CervoMed Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA   Description Page     Report of Independent Registered Public Accounting Firm ( KPMG LLP , McLean, Virginia Auditor Firm ID: 185 ) 53     Consolidated Balance Sheets as of December 31, 2021 and 2020 54     Consolidated Statements of Operations for the years ended December 31, 2021 and 2020 55     Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2021 and 2020 56     Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020 57     Notes to the Consolidated Financial Statements for the years ended December 31, 2021 and 2020 58   52     Report of Independent Registered Public Accounting Firm   To the Stockholders and Board of Directors Diffusion Pharmaceuticals Inc.:     Opinion on the Consolidated Financial Statements   We have audited the accompanying consolidated balance sheets of Diffusion Pharmaceuticals Inc. 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. generally accepted accounting principles.   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. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.   We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. 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.   Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.   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.   /s/ KPMG LLP   We have served as the Company’s auditor since 2015.   McLean, Virginia March 18, 2022     53       DIFFUSION PHARMACEUTICALS INC.   CONSOLIDATED BALANCE SHEETS       December 31,       2021     2020   Assets                 Current assets:                 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     —       149,162   Other assets     15,578       15,771   Total assets   $ 37,839,151     $ 27,729,551   Liabilities and Stockholders ’ Equity                 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:                 Common stock, $ 0.001 par value: 1,000,000,000 shares authorized; 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.   54       DIFFUSION PHARMACEUTICALS INC.   CONSOLIDATED STATEMENTS OF OPERATIONS       Year Ended December 31,       2021     2020   Operating expenses:                 Research and development   $ 8,499,414     $ 9,427,667   Intangible asset impairment charge     8,639,000       —   General and administrative     7,445,277       6,444,109   Depreciation     93,416       103,168   Loss from operations     ( 24,677,107 )     ( 15,974,944 ) Other income:                 Interest income     137,487       114,257   Loss before income taxes     ( 24,539,620 )     ( 15,860,687 ) Income tax benefit     443,893       1,675,381   Net loss   $ ( 24,095,727 )   $ ( 14,185,306 ) Deemed dividend arising from warrant exchange     —       ( 1,950,378 ) Net loss applicable to common stockholders   $ ( 24,095,727 )   $ ( 16,135,684 )                   Share information:                 Net loss per share of common stock, basic and diluted   $ ( 0.25 )   $ ( 0.30 ) Weighted average shares outstanding, basic and diluted     97,626,748       53,831,973     See accompanying notes to consolidated financial statements.   55       DIFFUSION PHARMACEUTICALS INC.   CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS ’ EQUITY       Stockholders' Equity       Common Stock                               Shares     Amount     Additional Paid-in Capital     Accumulated Deficit     Total Stockholders' Equity   Balance at December 31, 2019     33,480,365     $ 33,481     $ 111,824,859     $ ( 91,724,078 )   $ 20,134,262   Issuance of common stock, pre-funded warrants and warrants, net of issuance costs     11,428,572       11,429       10,330,202       —       10,341,631   Issuance of common stock upon exercise of warrants     19,106,504       19,106       7,768,370       —       7,787,476   Stock-based compensation expense     —       —       736,119       —       736,119   Net loss     —       —       —       ( 14,185,306 )     ( 14,185,306 ) Balance at December 31, 2020     64,015,441       64,016       130,659,550       ( 105,909,384 )     24,814,182   Issuance of common stock and warrants, net of issuance costs     33,658,538       33,658       31,060,644       —       31,094,302   Issuance of common stock upon exercise of warrants     4,230,000       4,230       2,197,220       —       2,201,450   Vesting of restricted stock units     10,301       10       ( 10 )     —       —   Stock-based compensation expense     —       —       897,260       —       897,260   Net loss     —       —       —       ( 24,095,727 )     ( 24,095,727 ) Balance at December 31, 2021     101,914,280     $ 101,914     $ 164,814,664     $ ( 130,005,111 )   $ 34,911,467     See accompanying notes to consolidated financial statements.   56       DIFFUSION PHARMACEUTICALS INC.   CONSOLIDATED STATEMENTS OF CASH FLOWS       Year Ended December 31,       2021     2020   Operating activities:                 Net loss   $ ( 24,095,727 )   $ ( 14,185,306 ) Adjustments to reconcile net loss to net cash used in operating activities:                 Depreciation and amortization     93,416       103,168   Loss on disposal of property and equipment     51,782       —   Stock-based compensation expense     897,260       736,119   Abandonment of in-process research and development intangible asset     8,639,000       —   Change in deferred income taxes     ( 443,893 )     ( 1,675,381 ) Changes in operating assets and liabilities:                 Prepaid expenses, deposits and other assets     ( 248,997 )     518,169   Accounts payable, accrued expenses and other liabilities     605,370       950,602   Net cash used in operating activities     ( 14,501,789 )     ( 13,552,629 )                   Cash flows provided by investing activities:                 Cash received from sale of property and equipment     4,000       —   Net cash provided by investing activities     4,000       —                     Cash flows provided by financing activities:                 Proceeds from the sale of common stock, net of issuance costs     31,094,302       10,827,100   Proceeds from the sale of common stock warrants     2,201,450       8,046,103   Payment of offering costs     —       ( 982,328 ) Net cash provided by financing activities     33,295,752       17,890,875                     Net increase in cash and cash equivalents     18,797,963       4,338,246                     Cash and cash equivalents at beginning of year     18,515,595       14,177,349   Cash and cash equivalents at end of year   $ 37,313,558     $ 18,515,595                     Supplemental disclosure of non-cash investing and financing activities:                 Vesting of restricted stock units   $ 10     $ —     See accompanying notes to consolidated financial statements.   57     DIFFUSION PHARMACEUTICALS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     1. Organization and Description of Business   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. 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 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.     2. Liquidity   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. The Company does not have any commitments to obtain additional funds and may be unable to obtain sufficient funding in the future on acceptable terms, if at all. If the Company cannot obtain the necessary funding, it will need to delay, scale back or eliminate some or all of its research and development programs or enter into collaborations with third parties to commercialize potential products or technologies that it might otherwise seek to develop or commercialize independently; consider other various strategic alternatives, including a merger or sale of the Company; or cease operations. 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, 2021 will enable it to fund its operating expenses and capital expenditure requirements through 2023.     3.   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. 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.   Use of Estimates   The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period.   On an ongoing basis, the Company evaluates its estimates using historical experience and other factors, including the current economic environment. Significant items subject to such estimates are assumptions used for purposes of determining stock-based compensation and accounting for research and development activities. Management believes its estimates to be reasonable under the circumstances. Actual results could differ significantly from those estimates.   58     DIFFUSION PHARMACEUTICALS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   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   Financial instruments that potentially expose the Company to concentrations of credit risk consist principally of cash on deposit with multiple financial institutions, the balances of which frequently exceed federally insured limits.   Cash and Cash Equivalents   The Company considers any highly-liquid investments, such as money market funds, with an original maturity of three months or less to be cash and cash equivalents.   Property and Equipment   The Company records property and equipment at cost less accumulated depreciation and amortization. Costs of renewals and improvements that extend the useful lives of the assets are capitalized. Maintenance and repairs are expensed as incurred. Depreciation is recognized on a straight-line basis over the estimated useful lives of the assets, which generally range from 2 to 15 years. The Company amortizes leasehold improvements over the shorter of the estimated useful life of the asset or the term of the related lease. 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. 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   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.   At the end of the reporting period, the Company compares payments made to third -party service providers to the estimated progress toward completion of the research or development objectives. Such estimates are subject to change as additional information becomes available. 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.   59     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   Patent costs, including related legal costs, are expensed as incurred and are recorded within general and administrative expenses in the consolidated statements of operations.   Income Taxes   As a corporation, the Company uses the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and credit carryforwards. 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.   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.   Stock-based Compensation   The Company measures stock-based awards at grant-date fair value and records compensation expense on a straight-line basis over the vesting period of the award. 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. The simplified method is based on the average of the vesting tranches and the contractual life of each grant. During the year ended December 31, 2020, it became apparent that the expected term of the Company's stock options was commensurate with the contractual life (i.e. 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 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 term of the option. The Company accounts for forfeitures in the periods they occur.   60     DIFFUSION PHARMACEUTICALS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   Net Loss Per Common Share   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.   The following potentially dilutive securities outstanding have been excluded from the computation of diluted weighted average shares outstanding, as they would be anti-dilutive:       December 31,       2021     2020   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 .” This guidance applies to all entities and aims to reduce the complexity of tax accounting standards while enhancing reporting disclosures. This guidance is effective for fiscal years beginning after December 15, 2020 and interim periods therein. Early adoption is permitted for any annual periods for which financial statements have not been issued and interim periods therein. The Company adopted this standard in January 2021 and the adoption did not have a material impact on its related disclosures.   61     DIFFUSION PHARMACEUTICALS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     4.   Accrued Expenses and Other Current Liabilities   Accrued expenses and other current liabilities consist of the following:       December 31,       2021     2020   Accrued payroll and payroll related expenses   $ 879,971     $ 653,899   Accrued professional fees     247,704       31,809   Accrued clinical studies expenses     786,579       1,055,398   Other     65,935       35,364   Total   $ 1,980,189     $ 1,776,470       5.   Commitments and Contingencies   Office Space Lease Commitment   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   In the course of normal business operations, the Company enters into agreements with universities and contract research organizations, or CROs, to assist in the performance of research and development activities and contract manufacturers to assist with chemistry, manufacturing, and controls related expenses. Expenditures to CROs represent a significant cost in clinical development for the Company. 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 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 % 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.   62     DIFFUSION PHARMACEUTICALS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   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. RestorGenex Corporation, Pro Sports & Entertainment, Inc., ProElite, Inc. and Stratus Media Group, GmbH (Case No. BC553996 ). 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. 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 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, 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.     6.   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. In addition, at the closing of the May 2020 Offering, the Company issued warrants to purchase up to 571,429 shares of common stock to designees of the placement agent for the May 2020 Offering. 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 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. 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.   63     DIFFUSION PHARMACEUTICALS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   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 . 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, 2021, the Company had the following warrants outstanding to acquire shares of its common stock:       Outstanding     Range of exercise price per share   Expiration dates Common stock warrants issued in 2017 related to Series A convertible preferred stock offering     903,870       $ 33.30     March 2022 Common stock warrants issued in 2018 related to the January 2018 common stock offering     1,181,421     $ 12.00 - $ 15.00   January 2023 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     May 2024 Common stock warrants issued related to the December 2019 Offering     313,339       $ 0.6981     December 2024 Common stock warrants issued related to the May 2020 Offering     571,429       $ 1.3125     March 2025 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.   64     DIFFUSION PHARMACEUTICALS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     7.   Stock-Based Compensation   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, 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.   The Company recorded stock-based compensation expense in the following expense categories of its consolidated statements of operations for the periods indicated:       Year ended December 31,       2021     2020   Research and development   $ 154,041     $ 164,791   General and administrative     743,219       571,328   Total stock-based compensation expense   $ 897,260     $ 736,119     The following table summarizes the activity related to all stock options:       Number of Options     Weighted average exercise price per share     Weighted average remaining contractual life (in years)     Aggregate Intrinsic Value   Balance at January 1, 2020     309,276     $ 55.78                   Granted     1,931,100       0.68                   Expired     ( 172 )     142.50                   Balance at December 31, 2020     2,240,204     $ 8.28             $ 289,067   Granted     1,815,767       0.89                   Forfeited     ( 429,748 )     1.37                   Outstanding at December 31, 2021     3,626,223       5.40       8.52       —   Exercisable at December 31, 2021     2,140,524     $ 8.58       8.09       —   Vested and expected to vest at December 31, 2021     3,626,223     $ 5.40       8.52       —     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, 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  1.7 years. 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.   65     DIFFUSION PHARMACEUTICALS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   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, 2021 and 2020:       2021     2020   Expected term (in years)     10       5.31 — 10   Risk-free interest rate   1.3 % — 1.7 %     0.4 % — 1.7 %   Expected volatility   122.6 % — 125.8 %     113.4 % — 124.8 %   Dividend yield     0 %         0 %       Restricted Stock Unit Awards   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:       Number of Units     Weighted average grant date fair value   Balance at January 1, 2021     153,000     $ 0.65   Granted     138,800       0.72   Vested (1)     ( 16,350 )     0.51   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.     8.   Income Taxes     66     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.     Significant components of the Company's deferred tax assets for federal income taxes consisted of the following:   Deferred tax assets   December 31, 2021     December 31, 2020   Net operating loss carryforwards   $ 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     —       ( 38,394 ) Deferred tax liabilities     —       ( 2,262,072 )                   Net deferred tax liability   $ —     $ ( 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.   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   Federal   $ 23,442,045     $ 15,013,388   State     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, 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.   67     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:   Rate reconciliation:   December 31, 2021     December 31, 2020   Federal tax benefit at statutory rate     ( 21.0 )%     ( 21.0 )% State tax, net of Federal benefit     ( 4.7 )%     ( 4.7 )% Orphan drug credit     ( 0.4 )%     ( 2.9 )% Change in valuation allowance     24.3 %     18.1 % Total provision     ( 1.8 )%     ( 10.5 )%   The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. 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.   68       ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE   None.