Phio Pharmaceuticals Corp. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In this report, “we,” “our,” “ours,” “us,” “Phio” and the “Company” refers to Phio Pharmaceuticals Corp. and our subsidiary, MirImmune, LLC and the ongoing business operations of Phio Pharmaceuticals Corp. and MirImmune, LLC, whether conducted through Phio Pharmaceuticals Corp. or MirImmune, LLC. This management’s discussion and analysis of financial condition as of March 31, 2023 and results of operations for the three months ended March 31, 2023 and 2022 should be read in conjunction with the audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the Securities and Exchange Commission (the “ SEC ”) on March 22, 2023 (the “2022 Form 10-K”). This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as “intends,” “believes,” “anticipates,” “indicates,” “plans,” “expects,” “suggests,” “may,” “would,” “should,” “potential,” “designed to,” “will,” “ongoing,” “estimate,” “forecast,” “target,” “predict,” “could” and similar references, although not all forward-looking statements contain these words. Forward-looking statements are neither historical facts nor assurances of future performance. These statements are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Risks that could cause actual results to vary from expected results expressed in our forward-looking statements include, but are not limited to, the impact to our business and operations by inflationary pressures, rising interest rates, recession fears, the development of our product candidates, our ability to execute on business strategies, our ability to develop our product candidates with collaboration partners, and the success of any such collaborations, the timeline and duration for advancing our product candidates into clinical development, results from our preclinical and clinical activities, the timing or likelihood of regulatory filings and approvals, the success of our efforts to commercialize our product candidates if approved, our ability to manufacture and supply our product candidates for clinical activities, and for commercial use if approved, the scope of protection we are able to establish and maintain for intellectual property rights covering our technology platform, and our ability to obtain future financing. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements as a result of a number of important factors, including those identified in our 2022 Form 10-K under the heading “Risk Factors” and in other filings the Company periodically makes with the SEC. Therefore, you should not rely on any of these forward-looking statements. Forward-looking statements contained in this Quarterly Report on Form 10-Q speak as of the date hereof and the Company does not undertake to update any of these forward-looking statements to reflect a change in its views or events or circumstances that occur after the date of this report except as required by law. Overview Phio 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. 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. 13 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 in 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 open for enrollment of subjects. We also 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 lymphocytes (“ DP TIL ”) with PH-762 increased by two-fold their tumor killing activity. In March 2021, we entered into a clinical co-development collaboration agreement (the “ Clinical Co-Development Agreement ”) with AgonOx to develop a T cell-based therapy using PH-762 and AgonOx’s DP TIL. Under the Clinical Co-Development Agreement, we committed to provide financial support for development costs of up to $4 million to AgonOx for expenses incurred to conduct a Phase 1 clinical trial of PH-762 treated DP TIL in subjects with advanced melanoma and other advanced solid tumors. 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. To date, the Company has recognized approximately $0.3 million of expense under the Clinical Co-Development Agreement. 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 TIL. 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. We have completed the investigational new drug (“ IND ”)-enabling studies and are in the process of finalizing the study reports required for an IND submission with PH-894. As a result of the reprioritization to advance our clinical trial with PH-762 in the U.S., we have elected to defer the IND submission for PH-894. 14 Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed 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. There have been no material changes to our critical accounting policies and estimates as compared to those disclosed in our 2022 Form 10-K. Results of Operations The following data summarizes the results of our operations for the periods indicated, in thousands: Three Months Ended March 31, Dollar 2023 2022 Change Operating expenses $ 3,602 $ 2,640 $ 962 Operating loss (3,602 ) (2,640 ) (962 ) Net loss $ (3,602 ) $ (2,642 ) $ (960 ) Comparison of the Three Months Ended March 31, 2023 and 2022 Operating Expenses The following table summarizes our total operating expenses, for the periods indicated, in thousands: Three Months Ended March 31, Dollar 2023 2022 Change Research and development $ 2,134 $ 1,586 $ 548 General and administrative 1,468 1,054 414 Total operating expenses $ 3,602 $ 2,640 $ 962 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. Research and development expenses for the three months ended March 31, 2023 increased 35% as compared with the three months ended March 31, 2022. The increase in research and development expenses was primarily driven by a ramp up in clinical-related expenses for our planned intratumoral and ACT clinical trials with PH-762 of approximately $460,000 as compared to the prior year period. We anticipate research and development expenses to continue to increase as a result of clinical-related activities as our pipeline programs progress in clinical development. 15 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 and patent-related activities, audit, tax and consulting services, as well as other general corporate expenses. General and administrative expenses for the three months ended March 31, 2023 increased 39% as compared with the three months ended March 31, 2022, primarily due to increased professional service fees totaling approximately $420,000 for legal, patent and public relations related services as compared to the prior year period. 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 March 31, 2023, we had cash of $9,035,000 as compared with $11,781,000 at December 31, 2022. In April 2023, we completed the April 2023 Financing and net proceeds received are estimated to be approximately $1,654,000 after deducting placement agent fees and offering expenses. For further information regarding the April 2023 Financing, see Note 9 to our condensed consolidated interim financial statements included elsewhere in this Quarterly Report. We have limited cash resources, have reported recurring losses from operations since inception and has not yet received product revenues. These factors raise substantial doubt regarding our ability to continue as a going concern, and our 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 Quarterly Report. Our continuation as a going concern depends upon our ability to raise additional capital through equity offerings, debt offerings and/or strategic opportunities to fund our operations. There can be no assurance that we will be successful in accomplishing any of these plans in order to continue as a going concern. The financial statements included elsewhere in this Quarterly Report do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern. The following table summarizes our cash flows for the periods indicated, in thousands: Three Months Ended March 31, 2023 2022 Net cash used in operating activities $ (2,708 ) $ (3,469 ) Net cash used in investing activities – (104 ) Net cash used in financing activities (38 ) (25 ) Net decrease in cash and restricted cash $ (2,746 ) $ (3,598 ) Net Cash Flow from Operating Activities Net cash used in operating activities decreased primarily due to decreases of $1,801,000 in operating assets and liabilities from the payments for the IND-enabling studies required for PH-894 and for the manufacturing of clinical supply batches of PH-762 and PH-894 in the prior year period and $80,000 in non-cash related items related to a decrease in stock-based compensation expense partially offset by an increase in net loss of $960,000. Net Cash Flow from Investing Activities Net cash used in investing activities for the three months ended March 31, 2023 decreased as compared with the three months ended March 31, 2022, primarily due to laboratory and computer equipment purchases for our facility that occurred during the prior year period, which purchases did not repeat during the three months ended March 31, 2023 . Net Cash Flow from Financing Activities Net cash used in financing activities for the three months ended March 31, 2023 was consistent with the three months ended March 31, 2022. 16 Contractual Obligations There have been no material changes to the contractual obligations as disclosed in our 2022 Form 10-K. Details of our obligations under the Clinical Co-Development Agreement with our partner AgonOx as of March 31, 2023 can be found in Note 2 of the condensed consolidated financial statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company, we are not required to provide this information.