs of materials and supplies, facilities cost, overhead costs, costs of pre-clinical trials, 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. 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 loss. Recent Accounting Pronouncements In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”). The guidance in ASU 2023-09 improves the transparency of income tax disclosures by greater disaggregation of information in the rate reconciliation and income taxes paid disaggregated by jurisdiction. The standard is effective for public companies for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact that the adoption of ASU 2023-09 may have on its consolidated financial statements. F- 10 Subsequent Events The Company has evaluated all transactions through the financial statement issuance date for subsequent disclosure consideration. 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 December 31, 2023 and 2022, the Company had a research and development tax credit receivable of $ 0 and $ 2,690,000 , respectively for R&D expenses incurred in the UK. During the years ended December 31, 2023 and 2022, the Company received $ 2,710,000 and $ 0 of R&D tax credit reimbursements, respectively 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 December 31, 2023 and 2022, the Company had a research and development tax credit receivable of $ 1,905,000 and $ 5,409,000 , respectively, for R&D expenses incurred in Australia. During the years ended December 31, 2023 and 2022, the Company received $ 6,557,000 and $ 0 of R&D tax credit reimbursements, respectively from Australia. 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. F- 11 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. During December 2023, the Company initiated a Phase I trial with INKmune in patients with metastatic castration-resistant prostate cancer and has recorded a $ 25,000 payable to Immune Ventures as of December 31, 2023. 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. 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”). F- 12 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: $ 10,000 due on June 26 of each year 2023-2024; and $ 25,000 due on June 26 of each year 2025 and annually thereafter until first commercial sale. The Company had no amounts owed pursuant to the PITT Agreement as of December 31, 2023. 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. As of December 31, 2023, there have been no commercial sales of product making use of the licensed technology under the PITT Agreement. 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 PITT Agreement expires upon the earlier of: (i) expiration of the last claim of the Patent Rights 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. 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) December 31, 2023: Cash equivalents Money market fund $ 35,162 $ 35,162 $ - $ - Total cash equivalents $ 35,162 $ 35,162 $ - $ - (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 $ - $ - F- 13 NOTE 6 – LEASE In September 2021, the Company signed a lease 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. Below is a summary of the Company’s right-of-use assets and liabilities: (in thousands, except years and rate) December 31, 2023 December 31, 2022 Right-of-use asset $ 414 $ 507 Operating lease, current liability 119 87 Long-term operating lease liability 397 526 Total lease liability $ 516 $ 613 Weighted-average remaining lease term 3.3 years 4.3 years Weighted-average discount rate 12.0 % 12.0 % NOTE 7 – RELATED PARTY TRANSACTIONS UCL During the years ended December 31, 2023 and 2022, the Company paid UCL $ 573,000 and $ 586,000 , respectively, for medical research performed on behalf of the Company. 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. CTI During 2022, the Company paid CTI $ 153,000 pursuant to its former sublease agreement with CTI and $ 5,000 for research and development performed on behalf of the Company. The Company had no transactions with CTI in 2023. AmplifyBio During the years ended December 31, 2023 and 2022, the Company paid AmplifyBio $ 77,000 and $ 230,000 , respectively, to perform certain research and development on behalf of the Company. The CEO of AmplifyBio is on the Board of Directors 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., together (the “Lenders”). The Term Loan provides 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. The Term Loan also provides for the Company to request an additional $ 5.0 million term loan from the Lenders, which may be granted or denied at the sole discretion of the Lenders. F- 14 The term loan and debt discount are as follows as of December 31, 2023: (in thousands) Current portion of debt $ 10,000 Less: debt discount ( 79 ) Current portion of debt, net $ 9,921 For the years ended December 31, 2023 and 2022, the Company recognized interest expense of $ 2,278,000 and $ 2,014,000 , respectively, related to the Term Loan. 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 December 31, 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. 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. 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 December 31, 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 December 31, 2023, the Company has $ 28.7 million of common stock available under the ATM program. F- 15 Common Stock – Issuance to Directors and Officers During the year ended December 31, 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 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. During 2022, the Company granted certain employees and directors options to purchase 819,000 shares of its common stock pursuant to the 2021 Incentive Stock Plan. The stock options had a fair value of approximately $ 5.5 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 1.60 % - 3.06 % based on the applicable US Treasury bill rate (2) expected life of 6.0 – 10.0 years, (3) expected volatility of approximately 105 % - 108 % based on the trading history of similar companies, and (4) zero expected dividends. At December 31, 2023, the Company had 1,952,525 shares reserved for issuance pursuant to the 2021 Amended and Restated Incentive Stock Plan. The following table summarizes stock option activity: (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 December 31, 2021 4,097,000 $ 8.67 7.21 - Options granted 819,000 $ 8.01 10.0 - Options exercised - $ - - - Options cancelled ( 74,583 ) $ 11.68 - - Outstanding at December 31, 2022 4,841,417 $ 8.60 6.28 - Options granted 665,000 $ 9.69 10.0 - Options cancelled ( 10,417 ) $ 12.44 - - Outstanding at December 31, 2023 5,496,000 $ 8.73 6.18 $ 21,509 Exercisable at December 31, 2023 4,319,605 $ 8.16 5.67 $ 19,354 F- 16 During the years ended December 31, 2023 and 2022, the Company recognized stock-based compensation expense of $ 7,368,000 and $ 7,149,000 , respectively, related to stock options. As of December 31, 2023, there was $ 8,592,000 of total unrecognized compensation cost related to non-vested stock options which is expected to be recognized over a weighted-average period of 2.05 years. 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 December 31, 2023 and 2022, respectively, 45,386 of these warrants are outstanding and the intrinsic value of these warrants is $ 0 . During the year ended December 31, 2023, a third party exercised 28,688 warrants on a cashless basis in exchange for 4,781 shares of common stock. During the year ended December 31, 2022, a third party exercised 19,792 warrants in exchange for 19,792 shares of common stock 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 years ended December 31, 2023 and 2022, respectively: Year Ended December 31, 2023 Year Ended December 31, 2022 Research and development $ 2,743,000 $ 2,645,000 General and administrative 4,625,000 4,504,000 Total $ 7,368,000 $ 7,149,000 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. The Rights Agreement was amended in 2021, 2022 and 2023 to extend the expiration date and shall expire on December 30, 2024. F- 17 Preferred Stock In 2020, the Company designated 45,000 shares of its preferred stock with par value of $ 0.001 per share as Series A Junior Participating Preferred Stock. The remaining 9,955,000 shares of preferred stock with par value of $ 0.001 remain undesignated. None of the preferred shares were issued and outstanding at December 31, 2023 and 2022. NOTE 10 – INCOME TAXES The provision for income taxes consists of the following components : December 31, 2023 December 31, 2022 Current expense (benefit) $ - $ - Federal - - State - - Foreign - - Current income tax expense - - Deferred expense (benefit) - - Federal - - State - - Foreign - - Deferred income tax - - Net deferred taxes $ - $ - A reconciliation of income tax benefit computed using the federal statutory income tax rate to the Company’s tax expense is as follows: (in thousands, except percentage) December 31, 2023 December 31, 2022 Federal tax benefit at statutory rate (21%) $ ( 6,302 ) $ ( 5,733 ) Stock-based compensation 1,143 1,049 State income tax benefit, net of federal tax effect ( 222 ) ( 269 ) Foreign tax differential ( 241 ) ( 237 ) Research credits 266 18 Other 3 3 Return to provision adjustment 335 ( 1,774 ) Change in valuation allowance 5,018 6,943 Income tax benefit $ - $ - F- 18 The principal components of deferred tax assets and liabilities consist of the following at December 31, 2023 and 2022, respectively: (in thousands) December 31, 2023 December 31, 2022 Deferred tax assets Stock-based compensation $ 2,208 $ 1,386 Research and development 2,900 1,114 Federal NOL carryforwards 6,849 5,441 State NOL carryforwards 1,685 1,487 Foreign NOL carryforwards 5,965 4,307 Total deferred tax assets 19,607 13,735 Less valuation allowance ( 19,607 ) ( 13,735 ) Net deferred tax assets $ - $ - At December 31, 2023, the Company had a federal net operating loss carryforward of approximately $ 32.6 million. The net operating loss carryforwards for 2017 will begin to expire in the year ending December 31, 2037. The net operating loss carryforwards starting in 2018 have no expiration. The Company’s gross deferred tax assets of $ 19.6 million and $ 13.7 million at December 31, 2023 and 2022, respectively, primarily consist of net operating loss carryforwards for income tax purposes. A valuation allowance is required to be recorded when it is not more likely than not that some portion or all of the net deferred tax assets will be realized. Since the Company cannot be assured of generating taxable income and thereby realizing the net deferred tax assets, a full valuation allowance has been recorded. The change in the valuation allowance was $ 5,872,000 during the year ended December 31, 2023. The Company recognizes uncertain tax positions in accordance with ASC 740 on the basis of evaluating whether it is more likely than not that the tax positions will be sustained upon examination by tax authorities. For those tax positions that meet the more-likely-than not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement. As of December 31, 2023, and 2022, the Company has no significant uncertain tax positions. There are no unrecognized tax benefits included on the balance sheet that would, if recognized, impact the effective tax rate. The Company does not anticipate there will be a significant change in unrecognized tax benefits within the next 12 months. NOTE 11 – 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 XPro in patients with treatment resistant depression. As of December 31, 2023, the Company has not received any proceeds pursuant to this grant. F- 19 NOTE 12 – COMMITMENTS AND CONTINGENCIES Lease During September 2021, the Company signed a lease agreement with a third party for office space in Boca Raton, Florida. The operating lease 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) 2024 $ 186 2025 193 2026 198 2027 51 Total lease payments 628 Less: imputed interest ( 112 ) Present value of future lease payments 516 Less: operating lease, current liabilities ( 119 ) Long-term operating lease liabilities $ 397 During the years ended December 31, 2023 and 2022, the Company recognized $ 163,000 and $ 209,000 , 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. F- 20 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.