Phio Pharmaceuticals Corp

**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™ self-delivering RNAi technology platform 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 consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

*Principles of Consolidation *

The 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.

Reverse Stock Split

Effective January 26, 2023, the Company completed a 1-for-12 reverse stock split of the Company’s outstanding common stock (the “Reverse Stock Split”). All share and per share amounts in the consolidated financial statements have been retroactively adjusted for all periods presented to give effect to the Reverse Stock Split, including reclassifying an amount equal to the reduction in par value to additional paid-in capital. Additionally, the Company made adjustments to the outstanding stock option and unvested restricted stock unit (“RSU”) balances, and related per share amounts, at December 31, 2022 to reflect final revisions to those outstanding equity awards as a result of the Reverse Stock Split. The Reverse Stock Split did not reduce the number of authorized shares of the Company’s common stock or preferred stock.

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 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 our 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.

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 us 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, 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 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 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.

Restricted Cash

Restricted cash consists of certificates of deposit held by financial institutions as collateral for the Company’s corporate credit cards.

*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 reputable financial institution that management believes is creditworthy, and which at times are in excess of federally insured limits. These accounts are insured by the Federal Deposit Insurance Corporation for up to $250,000 per institution.

The Company relies, and expects to continue to rely, on a small number of vendors to perform research activities and clinical trial activities that continue to progress its product candidates for its development programs. These programs could be adversely affected by a significant interruption in the related processes of these vendors.

*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:

*Impairment of Long-Lived Assets *

The Company reviews long-lived assets for impairment annually or whenever an event or change in circumstance occurs in which 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.

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.

*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.

Collaborative Arrangements

The Company follows the provisions of the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“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. The Company recognizes its share of costs arising from research and development activities performed by collaborators in the period its collaborators incur such expense. Reimbursements that are the result of a collaborative relationship instead of a customer relationship, such as co-development activities, are evaluated on a quarterly basis and recorded as an offset to research and development expense incurred. Payments in excess of our collaboration expense will be recorded as revenue.

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 RSUs 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 on a straight-line basis 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 consolidated 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 or to the extent that actual forfeitures differ from our estimates, 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 consolidated 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.

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.

*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, RSUs and stock options.

Recent Accounting Pronouncements

In November 2023, 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.

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 will recognize its share of costs arising from research and development activities performed by AgonOx in the Company’s 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 $1,115,000 and $130,000 of expense in connection with these efforts during the years ended December 31, 2023 and 2022, respectively.

There is approximately $2,757,000 of remaining costs not yet incurred under the Clinical Co-Development Agreement as of December 31, 2023.

3. Fair Value of Financial Instruments

The Company follows the provisions of the FASB 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.

At December 31, 2022, the Company categorized its restricted cash of $50,000 as Level 2 hierarchy. Restricted cash consisted of certificates of deposit held by financial institutions as collateral for the Company’s corporate credit cards. 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.

The carrying amounts of cash, accounts payable and accrued expenses of the Company approximate their fair values due to their short-term nature.

4. Property and Equipment

The following table summarizes the Company’s major classes of property and equipment, in thousands:

Depreciation and amortization expense for the years ended December 31, 2023 and 2022 was $56,000 and $71,000, respectively.

In November 2023, the Company decided not to renew the lease for its corporate headquarters and primary research facility in Marlborough, Massachusetts. Beginning in April of 2024, we expect to continue operations as a remote business with a small laboratory facility. Based on this evaluation, the Company determined that long-lived assets with a carrying amount of $126,000 were no longer recoverable and an impairment charge of $126,000 was recorded to write those assets down to their fair value. The Company didnot record any impairment charges at December 31, 2022.

**5. Accrued Expenses **

Accrued expenses consist of the following, in thousands:

6. 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.

The lease for the Company’s corporate headquarters represents all of its significant lease obligations. The amounts reported in the consolidated balance sheets for the 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:

Operating lease costs included in operating expense were $132,000 for the years ended December 31, 2023 and 2022, respectively.

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 the Company’s consolidated statements of cash flows was $139,000 and $135,000 for the years ended December 31, 2023 and 2022, respectively.

Future lease payments for our non-cancellable operating lease and a reconciliation to the carrying amount of the operating lease liability presented in the consolidated balance sheet as of December 31, 2023 is as follows, in thousands:

**7. Commitments and Contingencies **

Commitments

In February 2021, the Company entered into the Clinical Co-Development Agreement with AgonOx to develop a T cell-based therapy using the Company’s lead product candidate, PH-762, and AgonOx’s 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. Refer to Note 2 for further details on the Clinical Co-Development Agreement with AgonOx.

Refer to Note 6 for more information about the Company’s obligations under its non-cancellable lease for its corporate headquarters.

In September 2011, the Company entered into an agreement with Advanced RNA Technologies, LLC (“Advirna”), pursuant to which Advirna assigned to the Company its existing patent and technology rights related to the INTASYL technology in exchange for an annual maintenance fee of $100,000, a one-time milestone payment upon the future issuance of the first patent with valid claims covering the assigned patent and technology rights and the issuance of shares of common stock of the Company equal to 5% of the Company’s fully-diluted shares outstanding at the time of issuance. The one-time milestone payment and the issuance of shares of common stock of the Company were completed in 2014 and 2012, respectively. Additionally, the Company is required to pay low single-digit royalties to Advirna on any licensing revenue received by the Company with respect to future licensing of the assigned Advirna patent and technology rights. To date, any royalties owed to Advirna under the Advirna agreement have been minimal.

The Company’s 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 Advirna agreement. Further, the Company also granted back to Advirna a license under the assigned patent and technology rights for fields of use outside human therapeutics.

As part of its business, the Company may enter into licensing agreements with third parties that require milestone and royalty payments based on the progress of the asset through development stages. Milestone payments may be required, for example, upon progress through clinical trials, upon approval of the product by a regulatory agency and/or upon a percentage of sales of the product pursuant to such agreements. The expenditures required under these arrangements may be material individually in relation to any product candidates covered by the intellectual property licensed under any such arrangement, and material in the aggregate in the unlikely event that milestones for multiple products covered by these arrangements were reached in the same period. Due to the contingent nature of these payments, they are not included in the table of contractual obligations shown below.

During the years ended December 31, 2023 and 2022, the Company didnot trigger any milestone payments.

The Company’s contractual license obligations that will require future cash payments as of December 31, 2023, which result from payments expected in connection with annual license fees, are as follows, in thousands:

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 may become a party to various legal proceedings and complaints arising in the ordinary course of business. To the Company’s knowledge, it is not currently a party to any actual or threatened material legal proceedings. Accordingly, there wereno contingent liabilities recorded as of the year ended December 31, 2023.

8. Preferred Stock

The Company has authorized up to 10,000,000 shares of preferred stock, $0.0001 par value per share, for issuance. The Company’s Board of Directors (the “Board”) is authorized under the Company’s Amended and Restated Certificate of Incorporation (as may be amended and/or restated from time to time, the “Amended Certificate”), to designate the authorized preferred stock into one or more series and to fix and determine such rights, preferences, privileges and restrictions of any series of preferred stock, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, as shall be determined by the Board upon its issuance.

In November 2022, the Company soldone share of Series D Preferred Stock, par value $0.0001 per share (the “Series D Preferred Stock”) to Robert Bitterman, then its interim Executive Chairman and current Chief Executive Officer, for $1,750. The Series D Preferred Stock was not convertible into, or exchangeable for, shares of any other class or series of stock or other securities of the Company; had no rights with respect to any distribution of assets of the Company, including upon a liquidation, bankruptcy, reorganization, merger, acquisition, sale, dissolution or winding up of the Company, whether voluntarily or involuntarily; and was not entitled to receive dividends of any kind.

The Series D Preferred Stock was entitled to 17,500,000 votes per share exclusively with respect to any proposal to amend the Company’s Amended Certificate to effect a reverse stock split of the Company’s common stock. The terms provided that it would be voted, without action by the holder, on any such proposal in the same proportion as shares of the Company’s common stock were voted. The Series D Preferred Stock otherwise had no voting rights except as otherwise required by the General Corporation Law of the State of Delaware.

Under its terms, the outstanding share of Series D Preferred Stock was to be redeemed in whole, but not in part, at any time: (i) if such redemption was approved by the Board in its sole discretion or (ii) automatically and effective upon the approval by the Company's stockholders of an amendment to the Amended Certificate to effect a reverse stock split of the Company’s common stock. The Series D Preferred Stock was redeemed in whole on January 4, 2023, upon the approval by the Company’s stockholders of the Reverse Stock Split. Upon such redemption, the holder of the Series D Preferred Stock received consideration of $1,750 in cash.

At December 31, 2023, there wereno shares of preferred stock issued or outstanding.

**9. Stockholders’ Equity **

April 2023 Financing — In April 2023, the Company completed a registered direct offering and a concurrent private placement of a total of:353,983 registered shares of the Company’s common stock at a purchase price per share of $5.65, unregistered five and one-half year term Series A warrants to purchase up to 353,983 shares of common stock at an exercise price of $5.40 per share and unregistered eighteen month term Series B warrants to purchase up to 353,983 shares of common stock at an exercise price of $5.40 per share (collectively, the “April 2023 Financing”). In addition, the Company issued unregistered warrants to the placement agent, H.C. Wainwright & Co., LLC (“HCW”), in the April 2023 Financing to purchase a total of 26,549 shares of common stock at an exercise price of $7.0625 per share. Net proceeds to the Company from the April 2023 Financing were $1,538,000 after deducting placement agent fees and offering expenses.

In connection with the April 2023 Financing, the Company entered into warrant amendment agreements (the “Warrant Amendment Agreements”) with the participating investors to amend the exercise price of certain existing warrants to purchase up to an aggregate of 191,619 shares of common stock that were previously issued in April 2018 through January 2021, such that each of the amended warrants have an exercise price of $5.40 per share. The Company received $24,000 as consideration in connection with the Warrant Amendment Agreements. The Company assessed the amendments to the exercise price of the warrants under the FASB ASC Topic 815, “Derivatives and Hedging” (“ASC 815”) and determined that the amendment to the exercise price was completed in connection with and contingent on the close of the April 2023 Financing. The increase in fair value of $293,000 related to the Warrant Amendment Agreements was recognized as an equity issuance cost and recorded in additional paid in capital per ASC 815.

June 2023 Financing — In June 2023, the Company completed a registered direct offering and a concurrent private placement of a total of:233,646 registered shares and 72,000 unregistered shares of the Company’s common stock each at a purchase price per share of $4.28, unregistered pre-funded warrants to purchase up to an aggregate of 628,935 shares of common stock at a purchase price per share of $4.279 and with an exercise price of $0.001 per share, unregistered five and one-half year term Series A warrants to purchase up to an aggregate of 934,581 shares of common stock at an exercise price of $4.03 per share and unregistered eighteen month term Series B warrants to purchase up to an aggregate of 934,581 shares of common stock at an exercise price of $4.03 per share (collectively, the “June 2023 Financing”). In addition, the Company issued unregistered warrants to the placement agent, HCW, in the June 2023 Financing to purchase a total of 70,094 shares of common stock at an exercise price of $5.35 per share. Net proceeds to the Company from the June 2023 Financing were $3,510,000 after deducting placement agent fees and offering expenses.

December 2023 Financing – 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 existing warrants were originally issued on dates between October 2018 and June 2023 with an exercise price of $5.40 or $4.03 per share. Pursuant to the Inducement Letter Agreement, these warrants were exercised for cash at a reduced exercise price of $1.33 per share in consideration of the Company’s agreement to issue new five and one-half year term Series A warrants to purchase up to 2,270,320 shares of common stock at an exercise price of $1.08 per share and new eighteen month term Series B warrants to purchase up to 1,990,184 shares of common stock at an exercise price of $1.08 per share (collectively, the “December 2023 Financing”). In addition, the Company issued warrants to the placement agent, HCW, in the December 2023 Financing to purchase a total of 159,769 shares of common stock at an exercise price of $1.66 per share.

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, at December 31, 2023, 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 are deemed to be prepaid. The Abeyance Shares will be held until notice is received by the holder that the balance of the shares of common stock may be issued in compliance with such beneficial ownership limitations and may be exercised pursuant to a notice of exercise from the holder. Until such time, the Abeyance Shares are evidenced through the holder’s existing warrants and have been included in the Company’s table of outstanding warrants below.

Net proceeds to the Company from the December 2023 financing were $2,404,000 after deducting placement agent fees and offering expenses. The Company assessed the amendments to the exercise price of the warrants under the ASC 815 and determined that the amendment to the exercise price was completed in connection with and contingent on the close of the December 2023 Financing. The increase in fair value of $412,000 related to the modification of the terms of the warrants to induce exercise was recognized as an equity issuance cost and recorded in additional paid in capital per ASC 815.

Warrants

The Company first assessed the warrants in the April 2023 Financing, June 2023 Financing and December 2023 Financing under the FASB ASC Topic 480, “Distinguishing Liabilities from Equity” (“ASC 480”) to determine whether they were within the scope of ASC 480. As there were no instances outside of the Company’s control that could require cash settlement, the Company’s warrants issued in the April 2023 Financing, June 2023 Financing and December 2023 Financing were determined to be outside the scope of ASC 480.

The Company then applied and followed the applicable accounting guidance in ASC 815. Financial instruments are accounted for as either derivative liabilities or equity instruments depending on the specific terms of the agreement. The warrants issued in the April 2023 Financing, June 2023 Financing and December 2023 Financing did not meet the definition of a derivative instrument as they are indexed to the Company’s common stock and classified within stockholders’ equity. Based on this determination, the warrants issued in the April 2023 Financing, June 2023 Financing and December 2023 Financing were classified within stockholders’ equity.

In addition to the December 2023 Financing, the Company issued 628,935 shares of common stock related to exercises from the pre-funded warrants issued in the June 2023 Financing for proceeds of $630. There wereno warrants exercised during the year ended December 31, 2022.

The following table summarizes the Company’s outstanding warrants, all of which are classified as equity instruments, at December 31, 2023:

**10. 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 and provide for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards, RSU 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. In July 2023, the Company’s stockholders approved an amendment to the 2020 Plan to increase the number of shares authorized for issuance thereunder to 231,140 shares of common stock.

As of December 31, 2023, there were 10,084 shares subject to outstanding stock options,49,683 shares subject to unvested RSUs and 133,574 shares available for future grants.

Restricted Stock Units

RSUs are issued under the Company’s 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 directors 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.

The following table summarizes the activity of the Company’s RSUs for the year ended December 31, 2023:

The weighted-average fair value of RSUs granted during the years ended December 31, 2023 and 2022 was $5.24 and $10.08, respectively.

Stock-based compensation expense related to RSUs was $298,000 and $401,000 for the years ended December 31, 2023 and 2022, respectively.

The aggregate fair value of awards that vested during the years ended December 31, 2023 and 2022 was $105,000 and $138,000, which represents the market value of the Company’s common stock on the date that the RSUs vested.

As of December 31, 2023, the compensation expense for all unvested RSUs in the amount of approximately $212,000 will be recognized in the Company’s results of operations over a weighted average period of 1.30 years.

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 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 year ended December 31, 2022. For valuing options granted during the year ended December 31, 2023, the following assumptions were used:

The weighted average grant date fair value of options granted during the year ended December 31, 2023 was $1.14 per share.

The following table summarizes the Company’s stock option activity for the year ended December 31, 2023:

Stock-based compensation expense related to stock options for the years ended December 31, 2023 and 2022 was $5,000 and $13,000, respectively.

As of December 31, 2023, the compensation expense for all unvested stock options in the amount of $6,000 will be recognized in the Company’s results of operations over a weighted average period of 0.25 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.

Employee Stock Purchase Plan

The Company has 684 shares authorized for issuance under the 2013 Employee Stock Purchase Plan (“ESPP”). The ESPP allows employees to contribute a percentage of their cash earnings, subject to certain maximum amounts, to be used to purchase shares of the Company’s common stock on each of two semi-annual purchase dates at a purchase price equal to 90% of the market value per share on either (a) the date of grant of a purchase right under the ESPP or (b) the date on which such purchase right is deemed exercised, whichever is lower. As of December 31, 2023,661 shares were reserved for future issuance under the ESPP. There wasno activity under the ESPP for the years ended December 31, 2023 and 2022.

Compensation Expense Related to Equity Awards

The following table sets forth total stock-based compensation expense for the years ended December 31, 2023 and 2022, in thousands:

**11. Income Taxes **

The provision for income taxes for the years ended December 31, 2023 and 2022 are as follows, in thousands:

The following table presents a reconciliation of the U.S. statutory tax rate to the Company’s actual effective income tax rate:

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 consolidated 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. As a result of this evaluation, the Company has recorded a full valuation allowance against its deferred tax assets as the Company believes it is more likely than not that the benefit of all of its deferred tax assets will not be realized.

The significant components of the Company’s deferred tax assets and liabilities are as follows, in thousands:

Ownership changes may limit the amount of net operating loss (“NOL”) carryforwards or tax credit carryforwards that can be utilized to offset future taxable income or tax liability. Pursuant to Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the “Code”), NOL and tax credit carryforwards may be subject to annual limitations in the event a cumulative change in ownership of more than 50% occurs within a three-year period. Any limitation may result in expiration of a portion of the NOL carryforwards or tax credit carryforwards before utilization.

During 2023, the Company completed an assessment of the available NOL and tax credit carryforwards under Sections 382 and 383 of the Code since the last assessment completed in 2021 and concluded that the Company underwent an ownership change in 2023. As a result, NOL and tax credit carryforwards attributable to the pre-ownership change are subject to substantial annual limitations under Sections 382 and 383 of the Code. The Company adjusted its NOL and tax credit carryforwards to address the impact of the ownership change. For the year ended December 31, 2023, federal and state NOLs were reduced by $52,400,000 and $25,900,000, respectively, and federal and state research and development tax credit carryforwards were reduced by $918,000 and $517,000, respectively, as a result of the ownership change in 2023. The Company may experience ownership changes in the future as a result of subsequent shifts in stock ownership, some of which may be outside of the Company’s control.

At December 31, 2023, the Company had federal and state NOL carryforwards of approximately $2,900,000 and $2,475,000, respectively, 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 NOLs generated in tax years beginning after 2017 may be carried forward indefinitely, but are limited to offset up to 80% of future taxable income. As of December 31, 2023, all of our federal NOL carryforwards will carryforward indefinitely. The Company’s available state NOL carryforwards will begin to expire in 2044, unless previously utilized.

At December 31, 2023, the Company also had federal and state research and development credits of approximately $227,000 and $87,000, respectively. The federal tax credit carryforwards will begin to expire in 2044 and the state tax credit carryforwards will begin to expire in 2039.

The Company has not recorded any uncertain tax positions as of December 31, 2023 or 2022. The Company doesnot believe there will be any material changes in its unrecognized tax positions over the next 12 months.

The Company hasnot 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 consolidated financial statements as general and administrative expenses.

The Company files income tax returns in the United States and in multiple state jurisdictions. The Company is subject to tax examinations for federal and state purposes for tax years 2015 through 2023.

**12. 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 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:

**13. Subsequent Events **

In connection with the Inducement Letter Agreement, shares were held in abeyance 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. These Abeyance Shares will be held until notice is received by the holder that the balance, or portion thereof, may be issued in compliance with the beneficial ownership limitations. Subsequent to the balance sheet date, 826,370 Abeyance Shares were released and issued.