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. 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. 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. In 2023, the Company implemented a cost rationalization program driven by its transition from discovery research to product development. This resulted in a decision not to renew the lease for office and laboratory space in Marlborough, Massachusetts, which will expire on March 31, 2024. Beginning in April of 2024, we expect to continue operations as a remote business with a small laboratory facility in Worcester, Massachusetts for 321 square feet of space that commenced on March 1, 2024. Additionally, we rationalized discovery research personnel resulting in headcount reduction by approximately 36%. Expense reductions have been redirected to funding the Phase 1b clinical trial with PH-762 directed toward skin cancer. 24 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. Our preclinical studies 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 U.S. multi-center Phase 1b dose-escalating clinical trial through the intratumoral injection of PH-762 for the treatment of patients with cutaneous squamous cell carcinoma, melanoma and Merkel cell carcinoma. The trial is designed to evaluate the safety and tolerability of neoadjuvant use of intratumorally injected PH-762, assess the tumor response, and determine the dose or dose range for continued study of PH-762 and is expected to enroll up to 30 patients. In November 2023, we announced the dosing of the first patient under a previously cleared Investigational New Drug application (“ IND ”) application by the Food and Drug Administration and the trial is currently open for the continued enrollment of patients. Given our intention to focus our efforts and resources on our U.S. clinical trial with PH-762, we have completed the winding down process for our first-in-human clinical trial for PH-762 in France, which was limited to the treatment of patients with metastatic melanoma. Safety data from the initial cohort of three patients in the French clinical trial were 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. 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 their tumor killing activity by twofold. In February 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 agreed to reimburse AgonOx up to $4 million 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. We are 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 TIL are being evaluated in a Phase 1 clinical trial in the United States with up to 18 patients with advanced melanoma and other advanced solid tumors by AgonOx. The primary trial objectives are to evaluate the safety and to study the potential for enhanced therapeutic benefit from the administration of PH-762 treated DP TIL. We announced the first patient was dosed in August 2023 and the trial is open for the continued enrollment of patients. As of December 31, 2023, there is approximately $2,757,000 of remaining costs not yet incurred under the Clinical Co-Development Agreement. 25 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 against distant untreated tumors, indicative of 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 IND-enabling studies and are in the process of continuing to finalize 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. 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 our accounting policies to be the most critical in understanding the judgments and estimates we use in preparing our consolidated financial statements. Research and Development Expenses Research and development expenses are charged to expense as incurred. Payments made by us 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 we have 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 our reported results. Our 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. 26 Collaborative Arrangements We follow 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. We also consider the guidance in the FASB ASC Topic 606, “ Revenue from Contracts with Customers ,” (“ Topic 606 ”) in determining the appropriate treatment for activities between us and our collaborative partners that are more reflective of a vendor-customer relationship and therefore, within the scope of Topic 606, as well as other accounting literature. 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. We recognize our share of costs arising from research and development activities performed by collaborators in the period our 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. Derivative Financial Instruments   During the normal course of business we may issue warrants as part of a debt or equity financing. Warrants and other derivative financial instruments are accounted for either as equity or as an asset or liability, depending on the characteristics of each derivative financial instrument. 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. Financial instruments that meet the definition of a derivative are classified as an asset or liability are measured at fair value on the issuance date and are revalued on each subsequent balance sheet date. The changes in the fair value are recognized as current period income or loss. 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 we 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 collaboration, 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. 27 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. 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 2023 2022 Change Operating expenses $ 10,824 $ 11,462 $ (638 ) Operating loss $ (10,824 ) $ (11,462 ) $ 638 Net loss $ (10,826 ) $ (11,480 ) $ 654 Comparison of the Years Ended December 31, 2023 and 2022 Operating Expenses The following table summarizes our total operating expenses, for the periods indicated, in thousands: Years Ended December 31, Dollar 2023 2022 Change Research and development $ 6,332 $ 7,012 $ (680 ) General and administrative 4,366 4,450 (84 ) Impairment of property and equipment 126 – 126 Total operating expenses $ 10,824 $ 11,462 $ (638 ) Research and Development Expenses Research and development expenses for the year ended December 31, 2023 decreased 10% as compared to the year ended December 31, 2022. The decrease was primarily due to a decrease in costs related to the completion of our IND-enabling preclinical studies for PH-894 of approximately $1,979,000 and reduced lab supplies of approximately $298,000 as a result of a decrease in lab personnel and a shift in focus on clinical development and, partially offset by an increase in clinical-related costs of approximately $1,580,000 for the two U.S. PH-762 Phase 1 clinical trials as compared to the prior year period. 28 General and Administrative Expenses General and administrative expenses for the year ended December 31, 2023 decreased 2% as compared to the year ended December 31, 2022. The decrease was primarily due to decreases in personnel-related expenses of approximately $230,000 due to departmental organizational changes and one-time executive search-related fees of approximately $78,000 for the Company’s President & CEO and reduced D&O insurance premiums of $92,000, partially offset by increased legal fees of approximately $302,000. Impairment of Property and Equipment Loss on impairment of property and equipment for the year ended December 31, 2023 increased 100% as compared to the year ended December 31, 2022. The impairment charge to our long-lived assets was associated with our non-renewal of our office lease to operate as a remote business. The carrying value of these assets totaling $126,000 was deemed no longer recoverable and an impairment charge of $126,000 was recorded to adjust those assets to their fair value. 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, 2023, we had cash of $8,490,000 as compared with $11,781,000 at December 31, 2022. During the year ended December 31, 2023, we completed the April 2023 Financing, June 2023 Financing and December 2023 Financing (each as defined in Note 9 to our consolidated financial statements included elsewhere in this Annual Report) and received total net proceeds of $7,452,000 after deducting placement agent fees and offering expenses. For further information regarding the April 2023 Financing, June 2023 Financing and December 2023 Financing, see Note 9 to our consolidated financial statements included elsewhere in this Annual Report. We have limited cash resources, have reported recurring losses from operations since inception, negative operating cash flows and have 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 consolidated financial statements included elsewhere in this Annual 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 consolidated 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 we 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, 2023 2022 Net cash used in operating activities $ (10,749 ) $ (12,129 ) Net cash used in investing activities (5 ) (121 ) Net cash provided by (used in) financing activities 7,413 (26 ) Net decrease in cash and restricted cash $ (3,341 ) $ (12,276 ) 29 Net Cash Flow from Operating Activities Net cash used in operating activities for the year ended December 31, 2023 decreased 11% as compared to the year ended December 31, 2022, primarily due to decreased cash outflows from changes in operating assets and liabilities of $720,000 as a result of liabilities owed for the payments related to the IND-enabling studies with PH-894 and clinical supply manufacturing of PH-762 and PH-894 in the prior year period and a decrease in net loss of $654,000. Net Cash Flow from Investing Activities Net cash used in investing activities for the year ended December 31, 2023 decreased 96% as compared to the year ended December 31, 2022, primarily due to changes in laboratory and computer equipment purchases for our facility over the comparative period. Net Cash Flow from Financing Activities Net cash provided by financing activities for the year ended December 31, 2023 increased as compared to the net cash used in financing activities for the year ended December 31, 2022, primarily due to the Company’s capital raise activities over the comparative period (see Note 9 to our consolidated annual consolidated financial statements included elsewhere in this Annual Report). Contractual Obligations Commitments In February 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. Details of our obligations under the Clinical Co-Development Agreement as of December 31, 2023 can be found in Note 2 of the consolidated financial statements included elsewhere in this Annual Report. As of December 31, 2023, there is approximately $2,757,000 of remaining costs not yet incurred 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, 2023 and 2022, we did not trigger any milestone payments. Our contractual license obligations that will require future cash payments as of December 31, 2023 are $600,000, 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 $35,000 over the remaining duration of our lease, or through March 31, 2024. We do not intend to renew the lease for our corporate headquarters and primary research facility in Marlborough, Massachusetts, which will expire on March 31, 2024. Beginning in April of 2024, we expect to continue operations as a remote business with a small laboratory facility. The term of the laboratory facility commenced on March 1, 2024 and has a 6-month term, with lease payments expected to be $15,000 over the term of the lease. For further information regarding our future cash commitments see Note 7 to our consolidated financial statements included elsewhere in this Annual Report. 30 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company, we are not required to provide this information.