Phio Pharmaceuticals Corp. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes to those consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve significant risks and uncertainties. As a result of many factors, such as those set forth under “Risk Factors” and elsewhere in this Annual Report on Form 10-K, our actual results may differ materially from those anticipated in these forward-looking statements. Please refer to the discussion under the heading “Forward-Looking Statements” above. 28 Overview Phio Pharmaceuticals Corp. (“ Phio ,” “ we ,” “ our ” 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. We are 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. We are committed to discovering and developing innovative cancer treatments for patients by creating new pathways toward a cancer-free future. Our development efforts are based on our proprietary INTASYL self-delivering RNAi technology platform. INTASYL compounds are designed to precisely target specific proteins that reduce the body’s ability to fight cancer, without the need for specialized formulations or drug delivery systems, and are designed to make immune cells more effective in killing tumor cells. Our efforts are focused on developing immuno-oncology therapeutics using our INTASYL platform. We have demonstrated preclinical efficacy in both direct-to-tumor injection and adoptive cell therapy (“ ACT ”) applications with our INTASYL compounds. PH-762 PH-762 is an INTASYL compound designed to reduce the expression of cell death protein 1 (“ PD-1 ”). PD-1 is a protein that inhibits T cells’ ability to kill cancer cells and is a clinically validated target in immunotherapy. Decreasing the expression of PD-1 can thereby increase the capacity of T cells, which protect the body from cancer cells and infections, to kill cancer cells. Preclinical studies conducted by the Company have demonstrated that direct-to-tumor application of PH-762 resulted in potent anti-tumoral effects and have shown that direct-to-tumor treatment with PH-762 inhibits tumor growth in a dose dependent fashion in PD-1 responsive and refractory models. Importantly, direct-to-tumor administration of PH-762 resulted in activity against distant untreated tumors, indicative of a systemic anti-tumor response. We believe these data further support the potential for PH-762 to provide a strong local immune response without the dose immune-related adverse effects seen with systemic antibody therapy. PH-762 is currently being evaluated in a Phase 1b dose escalation clinical trial in France that is expected to enroll up to 21 subjects with advanced melanoma. PH-762 will be administered as a neoadjuvant monotherapy intratumorally once a week, for a total of four injections, across five escalating dose levels. Dosing will be followed by tumoral excision after an additional two weeks. The primary study objectives are to evaluate the safety and tolerability, and pharmacokinetics of PH-762; to determine the potential immunologic and pathologic tumor responses; and to determine the recommended dose for later clinical trials. Safety data from the initial cohort of three subjects in the clinical trial was evaluated by a Data Monitoring Committee in the first quarter of 2023. The safety data review disclosed no dose-limiting toxicity, and no drug-related severe or serious adverse events, and the Data Monitoring Committee recommended proceeding to the enrollment of the subsequent dose cohort. The next cohort is now open for enrollment of subjects. In addition to the French clinical trial, we expect to commence a U.S. Phase 1b clinical trial with PH-762 in the second half of 2023. The U.S. trial is expected to focus on the application of PH-762 to treat cutaneous squamous cell carcinoma (“ cSCC ”) and other selected cutaneous malignancies. Due to INTASYL’s ease of administration, we have shown that our compounds can easily be incorporated into current ACT manufacturing processes. In ACT, T cells are usually taken from a patient's own blood or tumor tissue, grown in large numbers in a laboratory, and then given back to the patient to help the immune system fight cancer. By treating T cells with our INTASYL compounds while they are being grown in the laboratory, we believe our INTASYL compounds can improve these immune cells to make them more effective in killing cancer. Preclinical data generated in collaboration with AgonOx, Inc. (“ AgonOx ”), a private company developing a pipeline of novel immunotherapy drugs targeting key regulators of the immune response to cancer, demonstrated that treating AgonOx’s “double positive” tumor infiltrating lymphocyte (“ DP TIL ”) with PH-762 increased by two-fold their tumor killing activity. 29 In March 2021, we entered into a clinical co-development collaboration agreement (the “ Clinical Co-Development Agreement ”) with AgonOx to conduct a Phase 1 clinical trial using DP TIL and PH-762. Under the Clinical Co-Development Agreement, we paid AgonOx $0.3 million as an upfront payment in December 2022 and have agreed to provide up to $4 million in total financial support to AgonOx to conduct a Phase 1 clinical trial of PH-762 treated DP TIL. Phio is also eligible to receive certain future development milestones and low single-digit sales-based royalty payments from AgonOx’s licensing of its DP TIL technology. PH-762 treated DP TILs are expected to be evaluated in a Phase 1 clinical trial in the United States with up to 18 subjects with advanced melanoma and other advanced solid tumors. The primary study objectives are to evaluate the safety and to study the potential for enhanced therapeutic benefit from the administration of PH-762 treated DP TILs. Enrollment of subjects is expected to commence in the second quarter of 2023. PH-894 PH-894 is an INTASYL compound that is designed to silence BRD4, a protein that controls gene expression in both T cells and tumor cells, thereby effecting the immune system as well as the tumor. Intracellular and/or commonly considered “undruggable” targets, such as BRD4, represent a challenge for small molecule and antibody therapies. Therefore, what sets this compound apart is its dual mechanism: PH-894 suppression of BRD4 in T cells results in T cell activation, and suppression of BRD4 in tumor cells results in tumors becoming more sensitive to being killed by T cells. Preclinical studies conducted have demonstrated that PH-894 resulted in a strong, concentration dependent and durable silencing of BRD4 in T cells and in various cancer cells. Similar to PH-762, preclinical studies have also shown that direct-to-tumor application of PH-894 resulted in potent and statistically significant anti-tumoral effects and demonstrated a systemic anti-tumor response. These preclinical data indicate that PH-894 can reprogram T cells and other cells in the tumor microenvironment to provide enhanced immunotherapeutic activity. The Company has completed the investigational new drug (“ IND ”)-enabling studies and is in the process of finalizing the study reports required for an IND submission with PH-894. As a result of the reprioritization to advance the Company’s clinical trial with PH-762 in the U.S., the Company has elected to defer the IND submission for PH-894. Impact of the Coronavirus Pandemic The Company continues to respond to and monitor the ongoing coronavirus pandemic. The Company believes that the coronavirus pandemic has not had a significant impact on our financial condition and results of operations, however, the extent to which the coronavirus pandemic may materially impact our financial results and operations will depend on a number of factors, including the availability of supplies and services we rely on, the ability to enroll subjects in our clinical trials, the emergence of variant strains of the coronavirus, the development, availability, and public acceptance of effective treatments and vaccines, and the duration of the coronavirus pandemic, which remain difficult to predict and are highly uncertain. Impact of Inflation Inflation has increased during the period covered by this Annual Report and is expected to continue to remain at elevated levels or even increase in the near future. Inflation generally affects us by increasing our cost of labor and third party contract costs. We do not believe inflation has had a material effect on our results of operations during year ended December 31, 2022. 30 Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“ GAAP ”). The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions and could have a material impact on our reported results. While our significant accounting policies are more fully described in Note 1 to our consolidated financial statements included elsewhere in this Annual Report, we believe the following addresses the Company’s accounting policies to be the most critical in understanding the judgments and estimates we use in preparing our financial statements. Research and Development Expenses 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 with respect to services provided and/or materials that we have received for which vendors have not yet billed us. The financial terms of these contracts are subject to negotiation, vary from provider to provider and may result in uneven payment flows. There may be instances in which payments made to our vendors exceed the level of services provided and result in a prepayment of the expense. In other instances, payment depends on factors such as the successful completion of milestones. We are required to estimate our accrued research and development expenses, of which a significant portion relate to third party providers the Company has contracted with to perform various research activities on our behalf for the continued development of our product candidates. This process includes reviewing open contracts and purchase orders, estimating the service performed and the associated cost incurred for research and development services not yet billed or otherwise notified of actual cost. 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 level of effort to be expended in each period, the achievement of milestones and other information available to us. Estimates of our research and development accruals are assessed on a quarterly basis based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors and facts and circumstances known to us at that time, and adjusted accordingly. 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 our actual costs. Due to the nature of estimates, we cannot provide assurance that we will not make changes to our estimates in the future as we become aware of additional information about the conduct of our research activities. 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 our collaborative partners that are more reflective of a vendor-customer relationship and therefore, within the scope of Topic 606. Under Topic 808, we determine 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 arrangement 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. Payments or 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. 31 Financial Operations Overview Revenues To date, we have primarily generated revenues through government grants. We have not generated any commercial product revenue and do not expect to do so in the foreseeable future. In the future, we may generate revenue from a combination of government grants, research and development agreements, license fees and other upfront payments, milestone payments, product sales and royalties in connection with future strategic collaborators and partners. We expect that any revenue we generate will fluctuate from period to period as a result of the timing of the achievement of any preclinical, clinical or commercial milestones and the timing and amount of payments received relating to those milestones and the extent to which any of our product candidates are approved and successfully commercialized by us or strategic collaborators and partners. If the Company or any future partner fails to develop product candidates in a timely manner or obtain regulatory approval for them, then our ability to generate future revenue and our results of operations and financial position would be adversely affected. 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. Our research and development programs are focused on the development of immuno-oncology therapeutics based on our INTASYL therapeutic platform. Since we commenced operations, research and development expenses have been a significant portion of our total operating expenses and are expected to constitute the majority of our spending for the foreseeable future. General and Administrative Expenses General and administrative expenses relate to compensation and benefits for general and administrative personnel, facility-related expenses, professional fees for legal, audit, tax and consulting services, as well as other general corporate expenses. Other (Expense) Income, net Other (expense) income consists primarily of interest income and expense and various income or expense items of a non-recurring nature. Results of Operations The following table summarizes our results of operations for the periods indicated, in thousands: Years Ended December 31, Dollar 2022 2021 Change Operating expenses $ 11,462 $ 13,511 $ (2,049 ) Operating loss (11,462 ) (13,511 ) 2,049 Net loss $ (11,480 ) $ (13,287 ) $ 1,807 32 Comparison of the Years Ended December 31, 2022 and 2021 Operating Expenses The following table summarizes our total operating expenses, for the periods indicated, in thousands: Years Ended December 31, Dollar 2022 2021 Change Research and development $ 7,012 $ 8,886 $ (1,874 ) General and administrative 4,450 4,625 (175 ) Total operating expenses $ 11,462 $ 13,511 $ (2,049 ) Research and Development Expenses Research and development expenses for the year ended December 31, 2022 decreased 21% compared with the year ended December 31, 2021. The decrease in research and development expenses was primarily driven by manufacturing related costs of approximately $2,000,000 for our PH-762 and PH-894 compounds and approximately $195,000 in preclinical studies with PH-762 that were required for the Company’s clinical trial in France, both of which were completed in the prior year period, offset by increases in clinical-related costs for the Company’s clinical trials with PH-762 in France and in ACT with our partner AgonOx of approximately $334,000. The Company anticipates research and development expenses to increase as a result of clinical-related activities as our pipeline programs progress in clinical development. General and Administrative Expenses General and administrative expenses for the year ended December 31, 2022 decreased 4% compared with the year ended December 31, 2021. The decrease in general and administrative expenses was primarily due to decreases in total payroll-related expenses of approximately $156,000 as a result of the departure of our former Chief Executive Officer and a reduction in the use of consultants and outside professional services of approximately $141,000 offset by approximately $55,000 in executive search fees. Total Other (Expense) Income Total other income for the year ended December 31, 2022 decreased by $242,000 as compared with the year ended December 31, 2021, primarily due to the full forgiveness of our Paycheck Protection Program (“ PPP ”) loan in 2021. Liquidity and Capital Resources Historically, our primary source of funding has been through the sale of our securities. In the future, we will be 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. We have reported recurring losses from operations since inception and expect that we will continue to have negative cash flows from our operations for the foreseeable future. At December 31, 2022, we had cash of $11,781,000 as compared with $24,057,000 at December 31, 2021. 33 In August 2019, we entered into a purchase agreement (the “ Purchase Agreement ”) with Lincoln Park Capital, LLC (“ LPC ”), pursuant to which we had the right to sell to LPC up to $10,000,000 in shares of our common stock, subject to certain limitations and conditions set forth in the Purchase Agreement. The Purchase Agreement expired in May 2022 and no shares of common stock were sold to LPC under the Purchase Agreement. The Company has limited cash resources, has reported recurring losses from operations since inception 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 the financial statements included elsewhere in this Annual Report. The continuation of the Company as a going concern depends upon the Company’s ability to raise additional capital through equity offerings, debt offerings or strategic opportunities to fund its operations. There can be no assurance that the Company will be successful in accomplishing any of these plans in order to continue as a going concern. The financial statements included elsewhere in this Annual Report 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. The following table summarizes our cash flows for the periods indicated, in thousands: Years Ended December 31, 2022 2021 Net cash used in operating activities $ (12,129 ) $ (11,858 ) Net cash used in investing activities (121 ) (51 ) Net cash (used in) provided by financing activities (26 ) 21,722 Net (decrease) increase in cash and restricted cash $ (12,276 ) $ 9,813 Net Cash Flow from Operating Activities Net cash used in operating activities for the year ended December 31, 2022 increased as compared with the year ended December 31, 2021, primarily due to an increase of $2,246,000 in the changes in operating assets and liabilities primarily due to payments made for the preclinical studies conducted for PH-894 and for the manufacturing of our PH-762 and PH-894 compounds and an increase of $168,000 in non-cash related items primarily as a result of the full forgiveness of the Company’s PPP loan in the prior year period offset by a decrease in net loss of $1,807,000. Net Cash Flow from Investing Activities Net cash used in investing activities for the year ended December 31, 2022 increased as compared with the year ended December 31, 2021, primarily due to an increase of $70,000 in laboratory and computer equipment purchases for the Company’s facility as compared to the prior year period. Net Cash Flow from Financing Activities Net cash from financing activities for the year ended December 31, 2022 decreased as compared with the year ended December 31, 2021, primarily due to the net proceeds of $21,722,000 received by the Company from capital raising activities and warrant exercises in the comparable prior year period. 34 Contractual Obligations Commitments In March 2021, we entered into a Clinical Co-Development Agreement with AgonOx to develop a T cell-based therapy using PH-762, and AgonOx’s DP TIL technology. Under the Clinical Agreement, we committed to make future payments of up to $4,000,000 to reimburse AgonOx for expenses incurred to support the Phase 1 clinical trial with PH-762 treated DP TIL. During the year ended December 31, 2022, the Company paid AgonOx $250,000 as an upfront payment. No amounts were paid to AgonOx during the year ended December 31, 2021 under the Clinical Co-Development Agreement. License Commitments We enter into licensing agreements with third parties that often require milestone and royalty payments based on the progress of the asset through development stages. Milestone payments may be required, for example, upon 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. During the years ended December 31, 2022 and 2021, we did not trigger any milestone payments. Our contractual license obligations that will require future cash payments as of December 31, 2022 are $700,000, which result from payments expected in connection with annual license fees. Lease Commitments Future lease payments under our non-cancellable operating lease are expected to be approximately $175,000 over the remaining duration of our lease, or through March 31, 2024. For further information regarding our future cash commitments see Note 8 to our consolidated financial statements. 35 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company, we are not required to provide this information.