Annual Report for Fiscal Year Ending 12-31, 2025 (Form 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 biopharmaceutical company whose proprietary INTASYL™ self-delivering RNAi® 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. We are committed to discovering and developing innovative cancer treatments for patients by creating new pathways toward a cancer-free future.

INTASYL Technology

Overall, RNA is involved in the synthesis, regulation and expression of proteins. RNA takes the instructions from DNA and turns those instructions into proteins within the body's cells. RNA interference, or RNAi, is a biological process that inhibits the expression of genes or the production of proteins. Diseases are often related to the incorrect protein being made, excessive amounts of a specific protein being made, or the correct protein being made, but at the wrong location or time. RNAi offers a novel approach to drug development because RNAi compounds can be designed to silence any one of the thousands of human genes, many of which are considered "undruggable" by traditional therapeutics.

Our development efforts are based on our proprietary INTASYL small interfering RNA technology. It is a patented technology from which specific patented compounds are developed. INTASYL compounds are comprised of a unique sequence of chemically modified nucleotides (modified small interfering RNA, or siRNAs) that target a broad range of cell types and tissues. The compounds are designed to effectively silence genes that tumors use to evade the immune system.

PH-762 is an INTASYL compound designed to reduce the expression of cell death protein 1 ("PD-1"). 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 (NCT 06014086) was 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.

PH-762 is an INTASYL compound designed to reduce the expression of 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 demonstrated that direct-to-tumor application of PH-762 resulted in potent anti-tumoral effects and showed 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 (NCT 06014086) 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 Phase 1b clinical trial is designed to evaluate the safety and tolerability of neoadjuvant use of intratumoral PH-762 in Stages 1, 2 and 4 cSCC, Stage 4 melanoma, and Stage 4 Merkel cell carcinoma. Per the trial's protocol, patients received four injections of PH-762 at weekly intervals and pathologic response were assessed two weeks following the final injection of PH-762. The study was fully enrolled in November 2025 with a total of 22 patients, 20 with cutaneous squamous cell carcinoma, one with melanoma and one with Merkel cell carcinoma.

While final study data is pending formal analysis, an FDA submission intended to propose and seek guidance for next steps in clinical study design for PH-762 is targeted for the second quarter of 2026. A total of 22 patients with cutaneous carcinomas completed treatment in the Phase 1b trial and underwent excision of the treated lesional site. Revised reported data supports an overall response rate of 65% for squamous cell carcinomas (cSCC). Among the 20 patients with cSCC, 13 patients were classified as pathologic responders, including 9 patients with complete response (100% clearance), 2 patients with major/near clear response (greater than 90% clearance), and 2 patients with partial response (greater than 50% clearance). A single patient with metastatic Merkel cell carcinoma had a partial response. Seven cSCC patients and one melanoma patient had responses of less than 50%, however, none of the patients experienced a progression of the disease.

In this trial to date, intratumoral injection of PH-762 has been well tolerated in all enrolled patients and there were no dose-limiting toxicities or clinically relevant treatment-emergent adverse effects in any patients who received intratumoral PH-762. PH-762 has been evaluated in patients within five dose-escalating cohorts, increasing drug concentration 20-fold from the first to the final cohort. Safety data through an extended follow-up period is expected to be reported in the second quarter of 2026.

In July 2025, we entered into a comprehensive drug substance development services agreement with a US manufacturer. This manufacturer will provide analytical and process development and cGMP manufacture of our lead development compound PH-762. The cGMP material will support future clinical development of PH-762.

In December 2025, we entered into a development services agreement with a US laboratory to conduct a non-clinical toxicology study, which is required by the FDA prior to commencing a human clinical trial for registration purposes.

PH-894

PH-894 is an INTASYL compound that is designed to specifically silence BRD4, a protein that controls gene expression in both T cells and tumor cells, thereby affecting 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 mode of action: 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 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.

Financial Operations Overview

Revenues

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 fail 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 consist primarily of personnel expenses, including salaries, benefits and stock-based compensation expenses for employees engaged in research and development functions, consultants and third-party experts, costs to acquire technology licenses, expenses associated with preclinical studies and clinical trial development activities, regulatory 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 consist primarily of personnel expenses, including salaries, benefits and stock-based compensation expenses for employees and consultants in general and administrative functions, professional fees for legal, audit, tax, information technology, insurance as well as other general operating expenses.

Interest Income (Expense), net

Interest Income (Expense) consists of interest income and expense.

Results of Operations

The following table summarizes our results of operations for the periods indicated, in thousands:

		Years Ended December 31,								Dollar
Description		2025				2024				Change
Operating expenses		$	9,220			$	7,387			$	1,833
Operating loss		$	(9,220	)		$	(7,387	)		$	(1,833	)
Net loss		$	(8,698	)		$	(7,150	)		$	(1,548	)

Comparison of the Years Ended December 31, 2025 and 2024

Operating Expenses

The following table summarizes our total operating expenses, for the periods indicated, in thousands:

		Years Ended December 31,								Dollar
Description		2025				2024				Change
Research and development		$	4,618			$	3,643			$	975
General and administrative			4,602				3,744				858
Total operating expenses		$	9,220			$	7,387			$	1,833

Research and Development Expenses

Research and development expenses for the year ended December 31, 2025 increased 27% as compared with the year ended December 31, 2024. The increase in research and development expenses was primarily driven by a $740 thousand increase in costs for our PH-762 clinical 1b clinical study and a $250 thousand increase in employee compensation costs including bonus and stock-based compensation expense. Overall, there was a $975 thousand increase due to advancement of our PH-762 clinical studies and planning for upcoming non-clinical toxicology studies.

General and Administrative Expenses

General and administrative expenses for the year ended December 31, 2025 increased 23% as compared to the year ended December 31, 2024. The increase of $858 thousand in general and administrative expenses was primarily due to an increase of $400 thousand for outsourced professional accounting services, a $110 thousand increase in outsourced legal costs and an increase of $300 thousand for stock-based compensation expense.

Liquidity and Capital Resources

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, 2025, we had cash and cash equivalents of $21.0 million as compared with $5.4 million at December 31, 2024. Based on current cash flow projections, we believe we have sufficient cash and cash equivalents, including net proceeds from our January 2025 Offerings, July 2025 Financing and November 2025 Financing (each as defined below), to meet our current planned obligations for at least 12 months from the date these financial statements are issued.

During the year ended December 31, 2025, we completed multiple financings and received total net proceeds of $20.6 million after deducting placement agent fees and offering expenses. For further information regarding the financings, see Note 8 to our consolidated financial statements included elsewhere in this Annual Report.

We expect we will need to raise additional capital until we are profitable, which may never occur. Historically, our primary source of funding has been through the sale of our securities. If no additional capital is raised through either additional public or private equity financings, debt financings, strategic relationships, alliances and licensing agreements, or a combination thereof, we may delay, limit or reduce discretionary spending in areas related to research and development activities and other general and administrative expenses in order to fund our operating costs and working capital needs.

We have based these estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. If we receive regulatory approvals for our program candidates, we expect to incur commercialization expenses related to program manufacturing, sales, marketing and distribution, depending on where we choose to commercialize or whether we commercialize jointly or on our own.

Because of the numerous risks and uncertainties associated with research, development and commercialization of our program candidates, we are unable to estimate the exact amount of our working capital requirements. Our future funding requirements will depend on and could increase significantly as a result of many factors, including:

• the scope, progress, results and costs of researching and developing our program candidates, and conducting preclinical studies and clinical trials;

• the costs, timing and outcome of regulatory review of our program candidates;

• the costs and timing of hiring new employees to support our continued growth;

• the costs of preparing, filing, and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims; and

• our ability to generate cash, and successfully obtain additional working capital, to fund our operating, investing and financing activities.

Until such time, if ever, that we can generate program revenue sufficient to achieve profitability, we expect to finance our cash needs through a combination of public and private equity offerings, debt financings, other third-party funding, strategic alliances, licensing arrangements or marketing and distribution arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing stockholders. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through other third-party funding, strategic alliances, licensing arrangements, outright sales of program candidates or marketing and distribution arrangements, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we will be required to delay, limit, reduce or terminate our program development or future commercialization efforts or grant rights to develop and market programs or program candidates that we would otherwise prefer to develop and market ourselves.

The following table summarizes our cash flows for the periods indicated, in thousands:

		Years Ended December 31,
		2025				2024
Net cash used in operating activities		$	(7,979	)		$	(7,112	)
Net cash (used in) provided by investing activities			(12	)			8
Net cash provided by financing activities			23,640				3,996
Net increase (decrease) in cash and cash equivalents		$	15,649			$	(3,108	)

Net Cash Flow from Operating Activities

Net cash used in operating activities for the year ended December 31, 2025 increased 12% as compared with the year ended December 31, 2024. This change of $867 thousand reflects a $1.5 million increase in net loss, partially offset by an increase in the non-cash items of $330 thousand for stock-based compensation as well as changes in operating assets and liabilities, including a $300 thousand increase in accounts payable and accrued expenses as a result of liabilities owed for the completion of clinical studies in the prior year.

Net Cash Flow from Investing Activities

Net cash used in investing activities for the year ended December 31, 2025 was approximately $12 thousand as compared to the year ended December 31, 2024 where net cash provided by investing activities was $8 thousand. The increase in net cash used in investing activities was primarily due to laboratory and computer equipment purchases.

Net Cash Flow from Financing Activities

Net cash provided by financing activities for the year ended December 31, 2025 increased by 492% as compared to the year ended December 31, 2024, primarily due to three separate financings by the Company, which occurred in January, July and November, during the year ended December 31, 2025. Our financing activities in 2024 were at a significantly lower transaction volume.

Contractual Obligations

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, 2024 can be found in Note 2 of the consolidated financial statements included elsewhere in this Annual Report. In May 2024, we terminated the Clinical Co-Development Agreement with AgonOx, which such termination was effective immediately.

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, 2025 and 2024, we did not trigger any milestone payments.

In September 2011, we entered into an agreement with Advanced RNA Technologies, LLC ("Advirna"), pursuant to which Advirna assigned to us its existing patent and technology rights related to the INTASYL technology in exchange for an annual maintenance fee of $100,000, until the patent's expiration date, a one-time milestone payment upon the future issuance of the first patent with valid claims covering the assigned patent and technology rights and the issuance of shares of our Common Stock equal to 5% of our fully-diluted shares outstanding at the time of issuance. The one-time milestone payment and the issuance of shares of Common Stock were completed in 2014 and 2012, respectively. Additionally, we are required to pay low single-digit royalties to Advirna on any licensing revenue received by us with respect to future licensing of the assigned Advirna patent and technology rights. To date, any royalties owed to Advirna under the Advirna agreement have been minimal.

Lease Commitments

We did not renew the lease for our corporate headquarters and primary research facility in Marlborough, Massachusetts, which expired on March 31, 2024. Beginning in April 2024, we have continued operations as a remote business with a laboratory space in Worcester, Massachusetts. The lease expired on February 28, 2026. We currently have shared office space at Life Sciences of Pennsylvania, 411 Swedeland Rd, Suite 23-1080, in King of Prussia, Pennsylvania. This arrangement is $300 on a month-to-month basis and is cancelable at any time.

For further information regarding our future cash commitments see Notes 5 and 6 to our consolidated financial statements included elsewhere in this Annual Report.