Item 5. Market for Registrant’s Common Equity
ITEM 5.
MARKET FOR REGISTRANT ’ S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Market Information
 
Our common stock trades publicly on the Nasdaq Capital Market under the symbol “DFFN.”
 
Holders
 
As of March 15, 2022, there were 343 record holders of our common stock. This does not include beneficial owners of our common stock whose stock is held in nominee or “street name”.
 
Dividends
 
To date, we have not declared or paid any cash dividends on our common stock and do not intend to do so in the near future.
 
Securities Authorized for Issuance Under Equity Compensation Plans
 
The information set forth in, Part III — Item 12 (Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters) of this Annual Report is incorporated herein by reference to the extent required by Item 201(d) of Regulation S-K.
 
Recent Unregistered Sales of Equity Securities and Use of Proceeds
 
None
 
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
 
None.
 
 
ITEM 6.
SELECTED FINANCIAL DATA
 
The information required by Item 6 of Form 10-K has been omitted from this Annual Report pursuant to the amendments to Regulation S-K adopted by the SEC on November 19, 2020.
 
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ITEM 7.
MANAGEMENT ’ S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Introduction
 
This discussion and analysis contains information related to historical and prospective events intended to enable you to assess our financial condition and results of operations. The information contained in this discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes contained elsewhere in this Annual Report, as well as the risks and uncertainties discussed under the heading, " Part 1A — Risk Factors. "
 
Diffusion Pharmaceuticals: Enhancing Oxygen, Fueling Life
 
We are a biopharmaceutical company developing novel therapies that enhance the body’s ability to deliver oxygen to the areas where it is needed most. Our 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.
 
Highlights from Fourth Quarter of 2021
 
 
•
Announced Lead Development Program  – In November 2021, we announced our intent to develop TSC as an adjunct to standard of care therapy for hypoxic solid tumors.
 
 
•
Initiated Final Two Oxygenation Trials  – On November 22, 2021, we announced dosing of the first participants in the Altitude Trial and, on December 16, 2021, we announced dosing of the first patients in the ILD-DLCO Trial. We currently expect to complete dosing in the Altitude Trial in the first quarter of 2022 and to complete dosing in the ILD-DLCO Trial in the second quarter of 2022.
 
 
•
Enhanced Intellectual Property Portfolio  – On November 30, 2021, the USPTO granted to the Company United States Patent No. 11,185,523, “Use of Bipolar Trans Carotenoids With Chemotherapy and Radiotherapy for Treatment of Cancer.” This patent includes new claims related to methods of treating cancerous tumors by administering TSC in combination with radiation therapy and chemotherapy. This new patent extends the normal life of our cancer-related intellectual property claims into 2037.
 
 
•
Implemented Cost-Saving Facility Changes  – In November 2021, we terminated the Carlton Lease for our prior corporate headquarters, furthering our shift to a remote-work culture. During 2021, we also entered into short-term agreements to utilize membership-based co-working space in both Charlottesville, Virginia and Philadelphia, Pennsylvania, resulting in cost savings.
 
Our Strategic Priorities for 2022
 
In 2022, we plan to continue and further our focus on the development of TSC for the treatment of hypoxia and as a platform to enhance standard-of-care treatment for conditions complicated by hypoxia with a particular near-term focus on hypoxic solid tumors.
 
As of March 15, 2022, TSC has been administered to more than 220 subjects across 11 clinical trials. Data from these clinical trials support our understanding of the safety, tolerability, pharmacokinetics and pharmacodynamic effects of TSC. In addition, post hoc analyses of two prior studies involving patients with PAD with claudication and unresected GBM tumors have provided preliminary evidence of TSC’s potential. However, the data available from these studies and the post hoc analyses of their outcomes are limited in several meaningful ways. For example, neither study was powered to formally demonstrate efficacy at a statistically significant level, there was no evaluation of whether TSC increased oxygenation in the target tissues in either study, and, in the GBM Trial, no dose exploration was conducted.
 
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During 2021, to address these identified gaps in our TSC knowledge base, further inform our identification of potential indications appropriate for TSC, and guide the future of our TSC development program, we designed and executed on our Oxygenation Trials. The Oxygenation Trials are a series of three short-term, clinical studies designed to provide clinical evidence of the relationship between TSC dose and the effects on oxygenation, each specifically tailored to evaluate the effects of TSC on a different component of the oxygen delivery pathway. We completed the first of these studies, the TCOM Trial, in March 2021. The first participants and patients in the remaining two Oxygenation Trials, the Altitude Trial and the ILD-DLCO Trial, were dosed in November 2021 and December 2021, respectively. We currently expect to complete dosing in the Altitude Trial in the second quarter of 2022 and to complete dosing in the ILD-DLCO Trials in the middle of 2022 and, in each case, to report top-line results within two months of study completion.
 
In November 2021, based on the available preclinical and clinical data and the significant unmet medical need, we announced our intention to focus near-term efforts on developing TSC as an adjunct to standard of care therapy for hypoxic solid tumors. Through the combination of our past experiences, new knowledge gained from our Oxygenation Trials and COVID Trial regarding TSC’s effects on oxygenation, dose response characteristics, pharmacokinetics, and pharmacodynamics, and further analyses and discussions of all available data with our Scientific Advisory Board and other external advisors, we believe we now have the necessary information to design the Hypoxic Solid Tumor Program to be more efficient and increase our likelihood of success compared to the Company’s past efforts to develop TSC as a cancer treatment, which were terminated in 2019 due to financial constraints.
 
As part of the ongoing design of our Planned Phase 2 Hypoxic Tumor Trial – the first trial in our Hypoxic Solid Tumor Program which we currently expect to commence in the second half of 2022, subject to FDA feedback and the availability of clinical drug supply – we are currently drafting a trial protocol which we intend to file with the FDA. In parallel, we will continue our work to optimize the TSC manufacturing process and support the continued availability of high-quality drug product and undertake preclinical studies and other opportunities to continue developing data designed to demonstrate TSC’s potential uses in a broad spectrum of non-cancer indications.
 
Financial Summary
 
As of December 31, 2021, we had a cash and cash equivalents balance of $37.3 million. We have incurred operating losses since inception, have not generated any product sales revenue, and have not achieved profitable operations. We incurred net losses of $24.1 million and $14.2 million for the years ended December 31, 2021 and 2020, respectively. To date, we have funded our operations and short-term liquidity needs primarily through the issuance and sale of common stock, warrants to purchase common stock, convertible debt, and convertible preferred stock. We expect to continue funding our operations through similar means for the foreseeable future, assuming the availability of additional capital, though we may enter into strategic partnerships or other alternative transactions in order to fund our ongoing capital requirements.
 
Our accumulated deficit as of December 31, 2021, was $130.0 million and we expect to continue to incur substantial losses in future periods for the foreseeable future. We also anticipate that our operating expenses will increase substantially as we continue to advance the development of TSC, including any costs related to:
 
 
•
our ongoing and planned clinical trials, including the ongoing Oxygenation Trials and our Planned Phase 2 Hypoxic Solid Tumor Trial;
 
•
any additional studies we may undertake to evaluate TSC, including other preclinical and clinical studies to support the filing of any NDA with the FDA;
 
•
near-term investments intended to improve the quality and robustness of our supplier relationships and overall supply chain;
 
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•
other research, development, and manufacturing activities designed to develop and optimize formulation, manufacturing processes, dosage, dose forms, and other characteristics prior to regulatory approval;
 
•
the maintenance, expansion, and protection our global intellectual property portfolio;
 
•
the hiring of additional clinical, manufacturing, scientific, sales, or other personnel;
 
•
research and development related to any other product candidates we may acquire or in-license in the future; and
 
•
investments in operational, financial, and management information systems.
 
We intend to use our existing cash and cash equivalents for working capital and to fund the research and development of TSC. We expect that our cash and cash equivalents as of December 31, 2021 will enable us to fund our operating expenses and capital expenditure requirements through 2023.
 
Financial Operations Overview
 
Revenues
 
We have not yet generated any revenue from product sales. We do not expect to generate revenue from product sales for the foreseeable future.
 
Research and Development Expense
 
R&D expenses include, but are not limited to, third-party CRO arrangements and employee-related expenses, including salaries, benefits, stock-based compensation, and travel expense reimbursement. R&D activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical studies. As we advance our product candidates, we expect the amount of R&D costs will continue to increase for the foreseeable future. R&D costs are charged to expense as incurred.
 
Intangible Asset Impairment Charge
 
In the third quarter of 2021, the Company made a determination to no longer dedicate resources to the Company’s DFN-529 intangible asset and any future development efforts were abandoned. In connection with this decision, the Company concluded that DFN-529 was impaired in its entirety.
 
General and Administrative Expense
 
G&A expenses consist principally of salaries and related costs for executive and other personnel, including stock-based compensation, other employee benefit costs, expenses associated with investment bank and other financial advisory services, and travel expenses. Other G&A expenses include, facility-related costs, communication expenses and professional fees for legal, patent prosecution and maintenance, consulting, accounting, and other professional services.
 
Interest Income
 
Interest income consists of interest earned from our cash and cash equivalents.
 
Income Tax Benefit 
 
The Company recorded an income tax benefit of $0.4 million during the year ended December 31, 2021. The income tax benefit was due to the tax effect of the reduction in the deferred tax liability associated with the basis difference from the IPR&D indefinite lived intangible asset. The Company maintains a full valuation allowance against its deferred tax assets due to the Company’s history of losses as of December 31, 2021.
 
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Our NOLs and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. NOL and tax credit carryforwards may become subject to an annual limitation in the event of a greater than 50.0% cumulative change in the ownership interest of significant stockholders over a three year period, as defined under Sections 382 and 383 of the Internal Revenue Code as well as similar state provisions. The amount of the annual limitation is determined based on the Company’s value immediately prior to the ownership change, and subsequent ownership changes may further affect the limitation in future years. We have not yet performed an analysis to determine whether or not ownership changes that have occurred in the year ended December 31, 2020 or during the year ended December 31, 2021 give rise to any further limitations.
 
Critical Accounting Policies and Estimates
 
Certain of our critical accounting policies require estimates that involve the application of significant judgment by management in selecting the appropriate assumptions in determining the estimate. By their nature, these judgments are subject to an inherent degree of uncertainty. We develop these judgments based on our historical experience, terms of existing contracts, our observance of trends in the industry, and information available from other outside sources, as appropriate. Actual results may differ from these judgments under different assumptions or conditions. Different, reasonable estimates could have been used for the current period. Additionally, changes in accounting estimates are reasonably likely to occur from period to period. Both of these factors could have a material impact on the presentation of our financial condition, changes in financial condition, or results of operations. We believe the accounting policies described below are among the most critical to aid in fully understanding and evaluating our financial statements, as they require estimates which involve our most subjective or complex judgments.
 
Intangible Assets
 
Our sole intangible asset as of December 31, 2020 consisted of DFN-529, which was acquired in 2016 pursuant to our merger with RestorGenex Corporation and was accounted for as an IPR&D intangible asset. The fair value of the IPR&D asset was determined as of the acquisition date using the cost approach, often referred to as current replacement cost, which establishes a value based on the cost of reproducing or replacing the asset. The cost approach was chosen as we were not able to estimate an income stream attributable to the IPR&D asset, given the fact that the related products had only completed limited preclinical and clinical trials and the timeline to commercial viability, if the FDA approval process were to be successful, was uncertain, would take a number of years, and the costs would have been significant. In the third quarter of 2021, we made a determination to no longer dedicate resources to our DFN-529 intangible asset and any future development efforts were abandoned. In connection with this decision, we concluded that DFN-529 was impaired in its entirety.
 
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Results of Operations for Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
 
The following table summarizes our results of operations for the years ended December 31, 2021 and 2020:
 
 
 
Year ended December 31,
 
 
 
 
 
 
 
2021
 
 
2020
 
 
Change
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Research and development
 
$
8,499,414
 
 
$
9,427,667
 
 
$
(928,253
)
Intangible asset impairment charge
 
 
8,639,000
 
 
 
—
 
 
$
8,639,000
 
General and administrative
 
 
7,445,277
 
 
 
6,444,109
 
 
 
1,001,168
 
Depreciation
 
 
93,416
 
 
 
103,168
 
 
 
(9,752
)
Loss from operations
 
 
(24,677,107
)
 
 
(15,974,944
)
 
 
8,702,163
 
Interest income
 
 
137,487
 
 
 
114,257
 
 
 
23,230
 
Loss from operations before income taxes
 
 
(24,539,620
)
 
 
(15,860,687
)
 
 
(8,678,933
)
Income tax benefit (expense)
 
 
443,893
 
 
 
1,675,381
 
 
 
(1,231,488
)
Net loss
 
$
(24,095,727
)
 
$
(14,185,306
)
 
$
(7,447,445
)
 
Research and development expenses were $8.5 million during the year ended December 31, 2021 compared to $9.4 million during the year ended December 31, 2020, a decrease of 10%. This decrease was due to lower project spending due to the completion and/or wind-down of our clinical studies evaluating TSC in Covid-19, GBM, and stroke.
 
In the third quarter of 2021, the Company made a determination to no longer dedicate resources to the Company’s DFN-529 intangible asset and any future development efforts were abandoned.  As a result, we recognized a nonrecurring $8.6 million non-cash impairment charge related to the write down of our DFN-529 IPR&D asset.
 
General and administrative expenses were $7.4 million during the year ended December 31, 2021 compared to $6.4 million during the year ended December 31, 2020, an increase of 16%. The increase was primarily due to increased headcount resulting in higher compensation expense and other costs associated with the hiring of new employees as well as an increase in expense related to consulting services.
 
For the year ended December 31, 2021, we recognized an income tax benefit of $0.4 million due to the tax effect of the reduction in the deferred tax liability associated with the basis differences from the DFN-529 IPR&D intangible asset that was written down in the third quarter of 2021. For the year ended December 31, 2020, we recognized an income tax benefit of $1.7 million to reflect the utilization of indefinite deferred tax liabilities as a source of income against indefinite lived portions of our deferred tax assets. Prior to 2021, we recognized the full income tax benefit allowed by the 2017 Tax Act to utilize indefinite deferred tax liabilities as a source of income against indefinite lived portions of our deferred tax assets.
 
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Liquidity and Capital Resources
 
Working Capital
 
The following table summarizes our working capital as of December 31, 2021 and 2020:
 
 
 
December 31,
 
 
 
2021
 
 
2020
 
Cash and cash equivalents
 
$
37,313,558
 
 
$
18,515,595
 
Prepaid expenses, deposits and other assets
 
 
510,015
 
 
 
260,825
 
Total current liabilities
 
 
2,927,684
 
 
 
2,435,783
 
Working capital
 
$
34,895,889
 
 
$
16,340,637
 
 
We expect to continue to incur net losses for the foreseeable future. We intend to use our existing cash and cash equivalents for working capital and to fund the research and development of TSC and our other product candidates through 2023.
 
Cash Flows
 
The following table sets forth our cash flows for the years ended December 31, 2021 and 2020:
 
 
 
December 31,
 
Net cash (used in) provided by:
 
2021
 
 
2020
 
Operating activities
 
$
(14,501,789
)
 
$
(13,552,629
)
Investing activities
 
 
4,000
 
 
 
—
 
Financing activities
 
 
33,295,752
 
 
 
17,890,875
 
Net increase in cash and cash equivalents
 
$
18,797,963
 
 
$
4,338,246
 
 
Operating Activities
 
For the year ended December 31, 2021, net cash used in operating activities increased $0.9 million, or 7% compared to the year ended December 31, 2020.
 
Net cash used in operating activities of $14.5 million during the year ended December 31, 2021 was primarily attributable to our net loss of $24.1 million and a $0.4 million change in deferred income taxes. These amounts were partially offset by a $8.6 million non cash impairment charge in connection with the write down of our DFN-529 IPR&D asset, our net change in operating assets and liabilities of $0.4 million, and non-cash charges comprised of $0.9 million of stock-based compensation expense, the loss on the disposal of property and equipment of $0.1 million and depreciation expense of $0.1 million.
 
Net cash used in operating activities of $13.6 million during the year ended December 31, 2020 was primarily attributable to our net loss of $14.2 million and a $1.7 million change in deferred income taxes. This amount was offset by our net change in operating assets and liabilities of $1.5 million, and non-cash charges comprised of $0.7 million of stock-based compensation expense and depreciation expense of $0.1 million.
 
Investing Activities
 
During the year ended December 31, 2021, we received $4,000 from the sale of property and equipment. For the year ended December 31, 2020, we had no cash flows from investing activities.
 
Financing Activities
 
For the year ended December 31, 2021, net cash provided by financing activities increased $15.4 million, or 86% compared to the year ended December 31, 2020.
 
Net cash provided by financing activities of $33.3 million during the year ended December 31, 2021 was attributable to net proceeds of $31.1 million received from the sale of our common stock in connection with the February 2021 Offering and $2.2 million in proceeds received from the exercise of previously issued common stock warrants.
 
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Net cash provided by financing activities of $17.9 million during the year ended December 31, 2020 was primarily attributable to the $10.8 million in proceeds (net of underwriting discounts and commissions payable by us) received in connection with the May 2020 Offering and $8.0 million in proceeds received in connection with the exercise of common stock warrants stock during the year. These cash inflows were offset in part by the payment of $1.0 million in additional financing costs.
 
Capital Requirements
 
We expect to continue to incur substantial expenses and generate significant operating losses as we continue to pursue our business strategy of developing TSC. Our operations have consumed substantial amounts of cash since inception and we expect to continue to spend substantial amounts of cash to advance the clinical development of TSC and any other product candidates we may in-license or acquire in the future. As of the date of this Annual Report, most of our cash resources for clinical development are dedicated to our ongoing and planned clinical trials. While we believe we have adequate cash resources to continue operations through 2023, we anticipate that we will need additional funding in order to complete development of TSC which, if available, could be obtained through additional capital raising transactions, entry into strategic partnerships or collaborations, or alternative financing arrangements.
 
As of December 31, 2021, we did not have any credit facilities in place under which we could borrow funds or any other sources of committed capital. In the future, we may seek to raise additional funds through various sources. However, we can give no assurances that we will be able to secure 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 or be on terms acceptable to us. This risk may increase if economic and market conditions deteriorate. If we are unable to obtain additional financing when needed, we may need to terminate, significantly modify, or delay the development of TSC or our product candidates, or we may need to obtain funds through collaborations or otherwise on terms that may require us to relinquish rights to our technologies or product candidates that we might otherwise seek to develop or commercialize independently. If we are unable to raise adequate additional capital as and when required in the future, we could be forced to cease development activities and terminate our operations, and you could experience a complete loss of your investment.
 
To the extent that we raise additional capital in the future through the sale of our common stock or securities convertible or exchangeable for common stock such as common stock warrants, convertible preferred stock, or convertible debt instruments, the interests of our current stockholders may be diluted or otherwise impacted. In particular, specific rights granted to future holders of preferred stock or convertible debt securities may include voting rights, preferences as to dividends and liquidation, conversion and redemption rights, sinking fund provisions, and restrictions on our ability to merge with or sell our assets to a third party. Debt 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.
 
Off-Balance Sheet Arrangements
 
We do not have any off-balance sheet arrangements, as defined by the rules and regulations of the SEC that have or are reasonably likely to have a material effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources. As a result, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these arrangements.
 
Recently Issued Accounting Pronouncements
 
The information in Note 3, Basis of Presentation and Summary of Significant Accounting Policies to our consolidated financial statements set forth in, "Part II — Item 8 — Financial Statements " of this Annual Report is incorporated herein by reference.
 
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