Phio Pharmaceuticals Corp. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm (BDO USA, LLP; Boston, Massachusetts; PCAOB ID# 243) F-1 Consolidated Balance Sheets as of December 31, 2021 and 2020 F-3 Consolidated Statements of Operations for the Years Ended December 31, 2021 and 2020 F-4 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2021 and 2020 F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 2021 and 2020 F-6 Notes to Consolidated Financial Statements F-7 40 Report of Independent Registered Public Accounting Firm Stockholders and Board of Directors Phio Pharmaceuticals Corp. Marlborough, Massachusetts Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Phio Pharmaceuticals Corp. (the “Company”) and subsidiary as of December 31, 2021 and 2020, the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021 , in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated 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 audit to obtain reasonable assurance about whether the consolidated 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 consolidated 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 consolidated 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 consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. Accounting for warrants issued as part of equity offering As described in Note 10 to the consolidated financial statements, the Company completed a private placement offering in January 2021 that included the issuance of common stock and warrants to purchase common stock. The warrants were evaluated for proper classification on the consolidated balance sheet and it was determined that the warrants issued in this equity offering should be classified within stockholders’ equity. We identified the accounting for warrants issued as part of the equity offering in January 2021 as a critical audit matter. Our principal considerations included the existence of accounting complexities related to certain provisions of the warrant agreements, including provisions of cash settlement and derivative elements. Auditing these elements required especially challenging auditor judgement and significant audit effort as well as the need for specialized knowledge and skill assessing these elements of the agreement. The primary procedures we performed to address this critical audit matter included: · Reading the agreements related to the warrants issued along with management’s technical accounting memo to understand the facts and circumstances within the warrant agreements and other assumptions impacting the determination of warrant classification. · Utilizing personnel with specialized knowledge and skill in debt and equity accounting to evaluate the appropriateness of management’s interpretation on how to apply the relevant accounting guidance for the classification of the warrants issued, including the evaluation of derivative characteristics and the terms associated with the Company’s control that could require cash settlement of the warrants. /s/ BDO USA, LLP We have served as the Company’s auditor since 2011. Boston, Massachusetts March 22, 2022 243 F- 1 PHIO PHARMACEUTICALS CORP. CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share data) December 31, 2021 December 31, 2020 ASSETS Current assets: Cash $ 24,057 $ 14,244 Restricted cash 50 50 Prepaid expenses and other current assets 620 870 Total current assets 24,727 15,164 Right of use asset, net 283 400 Property and equipment, net 133 157 Other assets 27 18 Total assets $ 25,170 $ 15,739 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 283 $ 728 Accrued expenses 2,660 1,352 Lease liability 125 116 Total current liabilities 3,068 2,196 Lease liability, net of current portion 170 295 Long-term debt – 231 Total liabilities 3,238 2,722 Commitments and contingencies (Footnote 9) – – Stockholders’ equity: Preferred stock, $ 0.0001 par value, 10,000,000 shares authorized – – Common stock, $ 0.0001 par value, 100,000,000 shares authorized; 13,534,996 and 5,780,973 shares issued and outstanding at December 31, 2021 and December 31, 2020, respectively 1 1 Additional paid-in capital 138,831 116,629 Accumulated deficit ( 116,900 ) ( 103,613 ) Total stockholders’ equity 21,932 13,017 Total liabilities and stockholders’ equity $ 25,170 $ 15,739 See accompanying notes to consolidated financial statements. F- 2 PHIO PHARMACEUTICALS CORP. CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except share and per share data) Twelve Months Ended December 31, 2021 2020 Operating expenses: Research and development $ 8,886 $ 3,716 General and administrative 4,625 5,077 Total operating expenses 13,511 8,793 Operating loss ( 13,511 ) ( 8,793 ) Other income (expense) Gain on extinguishment of debt 233 – Interest (expense) income, net ( 9 ) ( 1 ) Total other income (expense) 224 ( 1 ) Loss before income taxes ( 13,287 ) ( 8,794 ) Provision for income taxes – – Net loss $ ( 13,287 ) $ ( 8,794 ) Net loss per share: Basic and diluted $ ( 1.04 ) $ ( 1.92 ) Weighted average number of common shares outstanding Basic and diluted 12,830,809 4,587,346 See accompanying notes to consolidated financial statements. F- 3 PHIO PHARMACEUTICALS CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Amounts in thousands, except share data) Common Stock Additional Paid-in Accumulated Shares Amount Capital Deficit Total Balance at December 31, 2019 669,433 $ 1 $ 100,566 $ ( 94,819 ) $ 5,748 Cash in lieu of fractional shares for 1:55 reverse stock split ( 1,364 ) – ( 15 ) – ( 15 ) Issuance of common stock under employee stock purchase plan 153 – 1 – 1 Issuance of common stock and warrants in connection with registered direct and private placement offerings, net of offering costs 1,910,120 – 4,994 – 4,994 Issuance of common stock, pre-funded warrants and warrants in connection with underwritten public offering, net of offering costs 993,633 – 7,093 – 7,093 Issuance of common stock upon the exercise of warrants 2,205,663 – 3,856 – 3,856 Issuance of common stock upon vesting of restricted stock units 3,335 – ( 2 ) – ( 2 ) Stock-based compensation expense – – 136 – 136 Net loss – – – ( 8,794 ) ( 8,794 ) Balance at December 31, 2020 5,780,973 1 116,629 ( 103,613 ) 13,017 Issuance of common stock, pre-funded warrants and warrants in connection with private placement, net of offering costs 4,420,863 – 12,669 – 12,669 Issuance of common stock in registered direct offering, net of offering costs 2,246,784 – 6,908 – 6,908 Issuance of common stock upon the exercise of warrants 1,083,321 – 2,146 – 2,146 Issuance of common stock upon vesting of restricted stock units 3,055 – ( 1 ) – ( 1 ) Stock-based compensation expense – – 480 – 480 Net loss – – – ( 13,287 ) ( 13,287 ) Balance at December 31, 2021 13,534,996 $ 1 $ 138,831 $ ( 116,900 ) $ 21,932 See accompanying notes to consolidated financial statements. F- 4 PHIO PHARMACEUTICALS CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) Twelve Months Ended December 31, 2021 2020 Cash flows from operating activities: Net loss $ ( 13,287 ) $ ( 8,794 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 75 72 Non-cash lease expense 117 111 Non-cash stock-based compensation 480 136 Forgiveness of debt ( 233 ) – Changes in operating assets and liabilities: Prepaid expenses and other assets 241 ( 554 ) Accounts payable ( 445 ) ( 81 ) Accrued expenses and other liabilities 1,310 415 Lease liability ( 116 ) ( 107 ) Net cash used in operating activities ( 11,858 ) ( 8,802 ) Cash flows from investing activities: Cash paid for purchase of property and equipment ( 51 ) ( 19 ) Net cash used in investing activities ( 51 ) ( 19 ) Cash flows from financing activities: Net proceeds from the issuance of common stock and warrants 19,577 12,088 Net proceeds from the exercise of warrants 2,146 3,856 Proceeds from debt – 231 Cash paid in lieu of fractional shares for 1:55 reverse stock split – ( 15 ) Payments of taxes for net share settled restricted stock unit issuances ( 1 ) ( 2 ) Payments of capital lease obligations less than one year – ( 27 ) Net cash provided by financing activities 21,722 16,131 Net increase in cash and restricted cash 9,813 7,310 Cash and restricted cash at the beginning of period 14,294 6,984 Cash and restricted cash at the end of period $ 24,107 $ 14,294 Supplemental disclosure of cash flow information: Interest paid $ 8 $ 6 See accompanying notes to consolidated financial statements. F- 5 PHIO PHARMACEUTICALS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of Operations Phio Pharmaceuticals Corp. (“ Phio ,” “ we ,” “ our ” or the “ Company ”) is seeking to address the biggest challenges in immuno-oncology by creating new pathways to a cancer-free future for patients. We are developing therapeutics that leverage our INTASYL™ technology to target both tumor and immune cells by regulating genes to strengthen a patient’s immune system while weakening tumor defense mechanisms. With our INTASYL self-delivering RNAi technology, we aim to bring the benefits of RNA therapeutics into cancer care where other modalities may fall short. Our operations are being conducted in accordance with guidance provided by the World Health Organization, the Center for Disease Control and governmental authorities, including the implementation of safety measures such as working remotely and flexible scheduling. We expect to continue following these safety measures and may take further actions as we require, as government authorities require or recommend, or as we determine to be in the best interests of our employees. As a result of the coronavirus pandemic, certain of our third-party providers on which we rely have seen impacts to their operations. The Company had and continues to undertake efforts to mitigate potential future impacts by identifying and engaging alternative third-party providers to limit the impact of potential delays on our program’s anticipated timelines. However, the continued impacts to these third-party providers, including, for example, limited availability of certain services and supplies, began significantly affecting our operations in the second quarter of 2021, which resulted in delays to the start of our clinical trials. If measures to overcome the pandemic are insufficient, it could further reduce or delay the availability of supplies and services that we purchase and rely on, which may in turn further slow or delay our preclinical and clinical activities. We believe that the coronavirus pandemic has not had a significant impact on our financial condition to date; however a variety of factors such as those described above, may further impact our operations and slow or diminish our research and development activities, which in turn may impact our financial condition in the future. The extent to which the coronavirus pandemic impacts our results will depend on future developments, which are highly uncertain and cannot be predicted. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“ GAAP ”). Additionally, certain prior year amounts have been reclassified for consistency with the current year presentation. The Company made an adjustment to the consolidated statements of operations to reflect patent costs within general and administrative operating expenses in the consolidated statements of operations. The reclassification increased general and administrative operating expenses and reduced research and development operating expenses by $ 715,000 for the year ended December 31, 2020. This reclassification had no effect on total operating expenses, net loss, net loss per share and had no impact on the Company’s consolidated balance sheets, statement of stockholders’ equity and statement of cash flows for the prior year period. Principles of Consolidation The consolidated financial statements include the accounts of Phio and its wholly-owned subsidiary, MirImmune, LLC. All material intercompany accounts have been eliminated in consolidation. F- 6 Uses of Estimates in Preparation of Financial Statements The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The areas subject to significant estimates and judgement include, among others, those related to the fair value of equity awards, accruals for research and development expenses, useful lives of property and equipment, income taxes, and our valuation allowance on our deferred tax assets. On an ongoing basis we evaluate our estimates and base our estimates on historical experience and other relevant assumptions that we believe are reasonable under the circumstances, including as a result of new information that may emerge concerning the coronavirus pandemic. We have made estimates of the impact of the coronavirus pandemic within our financial statements and there may be changes to those estimates in future periods. Actual results could differ materially from these estimates. Restricted Cash Restricted cash consists of certificates of deposit held by financial institutions as collateral for the Company’s corporate credit cards. The following table provides a reconciliation of cash and restricted cash reported within the balance sheet that sum to the total of the same such amounts shown in the statement of cash flows (in thousands): Schedule of Cash December 31, 2021 2020 Cash $ 24,057 $ 14,244 Restricted cash 50 50 Cash and restricted cash shown in the statement of cash flows $ 24,107 $ 14,294 Concentrations of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash. The Company maintains cash balances in several accounts with a financial institution that management believes is creditworthy, which at times are in excess of federally insured limits. These accounts are insured by the Federal Deposit Insurance Corporation (the “ FDIC ”) for up to $ 250,000 per institution. Property and Equipment Property and equipment are stated at cost and depreciated using the straight-line method based on the estimated useful lives of the related assets. The Company provides for depreciation over the assets’ estimated useful lives as follows: Schedule of estimated useful lives Computer equipment 3 years Machinery & equipment 5 years Furniture & fixtures 5 years Leasehold improvements 5 years Impairment of Long-Lived Assets The Company reviews long-lived assets for impairment whenever an event occurs or change in circumstances that the related carrying amounts may not be recoverable. An impairment loss would be recognized based on the difference between the carrying value of the asset and its estimated fair value, which would be determined based on either discounted future cash flows or other appropriate fair value methods. The Company believes no impairment existed as of December 31, 2021 or 2020. Fair Value of Financial Instruments The carrying amounts reported in the balance sheet for restricted cash, accounts payable and accrued expenses approximate their fair values due to their short-term nature. The Company follows the provisions of the FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” for the Company’s financial assets and liabilities that are re-measured and reported at fair value each reporting period and are re-measured and reported at fair value at least annual using a fair value hierarchy that is broken down into three levels. Level inputs are defined as follows: Level 1 – quoted prices in active markets for identical assets or liabilities. Level 2 – other significant observable inputs for the assets or liabilities through corroboration with market data at the measurement date. Level 3 – significant unobservable inputs that reflect management’s best estimate of what market participants would use to price the assets or liabilities at the measurement date. For the years ended December 31, 2021 and 2020, the Company categorized its restricted cash of $ 50,000 as Level 2 hierarchy. The assets classified as Level 2 have initially been valued at the applicable transaction price and subsequently valued, at the end of each reporting period, using other market observable data. Observable market data points include quoted prices, interest rates, reportable trades and other industry and economic events. F- 7 Leases At the inception of a contract, the Company determines whether the contract is or contains a lease based on all relevant facts and circumstances. For contracts that contain a lease, the Company identifies the lease and non-lease components, determines the consideration in the contract and recognizes the classification of the lease as operating or financing. For leases with a term greater than one year, the Company recognizes a liability to make lease payments and an asset representing the right to use the underlying asset during the lease term at the commencement date of the lease. Lease liabilities and the corresponding right of use assets are recorded based on the present value of lease payments to be made over the lease term. The discount rate used to calculate the present value is the rate implicit in the lease, or if not readily determinable, the Company’s incremental borrowing rate. The Company’s incremental borrowing rate is the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Certain adjustments to the right of use asset may be required for items such as initial direct costs or incentives received. Lease payments on operating leases, including scheduled increases, are recognized on a straight-line basis over the expected term of the lease. Lease payments on financing leases are recognized using the effective interest method. Debt On March 27, 2020, the United States enacted the Coronavirus Aid, Relief, and Economic Security Act (the “ CARES Act ”) in response to the coronavirus pandemic. The CARES Act is an emergency economic stimulus package passed in response to the coronavirus outbreak that includes, but is not limited to, provisions providing aid to small businesses in the form of loans and grants and numerous tax provisions including, certain payroll tax benefits, changes to the net operating loss rules and changes to the business interest expense deduction rules. In May 2020, the Company received loan proceeds pursuant to the Paycheck Protection Program (the “ PPP ”) offered under the CARES Act, and the loan was subsequently forgiven in February 2021. Outside of the PPP, the Company has not utilized the other CARES Act loan programs and tax provisions, such as certain payroll tax benefits. The Company followed the guidance under the Financial Accounting Standards Board (the “ FASB ”) Accounting Standards Codification (“ ASC ”) Topic 470, “ Debt ” (“ ASC 470 ”) in assessing the accounting for the PPP loan proceeds. Per ASC 470, the Company recorded a liability on the balance sheet for the full amount of the PPP loan proceeds received and accrued interest over the term of the loan. Upon loan forgiveness, the Company recognized the extinguishment of the liability in the consolidated statement of operations as a gain on extinguishment of debt. Derivative Financial Instruments Financial instruments that meet the definition of a derivative are classified as an asset or liability and measured at fair value on the issuance date and are revalued on each subsequent balance sheet date. The changes in fair value are recognized as current period income or loss. Financial instruments that do not meet the definition of a derivative are classified as equity and measured at fair value and recorded as additional paid-in capital in stockholders’ equity at the date of issuance. No further adjustments to their valuation are made. Research and Development Expenses Research and development expenses relate to compensation and benefits for research and development personnel, facility-related expenses, supplies, external services, costs to acquire technology licenses, research activities under our research collaborations, expenses associated with preclinical and clinical development activities and other operating costs. Research and development expenses are charged to expense as incurred. Payments made by the Company in advance for research and development services not yet provided and/or for materials not yet received are recorded as prepaid expenses and expensed when the service has been performed or when the goods have been received. Accrued liabilities are recorded related to those expenses for which vendors have not yet billed the Company with respect to services provided and/or materials that it has received. Accrued liabilities for the services provided by contract research organizations are recorded during the period incurred based on such estimates and assumptions as expected cost, passage of time, the achievement of milestones and other information available to us and are assessed on a quarterly basis. Actual results may differ from these estimates and could have a material impact on the Company’s reported results. The Company’s historical accrual estimates have not been materially different from its actual costs. F- 8 Collaborative Arrangements The Company follows the provisions of the FASB ASC Topic 808, “Collaborative Arrangements,” (“ Topic 808 ”) when collaboration agreements involve joint operating activities in which both parties are active participants and that are also both exposed to significant risks and rewards. The Company also considers the guidance in the FASB ASC Topic 606, “Revenue from Contracts with Customers,” (“ Topic 606 ”) in determining the appropriate treatment for activities between the Company and its collaborative partners that are more reflective of a vendor-customer relationship and therefore, within the scope of Topic 606. Under Topic 808, the Company determines an appropriate recognition method, either by analogy to appropriate accounting literature or by applying a reasonable accounting policy election. Generally, the classification of transactions under the collaborative arrangements is determined based on the nature and contractual terms of the arrangement along with the nature of the operations of the participants. Payments or reimbursements that are the result of a collaborative relationship instead of a customer relationship, such as co-development activities, are recorded as increases or decreases to research and development expense. Patents and Patent Application Costs Although the Company believes that its patents and underlying technology have continuing value, the amount of future benefits to be derived from the patents is uncertain. Patent costs are, therefore, expensed as general and administrative costs as incurred. Stock-based Compensation The Company follows the provisions of the FASB ASC Topic 718, “ Compensation — Stock Compensation ” (“ ASC 718 ”), which requires the measurement and recognition of compensation expense for all stock-based payment awards. The fair value of restricted stock units is based upon the Company’s closing stock price at the grant date. The Company uses the Black-Scholes option-pricing model to estimate the fair value of stock options at the grant date. The Black-Scholes valuation model requires the input of valuation assumptions to calculate the value of stock options, including expected volatility, expected term, risk-free interest rate and expected dividends. Stock-based compensation expense is recognized over the requisite service period, which generally represents the vesting period, and commences at the date of grant based on the fair value of the award. Stock-based compensation expense recognized in the financial statements is based on awards that are ultimately expected to vest. Accordingly, we are also required to estimate forfeitures at the time of grant and to revise those estimates in subsequent periods if actual forfeitures differ from estimates. We use historical data to estimate pre-vesting award forfeitures and record stock-based compensation expense only for those awards that are expected to vest. Our forfeiture rate estimates are based on an analysis of our actual forfeiture experience, employee turnover behavior, and other factors. The impact of any adjustments to our forfeiture rates is recorded as a cumulative adjustment in the period of adjustment. To the extent that actual forfeitures differ from our estimates, the difference is recorded as a cumulative adjustment in the period the estimates are revised. Income Taxes The Company recognizes assets or liabilities for the deferred tax consequences of temporary differences between the tax basis of assets or liabilities and their reported amounts in the financial statements in accordance with the FASB ASC Topic 740, “Accounting for Income Taxes” (“ ASC 740 ”) . These temporary differences will result in taxable or deductible amounts in future years when the reported amounts of the assets or liabilities are recovered or settled. Those temporary differences referred to as deferred tax assets and liabilities are determined at the end of each period using the tax rate expected to be in effect when taxes are actually paid or recovered. Valuation allowances are established if, based on the weight of available evidence, it is more likely than not that all or a portion of a deferred tax asset will not be realized. The provision for income taxes, if any, represents the tax payable for the period and the change in deferred income tax assets and liabilities during the period. Immaterial Revision In 2021, the Company completed an Internal Revenue Code Section 382 analysis of its historical net operating loss carry-forward amount. As a result, the prior year net operating loss carry-forward was determined to be limited. See Note 13 Income Taxes , for further details. F- 9 Comprehensive Loss The Company’s comprehensive loss is equal to its net loss for all periods presented. Net Loss per Share Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding. Diluted net loss per share is computed by dividing the Company’s net loss by the weighted average number of common shares outstanding and the impact of all dilutive potential common shares outstanding, except where such dilutive potential common shares would be anti-dilutive. Dilutive potential common shares primarily consist of warrants, restricted stock units and stock options. 3. Liquidity and Going Concern The Company has reported recurring losses from operations since its inception and expects to continue to have negative cash flows from operations for the foreseeable future. Historically, the Company’s primary source of funding has been from sales of its securities. The Company’s ability to continue to fund its operations is dependent on obtaining funding from third parties, such as proceeds from the issuance of debt, sale of equity, or strategic opportunities, in order to maintain its operations. This is dependent on a number of factors, including the market demand or liquidity of the Company’s common stock. There is no guarantee that debt, additional equity or other funding will be available to us on acceptable terms, or at all. If we fail to obtain additional funding when needed, we would be forced to scale back or terminate our operations or seek to merge with or to be acquired by another company. While we believe that the coronavirus pandemic has not had a significant impact on our financial condition and results of operations at this time, the potential economic impact brought by, and the duration of, the coronavirus pandemic is difficult to assess or predict. There may be developments outside of our control that require us to adjust our operating plans and given the nature of the situation, we cannot reasonably estimate the impact of the coronavirus pandemic on our financial conditions, results of operations or cash flows in the future. The Company believes that its existing cash should be sufficient to fund operations for at least the next 12 months from the date of the release of these financial statements. 4. Recent Accounting Pronouncements In December 2019, the FASB issued Accounting Standards Update (“ ASU ”) 2019-12, “ Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ” (“ ASU 2019-12 ”). The amendments in the update simplify the accounting for income taxes by eliminating the exceptions related to the incremental approach for intraperiod tax allocation, the recognition of a deferred tax liability for equity method investments, not recognizing a deferred tax liability for a foreign subsidiary and the general methodology for calculating income taxes in an interim period. The amendments also clarify and simplify other aspects of the accounting for income taxes. The amendments in ASU 2019-12 are effective for public entities for fiscal years, and the interim periods within those fiscal years, beginning after December 20, 2020. The Company adopted ASU 2019-12 on January 1, 2021. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements. In August 2020, the FASB issued ASU 2020-06, “ Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40)” (“ ASU 2020-06 ”), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. ASU 2020-06 is part of the FASB’s simplification initiative, which aims to reduce unnecessary complexity in U.S. GAAP. For convertible instruments, the accounting models for instruments issued with beneficial conversion features or cash conversion features are removed. For contracts in an entity’s own equity, ASU 2020-06 simplifies the settlement assessment by removing the requirements to (1) consider whether the contract would be settled in registered shares, (2) consider whether collateral is required to be posted, and (3) assess shareholder rights. ASU 2020-06 is effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company early adopted ASU 2020-06 on January 1, 2021. The adoption of this standard did not have an impact on the Company’s consolidated financial statements. F- 10 In May 2021, the FASB issued ASU 2021-04, “ Earnings per Share (Topic 260), Debt – Modifications and Extinguishments (Subtopic 470-50), Compensation – Stock Compensation (Topic 718), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40) ” (“ ASU 2021-04 ”). The amendments in the updates are intended to clarify and reduce diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options that remain equity classified after modification or exchange. The amendments in ASU 2021-04 are effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. Early adoption is permitted for all entities, including within an interim period. The Company does not expect the adoption of ASU 2021-04 to have a material impact on its consolidated financial statements. 5. Property and Equipment The following table summarizes the Company’s major classes of property and equipment: Schedule of property and equipment December 31, 2021 2020 Computer equipment $ 108 $ 195 Machinery & equipment 1,035 992 Furniture & fixtures 49 46 Leasehold improvements 46 46 Total gross fixed assets 1,238 1,279 Less: accumulated depreciation and amortization ( 1,105 ) ( 1,122 ) Property and equipment, net $ 133 $ 157 Depreciation and amortization expense for the years ended December 31, 2021 and 2020 was $ 75,000 and $ 72,000 , respectively. 6. Accrued Expenses Accrued expenses consist of the following, in thousands: Schedule of accrued expenses and other current liabilities December 31, 2021 2020 Compensation and benefits $ 572 $ 618 Professional fees 102 81 Research and development costs 1,986 549 Other – 104 Total accrued expenses and other current liabilities $ 2,660 $ 1,352 7. Leases In January 2019, the Company amended the lease for its corporate headquarters and primary research facility in Marlborough, Massachusetts. The lease is for a total of 7,581 square feet of office and laboratory space and will expire on March 31, 2024 . The lease contains an option to terminate after two or three years by providing advance written notice of termination pursuant to the terms of the agreement. The exercise of this option was not determined to be reasonably certain and thus was not included in the lease liability on the Company’s balance sheet. The Company did not exercise its option to terminate in either the second or third year of the lease, and the option to terminate has expired. Additionally, the lease agreement did not contain information to determine the borrowing rate implicit in the lease. As such, the Company calculated its incremental borrowing rate based on what the Company would have to pay to borrow on a collateralized basis over the lease term for an amount equal to the remaining lease payments, taking into consideration such assumptions as, but not limited to, the U.S. treasury yield rate and borrowing rates from a creditworthy financial institution using the above lease factors. F- 11 The lease for our corporate headquarters represents substantially all of our significant lease obligations. The amounts reported in the consolidated balance sheets for operating leases in which the Company is the lessee and other supplemental balance sheet information is set forth as follows, in thousands, except the lease term (number of years) and discount rate: Schedule of lease amounts recorded in balance sheet December 31, 2021 December 31, 2020 Assets Right of use asset $ 283 $ 400 Liabilities Lease liability, current 125 116 Lease liability, non-current 170 295 Total lease liability $ 295 $ 411 Lease Term and Discount Rate Weighted average remaining lease term 2.25 3.25 Weighted average discount rate 4.70 % 4.70 % Operating lease costs included in operating expense were $ 132,000 and $ 132,000 for the years ended December 31, 2021 and 2020, respectively. Short-term lease costs were not material for the years ended December 31, 2021 and 2020. Cash paid for the amounts included in the measurement of the operating lease liability on the Company’s consolidated balance sheets and included within changes in the lease liability in the operating activities of our consolidated statement of cash flows was $ 131,600 and $ 127,800 for the years ended December 31, 2021 and 2020, respectively. Future lease payments for our non-cancellable operating leases and a reconciliation to the carrying amount of the operating lease liability presented in the consolidated balance sheet as of December 31, 2021 is as follows, in thousands: Aggregate future minimum lease payments 2022 $ 135 2023 140 2024 35 Total lease payments 310 Less: Imputed interest ( 15 ) Total operating lease liabilities (includes current portion) $ 295 8. Debt In May 2020, the Company received loan proceeds in the amount of $ 231,252 from Bank of America, N.A., as lender, pursuant to the PPP under the CARES Act. The PPP loan had a maturity date of May 11, 2022 , interest at a rate of 1 % per year and monthly principal and interest payments that were deferred to the date that the Small Business Administration (the “ SBA ”) remitted the borrower’s loan forgiveness amount to the lender. When applying for the PPP loan, the Company carefully assessed the requirements for application under the program and believed that the loan was necessary to support its operations. The loans under the PPP may be forgiven if used for eligible purposes, including payroll, benefits, rent and utilities. The Company followed the guidance under ASC 470 in assessing the accounting for the PPP loan proceeds. Per ASC 470, the Company recorded a liability on the balance sheet for the full amount of PPP loan proceeds received and accrued interest over the term of the loan. The Company believed it used the loan proceeds for eligible purposes and applied for full loan forgiveness. In February 2021, the SBA approved the Company’s application for full loan forgiveness, and the full amount of the PPP loan was remitted to the lender for forgiveness. Upon loan forgiveness, the Company recognized a gain on the extinguishment of debt of $ 233 ,000 for the loan proceeds received and interest accrued in the consolidated statements of operations for the year ended December 31, 2021. F- 12 9. Commitments and Contingencies License Commitments The Company acquires assets under development and enters into research and development arrangements with third parties that often require milestone and royalty payments based on the progress of the asset through development stages. Milestone payments may be required, for example, upon approval of the product for marketing by a regulatory agency. In certain agreements, the Company is required to make royalty payments based upon a percentage of the sales of the products licensed pursuant to such agreements. Because of the contingent nature of these payments, they are not included in the table of contractual obligations shown below. During the years ended December 31, 2021 and 2020, the Company did not trigger any milestone payments. The Company’s contractual license obligations that will require future cash payments as of December 31, 2021 are as follows, in thousands: Schedule of future cash payments for contractual license obligations Year Ending December 31, 2022 $ 100 2023 100 2024 100 2025 100 2026 100 Thereafter 300 Total $ 800 The Company applies the disclosure provisions of the FASB ASC Topic 460, “ Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others ” (“ ASC 460 ”), to its agreements that contain guarantee or indemnification clauses. The Company provides: (i) indemnifications of varying scope and size to certain investors and other parties for certain losses suffered or incurred by the indemnified party in connection with various types of third-party claims; and (ii) indemnifications of varying scope and size to officers and directors against third-party claims arising from the services they provide to us. These indemnifications give rise only to the disclosure provisions of ASC 460. To date, the Company has not incurred costs as a result of these obligations and does not expect to incur material costs in the future. Accordingly, the Company has not accrued any liabilities in its consolidated financial statements related to these indemnifications. Litigation From time to time, the Company is party to legal proceedings. There are none deemed to be material at this time. Accordingly, the Company has not accrued any liabilities in its consolidated financial statements related to proceedings. 10. Stockholders’ Equity January 2021 Private Placement — On January 25, 2021, the Company completed a private placement of 4,420,863 shares of the Company’s common stock at a purchase price per share of $ 3.07 , pre-funded warrants to purchase an aggregate of 140,065 shares of the Company’s common stock (the “ January 2021 Pre-Funded Warrants ”) at a purchase price per pre-funded warrant share of $ 3.069 and warrants to purchase an aggregate of 3,420,696 shares of the Company’s common stock with an exercise price of $ 3.00 per warrant share (the “ January 2021 Warrants ”) (the “ Private Placement ”). In connection with the Private Placement, the Company issued warrants to the placement agent, H.C. Wainwright & Co., LLC (“ HCW ”), to purchase a total of 342,070 shares of the Company’s common stock at an exercise price of $ 3.8375 (the “ January 2021 Placement Agent Warrants ”). Net proceeds to the Company from the Private Placement were $ 12,669,000 after deducting placement agent fees and offering expenses. February 2021 Registered Direct Offering — On February 17, 2021, the Company completed a registered direct offering of 2,246,784 shares of the Company’s common stock at a purchase price of $ 3.42 per share (the “ Offering ”). In connection with the Offering, the Company issued warrants to the placement agent, HCW, to purchase a total of 168,509 shares of the Company’s common stock at an exercise price of $ 4.275 (the “ February 2021 Placement Agent Warrants ”). Net proceeds to the Company from the Offering were $ 6,908,000 after deducting placement agent fees and offering expenses. F- 13 February 2020 Registered Direct Offering and Private Placement — On February 6, 2020, the Company completed a registered direct offering (the “ February 2020 Registered Offering ”) of 197,056 shares of the Company’s common stock at a purchase price of $ 8.705 per share and in a concurrent private placement, sold warrants to purchase an aggregate of 197,056 shares of the Company’s common stock at a purchase price of $ 0.125 per underlying warrant share and with an exercise price of $ 8.71 per share (the “ February 2020 Registered Direct Warrants ”). In connection with the February 2020 Registered Offering, the Company also issued warrants to purchase a total of 14,779 shares of the Company’s common stock with an exercise price of $ 11.0375 per share (the “ February 2020 Placement Agent Warrants ”) to the placement agent, HCW. Net proceeds to the Company from the February 2020 Registered Offering were $ 1,467,000 after deducting placement agent fees and offering expenses paid by the Company. February 2020 Underwritten Public Offering — On February 13, 2020, the Company completed an underwritten public offering of 993,633 shares of the Company’s common stock at a purchase price per share of $ 4.00 , pre-funded warrants (the “ 2020 Pre-Funded Warrants ”) to purchase an aggregate of 1,006,367 shares of the Company’s common stock at a purchase price per pre-funded warrant share of $ 3.999 and warrants (the “ February 2020 Warrants ”) to purchase an aggregate of 2,000,000 shares of the Company’s common stock with an exercise price of $ 4.00 per warrant share (the “ February 2020 Underwritten Offering ”). The 2020 Pre-Funded Warrants were immediately exercisable at an exercise price per share of $ 0.001 and each share of Company common stock or 2020 Pre-Funded Warrant, as applicable, was sold with a February 2020 Warrant. In connection with the February 2020 Underwritten Offering, the Company issued warrants to purchase up to 150,000 shares of Company common stock, immediately exercisable at an exercise price of $ 5.00 per share (the “ February 2020 Underwriter Warrants ”) to HCW, as underwriter. In connection with the February 2020 Underwritten Offering, the Company also granted to the underwriter, HCW, a 30-day option to purchase up to an additional 300,000 shares of the Company’s common stock at a purchase price of $ 3.999 per such share and/or warrants to purchase up to 300,000 shares of the Company’s common stock at a purchase price of $ 0.001 per such warrant. Such warrants have the same terms as the February 2020 Warrants. On February 12, 2020, HCW exercised its option to purchase warrants to purchase an aggregate of 300,000 shares of the Company’s common stock. Net proceeds from the February 2020 Underwritten Offering were $ 7,093,000 after deducting underwriting discounts and commissions and offering expenses paid by the Company. April 2020 Registered Direct Offering and Private Placement — On April 2, 2020, the Company completed a registered direct offering (the “ April 2020 Offering ”) of 1,713,064 shares of the Company’s common stock at a purchase price of $ 2.21 per share and in a concurrent private placement, sold warrants to purchase an aggregate of 1,713,064 shares of the Company’s common stock at a purchase price of $ 0.125 per underlying warrant share and with an exercise price of $ 2.21 per share (the “ April 2020 Warrants ”). In connection with the April 2020 Offering, the Company also issued warrants to purchase a total of 128,480 shares of the Company’s common stock with an exercise price of $ 2.9188 per share (the “ April 2020 Placement Agent Warrants ”) to the placement agent, HCW. Net proceeds to the Company from the April 2020 Offering were $ 3,527,000 after deducting placement agent fees and offering expenses paid by the Company. Warrants The Company first assesses the warrants it issues under the FASB ASC Topic 480, “ Distinguishing Liabilities from Equity ” (“ ASC 480 ”) to determine whether they are within the scope of ASC 480. As there were no instances outside of the Company’s control that could require cash settlement of the warrants issued in the Private Placement and Offering, as well as warrants issued in the Company’s prior financing transactions, the Company’s outstanding warrants are outside the scope of ASC 480. The Company then applies and follows the applicable accounting guidance in ASC 815. Financial instruments are accounted for as either derivative liabilities or as equity instruments depending on the specific terms of the agreement. The warrants issued in the Private Placement and the Offering do not meet the definition of a derivative instrument as they are indexed to the Company’s common stock and classified within stockholders’ equity, as are the warrants issued in the Company’s prior financing transactions. Based on this determination, the Company’s warrants are classified within stockholders’ equity. F- 14 The following table summarizes the Company’s outstanding equity-classified warrants at December 31, 2021: Summary of outstanding warrants Exercise Expiration Balance December 31, Warrants Warrants Warrants Balance December 30, Description Price Date 2020 Issued Exercised Expired 2021 December 2016 Warrants $ 495.00 12/21/2021 23,233 – – ( 23,233 ) – April 2018 Warrants $ 173.25 5/31/2023 20,599 – – – 20,599 April 2018 Placement Agent Warrants $ 223.00 4/9/2023 1,373 – – – 1,373 October 2018 Warrants $ 10.45 10/3/2025 389,610 – – – 389,610 October 2018 Underwriter Warrants $ 13.06 10/1/2023 29,220 – – – 29,220 November 2019 Placement Agent Warrants $ 6.875 11/18/2024 13,636 – – – 13,636 February 2020 Registered Direct Warrants $ 8.71 8/6/2025 197,056 – – – 197,056 February 2020 Placement Agent Warrants $ 11.0375 2/4/2025 14,779 – – – 14,779 February 2020 Warrants $ 4.00 2/13/2025 1,326,500 – – – 1,326,500 February 2020 Underwriter Warrants $ 5.00 2/11/2025 150,000 – – – 150,000 April 2020 Warrants $ 2.21 10/2/2025 1,284,798 – ( 856,532 ) – 428,266 April 2020 Placement Agent Warrants $ 2.9188 3/31/2025 128,480 – ( 86,724 ) – 41,756 January 2021 Pre-Funded Warrants $ 0.001 No expiration – 140,065 ( 140,065 ) – – January 2021 Warrants $ 3.00 7/27/2026 – 3,420,696 – – 3,420,696 January 2021 Placement Agent Warrants $ 3.8375 7/27/2026 – 342,070 – – 342,070 February 2021 Placement Agent Warrants $ 4.275 2/12/2026 – 168,509 – – 168,509 3,579,284 4,071,340 ( 1,083,321 ) ( 23,233 ) 6,544,070 F- 15 The Company received net proceeds of $ 2,146,000 and $ 3,856,000 from the exercise of warrants during the years ended December 31, 2021 and 2020, respectively. Of the warrants exercised during the year ended December 31, 2020, 428,266 of the Company’s April 2020 Warrants were exercised via a cashless exercise transaction and as a result a total of 225,796 shares of common stock were issued. There were no such cashless exercises of warrants during the year ended December 31, 2021. 11. Net Loss per Share The following table sets forth the potential common shares excluded from the calculation of net loss per share because their inclusion would be anti-dilutive: Schedule of antidilutive stock December 31, 2021 2020 Options to purchase common stock 2,499 2,570 Unvested restricted stock units 367,101 9,699 Warrants to purchase common stock 6,544,070 3,579,284 Total 6,913,670 3,591,553 12. Stock-based Compensation Stock Plans The Company’s approved equity plans include the Phio Pharmaceuticals Corp. 2020 Long Term Incentive Plan (the “ 2020 Plan ”) and the Phio Pharmaceuticals Corp. 2012 Long Term Incentive Plan (the “ 2012 Plan ”). These plans are administered by our board of directors and provide for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance stock awards, and performance cash awards. Upon adoption of the 2020 Plan, shares that remained available for grant under the 2012 Plan and shares that were subject to outstanding awards under the 2012 Plan were included in the authorized shares available for grant under the 2020 Plan. Further, upon adoption of the 2020 Plan, the Company no longer grants new equity awards under the 2012 Plan. As of December 31, 2021, there were an aggregate of 1,267,675 shares of common stock reserved under the 2020 Plan, including 2,499 shares subject to outstanding stock options and 367,101 shares subject to unvested restricted stock units (“ RSUs ”) and 894,227 shares available for future grants. RSUs granted by the Company to employees vest annually over 3 years after the grant date, stock options granted by the Company to employees generally vest annually over 4 years after the grant date and, in the instance of stock options, expire within ten years of issuance. Restricted Stock Units RSUs are issued under the 2020 Plan or as inducement grants issued outside of the plan to new employees. RSUs are generally subject to graded vesting and the satisfaction of service requirements. Upon vesting, each outstanding RSU will be exchanged for one share of the Company’s common stock. Employee RSU recipients may elect to net share settle upon vesting, in which case the Company pays the employee’s income taxes due upon vesting and withholds a number of shares of equal value. The fair value of the RSUs awarded are based upon the Company’s closing stock price at the grant date and are expensed over the requisite service period. F- 16 The following table summarizes the activity of the Company’s RSUs for the year ended December 31, 2021: Summary of RSU activity Number of Shares Weighted- Average Grant Date Fair Value Per Share Unvested units at December 31, 2020 9,699 $ 19.97 Granted 360,750 2.94 Vested ( 3,348 ) 22.67 Forfeited – – Unvested units at December 31, 2021 367,101 $ 3.21 Stock-based compensation expense related to RSUs was $ 443,000 and $ 85,000 for the years ended December 31, 2021 and 2020, respectively. The aggregate fair value of awards that vested during the year ended December 31, 2021 was $ 9,400 , which represents the market value of the Company’s common stock on the date that the RSUs vested. As of December 31, 2021, the compensation expense for all unvested RSUs in the amount of approximately $ 770,000 will be recognized in the Company’s results of operations over a weighted average period of 2.03 years. Stock Options Stock options are issued under the 2020 Plan or as inducement grants issued outside of the plan to new employees. Stock options are generally subject to graded vesting and the satisfaction of service requirements. Upon the exercise of a stock option, the Company issues new shares and delivers them to the recipient. The Company does not expect to repurchase shares to satisfy stock option exercises. The Company uses the Black-Scholes option-pricing model to determine the fair value of all its option grants. The risk-free interest rate used for each grant was based upon the yield on zero-coupon U.S. Treasury securities with a term similar to the expected life of the related option. The Company’s expected stock price volatility assumption is based upon the Company’s own implied volatility. As the Company has limited stock option exercise information, the expected life assumption used for option grants is based upon the simplified method provided for under ASC 718. The dividend yield assumption is based upon the fact that the Company has never paid cash dividends and presently has no intention of paying cash dividends. The Company did not grant stock options during the years ended December 31, 2021 and December 31, 2020. The following table summarizes the activity of the Company’s stock option plan for the year ended December 31, 2021: Summary of Stock Option Activity Total Number of Shares Weighted- Average Exercise Price Per Share Weighted- Average Remaining Contractual Term Aggregate Intrinsic Value Balance at December 31, 2020 2,570 $ 3,334.06 Granted – – Exercised – – Cancelled ( 71 ) 946.27 Balance at December 31, 2021 2,499 $ 3,401.90 5.39 years $ – Exercisable at December 31, 2021 2,153 $ 3,932.78 5.20 years $ – F- 17 Stock-based compensation expense related to stock options for the years ended December 31, 2021 and 2020 was $ 37,000 and $ 51,000 , respectively. As of December 31, 2021, the compensation expense for all unvested stock options in the amount of approximately $ 21,000 will be recognized in the Company’s results of operations over a weighted average period of 0.58 years. There is no income tax benefit as the Company is currently operating at a loss and an actual income tax benefit may not be realized. Compensation Expense Related to Equity Awards The following table sets forth total stock-based compensation expense for the years ended December 31, 2021 and 2020, in thousands: Details of Stock-based Compensation Expense December 31, 2021 2020 Research and development $ 117 $ 22 General and administrative 363 114 Total stock-based compensation $ 480 $ 136 13. Income Taxes The provisions for income taxes for the years ended December 31, 2021 and 2020 are as follows, in thousands: Components of Federal and State Income Tax Expense Years Ended December 31, 2021 2020 Current Federal $ – $ – State – – Total current – – Deferred Federal ( 3,016 ) 9,780 State ( 1,329 ) 5,548 Total deferred ( 4,345 ) 15,328 Valuation allowance 4,345 ( 15,328 ) Total provision for income taxes $ – $ – Reconciliation of the effective income tax rate to the U.S. statutory rate is as follows: Schedule of effective income tax reconciliation Years Ended December 31, 2021 2020 Federal statutory rate 21.0 % 21.0 % State income taxes, net of federal benefit 8.5 6.7 Non-deductible expenses   0.2   ( 0.5 )  Income tax credits 4.3 2.1 Valuation allowance ( 34.0 ) ( 29.3 ) Effective tax rate 0.0 % 0.0 % F- 18 The Company recognizes deferred tax assets and liabilities to reflect the tax effects of temporary differences between the tax basis of assets or liabilities and their reported amounts in the financial statements in accordance with ASC 740. These temporary differences will result in taxable or deductible amounts in future years when the reported amounts of the assets or liabilities are recovered or settled. ASC 740 requires that a valuation allowance be established when management determines that it is more likely than not that all or a portion of a deferred asset will not be realized. The Company evaluates the realizability of its net deferred income tax assets and valuation allowances as necessary, at least on an annual basis. During this evaluation, the Company reviews its forecasts of income in conjunction with other positive and negative evidence surrounding the realizability of its deferred income tax assets to determine if a valuation allowance is required. Adjustments to the valuation allowance will increase or decrease the Company’s income tax provision or benefit. The components of the Company’s deferred tax assets are as follows, in thousands: Schedule of deferred tax assets Years Ending December 31, 2021 2020 Deferred tax assets: Net operating loss carryforwards $ 10,150 $ 6,355 Tax credit carryforwards 946 – Stock-based compensation 1,363 1,374 Licensing deduction deferral 2,018 2,376 Lease liability 79 111 Other timing differences 169 196 Deferred tax assets 14,725 10,412 Deferred tax liabilities: Right of use asset ( 76 ) ( 108 ) Deferred tax liability ( 76 ) ( 108 ) Valuation allowance ( 14,649 ) ( 10,304 ) Net deferred tax asset $ – $ – The Company evaluated the realizability of its net deferred tax assets and concluded that, in accordance with the applicable accounting standards, that it is more likely than not that the Company may not realize the benefit of all of its deferred tax assets. Accordingly, a valuation allowance against 100% of its deferred tax assets has been recorded. Significant judgment is required in the evaluation of deferred tax benefits and differences in future results from our estimates could result in material differences in the realization of these assets. As of December 31, 2021, the Company had federal net operating loss carryforwards of approximately $ 42,900,000 and state net operating loss carryforwards of approximately $ 18,100,000 to reduce future taxable income. The utilization of the federal carryforwards as an available offset to future taxable income is subject to limitations under federal income tax laws. Under current federal income tax law, federal net operating losses incurred in tax years beginning after December 31, 2017 may be carried forward indefinitely, but are limited to 80% of taxable income. As of December 31, 2021, approximately $ 42,579,000 of our federal net operating loss carryforwards will carryforward indefinitely, while the remaining federal net operating loss of $ 321,000 will begin to expire in 2031 , unless previously utilized. The Company’s state tax loss carryforwards will begin to expire in 2038 , unless previously utilized. In addition, the Company had federal and state research and development credits of approximately $ 573,000 and $ 472,000 , respectively, which will begin to expire in 2042 . Based on an assessment of all available evidence, the Company has concluded that it is more likely than not that these net operating loss carryforwards and credits will not be realized and, as a result, a full deferred income tax valuation allowance has been recorded against these assets. Ownership changes may limit the amount of net operating loss carryforwards or research and development tax credit carryforwards that can be utilized to offset future taxable income or tax liability. In general, an ownership change, as defined by Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the “ Code ”), results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than 50% over a three-year period. If the Company has experienced a change of control, utilization of the net operating loss carryforwards or research and development tax credit carryforwards would be subject to an annual limitation under Section 382 and 383 of the Code. Any limitation may result in expiration of a portion of the net operating loss carryforwards or research and development tax credit carryforwards before utilization. During 2021, the Company completed an assessment of the available net operating loss and tax credit carryforwards under Section 382 and 383 and determined that the Company underwent six ownership changes during the period from 2012 to 2021. As a result, net operating loss and tax credit carryforwards attributable to the pre-ownership changes are subject to substantial annual limitations under Section 382 and 383 of Code due to the ownership changes. The Company has adjusted its net operating loss and tax credit carryforwards to address the impact of the ownership changes. This resulted in a reduction of available federal and state net operating loss carryforwards of approximately $ 55,000,000 and $ 70,000,000 , respectively, which related to the years ended December 31, 2020 and prior. This also resulted in a reduction of federal and state tax credit carryforwards of approximately $ 1,400,000 and $ 700,000 , respectively, related to the years ended December 31, 2020 and prior. Accordingly, the net operating loss and tax credit carryforwards presented above for the year ending December 31, 2020 were reduced by $ 15,952,000 and $ 2,017,000 , respectively, with a corresponding reduction to the valuation allowance of $ 17,969,000 . F- 19 The recognition and measurement of benefits related to the Company’s tax positions requires significant judgment, as uncertainties often exist with respect to new laws, new interpretations of existing laws, and rulings by taxing authorities. The Company follows a more-likely-than not threshold for financial statement recognition and measurement of a tax position taken, or expected to be taken in a tax return. The guidance relates to, amongst other things, classification, accounting for interest and penalties associated with tax positions, and disclosure requirements. Any interest and penalties accrued related to uncertain tax positions are recorded as tax expense. Differences between actual results and the Company’s assumptions or changes in the Company’s assumptions in future periods are recorded in the period they become known. The Company has not recorded any uncertain tax positions as of December 31, 2021 or 2020. The Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months. The Company has not incurred any interest or penalties. In the event that the Company is assessed interest or penalties at some point in the future, they will be classified in the financial statements as general and administrative expenses. The Company files income tax returns in the United States, Massachusetts and New Jersey. The Company is subject to tax examinations for federal and state purposes for tax years 2013 through 2021. 14. Collaboration and License Agreements In March 2021, the Company entered into a clinical development collaboration with AgonOx, Inc. (“ AgonOx ”), a private company developing a pipeline of novel immunotherapy drugs targeting key regulators of the immune response to cancer. Under the collaboration, the companies will develop a T cell-based therapy using PH-762 and AgonOx’s “double positive” TIL (“ DP TIL ”) technology. Per the terms of the clinical development agreement, AgonOx will receive financial support from Phio to conduct a clinical trial with AgonOx’s DP TIL technology and PH-762. Phio will be entitled to certain future development milestones and sales-based royalty payments from AgonOx’s DP TIL technology. The Company did not provide financial support to AgonOx, nor has Phio received milestone or sales-based royalty payments from AgonOx under this agreement in 2021. As part of its business, the Company enters into licensing agreements with third parties that often require milestone and royalty payments based on the progress of the asset through development stages. Milestone payments may be required, for example, upon approval of the product for marketing by a regulatory agency. In certain agreements, the Company is required to make royalty payments based upon a percentage of the sales of the products licensed pursuant to such agreements. The expenditures required under these arrangements may be material individually in the event that the Company develops product candidates covered by the intellectual property licensed under any such arrangement, and in the unlikely event that milestones for multiple products covered by these arrangements were reached in the same period, the aggregate charge to expense could be material to the results of operations. In addition, these arrangements often give the Company discretion to unilaterally terminate development of the product, which would allow the Company to avoid making the contingent payments; however, the Company is unlikely to cease development if the compound successfully achieves clinical testing objectives. Advirna LLC. We have entered into an agreement with Advirna LLC (“ Advirna ”), pursuant to which Advirna assigned to us its existing patent and technology rights related to the INTASYL™ technology. Under the terms of the agreement, in April 2012, the Company issued to Advirna shares of common stock equal to 5% of the Company’s fully-diluted shares outstanding at the time of issuance. In exchange, the Company is also obligated to pay Advirna an annual maintenance fee and a milestone payment upon the issuance of the first patent with valid claims covering the assigned technology, which was paid in 2014. Additionally, we will be required to pay low single-digit royalties to Advirna on any licensing revenue received by us with respect to future licensing of the assigned Advirna patent and technology rights. To date, royalties owed to Advirna under the agreement have been minimal. We also granted back to Advirna a license under the assigned patent and technology rights for fields of use outside human therapeutics. Our rights under the Advirna agreement will expire upon the later of: (i) the expiration of the last-to-expire of the “patent rights” (as defined therein) included in the Advirna agreement; or (ii) the abandonment of the last-to-be abandoned of such patents, unless earlier terminated in accordance with the provisions of the agreement. F- 20 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.