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, 2024 and results of operations for the three months ended March 31, 2024 and 2023 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, 2023, which was filed with the Securities and Exchange Commission (the “ SEC ”) on April 1, 2024 (the “2023 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, if any, 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 2023 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™ small interfering RNA gene silencing technology 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. Cost Rationalization In 2023, we implemented a cost rationalization program driven by our transition from a research company to a product development company. This transition resulted in a decision not to renew the lease for our corporate headquarters and primary research facility in Marlborough, Massachusetts, which expired on March 31, 2024. As of April 1, 2024, we have continued operations primarily as a remote business with a laboratory facility in Worcester, Massachusetts. Additionally, we rationalized research personnel and reduced our headcount by approximately 36%. These expense reductions have been redirected to funding the Phase 1b clinical trial with PH-762 directed toward skin cancer. 14 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 (“ IND ”) application by the U.S. Food and Drug Administration. The first two patients enrolled in our first cohort have completed treatment with PH-762 with no reported adverse events. The trial is currently open for the continued enrollment of patients and expects to complete enrollment of patients in the second quarter of 2025. AgonOx Collaboration Due to INTASYL’s ease of administration, we have shown that our compounds can easily be incorporated into current adoptive cell therapy (“ 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 two-fold. 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 had 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 were 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. On May 8, 2024, we terminated the Clinical Co-Development Agreement with AgonOx, effective immediately. Effective as of the date of the termination, the Clinical Co-Development Agreement and our continuing obligations and those of AgonOx thereunder will be terminated in their entirety. We will no longer be required to provide financial support for the development costs incurred under the Clinical Co-Development Agreement or be entitled to certain future development milestones and low single-digit sales-based royalty payments from AgonOx’s licensing of its DP TIL technology. We will pay to AgonOx all payment obligations that have accrued prior to the termination of the Clinical Co-Development Agreement. We intend to pay to AgonOx future fees to be incurred for patients that were treated in the Phase 1 clinical trial as of the date of termination. We estimate that such payments to be made to AgonOx will amount to approximately $388,000, which primarily relate to our accrued obligations under the Clinical Co-Development Agreement as of March 31, 2024, as well as future fees to be incurred for patients that were treated in the Phase 1 clinical trial and other miscellaneous costs as of the date of termination. Pursuant to the terms of the Clinical Co-Development Agreement, we and AgonOx shall meet and discuss the orderly wind-down of the Phase 1 clinical trial. Each of us and AgonOx shall be responsible for its own costs and expenses incurred in connection with the wind-down of the Phase 1 clinical trial. See Item 5. Other Information included elsewhere in this Quarterly Report for further information. Prior to the termination of the Clinical Co-Development Agreement with AgonOx, PH-762 treated DP TIL were 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 were to evaluate the safety and to study the potential for enhanced therapeutic benefit from the administration of PH-762 treated DP TIL. AgonOx had enrolled three patients. The first two patients were treated with DP TIL only and the third patient was treated with a combination of DP TIL and PH-762. 15 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 2023 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 2024 2023 Change Operating expenses $ 2,209 $ 3,602 $ (1,393 ) Operating loss $ (2,209 ) $ (3,602 ) $ 1,393 Net loss $ (2,154 ) $ (3,602 ) $ 1,448 Comparison of the Three Months Ended March 31, 2024 and 2023 Operating Expenses The following table summarizes our total operating expenses, for the periods indicated, in thousands: Three Months Ended March 31, Dollar 2024 2023 Change Research and development $ 1,148 $ 2,134 $ (986 ) General and administrative 1,061 1,468 (407 ) Total operating expenses $ 2,209 $ 3,602 $ (1,393 ) 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 agreement, 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, 2024 decreased 46% as compared with the three months ended March 31, 2023. The decrease in research and development expenses was primarily driven by our cost rationalization measures in transitioning from a research company to a product development company resulting in a decrease of $305,000 of expense due to the wind-down of preclinical studies, $170,000 in salary-related costs, including stock-based compensation expense, and $108,000 in lab supplies associated with the reduction in headcount, in addition to a decrease in clinical consulting fees of $225,000 incurred in connection with our IND filing for PH-762 in the prior period and a decrease of $131,000 in manufacturing fees for PH-762. 16 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, 2024 decreased 28% as compared with the three months ended March 31, 2023. The decrease in general and administrative expenses was primarily due to decreases in consulting expenses of $102,000 and legal expenses of $211,000 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, 2024, we had cash of $6,475,000 as compared with $8,490,000 at December 31, 2023. We have limited cash resources, have reported recurring losses from operations since inception, have 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 condensed consolidated 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 condensed consolidated 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, 2024 2023 Net cash used in operating activities $ (2,011 ) $ (2,708 ) Net cash used in financing activities (4 ) (38 ) Net decrease in cash, cash equivalents and restricted cash $ (2,015 ) $ (2,746 ) Net Cash Flow from Operating Activities Net cash used in operating activities for the three months ended March 31, 2024 decreased 26% as compared to the three months ended March 31, 2023, primarily due to a decrease in net loss of $1,448,000, a decrease in non-cash related items of $89,000 primarily related to reduced stock-based compensation expense, and a decrease in the changes in operating assets and liabilities of $662,000 primarily as a result of liabilities owed to support our IND filing for PH-762 and manufacturing fees related to the fill/finish of PH-762 drug product in the prior year period. Net Cash Flow from Investing Activities There were no net cash flows from investing activities for the three months ended March 31, 2024 and 2023. 17 Net Cash Flow from Financing Activities Net cash used in financing activities for the three months ended March 31, 2024 decreased 89% as compared to the three months ended March 31, 2023, primarily due to the amount of payments made for taxes on the net share settlements of RSUs. Contractual Obligations Details of our obligations under the Clinical Co-Development Agreement with our former collaboration partner AgonOx can be found in Note 2 of the condensed consolidated financial statements. Outside of the above, there have been no material changes to the contractual obligations as disclosed in our 2023 Form 10-K. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company, we are not required to provide this information.