Phio Pharmaceuticals Corp. 10-Q

ITEM 1. FINANCIAL STATEMENTS PHIO PHARMACEUTICALS CORP. CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share and per share data) (Unaudited) March 31, 2024 December 31, 2023 ASSETS Current assets: Cash and cash equivalents $ 6,475 $ 8,490 Prepaid expenses and other current assets 373 832 Total current assets 6,848 9,322 Right of use asset – 33 Property and equipment, net 2 6 Other assets 3 3 Total assets $ 6,853 $ 9,364 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 320 $ 657 Accrued expenses 929 942 Lease liability – 35 Total current liabilities 1,249 1,634 Commitments and contingencies (Note 2) – – Stockholders’ equity: Preferred stock, $ 0.0001 par value, 100,000,000 shares authorized; no shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively – – Common stock, $ 0.0001 par value, 100,000,000 shares authorized; 4,591,700 and 3,747,329 shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively – – Additional paid-in capital 146,964 146,936 Accumulated deficit ( 141,360 ) ( 139,206 ) Total stockholders’ equity 5,604 7,730 Total liabilities and stockholders’ equity $ 6,853 $ 9,364 The accompanying notes are an integral part of these condensed consolidated financial statements. 3 PHIO PHARMACEUTICALS CORP. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except share and per share data) (Unaudited) Three Months Ended March 31, 2024 2023 Operating expenses: Research and development $ 1,148 $ 2,134 General and administrative 1,061 1,468 Total operating expenses 2,209 3,602 Operating loss ( 2,209 ) ( 3,602 ) Total other income, net 55 – Net loss $ ( 2,154 ) $ ( 3,602 ) Net loss per common share: Basic and diluted $ ( 0.47 ) $ ( 3.15 ) Weighted average number of common shares outstanding: Basic and diluted 4,580,072 1,142,213 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 PHIO PHARMACEUTICALS CORP. CONDENSED CONSOLIDATED STATEMENTS OF PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (Amounts in thousands, except share data) (Unaudited) Series D Preferred Stock Common Stock Additional Paid-in Accumulated For the Three Months Ended March 31, 2024 Shares Amount Shares Amount Capital Deficit Total Balance at December 31, 2023 – $ – 3,747,329 $ – $ 146,936 $ ( 139,206 ) $ 7,730 Issuance of common stock upon exercise of warrants – – 826,370 – – – – Issuance of common stock upon vesting of restricted stock units – – 24,198 – – – – Shares withheld for payroll taxes – – ( 6,197 ) – ( 4 ) – ( 4 ) Stock-based compensation expense – – – – 32 – 32 Net loss – – – – – ( 2,154 ) ( 2,154 ) Balance at March 31, 2024 – $ – 4,591,700 $ – $ 146,964 $ ( 141,360 ) $ 5,604 Series D Preferred Stock Common Stock Additional Paid-in Accumulated For the Three Months Ended March 31, 2023 Shares Amount Shares Amount Capital Deficit Total Balance at December 31, 2022 1 $ 2 1,139,024 $ – $ 139,218 $ ( 128,380 ) $ 10,838 Cash-in-lieu of fractional shares for reverse stock split – – ( 1,706 ) – ( 11 ) – ( 11 ) Redemption of preferred stock ( 1 ) ( 2 ) – – – – – Issuance of common stock upon vesting of restricted stock units – – 18,080 – – – – Shares withheld for payroll taxes – – ( 4,816 ) – ( 25 ) – ( 25 ) Stock-based compensation expense – – – – 111 – 111 Net loss – – – – – ( 3,602 ) ( 3,602 ) Balance at March 31, 2023 – $ – 1,150,582 $ – $ 139,293 $ ( 131,982 ) $ 7,311 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 PHIO PHARMACEUTICALS CORP. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited) Three Months Ended March 31, 2024 2023 Cash flows from operating activities: Net loss $ ( 2,154 ) $ ( 3,602 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1 16 Amortization of right of use asset 33 31 Loss on disposal of property and equipment 3 – Stock-based compensation 32 111 Changes in operating assets and liabilities: Prepaid expenses and other assets 459 314 Accounts payable ( 337 ) 123 Accrued expenses ( 13 ) 331 Lease liability ( 35 ) ( 32 ) Net cash used in operating activities ( 2,011 ) ( 2,708 ) Cash flows from financing activities: Cash in lieu of fractional shares for reverse stock split – ( 11 ) Redemption of Series D preferred stock – ( 2 ) Payment of taxes on net share settlements of restricted stock units ( 4 ) ( 25 ) Net cash used in financing activities ( 4 ) ( 38 ) Net decrease in cash, cash equivalents and restricted cash ( 2,015 ) ( 2,746 ) Cash, cash equivalents and restricted cash at the beginning of period 8,490 11,831 Cash, cash equivalents and restricted cash at the end of period $ 6,475 $ 9,085 The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets to the totals above: March 31, 2024 2023 Cash and cash equivalents $ 6,475 $ 9,035 Restricted cash – 50 Cash, cash equivalents and restricted cash $ 6,475 $ 9,085 The accompanying notes are an integral part of these condensed consolidated financial statements. 6 PHIO PHARMACEUTICALS CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Organization and Significant Accounting Policies Nature of Operations Phio Pharmaceuticals Corp. (“ Phio ” or the “ Company ”) is a clinical stage biotechnology company whose proprietary INTASYL™ small interfering RNA gene silencing technology is designed to make immune cells more effective in killing tumor cells. The Company is developing therapeutics that are designed to leverage INTASYL to precisely target specific proteins that reduce the body’s ability to fight cancer, without the need for specialized formulations or drug delivery systems. Phio was incorporated in the state of Delaware in 2011 as RXi Pharmaceuticals Corporation. On November 19, 2018, the Company changed its name to Phio Pharmaceuticals Corp., to reflect its transition from a platform company to one that is fully committed to developing groundbreaking immuno-oncology therapeutics. Basis of Presentation The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States (“ GAAP ”). Certain information and footnote disclosures that are included in the Company’s annual consolidated financial statements, but that are not required for interim reporting purposes, have been condensed or omitted. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation of the condensed consolidated financial statements have been included. These statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s most recent Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the Securities and Exchange Commission (the “ SEC ”) on April 1, 2024 (the “ 2023 Form 10-K ”). Interim results are not necessarily indicative of results for a full year. Principles of Consolidation The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, MirImmune, LLC. All material intercompany accounts have been eliminated in consolidation. Segments The Company operates as one operating segment and all assets are located in the United States. Use of Estimates 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 as of 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, and the valuation allowance on the Company’s deferred tax assets. On an ongoing basis the Company evaluates its estimates and bases its estimates on historical experience and other relevant assumptions that the Company believes are reasonable under the circumstances. Actual results could differ materially from these estimates. 7 Liquidity 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 the Company on acceptable terms, or at all. If the Company fails to obtain additional funding when needed, the Company would be forced to scale back or terminate its operations or seek to merge with or to be acquired by another company. The Company has limited cash resources, has reported recurring losses from operations since inception, has negative operating cash flows and has not yet received product revenues. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern, and the Company’s current cash resources may not provide sufficient capital to fund operations for at least the next 12 months from the date of the release of these condensed consolidated financial statements. The continuation of the Company as a going concern depends upon the Company’s ability to raise additional capital through an equity offering, debt offering and/or strategic opportunity to fund its operations. There can be no assurance that the Company will be successful in accomplishing these plans in order to continue as a going concern. These condensed consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Summary of Significant Accounting Policies Cash and Cash Equivalents Cash and cash equivalents include unrestricted cash accounts, money market investments and highly liquid investment instruments with original maturity of three months or less at the date of purchase. Other than as set forth above, there have been no material changes to the significant accounting policies disclosed in the Company’s 2023 Form 10-K. Recent Accounting Pronouncements In November 2023, the Financial Accounting Standards Board (the “ FASB ”) issued Accounting Standards Update (“ ASU ”) 2023-07, “Segment Reporting (Topic 280) – Improvements to Reporting Segment Disclosures” (“ ASU 2023-07 ”), which requires disclosure of incremental segment information on an annual and interim basis. In addition, ASU 2023-07 clarifies circumstances in which an entity can disclose multiple segment measures of profit or loss, provides new segment disclosure requirements for entities with a single reportable segment, and contains other disclosure requirements. The amendments in ASU 2023-07 are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The enhanced disclosures are required to be applied retrospectively to all prior periods presented in the financial statements. The Company is currently evaluating the impact of ASU 2023-07 on its consolidated financial statements and disclosures, but does not expect that it will have a material impact on its consolidated financial statements. In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740) – Improvements to Income Tax Disclosures” (“ASU 2023-09”), which requires disclosure of specific categories in the rate reconciliation table along with additional information for reconciling items that meet a quantitative threshold, disclosure of disaggregated income taxes paid and modifies other income tax-related disclosures. The amendments in ASU 2023-09 are effective for annual periods beginning after December 15, 2024 and allows for adoption on a prospective basis, with a retrospective option. Early adoption is permitted. The Company is currently evaluating the impact of ASU 2023-09, but does not expect that it will have a material impact on its consolidated financial statements. 8 2. Collaboration Agreement AgonOx, Inc. (“ AgonOx ”) In February 2021, the Company entered into a clinical co-development collaboration agreement (the “ Clinical Co-Development Agreement ”) with AgonOx, a private company developing a pipeline of novel immunotherapy drugs targeting key regulators of the immune response to cancer. Under the Clinical Co-Development Agreement, Phio and AgonOx are working to develop a T cell-based therapy using the Company’s lead product candidate, PH-762, and AgonOx’s “double positive” tumor infiltrating lymphocytes (“ DP TIL ”) technology. Per the terms of the Clinical Co-Development Agreement, the Company agreed to reimburse AgonOx up to $4,000,000 in expenses incurred to conduct a Phase 1 clinical trial of PH-762 treated DP TIL in patients with advanced melanoma and other advanced solid tumors. The Company recognizes its share of costs arising from research and development activities performed by AgonOx in the Company’s condensed consolidated financial statements in the period AgonOx incurs such expense. Phio will be entitled to certain future development milestones and low single-digit sales-based royalty payments from AgonOx’s licensing of its DP TIL technology. The Company recognized approximately $ 50,000 and $ 119,000 of expense in connection with these efforts during the three months ended March 31, 2024 and 2023, respectively. On May 8, 2024, the Company terminated its Clinical Co-Development Agreement with AgonOx, effective immediately. Effective as of the date of the termination, the Clinical Co-Development Agreement and the continuing obligations of the Company and AgonOx thereunder will be terminated in their entirety. The Company will no longer be required to provide financial support for the development costs incurred under the Clinical Co-Development Agreement or be entitled to certain future development milestones and low single-digit sales-based royalty payments from AgonOx’s licensing of its DP TIL technology. The Company will pay to AgonOx all Company payment obligations that have accrued prior to the termination of the Clinical Co-Development Agreement. The Company intends to pay to AgonOx future fees to be incurred for patients that were treated in the Phase 1 clinical trial as of the date of termination. The Company estimates that such payments to be made to AgonOx will amount to approximately $ 388,000 , which primarily relate to the Company’s accrued obligations under the Clinical Co-Development Agreement as of March 31, 2024, as well as future fees to be incurred for patients that were treated in the Phase 1 clinical trial and other miscellaneous costs as of the date of termination. Pursuant to the terms of the Clinical Co-Development Agreement, the Company and AgonOx shall meet and discuss the orderly wind-down of the Phase 1 clinical trial. Each of the Company and AgonOx shall be responsible for its own costs and expenses incurred in connection with the wind-down of the Phase 1 clinical trial. See Item 5. Other Information included elsewhere in this Quarterly Report for further information. 3. Fair Value of Financial Instruments The Company follows the provisions of the Financial Accounting Standards Board (the “ FASB ”) Accounting Standards Codification (“ ASC ”) Topic 820, “ Fair Value Measurement ,” 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 annually 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. As of March 31, 2024, the Company categorized its cash equivalents as Level 1 hierarchy as the carrying amounts approximate their fair value due to their short-term nature and market rates of interest. As of December 31, 2023, the Company did not identify any financial instruments required to be presented at fair value. Schedule of financial instruments at fair value Description March 31, 2024 Quoted Prices In Active Markets (Level 1)   Other Significant Observable Inputs (Level 2) Unobservable Inputs (Level 3) Assets: Cash equivalents $ 6,379 $ 6,379 $ – $ – Total $ 6,379 $ 6,379 $ – $ – The carrying amounts of cash, accounts payable and accrued expenses of the Company approximate their fair values due to their short-term nature. 9 4. Leases The Company’s lease for its corporate headquarters and primary research facility in Marlborough, Massachusetts was for a total of 7,581 square feet of office and laboratory space and expired on March 31, 2024 . 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. The Company has continued operations as a primarily remote business with the expiration of the lease, but has contracted a private mailbox with an address of 11 Apex Drive, Suite 300A, PMB 2006, Marlborough, MA 01752 to use as its principal mailing address for SEC and other purposes. The Company entered into a lease for a laboratory facility located at 17 Briden Street, Worcester, Massachusetts, which commenced on March 1, 2024. The lease covers 321 square feet of rentable space and expires on September 1, 2024 . The total base rent for the premises over the term is expected to be $ 15,000 and the Company has the option to renew for additional 6-month periods. The Company made an accounting policy election under the FASB ASC Topic 824, “ Leases ” not to recognize leases with a term less than one year on the balance sheet and that do not contain a purchase option. Under the short-term lease election, the Company will recognize the lease payments for the laboratory facility on a straight-line basis over the lease term. The lease for the Company’s corporate headquarters represented all of our significant lease obligations. The amounts reported in the condensed consolidated balance sheets for the Company’s corporate headquarters classified as an operating lease 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 March 31, 2024 December 31, 2023 Assets Right of use asset $ – $ 33 Liabilities Lease liability $ – $ 35 Lease Term and Discount Rate Weighted average remaining lease term – 0.25 Weighted average discount rate 4.70 % 4.70 % Operating lease costs included in operating expense were $ 33,000 for the three months ended March 31, 2024 and 2023, respectively. Cash paid for the amounts included in the measurement of the operating lease liability on the Company’s condensed consolidated balance sheets and included within changes in the lease liability in the operating activities of the Company’s condensed consolidated statements of cash flows was $ 35,000 and $ 34,000 for the three months ended March 31, 2024 and 2023, respectively. 10 5. Stockholders’ Equity Warrants The Company first assesses warrants that are issued by the Company under the FASB ASC Topic 480, “ Distinguishing Liabilities from Equity ” (“ ASC 480 ”) to determine whether the warrants are within the scope of ASC 480. If there are no instances outside of the Company’s control that could require cash settlement, the Company then applies and follows the applicable accounting guidance in the FASB ASC Topic 815, “ Derivatives and Hedging ” (“ ASC 815 ”). Financial instruments are accounted for as either derivative liabilities or equity instruments depending on the specific terms of the agreement. Based on the assessment of the warrants issued by the Company under the guidance in ASC 480 and ASC 815, the warrants issued by the Company have been classified within stockholder’s equity. In December 2023, the Company entered into an inducement letter agreement (the “ Inducement Letter Agreement ”) with certain holders of the Company’s existing warrants to purchase up to an aggregate of 2,130,252 shares of the Company’s common stock (the “ December 2023 Financing ”). Pursuant to the terms of the Inducement Letter Agreement, in the event that the exercise of the existing warrants in the December 2023 Financing would have otherwise caused a holder to exceed the beneficial ownership limitations set forth in the existing warrant, the Company issued the number of shares that would not cause a holder to exceed such beneficial ownership limitation and agreed to hold such balance of shares of common stock in abeyance. Accordingly, an aggregate of 826,370 shares of common stock were held in abeyance (the “ Abeyance Shares ”) with such Abeyance Shares evidenced through the holder’s existing warrants and which were deemed to be prepaid. The Abeyance Shares were held until notice was received by the holder that the balance of the shares of common stock could be issued in compliance with such beneficial ownership limitations and were exercised pursuant to a notice of exercise from the holder. Until such time, the Abeyance Shares were evidenced through the holder’s existing warrants and have been included in the Company’s table of outstanding warrants below. During the three months ended March 31, 2024, all of the Abeyance Shares were released and issued. There were no warrant exercises during the three months ended March 31, 2023. The following table summarizes the Company’s outstanding warrants, all of which are classified as equity instruments, at March 31, 2024: Schedule of outstanding warrants   Number of Shares Weighted- Average Exercise Price Per Share Outstanding at December 31, 2023 6,331,288 $ 3.68 Issued – – Exercised ( 826,370 ) 1.33 Expired – – Outstanding at March 31, 2024 5,504,918 $ 4.03 6. Stock-based Compensation Restricted Stock Units Restricted stock units (“ RSUs ”) are issued under the Company’s 2020 Long-Term Incentive Plan (the “ 2020 Plan ”) or as inducement grants issued outside of the 2020 Plan to new employees. RSUs are generally subject to graded vesting and the satisfaction of certain service requirements. RSUs granted by the Company to employees generally vest annually over 3 years after the grant date and over 1 year after the grant date for non-employee members of the Board of Directors. Upon vesting, each outstanding RSU will be settled 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 Company does not expect to repurchase shares to satisfy RSU vests. 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. 11 The following table summarizes the activity of the Company’s RSUs for the three months ended March 31, 2024: Summary of RSU activity Number of Shares Weighted- Average Grant Date Fair Value Per Share Unvested units at December 31, 2023 49,683 $ 8.32 Granted – – Vested ( 24,198 ) 8.80 Forfeited ( 6,903 ) 10.96 Unvested units at March 31, 2024 18,582 $ 6.70 There were no RSUs granted during the three months ended March 31, 2024. The weighted-average fair value of RSUs granted during the three months ended March 31, 2023 was $ 5.24 . Stock-based compensation expense related to RSUs was $ 26,000 and $ 111,000 for the three months ended March 31, 2024 and 2023, respectively. The aggregate fair value of awards that vested during the three months ended March 31, 2024 and 2023 was $ 17,000 and $ 95,000 , respectively, which represents the market value of the Company’s common stock on the date that the RSUs vested. Stock Options Stock options are available for issuance under the 2020 Plan or as inducement grants issued outside of the 2020 Plan to new employees. Stock options are generally subject to graded vesting and the satisfaction of service requirements. Stock options granted by the Company to employees generally vest annually over 4 years after the grant date and generally vest over 1 year after the grant date for members of the Board of Directors and expire within ten years of grant. 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 the FASB ASC Topic 718, “ Compensation — Stock Compensation ”. 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 any stock options during the three months ended March 31, 2024 and 2023. The following table summarizes the activity of the Company’s stock options for the three months ended March 31, 2024: Summary of stock option activity Number of Shares Weighted- Average Exercise Price Per Share Aggregate Intrinsic Value Balance at December 31, 2023 10,084 $ 134.86 Granted – – Exercised – – Forfeited – – Expired ( 23 ) 13,541.48 Balance at March 31, 2024 10,061 $ 104.21 $ – Exercisable at March 31, 2024 10,061 $ 104.21 $ – Stock-based compensation expense related to stock options for the three months ended March 31, 2024 was $ 6,000 . The Company did no t have any stock-based compensation expense related to stock options for the three months ended March 31, 2023. 12 Compensation Expense Related to Equity Awards The following table sets forth total stock-based compensation expense for the three months ended March 31, 2024 and 2023, in thousands: Schedule of stock-based compensation expense March 31, 2024 2023 Research and development $ ( 11 ) $ 63 General and administrative 43 48 Total stock-based compensation $ 32 $ 111 7. Net Loss per Common 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 the dilutive effect of potential common stock equivalents, except when the inclusion of such potential common stock equivalents would be anti-dilutive. Dilutive potential common stock equivalents primarily consist of stock options, RSUs and warrants. Therefore, basic and diluted net loss per share applicable to common stockholders were the same for all periods presented because the impact of these items is generally anti-dilutive during periods of net loss. The following table sets forth the potential common shares excluded from the calculation of net loss per common share because their inclusion would be anti-dilutive: Schedule of anti dilutive stock March 31, 2024 2023 Stock options 10,061 177 Unvested RSUs 18,582 72,755 Warrants 5,504,918 545,401 Total 5,533,561 618,333 13