The accompanying notes are an integral part
of these condensed consolidated financial statements.
The accompanying notes are an integral
part of these condensed consolidated financial statements.
The accompanying notes are an integral
part of these condensed consolidated financial statements.
The accompanying notes are an integral part
of these condensed consolidated financial statements.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Nature of Operations
Phio
Pharmaceuticals Corp. (“Phio,” “we,” “our” or the “Company”)
is a biotechnology company developing the next generation of immuno-oncology therapeutics based on its self-delivering RNAi (“INTASYL™”)
therapeutic platform. The Company's efforts are focused on silencing tumor-induced suppression of the immune system through
its proprietary INTASYL™ platform with utility in immune cells and/or the tumor
micro-environment. The Company’s goal is to develop powerful INTASYL™ therapeutic
compounds that can weaponize immune effector cells to overcome tumor immune escape, thereby providing patients a powerful new treatment
option that goes beyond current treatment modalities.
2. Significant Accounting Policies
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 of America (“GAAP”). Certain information and footnote disclosures included
in the Company’s annual financial statements have been condensed or omitted. The year-end condensed balance sheet data was
derived from audited financial statements, but does not include all disclosures required by GAAP. 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. Interim results are not necessarily indicative of results for a full year.
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.
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. 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.
Leases
The Company follows the provisions of the
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic
842, “Leases” (“ASC 842”). 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. At the commencement date of the lease, the Company recognizes a liability to make lease payments
and an asset representing the right to use the underlying asset during the lease term. The Company has elected not to recognize
leases with a term less than one year on the balance sheet.
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 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
The Company follows the provisions of the
FASB ASC Topic 815, “Derivatives and Hedging.” 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.
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.
Research and Development Expenses
Research
and development costs relate to compensation and benefits for research and development personnel, facility-related expenses, supplies,
external services, costs to acquire technology licenses, 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.
The
Company contracts with third parties to perform various preclinical and clinical activities on its behalf for the continued development
of its product candidates. Accruals and expenses 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.
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. Stock compensation expense is based
on the grant date fair value estimated in accordance with the provisions of ASC 718 and is recognized as an expense over the requisite
service period.
Comprehensive Loss
The Company’s comprehensive loss
is equal to its net loss for all periods presented.
Net Loss per Share
The
Company accounts for and discloses net loss per share in accordance with the FASB ASC Topic 260, “Earnings per Share.”
Basic and diluted net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding.
Diluted earnings 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.
3. Liquidity and Going
Concern
The Company has reported recurring losses
from operations since inception and expects that the Company will continue to have negative cash flows from operations for the
foreseeable future. Historically, the Company’s primary source of funding has been the sale of its securities. The Company’s
ability to continue to fund its operation 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 our 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 to seek to merge with or to be acquired by another company.
The Company believes that its existing
cash and the funds available under its purchase agreements with Lincoln Park Capital Fund, LLC (“LPC”), should
be sufficient to fund operations for at least the next 12 months.
4. Recent Accounting Pronouncements
In February 2016, the FASB issued Accounting
Standards Update (“ASU”) 2016-02, “Leases (Topic 842)” (“Topic 842”),
which requires lessees to recognize a right of use asset and lease liability on the balance sheet for most leases that do not meet
the definition of a short-term lease and to disclose key information about leasing arrangements. Leases will continue to be classified
as either operating or financing. The Company adopted Topic 842 on January 1, 2019 using the modified retrospective approach and
elected to apply the transition method that allows companies to continue applying guidance under the lease standard in effect at
that time in the comparative period financial statements and recognize a cumulative-effect adjustment to the balance sheet on the
date of adoption. The Company has also elected the package of practical expedients to not reassess its prior conclusions about
lease identification, lease classification and indirect costs and to not separate lease and non-lease components.
Upon adoption of Topic 842 on January 1,
2019, the Company recorded a right of use asset of $28,000 and an operating lease liability of $28,000. Comparative periods have
not been restated. For additional information regarding how the Company is accounting for leases under Topic 842, refer to Note
5.
In November 2018, the FASB issued ASU 2018-18,
“Collaborative Arrangements (Topic 808)” (“Topic 808”), which clarifies the interaction between
Topic 808 and ASC Topic 606, “Revenue from Customers.” The update provides guidance on whether certain transactions
between collaborative arrangement participants should be accounted for with revenue under ASC Topic 606 and provide more comparability
in the presentation of revenue for certain transactions between collaborative arrangement participants. This will be effective
for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period. The Company
does not expect the adoption of Topic 808 to have a material impact on its financial statements.
5. Leases
The Company adopted Topic 842 on January
1, 2019 using the modified retrospective approach and elected to apply the transition method that allows companies to continue
applying guidance under the lease standard in effect at that time in the comparative period financial statements and recognize
a cumulative-effect adjustment to the balance sheet on the date of adoption. The Company has also elected the package of practical
expedients to not reassess its prior conclusions about lease identification, lease classification and indirect costs and to not
separate lease and non-lease components. With the adoption of Topic 842, the Company’s balance sheet now contains line items
for right of use asset, current lease liability and noncurrent lease liability.
The Company determined that it held an
operating lease for its office and laboratory space as of January 1, 2019. The Company held no other lease agreements. The Company
leases 7,581 square feet of office and laboratory space for its corporate headquarters and primary research facility in Marlborough,
Massachusetts. On January 1, 2019, the Company recorded a right of use asset and corresponding lease liability of $28,000.
On January 22, 2019, the Company amended
the lease for its office and laboratory space to extend the term by five years, such that the lease will expire on March 31, 2024.
With the amendment, the Company also has the option to terminate the lease after two or three years by providing advance written
notice. Due to the extension of the lease agreement, the Company increased the right of use asset and corresponding lease liability
by $592,000.
Additionally, the lease agreements did
not contain information to determine the rate implicit in the lease. 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. At September 30, 2019, the weighted average incremental borrowing rate and the weighted average remaining lease
term for the Company’s operating lease was 4.62% and 4.44 years, respectively.
As of September 30, 2019, the right of
use asset and liability arising from the Company’s operating lease was $538,000 and $542,000, respectively. During the three
months ended September 30, 2019, cash paid for the amounts included in the measurement of liabilities was $31,000 and the Company
recorded operating lease expense of $33,000, which was included in operating expenses on the statement of operations. During the
nine months ended September 30, 2019, cash paid for the amounts included in the measurement of liabilities was $90,000 and the
Company recorded operating lease expense of $94,000.
Future lease payments for non-cancellable
operating leases as of September 30, 2019 were as follows, in thousands:
2019 (remaining)
|
|
$
|
31
|
|
2020
|
|
|
128
|
|
2021
|
|
|
132
|
|
2022
|
|
|
135
|
|
2023
|
|
|
139
|
|
Thereafter
|
|
|
35
|
|
Total undiscounted lease payments
|
|
|
600
|
|
Less: Effects of discounting
|
|
|
(58
|
)
|
Total operating lease liabilities
|
|
$
|
542
|
|
6. Stockholders’ Equity
Lincoln Park Capital Fund, LLC –
On August 8, 2017, the Company entered into a purchase agreement (the “2017 Purchase Agreement”) and a registration
rights agreement with LPC, pursuant to which the Company has the right to sell to LPC up to $15,000,000 in shares of the Company’s
common stock, subject to certain limitations and conditions set forth in the 2017 Purchase Agreement.
No shares of common stock were sold to LPC
under the 2017 Purchase Agreement during the three or nine months ended September 30, 2019. During the three months ended September
30, 2018, the Company sold 15,000 shares of common stock to LPC under the 2017 Purchase Agreement for net proceeds of $21,000.
During the nine months ended September 30, 2018, the Company sold 435,000 shares of common stock to LPC under the 2017 Purchase
Agreement for net proceeds of $1,312,000.
On August 7, 2019, the Company entered into
a purchase agreement (the “2019 Purchase Agreement”) and a registration rights agreement with LPC, pursuant
to which the Company has the right to sell to LPC up to $10,000,000 in shares of the Company’s common stock, subject to certain
limitations and conditions set forth in the 2019 Purchase Agreement. As a commitment fee for entering into the 2019 Purchase Agreement,
the Company issued 500,000 shares of the Company’s common stock to LPC at a value per share of $0.3767, which was recorded
as a cost of capital. No shares of common stock were sold to LPC under the 2019 Purchase Agreement during the three or nine
months ended September 30, 2019.
Warrants — The following table
summarizes the Company’s outstanding equity-classified warrants at September 30, 2019:
Summary of Warrants
|
|
Exercise prices
|
|
|
Number of Shares
Underlying Warrants
|
|
|
Expiration
|
June 2015 Warrants
|
|
$
|
52.00
|
|
|
|
130,007
|
|
|
June 2, 2020
|
December 2016 Warrants
|
|
$
|
9.00
|
|
|
|
1,277,793
|
|
|
December 21, 2021
|
April 2018 Warrants
|
|
$
|
3.15
|
|
|
|
1,132,953
|
|
|
May 31, 2023
|
Placement Agent Warrants
|
|
$
|
4.0546
|
|
|
|
75,530
|
|
|
April 9, 2023
|
Pre-Funded Warrants
|
|
$
|
0.01
|
|
|
|
1,164,286
|
|
|
No expiration
|
October 2018 Warrants
|
|
$
|
0.70
|
|
|
|
21,428,572
|
|
|
October 3, 2025
|
Underwriter Warrants
|
|
$
|
0.875
|
|
|
|
1,607,143
|
|
|
October 1, 2023
|
Total warrants outstanding
|
|
|
|
26,816,284
|
|
|
|
There were no warrants exercised during
the three months ended September 30, 2019. During the nine months ended September 30, 2019, the Company received proceeds of $60,000
from the exercise of Pre-Funded Warrants for a total of 6,004,286 shares of common stock. There were no warrant exercises during
the three or nine months ended September 30, 2018.
7. 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:
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Options to purchase common stock
|
|
|
145,777
|
|
|
|
157,514
|
|
Unvested, restricted stock
|
|
|
–
|
|
|
|
73,587
|
|
Restricted stock units
|
|
|
517,241
|
|
|
|
151,250
|
|
Warrants to purchase common stock
|
|
|
26,816,284
|
|
|
|
2,616,283
|
|
Total
|
|
|
27,479,302
|
|
|
|
2,998,634
|
|
8. Stock-based Compensation
Stock Options
The Company uses the Black-Scholes option-pricing
model to determine the fair value of all its option grants. For valuing options granted during the three and nine months ended
September 30, 2019 and 2018, the following assumptions were used:
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Risk-free interest rate
|
|
|
N/A
|
|
|
|
2.93%
|
|
|
|
1.85 – 2.58%
|
|
|
|
2.70 – 2.93%
|
|
Expected volatility
|
|
|
N/A
|
|
|
|
161.45%
|
|
|
|
97.67 – 98.87%
|
|
|
|
91.28 – 161.45%
|
|
Expected lives (in years)
|
|
|
N/A
|
|
|
|
6.25
|
|
|
|
5.31
|
|
|
|
5.50
– 10.00
|
|
Expected dividend yield
|
|
|
N/A
|
|
|
|
0.00%
|
|
|
|
0.00%
|
|
|
|
0.00%
|
|
There were no options granted during the
three months ended September 30, 2019. The weighted average fair value of options granted during the three months ended September
30, 2018 was $1.72. The weighted average fair value of options granted during the nine months ended September 30, 2019 and 2018
was $0.30 and $1.75, respectively.
The risk-free interest rate used for each
grant is 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. The expected
life assumption 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 following table summarizes the activity
of the Company’s stock options for the nine months ended September 30, 2019:
|
|
Number
of Shares
|
|
|
Weighted-
Average
Exercise
Price
Per Share
|
|
|
Aggregate
Intrinsic
Value
|
|
Balance at December 31, 2018
|
|
|
141,677
|
|
|
$
|
66.29
|
|
|
|
–
|
|
Granted
|
|
|
15,000
|
|
|
|
0.40
|
|
|
|
–
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Cancelled
|
|
|
(10,900
|
)
|
|
|
60.62
|
|
|
|
–
|
|
Balance at September 30, 2019
|
|
|
145,777
|
|
|
$
|
59.93
|
|
|
$
|
–
|
|
Exercisable at September 30, 2019
|
|
|
69,454
|
|
|
$
|
123.52
|
|
|
$
|
–
|
|
Stock-based compensation expense related
to stock options for the three months ended September 30, 2019 and 2018 was $16,000 and $17,000, respectively. Stock-based compensation
expense related to stock options for the nine months ended September 30, 2019 and 2018 was $53,000 and $95,000, respectively.
Restricted Stock Units
Restricted stock units (“RSUs”)
are issued under the Company’s 2012 Long Term Incentive Plan (the “Plan”) or as inducement grants granted
outside of the Plan to new employees. RSUs are generally subject to graded vesting and the satisfaction of service requirements,
similar to our stock options. Upon vesting, each outstanding RSU will be exchanged for one share of the Company’s common
stock. 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 on 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 nine months ended September 30, 2019:
|
|
Number
of Shares
|
|
|
Weighted-
Average
Grant Date Fair Value
|
|
Unvested units at December 31, 2018
|
|
|
137,500
|
|
|
$
|
1.79
|
|
Granted
|
|
|
477,991
|
|
|
|
0.41
|
|
Vested
|
|
|
(69,750
|
)
|
|
|
1.79
|
|
Forfeited
|
|
|
(28,500
|
)
|
|
|
0.79
|
|
Unvested units at September 30, 2019
|
|
|
517,241
|
|
|
$
|
0.57
|
|
Stock-based compensation expense related
to RSUs for the three months ended September 30, 2019 and 2018 was $31,000 and $22,000, respectively. Stock-based compensation
expense related to RSUs for the nine months ended September 30, 2019 and 2018 was $110,000 and $22,000, respectively.
Restricted Stock
On August 31, 2018, and through subsequent
amendments on December 19, 2018 and February 14, 2019, Geert Cauwenbergh, Dr. Med. Sc., the Company’s former Chief Executive
Officer, elected the right to receive, in lieu of cash, for the period from September 15, 2018 to February 28, 2019, up to 50%
of his base salary and cash bonuses, if any, (collectively, the “Compensation”) payable in the form of unvested,
restricted shares of the Company’s common stock. Such restricted shares were received in the form of a series of grants made
on each Company payroll date in lieu of cash payment of the Compensation. All shares issued in lieu of Compensation vested in full
on June 1, 2019.
The fair value of the restricted stock
was based on the Company’s closing stock price on the date of grant and was expensed over the vesting period. During the
nine months ended September 30, 2019, the Company granted 243,032 shares of restricted stock in lieu of Compensation to Dr. Cauwenbergh
and recorded $106,000 in stock-based compensation expense related to the restricted stock. There were no restricted stock issuances
under this election or related stock-based compensation expense during the three months ended September 30, 2019.
During the three and nine months ended
September 30, 2018, the Company granted 73,587 shares of restricted stock in lieu of Compensation to Dr. Cauwenbergh. There was
no stock-based compensation expense recorded to related to the restricted stock during the same period.
Compensation Expense Related to Equity Awards
The following table sets forth total stock-based
compensation expense for the three and nine months ended September 30, 2019 and 2018, in thousands:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Research and development
|
|
$
|
6
|
|
|
$
|
9
|
|
|
$
|
25
|
|
|
$
|
29
|
|
General and administrative
|
|
|
41
|
|
|
|
30
|
|
|
|
244
|
|
|
|
88
|
|
Total stock-based compensation
|
|
$
|
47
|
|
|
$
|
39
|
|
|
$
|
269
|
|
|
$
|
117
|
|
9. Subsequent Events
Subsequent to the balance sheet date, the
Company received proceeds of $7,500 from the exercise of Pre-Funded Warrants for a total of 750,000 shares of common stock.