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Item 8. Financial Statements and Supplementary Data

2022-03-18 compared with 2021-03-17 · 285 added, 165 removed, 265 unchanged (63% of the section changed)

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm ( KPMG LLP , McLean, Virginia Auditor Firm ID:

Consolidated Balance Sheets as of December 31, 2021 and 2020

Consolidated Statements of Operations for the years ended December 31, 2021 and 2020

Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2020 and 2019

Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2021 and 2020

Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020

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We have audited the accompanying consolidated balance sheets of Diffusion Pharmaceuticals Inc.

and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively, the consolidated financial statements).

and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations, changes in stockholders’

equity, and cash flows for the years then ended, and the related notes (collectively, the consolidated financial statements).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years then ended, in conformity with U.S.

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Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Deemed dividend

As discussed in Note 7 to the consolidated financial statements, the Company entered into a warrant exercise agreement with an investor who held a previously outstanding warrant.

The Company recognized a deemed dividend of $2.0 million to reflect the fair value of the consideration given as an inducement for the investor to exercise the warrants.

We identified the evaluation of the deemed dividend as a critical audit matter.

A higher degree of auditor judgment was required to evaluate the application of the accounting guidance due to the unique nature of the transaction with the investor.

The following are the procedures we performed to address this critical audit matter.

We read and evaluated the Company’s accounting memorandum that documented the business purpose, the terms of the agreements underlying the transaction, and the factors the Company considered in determining the applicable accounting treatment.

We compared the facts and circumstances in the Company’s accounting memorandum to the agreements underlying the transaction.

We have served as the Company’s auditor since 2015.

Critical Audit Matters

Critical audit matters are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

We determined that there are no critical audit matters.

We have served as the Company’s auditor since 2015.

McLean, Virginia

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Cash and cash equivalents

$ 37,313,558  

$ 18,515,595  

Prepaid expenses, deposits and other current assets

510,015  

260,825  

Total current assets

37,823,573  

18,776,420  

Property and equipment, net

149,198  

Intangible asset

8,639,000  

Right of use asset

Liabilities and Stockholders ’ Equity

149,162  

15,578  

15,771  

$ 37,839,151  

$ 27,729,551  

Liabilities and Stockholders ’

Current liabilities:

Accounts payable

$ 947,495  

$ 545,844  

Accrued expenses and other current liabilities

1,980,189  

1,776,470  

Current operating lease liability

113,469  

Total current liabilities

2,927,684  

2,435,783  

Deferred income taxes

443,893  

Noncurrent operating lease liability

35,693  

Total liabilities

2,927,684  

2,915,369  

Commitments and Contingencies (Note 5)

Stockholders’ Equity:

Stockholders’

Common stock, $ 0.001 par value:

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101,914,280 and 64,015,441 shares issued and outstanding at December 31, 2021 and 2020, respectively

101,914  

64,016  

Additional paid-in capital

164,814,664  

130,659,550  

Accumulated deficit

( 130,005,111 )  

( 105,909,384 )

Total stockholders' equity

34,911,467  

24,814,182  

Total liabilities and stockholders' equity

$ 37,839,151  

$ 27,729,551  

See accompanying notes to consolidated financial statements.

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Research and development

Intangible asset impairment charge

General and administrative

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Interest income

Loss from operations before income taxes

Income tax benefit (expense)

Loss before income taxes

Income tax benefit

Deemed dividend arising from warrant exchange

Net loss attributable to common stockholders

Net loss applicable to common stockholders

Share information:

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DIFFUSION PHARMACEUTICALS INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS ’ EQUITY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS ’

Stockholders' Equity

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Balance at December 31, 2020

( 105,909,384

Issuance of common stock and warrants, net of issuance costs

Issuance of common stock upon exercise of warrants

Vesting of restricted stock units

Stock-based compensation expense

Balance at December 31, 2021

( 130,005,111

See accompanying notes to consolidated financial statements.

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Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization

Loss on disposal of property and equipment

Stock-based compensation expense

Abandonment of in-process research and development intangible asset

Change in deferred income taxes

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Net cash used in operating activities

Cash flows provided by investing activities:

Cash received from sale of property and equipment

Net cash provided by investing activities

Cash flows provided by financing activities:

Proceeds from the sale of common stock

Proceeds from the sale of common stock, pre-funded warrants and warrants

Proceeds from the exercise of common stock warrants and pre-funded warrants

Proceeds from the sale of common stock, net of issuance costs

Proceeds from the sale of common stock warrants

Payment of offering costs

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Supplemental disclosure of non-cash investing and financing activities:

Offering costs in accounts payable and accrued expenses

Operating lease right of use asset and liability

Vesting of restricted stock units

See accompanying notes to consolidated financial statements.

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Organization and Description of Business

Diffusion Pharmaceuticals Inc., a Delaware corporation, an innovative biopharmaceutical company developing novel therapies that enhance the body’s ability to deliver oxygen to the areas where it is needed most.

The Company’s lead product candidate, TSC, is being developed to enhance the diffusion of oxygen to tissues with low oxygen levels, also known as hypoxia, a serious complication of many of medicine’s most intractable and difficult-to-treat conditions.

In addition to TSC, the Company's product candidate DFN-529, a novel, allosteric PI3K/Akt/mTOR pathway inhibitor, is in early-stage development.

The Company previously completed two Phase 1 clinical trials evaluating DFN-529 in age-related macular degeneration.

DFN-529 was also previously in preclinical development in oncology, specifically GBM.

Diffusion Pharmaceuticals Inc.

("the Company"), a Delaware corporation, is a biopharmaceutical company developing novel therapies that enhance the body’s ability to deliver oxygen to areas where it is needed most.

In November 2021, based on the preclinical and clinical data accumulated to date and the significant unmet medical need, the Company announced that its near-term focus will be the design and execution of a clinical program to support the use of intravenously administered TSC as an adjunctive treatment for hypoxic solid tumors.

The Company has not generated any revenues from product sales and has funded operations primarily from the proceeds of public and private offerings of equity, convertible debt and convertible preferred stock.

Substantial additional financing will be required by the Company to continue to fund its research and development activities.

No assurance can be given that any such financing will be available when needed, or at all, or that the Company’s research and development efforts will be successful.

The Company regularly explores alternative means of financing its operations and seeks funding through various sources, including public and private securities offerings, collaborative arrangements with third parties and other strategic alliances and business transactions.

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If the Company engages in collaborations, it may receive lower consideration upon commercialization of such products than if it had not entered such arrangements or if it entered into such arrangements at later stages in the product development process.

Operations of the Company are subject to certain risks and uncertainties including various internal and external factors that will affect whether and when the Company’s product candidates become approved drugs and how significant their market share will be, some of which are outside of the Company’s control.

The length of time and cost of developing and commercializing these product candidates and/or failure of them at any stage of the drug approval process will materially affect the Company’s financial condition and future operations.

The Company expects that its existing cash and cash equivalents as of December 31, 2020, combined with the proceeds received by the Company in connection with the completion of the February 2021 Offering and the exercise of certain warrants to purchase common stock during the first quarter of 2021 prior to the date of this Annual Report, will enable it to fund its operating expenses and capital expenditure requirements, including expected costs related to the planned TSC Oxygenation Trials and the Planned Phase 2 Hypoxia-related Indication Trial through 2023.

The Company expects that its existing cash and cash equivalents as of December 31, 2021 will enable it to fund its operating expenses and capital expenditure requirements through 2023.

Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements of the Company have been prepared in accordance with GAAP.

The accompanying consolidated financial statements of the Company have been prepared in accordance with GAAP.

Any reference in these notes to applicable guidance is meant to refer to GAAP as found in the Accounting Standards Codification and Accounting Standards Updates of the Financial Accounting Standards Board.

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Fair Value of Financial Instruments

The carrying amounts of the Company’s financial instruments, including cash equivalents and accounts payable approximate fair value due to the short-term nature of those instruments.

Concentration of Credit Risk

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Upon retirement or disposition of assets, the costs and related accumulated depreciation and amortization are removed from the accounts with the resulting gains or losses, if any, reflected in results of operations.

Long-Lived Assets

Long-lived assets are reviewed for potential impairment whenever events indicate that the carrying amount of such assets may not be recoverable.

The Company does this by comparing the carrying value of the long-lived assets with the estimated future undiscounted cash flows expected to result from the use of the assets, including cash flows from disposition.

If it is determined an impairment exists, the asset is written down to its estimated fair value.

The Company has not recognized any impairment of long-lived assets during the years ended December 31, 2020 and 2019.

In November 2021, the Company terminated the lease of its prior corporate headquarters and in connection with the termination the Company disposed of all of its related property and equipment.

Intangible Asset

The Company has an indefinite-lived IPR&D asset, DFN-529, which has a balance of $8.6 million at both December 31, 2020 and December 31, 2019.

DFN-529 is a PI3K/Akt/mTOR pathway inhibitor in preclinical development for oncology.

Intangible assets deemed to have indefinite lives are not amortized but rather are assessed for impairment annually on October 1 of the Company’s fiscal year or more frequently if impairment indicators exist.

There was no impairment to the Company’s DFN-529 intangible asset recognized during the years ended December 31, 2020 and 2019.

In the third quarter of 2021, the Board of Directors made a determination to no longer dedicate financial resources to the Company's DFN- 529 intangible asset and any future internal development efforts were abandoned.

In connection with this decision, the Company concluded that DFN- 529 was impaired in its entirety and as such, the Company recognized a non-cash impairment charge of $ 8.6 million during the third quarter of 2021.

The abandonment also resulted in an income tax benefit of $ 0.4 million due to the tax effect of the reduction in the deferred tax liability associated with the asset.

Research and Development

Major components of research and development costs include internal research and development (such as salaries and related employee benefits, equity-based compensation, supplies and allocated facility costs) and contracted services (research and development activities performed on the Company’s behalf).

Costs incurred for research and development are expensed as incurred.

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Depending on the timing of payments to the service providers and the progress that the Company estimates has been made as a result of the services provided, the Company may record net prepaid or accrued expenses relating to these costs.

Upfront payments made to third parties who perform research and development services on the Company’s behalf are expensed as services are rendered.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Upfront payments made to third parties who perform research and development services on the Company’s behalf are expensed as services are rendered.

Patent costs, including related legal costs, are expensed as incurred and are recorded within general and administrative expenses in the consolidated statements of operations.

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Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized.

The Company recognizes the benefit of an uncertain tax position that it has taken or expects to take on its income tax return it files, if such a position is more likely than not to be sustained.

ASC 740-10 defines the criterion an individual tax position must meet for any part of the benefit of the tax position to be recognized in financial statements prepared in conformity with GAAP.

A valuation allowance is provided when it is more likely than 

not  that some portion or all of a deferred tax asset will 

not  be realized.

The Company recognizes the benefit of an uncertain tax position that it has taken or expects to take on its income tax return it files, if such a position is more likely than 

not  to be sustained.

FASB ASC Subtopic 740 - 10, Accounting for Uncertainty of Income Taxes , (“ASC 740 - 10”

) defines the criterion an individual tax position must meet for any part of the benefit of the tax position to be recognized in financial statements prepared in conformity with GAAP.

The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not such tax position will be sustained on examination by the taxing authorities, based solely on the technical merits of the respective tax position.

The tax benefits recognized in the financial statements from such a tax position should be measured based on the largest benefit having a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority.

In accordance with the disclosure requirements of ASC 740-10, the Company’s policy on income statement classification of interest and penalties related to income tax obligations is to include such items as part of total interest expense and other expense, respectively.

In accordance with the disclosure requirements of ASC 740 - 10, the Company’s policy on income statement classification of interest and penalties related to income tax obligations is to include such items as part of total interest expense and other expense, respectively.

Stock-based Compensation

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The Company uses the Black-Scholes Model to value its stock option awards.

Estimating the fair value of stock option awards requires management to apply judgment and make estimates, including the volatility of the Company’s common stock, the expected term of the Company’s stock options, the expected dividend yield and the fair value of the Company’s common stock on the measurement date.

As a result, if factors change and management uses different assumptions, stock-based compensation expense could be materially different for future awards.

For certain stock option grants, the expected term was estimated using the “simplified method” for employee options as the Company has limited historical information to develop reasonable expectations about future exercise patterns and post vesting employment termination behavior for its stock option grants.

For certain stock option grants, the expected term was estimated using the “simplified method”

for employee options as the Company has limited historical information to develop reasonable expectations about future exercise patterns and post vesting employment termination behavior for its stock option grants.

The simplified method is based on the average of the vesting tranches and the contractual life of each grant.

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10 years) of the stock option and therefore the Company began to use the contractual life as the expected term.

For stock price volatility, the Company uses a combination of their own historical stock price and comparable public companies as a basis for its expected volatility to calculate the fair value of option grants.

The Company assumes no dividend yield because dividends are not expected to be paid in the near future, which is consistent with the Company’s history of not paying dividends.

For stock price volatility, the Company uses a combination of its own historical stock price and comparable public companies as a basis for its expected volatility to calculate the fair value of option grants.

The Company assumes no dividend yield because dividends are not expected to be paid in the near future, which is consistent with the Company’s history of not paying dividends.

The risk-free interest rate is based on U.S.

Treasury notes with a term approximating the expected life of the option.

Treasury notes with a term approximating the expected term of the option.

The Company accounts for forfeitures in the periods they occur.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Net Loss Per Common Share

Basic net loss per share is computed by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during each period.

Basic net loss per share is computed by dividing net loss applicable to common stockholders by the weighted average number of shares of common stock outstanding during each period.

Diluted net loss per share includes the effect, if any, from the potential exercise or conversion of securities, such as convertible debt, convertible preferred stock, common stock warrants, stock options and unvested restricted stock that would result in the issuance of incremental shares of common stock.

In computing the basic and diluted net loss per share applicable to common stockholders, the weighted average number of shares remains the same for both calculations due to the fact that when a net loss exists, dilutive shares are not included in the calculation as the impact is anti-dilutive.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following potentially dilutive securities outstanding have been excluded from the computation of diluted weighted average shares outstanding, as they would be anti-dilutive:

Common stock warrants

6,499,469  

9,100,112  

Stock options

3,626,223  

2,240,204  

Unvested restricted stock units

275,450  

153,000  

10,401,142  

11,493,316  

Recently Issued But Not Yet Adopted Accounting Pronouncements

In June 2016, the FASB issued ASU 2016 - 13, Financial Instruments—

Credit Losses, Measurement of Credit Losses on Financial Instruments (Topic 326 ).

The standard amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income.

For available-for-sale debt securities, entities will be required to recognize an allowance for credit losses rather than a reduction in carrying value of the asset.

Entities will no longer be permitted to consider the length of time that fair value has been less than amortized cost when evaluating when credit losses should be recognized.

This new guidance is effective for the Company as of January 1, 2022.

The Company is currently evaluating the impact of this ASU but does not expect that adoption of this standard will have a material impact on its consolidated financial statements and related disclosures.

Recently Adopted Accounting Pronouncements

In December 2019, the FASB issued ASU No.

2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes .

2019 - 12, “Income Taxes (Topic 740 ):

Simplifying the Accounting for Income Taxes .”

This guidance applies to all entities and aims to reduce the complexity of tax accounting standards while enhancing reporting disclosures.

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Early adoption is permitted for any annual periods for which financial statements have not been issued and interim periods therein.

The Company is currently analyzing the impact of ASU No.

2019-12 on the consolidated financial statements.

Recently Adopted Accounting Pronouncements

In August 2018, the FASB issued ASU 2018-03, Disclosure Framework- Changes to the Disclosure Requirements for Fair Value Measurements, which changes the fair value measurement disclosure requirements of ASC 820.

The goal of the ASU is to improve the effectiveness of ASC 820's disclosure requirements.

The Company adopted this standard in January 2021 and the adoption did not have a material impact on its related disclosures.

Property and Equipment

Property and equipment consists of the following:

Laboratory equipment

Furniture and office equipment

Leasehold improvements

Total property and equipment

accumulated depreciation and amortization

Property and equipment, net

Depreciation and amortization expense was approximately $0.1 million for both the years ended December 31, 2020 and 2019.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Accrued Expenses and Other Current Liabilities

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Accrued clinical studies expenses

DIFFUSION PHARMACEUTICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Commitments and Contingencies

Office Space Lease Commitment

The Company has a non-cancelable operating lease for office and laboratory space in Charlottesville, Virginia, which began in April 2017 and, as of December 31, 2020, has a remaining lease term of approximately 1.3 years.

The discount rate used to account for the Company's operating lease is the Company’s estimated incremental borrowing rate of 10.0%.

The original term of the lease ends in the second quarter of 2022 and the Company has an option to extend for another 5 years.

This option to extend was not recognized as part of the Company's measurement of the right-of-use asset and operating lease liability as of December 31, 2020.

Rent expense related to the Company's operating lease for both the years ended December 31, 2020 and 2019 was approximately $0.1 million.

Future minimum rental payments under the Company's non-cancelable operating lease at December 31, 2020 were as follows:

imputed interest

On November 8, 2021, the Company entered into a Deed of Lease Termination Agreement with the Carlton Landlord providing for the early termination of the Carlton Lease related to the Company's prior corporate headquarters.

The Carlton Lease was previously scheduled to expire on April 30, 2022.

In connection with the termination, the Company made a one -time payment to the Carlton Landlord of approximately $ 14,000 , net of a security deposit subsequently returned in accordance with the Carlton Lease.

In lieu of the fixed office and laboratory space previously available to us under the Carlton Lease, the Company has entered into short term agreements to utilize membership-based co-working space in both Charlottesville, Virginia and Philadelphia, Pennsylvania.

Rent expense related to the Company's operating lease for both the years ended December 

31, 2021 and 2020 was approximately $ 0.1 million.

Research and Development Arrangements

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The Company could also enter into additional collaborative research, contract research, manufacturing, and supplier agreements in the future, which may require upfront payments and long-term commitments of cash.

Defined Contribution Retirement Plan

The Company has established its 401(k) Plan, which covers all employees who qualify under the terms of the plan.

Defined Contribution Retirement Plan  

The Company has established a 401 (k) defined contribution plan that covers all employees who qualify under the terms of the plan.

Eligible employees may elect to contribute to the 401 (k) Plan up to 90 % of their compensation, limited by the IRS-imposed maximum.

The Company provides a safe harbor match with a maximum amount of 4.0% of the participant’s compensation.

The Company made matching contributions under the 401(k) Plan of approximately $56,000 and $68,000 for the years ended December 31, 2020 and 2019, respectively.

The Company provides a safe harbor match with a maximum amount of 4 % of the participant’s compensation.

The Company made matching contributions under the 401 (k) Plan of approximately $ 75,000 and $ 68,000 for the years ended December 

31, 2021 and 2020, respectively.

DIFFUSION PHARMACEUTICALS INC.

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Legal Proceedings

On August 7, 2014, a complaint was filed in the Superior Court of Los Angeles County, California by Paul Feller, the former Chief Executive Officer of the Company's legal predecessor under the caption Paul Feller v.

On August 7, 2014, a complaint was filed in the Superior Court of Los Angeles County, California by Paul Feller, the former Chief Executive Officer of the Company’s legal predecessor under the caption Paul Feller v.

RestorGenex Corporation, Pro Sports & Entertainment, Inc., ProElite, Inc.

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The complaint asserts various causes of action, including, among other things, promissory fraud, negligent misrepresentation, breach of contract, breach of employment agreement, breach of the covenant of good faith and fair dealing, violations of the California Labor Code and common counts.

The plaintiff is seeking, among other things, compensatory damages in an undetermined amount, punitive damages, accrued interest and an award of attorneys’ fees and costs.

The plaintiff is seeking, among other things, compensatory damages in an undetermined amount, punitive damages, accrued interest and an award of attorneys’

fees and costs.

On December 30, 2014, the Company filed a petition to compel arbitration and a motion to stay the action.

On April 1, 2015, the plaintiff filed a petition in opposition to the Company’s petition to compel arbitration and a motion to stay the action.

After a hearing for the petition and motion on April 14, 2015, the Court granted the Company’s petition to compel arbitration and a motion to stay the action.

On April 1, 2015, the plaintiff filed a petition in opposition to the Company’s petition to compel arbitration and a motion to stay the action.

After a related hearing on April 14, 2015, the court granted the Company’s petition to compel arbitration and a motion to stay the action.

On January 8, 2016, the plaintiff filed an arbitration demand with the American Arbitration Association.

On November 19, 2018 at an Order to Show Cause Re Dismissal Hearing, the Court found sufficient grounds not to dismiss the case, and an arbitration hearing was scheduled for November 2020.

In August 2020, due to the ongoing COVID-19 pandemic and related restrictions on gatherings in the State of California, the arbitration hearing was postponed to August 16, 2021.

The Company believes this matter is without merit and intends to defend the arbitration vigorously.

However, at this stage, the Company is unable to predict its outcome and the possible loss or range of loss, if any, associated with its resolution or any potential effect the matter may have on the Company’s financial position.

Depending on the outcome or resolution of this matter, it could have a material effect on the Company’s financial position.

On November 19, 2018 at an Order to Show Cause Re Dismissal Hearing, the court found sufficient grounds not to dismiss the case and an arbitration hearing was scheduled, originally for November 2020 but later postponed due to the COVID- 19 pandemic and related restrictions on gatherings in the State of California.

In addition, following the November 2018 hearing, an automatic stay was placed on the arbitration in connection with the plaintiff filing for personal bankruptcy protection.

On October 22, 2021, following a determination by the bankruptcy trustee not to pursue the claims and release them back to the plaintiff, the parties entered into a stipulation to abandon arbitration and return the matter to state court.

A case management conference was held on February 23, 2022 at which a trial date of May 24, 2023 was set, and the parties have agreed to stipulate to mediation in advance of the trial.

The Company believes the claims in this matter are without merit and intends to defend itself vigorously.

However, at this stage, the Company is unable to predict the outcome and possible loss or range of loss, if any, associated with its resolution or any potential effect the matter may have on the Company’s financial position.

Depending on the outcome or resolution of this matter, it could have a material effect on the Company’s financial position, results of operations and cash flows.

Stockholders' Equity and Common Stock Warrants

2021 Common Stock Offering

In February 2021, the Company completed the February 2021 Offering in which it offered and sold 33,658,538 shares of its common stock in an underwritten, public offering for a purchase price to the public of $ 1.025 per share, inclusive of shares offered and sold pursuant to the exercise in full by the underwriter of its 30 -day option to purchase additional shares.

The February 2021 Offering resulted in aggregate net proceeds to the Company of $ 31.1 million, after deducting underwriting commissions, discounts, and expenses.

In addition, at the closings of the February 2021 Offering, the Company issued to designees of the underwriter of the transaction warrants to purchase up to an aggregate of 1,682,927 shares of common stock to designees.

The underwriter warrants have an exercise price of $ 1.28125 per share and a term of five years from the date of issuance.

2020 Common Stock Offering

In May 2020, the Company completed the May 2020 Offering, a public offering of 11,428,572 shares of common stock for a purchase price of $ 1.05 per share for net proceeds of $ 10.3 million after deducting commissions, discounts, and other offering costs.

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The placement agent's warrants have an exercise price of $ 1.3125 per share and a term of five years from the date of issuance.

Additionally, also in May 2020, the Company entered into a warrant exercise agreement with an investor who held a previously outstanding warrant to purchase up to an aggregate of 5,000,000 shares of our common stock at an exercise price of $0.35 per share(the Prior Warrant).

In consideration for the exercise of the Prior Warrant for cash and an additional $0.125 per each share of common stock resulting from the exercise, the exercising investor received new unregistered warrants to purchase up to an aggregate of 5,000,000 shares of common stock in a private placement.

Additionally, also in May 2020, the Company entered into a warrant exercise agreement with an investor who held the Prior Warrant, a previously outstanding warrant to purchase up to an aggregate of 5,000,000 shares of our common stock at an exercise price of $ 0.35 per share.

In consideration for the exercise of the Prior Warrant for cash and an additional $ 0.125 per each share of common stock in the Prior Warrant being exercised, the exercising investor received new unregistered warrants to purchase up to an aggregate of 5,000,000 shares of common stock in a private placement.

The warrants are exercisable immediately at an exercise price of $ 0.5263 per share and exercisable until November 8, 2025.

The Company recognized a deemed dividend of $2.0 million to reflect the consideration given as an inducement for the investor to exercise the warrants.

This deemed dividend is recorded in the Company's consolidated statement of operations during the year ended December 31, 2020 as an increase to the net loss attributable to common stockholders for purposes of computing net loss per share, basic and diluted.

In connection with the warrants exercised in May 2020, the Company issued warrants to purchase up to 250,000 shares of common stock to the placement agent with an exercise price of $0.5938 per share and otherwise have identical terms to the warrants issued to the investor.

2019 Common Stock Offerings

In December 2019, Company completed the December 2019 Offering, an offering of 6,266,787 shares of its common stock and warrants to purchase 6,266,787 shares of common stock.

The shares of common stock and warrants were sold for a combined purchase price of $0.5585 per share for net proceeds of $3.0 million.

The December 2019 Offering warrants are exercisable beginning on the date of their issuance until June 13, 2025 at an initial exercise price equal to $0.4335 per share.

In addition, at the closing of the December 2019 Offering, the Company issued warrants to purchase up to 313,339 shares of common stock to designees of the placement agent.

The placement agent's warrants have an exercise price of $0.6981 per share and a term of five years from the date of issuance.

During the year ended December 31, 2020, the Company recognized a deemed dividend of $ 2.0 million to reflect the consideration given as an inducement for the investor to exercise the warrants.

This deemed dividend was recorded in the Company's consolidated statement of operations during the year ended December 31, 2020 as an increase to the net loss applicable to common stockholders for purposes of computing net loss per share, basic and diluted.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In November 2019, the Company completed the November 2019 Offering, a registered direct public offering of 5,104,429 shares of its common stock, and 6,324,143 pre-funded warrants each to purchase one share of common stock, together with warrants to purchase up to 22,857,144 shares of common stock at a combined public offering price of $0.35 per share and associated warrants for total net proceeds of $3.3 million.

The warrants were issued with an exercise price of $0.35 per warrant and are exercisable beginning on their date of issuance.

Of the warrants issued, 11,428,572 have a term of 18 months and 11,428,572 have a term of 5 years.

During the year ended December 31, 2019, 11,091,716 of those warrants were exercised for additional proceeds of $3.9 million.

In addition, at the closing of the November 2019 Offering, the Company issued warrants to purchase up to 571,429 shares of common stock to designees of the placement agent.

The placement agent's warrants have an exercise price of $0.4375 per share and a term of five years from the date of issuance.

In May 2019, the Company completed the May 2019 Offering, a registered direct public offering of 1,317,060 shares of common stock and a private placement of warrants to purchase 1,317,060 shares of common stock.

The shares of common stock and warrants were sold for a combined purchase price of $4.895 for total net proceeds of $5.6 million.

The warrants are exercisable beginning on the date of their issuance until November 29, 2024 at an initial exercise price equal to $5.00.

In addition, at the closing of the May 2019 Offering, the Company issued warrants to purchase up to 65,853 shares of common stock to designees of the placement agent.

The placement agent's warrants have an exercise price of $6.11875 per share, a term of 5 years from the date of issuance and otherwise substantially similar terms to the form of the investor warrant.

In connection with the May 2020 Investor Warrant Exercise, the Company issued warrants to purchase up to 250,000 shares of common stock to the placement agent with an exercise price of $ 0.5938 per share and otherwise have identical terms to the warrants issued to the investor.

Common Stock Warrants

During its evaluation of equity classification for the Company's common stock warrants issued in 2020 and 2019, the Company considered the conditions as prescribed within ASC 815-40, Derivatives and Hedging, Contracts in an Entity ’ s own Equity .

During its evaluation of equity classification for the Company's common stock warrants issued in 2020 and 2019, the Company considered the conditions as prescribed within ASC 815 - 40, Derivatives and Hedging, Contracts in an Entity ’

s own Equity .

The conditions within ASC 815 - 40 are not subject to a probability assessment.

The warrants do not fall under the liability criteria within ASC 480 Distinguishing Liabilities from Equity as they are not puttable and do not represent an instrument that has a redeemable underlying security.

The warrants do meet the definition of a derivative instrument under ASC 815, but are eligible for the scope exception as they are indexed to the Company’s own stock and would be classified in permanent equity if freestanding.

As of December 31, 2020, the Company had the following warrants outstanding to acquire shares of its common stock:

As of December 

31, 2021, the Company had the following warrants outstanding to acquire shares of its common stock:

Range of exercise

2 unchanged sentences

Common stock warrants issued in 2017 related to Series A convertible preferred stock offering

903,870  

$ 33.30  

Common stock warrants issued in 2018 related to the January 2018 common stock offering

1,181,421  

$ 12.00 - $ 15.00  

Common stock warrants issued related to the May 2019 Offering

1,382,913  

$ 5.00 - $ 6.11875  

May and December 2024

Common stock warrants issued related to the November 2019 Offering

213,570  

$ 0.35  

Common stock warrants issued related to the December 2019 Offering

December 2024 and June 2025

313,339  

$ 0.6981  

December 2024

Common stock warrants issued related to the May 2020 Offering

571,429  

$ 1.3125  

Common stock warrants issued related to the May 2020 Investor Warrant Exercise

250,000  

$ 0.5938  

November 2025

Common stock warrants issued related to the February 2021 Offering

1,682,927  

$ 1.28  

February 2026

6,499,469  

During the year ended December 31, 2021, 53,570 warrants expired and 4,230,000 warrants were exercised for proceeds of approximately $ 2.2 million.

During the year ended December 31, 2020, no warrants expired and 19,106,504 warrants were exercised for gross proceeds of $ 8.0 million.

During the year ended December 31, 2019, 1,767 warrants expired and 17,415,859 warrants were exercised for net proceeds of $3.9 million.

DIFFUSION PHARMACEUTICALS INC.

2 unchanged sentences

2015 Equity Plan

The 2015 Equity Plan provides for increases to the number of shares reserved for issuance thereunder each January 1 equal to 4.0% of the total shares of the Company’s common stock outstanding as of the immediately preceding December 31, unless a lesser amount is stipulated by the Compensation Committee of the Company's board of directors.

Accordingly, 2,560,618 shares were added to the reserve as of January 1, 2021, which shares may be issued in connection with the grant of stock-based awards, including stock options, restricted stock, restricted stock units, stock appreciation rights and other types of awards as deemed appropriate, in each case, in accordance with the terms of the 2015 Equity Plan.

As of December 31, 2020, there were no shares of common stock available for future issuance under the 2015 Equity Plan.

Further, the Company granted options to purchase 270,000 shares of common stock to employees during the year ended December 31, 2020 that were granted outside of the 2015 Equity Plan as an inducement material to the employee’s acceptance of employment with the Company in accordance with Nasdaq Listing Rule 5635(c)(4).

The 2015 Equity Plan provides for increases to the number of shares reserved for issuance thereunder each January 1 equal to 4.0 % of the total shares of the Company’s common stock outstanding as of the immediately preceding December 31, unless a lesser amount is stipulated by the Compensation Committee of the Company's board of directors.

Accordingly, 4,076,571 shares were added to the reserve as of  

January 1, 2022.

All such shares may be issued in connection with the grant of stock-based awards, including stock options, restricted stock, restricted stock units, stock appreciation rights and other types of awards as deemed appropriate, in each case, in accordance with the terms of the 2015 Equity Plan.

As of December 

31, 2021, there were 580,925 shares of common stock available for future issuance under the 2015 Equity Plan.

Generally, the options have a ten ( 10 ) year contractual term and vest in equal monthly installments over three ( 3 ) years.

1 unchanged sentence

Research and development

$ 154,041  

$ 164,791  

General and administrative

743,219  

571,328  

Total stock-based compensation expense

The following table summarizes the activity related to all stock option:

$ 897,260  

$ 736,119  

The following table summarizes the activity related to all stock options:

exercise price

contractual life

Balance at January 1, 2020

309,276  

$ 55.78  

1,931,100  

( 172 )  

142.50  

Balance at December 31, 2020

2,240,204  

$ 8.28  

$ 289,067  

1,815,767  

( 429,748 )  

Outstanding at December 31, 2021

3,626,223  

Exercisable at December 31, 2021

2,140,524  

$ 8.58  

Vested and expected to vest at December 31, 2021

The weighted average grant date fair value of stock option awards granted was $0.64 and $2.16 during the years ended December 31, 2020 and 2019, respectively.

The total fair value of options vested during the years ended December 31, 2020 and 2019 were $0.7 million and $0.6 million, respectively.

3,626,223  

$ 5.40  

The weighted average grant date fair value of stock option awards granted was $ 0.89 and $ 0.64 during the years ended December 

31, 2021 and 2020, respectively.

The total fair value of options vested during the years ended December 

31, 2021 and 2020 were $ 0.8 million and $ 0.7 million, respectively.

No options were exercised during any of the periods presented.

At December 31, 2020, there was $0.8 million of unrecognized compensation cost related to unvested options that will be recognized as expense over a weighted-average period of 2.2 years.

At December 

31, 2021, there was $ 1.1 million of unrecognized compensation cost related to unvested options that will be recognized as expense over a weighted-average period of 

During the year ended December 31, 2021, the Company granted 385,267 performance-based stock options with an exercise price of $ 1.11 per share, subject to vesting based on the satisfaction of specified performance criteria.

Compensation expense for the performance-based awards is recorded over the estimated service period for each milestone when the performance conditions are deemed probable of achievement.

The Company recorded stock-based compensation expense of approximately $ 0.1 million year ended December 31, 2021, for service-based awards with performance conditions deemed probable of achievement and/or achieved.

For performance-based awards containing performance conditions which were not deemed probable of achievement at December 31, 2021, no stock compensation expense was recognized and any previously recognized expense related to those awards originally deemed probable was reversed.

DIFFUSION PHARMACEUTICALS INC.

1 unchanged sentence

The grant date fair value of employee stock options is determined using the Black-Scholes Model.

The following assumptions were used during the years ended December 31, 2020 and 2019:

The following assumptions were used during the years ended December 

31, 2021 and 2020:

Expected term (in years)

5.31 —

Risk-free interest rate

1.3 % —

0.4 % —

Expected volatility

122.6 % —

125.8 %  

113.4 % —

124.8 %  

Dividend yield

Restricted Stock Unit Awards

During the year ended December 31, 2020, the Company granted 153,000 restricted stock units to members of the board of directors of the Company.

The weighted average grant date fair value of the restricted stock units granted during the year ended December 31, 2020 was $0.65.

The shares begin to vest 18 months after the grant date.

The Company recognized approximately $18,000 in expense related to these units during the year ended December 31, 2020.

At December 31, 2020, there was approximately $82,000 of unrecognized compensation cost that will be recognized over a weighted average period of 2.4 years.

Since inception, the Company has incurred net losses, and until 2018, had not recorded any U.S.

federal or state income tax benefits for the losses.

In 2018, as a result of the change in net operating loss carryforward period associated with the 2017 Tax Act, the Company recognized an income tax benefit to reflect the adjustment allowed by the 2017 Tax Act to utilize indefinite deferred tax liabilities as a source of income against indefinite lived portions of the Company’s deferred tax assets.

In 2019, as a result of a change in ownership under the provisions of Internal Revenue Code Section 382, the cumulative benefit of net operating losses was remeasured which resulted in tax expense to reverse the 2018 benefit recorded and record a benefit relative to losses incurred in 2019 after the date of the change in ownership.

The Company issues restricted stock ("RSU") to newly elected, non-executive members of the board of directors that vest in six, tri-monthly installments beginning 18 months after the respective grant date.

The fair value of a RSU is equal to the fair market value price of the Company’s common stock on the date of grant.

RSU expense is recorded on a straight-line basis over the service period.

The following table summarizes activity related to RSU stock-based payment awards:

grant date fair value

Balance at January 1, 2021

153,000  

$ 0.65  

138,800  

( 16,350 )  

Outstanding at December 31, 2021

275,450  

$ 0.70  

( 1 ) The Company withheld 6,049 shares of common stock to cover the tax liability associated with the vesting of these units in 2021.

The Company recognized approximately $ 54,000 and $ 18,000 in expense related to these units during the years ended December 

31, 2021 and December 2020, respectively.

At December 

31, 2021, there was approximately $ 0.1 million of unrecognized compensation cost that will be recognized over a weighted average period of 2.12 years.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect for years in which differences are expected to reverse.

4 unchanged sentences

Net operating loss carryforwards

Stock-based compensation

$ 6,033,726  

$ 3,864,189  

Stock option compensation

1,641,354  

1,571,227  

Orphan Drug credits

647,937  

541,384  

Lease liability

38,394  

Capitalized start-up costs and other

12,403,925  

10,709,631  

Valuation allowance

( 20,726,942 )  

( 14,906,646 )

Deferred tax assets

1,818,179  

Deferred tax liabilities

Intangible assets

( 2,223,678 )

Right of use asset

Deferred tax liabilities

( 2,262,072 )

Net deferred tax liability

The Company does not have unrecognized tax benefits as of December 31, 2020 or December 31, 2019.

$ ( 443,893 )

The Company does not have unrecognized tax benefits as of December 

31, 2021 or December 31, 2020.

The Company recognizes interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company had NOL carryforwards for federal and state income tax purposes at December 31, 2020 and 2019 of approximately:

The Company had NOL carryforwards for federal and state income tax purposes at December 

31, 2021 and 2020 of approximately:

Combined NOL Carryforwards:

December 31, 2021

December 31, 2020

$ 23,442,045  

$ 15,013,388  

23,436,624  

15,007,966  

The pre- 2018 net operating loss carryforwards begin expiring in 2021 for both federal and state income tax purposes.

In November 2019, as a result of a change of ownership, under the provisions of Internal Revenue Code Section 382 and similar state provisions, the Company’s ability to utilize their net operating loss carryforwards to offset future income was limited.

The Company recorded a valuation allowance against a portion of their deferred tax assets as of December 31, 2020 because of the uncertainty of their realization.

In November 2019, the Company increased the number of shares outstanding resulting in a change of ownership, under the provisions of Internal Revenue Code Section 382 and similar state provisions.

These provisions limit the Company’s ability to utilize these net operating loss carryforwards to offset future income.

The amounts above reflect the amount of NOLs that the Company expects to be able to utilize as a result of the limitation.

The Company recorded a 100 % valuation allowance of the deferred tax assets as of December 31, 2021 because of the uncertainty of their realization.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A reconciliation of income tax benefit at the statutory federal income tax rate and income taxes as reflected in the consolidated financial statements is as follows:

3 unchanged sentences

Federal tax benefit at statutory rate

( 21.0 )%  

State tax, net of Federal benefit

( 4.7 )%  

Orphan drug credit

( 0.4 )%  

Change in valuation allowance

Stock compensation

24.3 %  

Total provision

( 1.8 )%  

The Company files income tax returns in the U.S.

federal jurisdiction and various state jurisdictions.

The Company’s 2017 to 2019 tax years remain open and subject to examination.

Related Party Transactions

The Company’s Director of Information Technologies is the son of the Chairman of the Board of Directors and he has held that position since December 2014.

Subsequent Events

2021 Warrant Exercises

From January 1, 2021 through March 15, 2021, warrants were exercised by multiple holders to purchase a total of 4,230,000 shares of the Company's common stock for aggregate gross proceeds of approximately $2.2 million.

2021 Common Stock Offering

In February 2021, the Company completed the February 2021 Offering in which it offered and sold 33,658,538 shares of its common stock in an underwritten, public offering for a purchase price to the public of $1.025 per share, inclusive of shares offered and sold pursuant to the exercise-in-full by the underwriter of its 30-day option to purchase additional shares.

The February 2021 Offering resulted in aggregate net proceeds to the Company of $31.2 million, after deducting underwriting commissions, discounts, and expenses but prior to deducting other offering costs.

The underwriter warrants have an exercise price of $1.28125 per share and a term of five years from the date of issuance.

The Company’s 2018 to 2021 tax years remain open and subject to examination.

All net operating losses and credits remain subject to review until utilized.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data