Dogwood Therapeutics, Inc.: Form 10-Q for the period ended Sep 30, 2023

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. See our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Security and Exchange Commission (“SEC”) on March 14, 2023 (the “2022 Annual Report on Form 10-K”), under “Risk Factors”, available on the SEC EDGAR website at www.sec.gov (http://www.sec.gov), for a discussion of the uncertainties, risks and assumptions associated with these statements. Actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements”, within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, that involve substantial risks and uncertainties. In some cases, you can identify forward-looking statements by the words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “objective,” “ongoing,” “plan,” “predict,” “project,” “potential,” “should,” “will,” or “would,” and or the negative of these terms, or other comparable terminology intended to identify statements about the future. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements, including the risks set forth in the 2022 Annual Report on Form 10-K. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report on Form 10-Q, we caution you that these statements are based on a combination of facts and factors currently known by us and our expectations of the future, about which we cannot be certain.

The forward-looking statements contained in this Quarterly Report on Form 10-Q include, among other things, statements about:

• our business strategies;
• our ability to obtain regulatory approval of our product candidate and any other product candidates we may develop, and the labeling under any regulatory approval we may obtain;
• risks relating to the timing and costs of clinical trials and the timing and costs of other expenses;
• timing and likelihood of success of our clinical trials and regulatory approval of our product candidates;
• risks associated with our reliance on third-party organizations;
• our competitive position;
• assumptions regarding the size of the available market, product pricing and timing of commercialization of our product candidates, if approved;
• our intellectual property position and our ability to maintain and protect our intellectual property rights;
• our results of operations, financial condition, liquidity, prospects, and growth strategies;
• our cash needs and financing plans;
• the industry in which we operate; and
• the trends that may affect the industry or us.

Overview

We are a development-stage biotechnology company focused on advancing novel antiviral therapies to treat diseases associated with a viral triggered abnormal immune response such as fibromyalgia (“FM”) and Long-COVID. Overactive immune response related to activation of tissue resident herpesvirus has been postulated to be a potential root cause of chronic illnesses such as FM, irritable bowel syndrome, Long-COVID, chronic fatigue syndrome and functional somatic syndromes, all of which are characterized by a waxing and waning manifestation of disease, often triggered by events which compromise the immune system. While not completely understood, there is general agreement in the medical community that activation of the herpesvirus is triggered by some form of environmental and/or health stressor. Our lead product candidates, which we have named IMC-1 and IMC-2, are novel, proprietary, fixed dose combinations of anti-herpes antivirals and celecoxib. IMC-1 is a novel combination of famciclovir and celecoxib intended to synergistically suppress herpesvirus activation and replication, with the end goal of reducing viral mediated disease burden. IMC-2 is a combination of valacyclovir and celecoxib that is believed to have specific activity against Epstein-Barr virus (herpesvirus HHV-4) as well as other herpesviruses.

IMC-1 and IMC-2 combine two specific mechanisms of action purposely designed to inhibit herpesvirus activation and replication, thereby keeping the herpesvirus in a latent (dormant) state or “down-regulating” the herpesvirus from a lytic (active) state back to latency. The famciclovir component of IMC-1 and valacyclovir component of IMC-2 inhibit viral DNA replication. The celecoxib component of IMC-1 and IMC-2 inhibits cyclooxegenase-2 (COX-2) and to a lesser degree cyclooxegenase-1 (COX-1), enzymes used by the herpesvirus to amplify or accelerate its own replication. We are unaware of any other antivirals currently in development for the treatment of FM or related conditions. We believe this novel approach was a germane consideration in the U.S. Food and Drug Administration (“FDA”) designating IMC-1 for fast-track review status for the treatment of FM. IMC-1 has also been granted a synergy patent based on the fact that neither of the individual components has proven effective in the management of FM, yet the combination therapy generated a result that is greater than the sum of its parts. IMC-1 was the focus of our Phase 2b FORTRESS (Fibromyalgia Outcome Research Trial Evaluating Synergistic Suppression of HerpesVirus) study.

In September 2022, we announced the top line results from our FORTRESS study in FM. Overall, the FORTRESS study did not achieve statistical significance on the prespecified primary efficacy endpoint of change from baseline to Week 14 in the weekly average of daily self-reported average pain severity scores comparing IMC-1 to placebo (p=0.302). However, based on post-hoc analysis of the FORTRESS data, community-based, or “new”, patients who have not participated in prior FM clinical trials demonstrated statistically significant improvement on the primary endpoint of reduction in FM related pain versus placebo. We believe focusing the forward development of IMC-1 on these “new” patients represents a viable and manageable path forward. We met with the Anesthesiology, Addiction Medicine and Pain Medicine division of the FDA in March 2023. In April 2023, we received initial feedback that the FDA was amenable to our proposed Phase 3 program, pending review of our final chronic toxicology program results. In August 2023, the FDA informed the Company that its chronic toxicology program studies appear adequate to support the safety of IMC-1 at the dose proposed by the Company for chronic use. Subject to its ability to raise additional capital, the Company plans to initiate a pharmacokinetic and food effect (“pK”) study for IMC-1 while concurrently submitting a final Phase 3 program outline and study protocols for FDA review. Following completion of the pK study, the Company intends to begin enrollment in the first FM Phase 3 safety and efficacy study in mid-2024.

The proposed Phase 3 program consists of three primary components: two adequate and well-controlled clinical studies, one of which would be a full factorial design with each of the individual components of IMC-1 (famciclovir and celecoxib) as separate comparator arms, and a long-term safety trial. The first planned double-blind, placebo-controlled Phase 3 clinical study will be a two-arm study comparing IMC-1 to placebo. The second planned double-blind, placebo-controlled Phase 3 clinical study will be a four-arm, multifactorial design to demonstrate the relative safety and efficacy of IMC-1 as compared to celecoxib alone, famciclovir alone and placebo. All patients from these two clinical studies will be offered the opportunity to enroll into an open label safety follow-on extension study with all on IMC-1.

In July 2023, the Company received positive data from an exploratory, open-label, proof of concept study in Long-COVID funded by an unrestricted grant provided to the Bateman Horne Center (“BHC”). BHC enrolled female patients diagnosed with Long-COVID illness, otherwise known as Post-Acute Sequelae of COVID-19 infection (“PASC”). Patients treated with a combination of valacyclovir and celecoxib exhibited clinically and statistically significant improvements in fatigue, pain, and symptoms of autonomic dysfunction as well as ratings of general well-being related to Long-COVID when treated open-label for 14 weeks, as compared to a control cohort of female Long-COVID patients matched by age and length of illness and treated with routine care. The statistically significant improvements in PASC symptoms and general health status were particularly encouraging given that the mean duration of Long-COVID illness was two years for both the treated and control cohort prior to enrollment in this study. Based on these data, the Company plans to meet with the FDA to discuss opening an investigational new drug application to formally assess treatment of symptoms associated with PASC using IMC-2.

In July 2023, we entered into a Capital on DemandTM Sales Agreement, (the “Sales Agreement”), with JonesTrading Institutional Services LLC, (“JonesTrading”), relating to our shares of common stock, par value $0.0001 per share. In accordance with the terms of the Sales Agreement, we could offer and sell our shares of common stock having an aggregate offering price of up to $6.7 million from time to time through JonesTrading, acting as sales agent or principal. In August, we halted sales under the Sales Agreement and in September the Sales Agreement was terminated. Before sales were halted and the Sales Agreement was terminated, we raised proceeds, net of issuance costs, of approximately $1.2 million.

In August 2023, we signed an unrestricted grant research agreement with BHC to conduct a second, investigator-initiated, randomized, double-blinded, placebo-controlled study of Long-COVID with IMC-2. Patient enrollment for this study is expected to begin in the fourth quarter of 2023 with results projected to be available in the second half of 2024. BHC is a non-profit, interdisciplinary Center of Excellence advancing the diagnosis and treatment of chronic fatigue disorders including myalgic encephalomyelitis/chronic fatigue syndrome, FM, post-viral syndromes, and related comorbidities.

We have not generated revenues and have incurred losses since inception. Our net losses for the three and nine months ended September 30, 2023 and 2022, were $1,235,074 and $4,192,842, respectively, and $2,575,715 and $10,203,278, respectively, and our accumulated deficit as of September 30, 2023 was $60,366,049. We expect to incur losses for the foreseeable future, and we expect these losses to increase as we continue to develop and seek regulatory approvals for our product candidates. Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when, or if, we will be able to achieve or maintain profitability.

The global economy, including credit and financial markets, has experienced extreme volatility and disruptions including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, increases in inflation rates and uncertainty about economic stability. For example, the recent Israel-Hamas conflict and the ongoing conflict between Ukraine and Russia, the effect of the wars and the resulting sanctions by the U.S. and European governments, has created extreme volatility in the global capital markets and is expected to have further global economic consequences, including disruptions of the global supply chain and energy markets. Any such volatility and disruptions may have adverse consequences on us or the third parties on whom we rely. If the equity and credit markets deteriorate, including as a result of political unrest or war, it may make any necessary debt or equity financing more difficult to obtain in a timely manner or on favorable terms, if at all.

Results of Operations

Below is a summary of the results of operations:

(Unaudited)

(Unaudited)

Three and Nine Months Ended September 30, 2023 and 2022

Research and Development Expenses

Research and development expenses decreased by $1.2 million and $5.4 million for the three and nine months ended September 30, 2023, respectively, compared to the prior year periods. The decrease of $1.2 million for the three months ended September 30, 2023 was due to decreases in expenses for clinical trials of $1.1 million and drug development and manufacturing costs of $0.1 million. The decrease of $5.4 million for the nine months ended September 30, 2023 was due to decreases in expenses for clinical trials of $5.0 million, toxicology studies of $0.3 million, drug development and manufacturing costs of $0.1 million and salaries and related costs of $0.2 million offset by increases in regulatory and research consulting costs of $0.2 million.

General and Administrative Expenses

General and administrative expenses decreased by $0.1 million and $0.5 million for the three and nine months ended September 30, 2023, respectively, compared to the prior year periods. The decrease of $0.1 million for the three months ended September 30, 2023 was due to a decrease in expenses associated with being a public company. The decrease of $0.5 million for the nine months ended September 30, 2023 was due to decreases in expenses associated with being a public company of $0.4 million and salaries and related costs of $0.1 million.

Liquidity and Capital Resources

Since our inception, we have financed our operations through public offerings of common stock and proceeds from private placements of membership interests and convertible promissory notes. To date, we have not generated any revenue from the sale of products and we do not anticipate generating any revenue from the sales of products for the foreseeable future. We have incurred losses and generated negative cash flows from operations since inception. As of September 30, 2023, our principal source of liquidity was our cash, which totaled $4.8 million.

Equity Financings

In July 2023, we entered into a Capital on DemandTM Sales Agreement (the “Sales Agreement”) with JonesTrading Institutional Services LLC (“JonesTrading”) under which we could issue and sale shares of our common stock, from time to time, through JonesTrading, acting as sales agent or principal, up to an aggregate offering price of up to $6,700,000 in which is commonly referred to as an “at-the-market” (“ATM”) program. During the three months ended September 30, 2023, we sold 641,873 shares of our common stock under the ATM program at a weighted-average gross sales price of approximately $2.11 per share and raised $1,355,090 of gross proceeds. The total commissions and related legal and accounting fees were approximately $198,650, and we received net proceeds of approximately $1,156,440. In August 2023, we terminated the Sales Agreement. As of September 30, 2023, there was no ATM program in place.

In September 2022, we closed an underwritten public offering raising gross proceeds of $5.0 million and net proceeds of approximately $4.5 million, after deducting underwriting discounts, commissions and offering expenses.

Debt Financings

There were no debt financings during the nine months ended September 30, 2023 and 2022. There was no debt outstanding at September 30, 2023 and December 31, 2022.

Future Capital Requirements

We estimate our current cash of $4.8 million at September 30, 2023 is not sufficient to fund operating expenses and capital requirements for at least the next 12 months. The Company will need to raise additional capital within the next nine months to remain a going concern and to further advance clinical development and to commercially develop its product candidates. Currently, the planned research and development activities include submission of an investigational new drug (“IND”) application to formally access IMC-2 as a treatment for the symptoms associated with Long-COVID; continued salaries and benefits; and provision of a new grant to the BHC to execute a double-blinded, placebo controlled investigator-sponsored study of Long-COVID with the combination of valacyclovir and celecoxib.

We expect to raise additional capital to complete clinical development of and to commercially develop our product candidates. We will need to finance our cash needs through public or private equity offerings, debt financings, collaboration and licensing arrangements or other financing alternatives. To the extent that we raise additional funds by issuing equity securities, our shareholders will experience dilution. We can give no assurances that we will be able to secure such additional sources of funds to support our operations, or, if such funds are available to us, that such additional financing will be sufficient to meet our needs. As a result, substantial doubt exists regarding our ability to continue as a going concern 12 months from the filing of this report on Form 10-Q. Failure to secure the necessary financing in a timely manner and on favorable terms could have a material adverse effect on the Company’s strategy and value and could require the delay of product development and clinical trial plans.

Summary of Cash Flows

The following table summarizes our cash flows for the nine months ended September 30, 2023 and 2022, respectively:

(Unaudited)

Cash Flows for the Nine Months Ended September 30, 2023 and 2022

Operating Activities

For the nine months ended September 30, 2023, net cash used in operations was $3.4 million and consisted of a net loss of $4.2 million offset by a net change in operating assets and liabilities of $0.3 million attributable to a decrease in accounts payable and accrued liabilities of $0.6 million offset by a decrease in prepaid expenses of $0.9 million and non-cash items of $0.5 million attributable to share-based compensation.

For the nine months ended September 30, 2022, net cash used in operations was $8.8 million and consisted of a net loss of $10.2 million offset by a net change in operating assets and liabilities of $1.0 million attributable to a decrease in prepaid expenses of $0.7 million and a net increase in accounts payable and accrued liabilities of $0.3 million and non-cash items of $0.4 million attributable to share-based compensation.

Financing Activities

Net cash provided by financing activities during the nine months ended September 30, 2023 was $1.2 million and was attributable to proceeds from the issuance and sale of common stock under the ATM program, net of commissions and other related expenses. In addition, there were 478,625 warrants cashless exercised. As a result, 192,951 shares of common stock were surrendered at fair value to satisfy the exercise price and 285,674 shares of common stock were issued.

Net cash provided by financing activities during the nine months ended September 30, 2022 was $4.6 million and was attributable to proceeds from our underwritten public offering, net of deal costs and other expenses but excluding non-cash financing activities of $0.1 million for legal and accounting fees that are in accounts payable and accrued liabilities as of September 30, 2022.

Off-Balance Sheet Arrangements

As of September 30, 2023, we did not have any off-balance sheet arrangements or relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities.

Discussion of Critical Accounting Policies and Significant Judgements and Estimates

The preparation of financial statements in conformity with U.S. GAAP requires us to use judgment in making certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require difficult, subjective and complex judgments by management in order to make estimates about the effect of matters that are inherently uncertain. During the nine months ended September 30, 2023, there were no significant changes to our critical accounting policies from those described in our annual financial statements for the year ended December 31, 2022, which we included in our 2022 Annual Report on Form 10-K.

JOBS Act

On April 5, 2012, the Jumpstart Our Business Startups Act of 2012, or JOBS Act, was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for an “emerging growth company.” As an “emerging growth company,” we are electing to take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards.

Subject to certain conditions set forth in the JOBS Act, as an “emerging growth company,” we are not required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis), and (iv) disclose certain executive compensation-related items such as the correlation between executive compensation and performance and comparisons of the chief executive officer’s compensation to median employee compensation. These exemptions will apply until the fifth anniversary of the completion of our IPO or until we no longer meet the requirements for being an “emerging growth company,” whichever occurs first.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Senior Vice President of Finance, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost benefit relationship of possible controls and procedures.

Based upon that evaluation, our Chief Executive Officer and Senior Vice President of Finance concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective in ensuring that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules, regulations and forms of the SEC, including ensuring that such material information is accumulated by and communicated to our management, including our Chief Executive Officer and Senior Vice President of Finance, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(f) of the Exchange Act that occurred during the quarter covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.