What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2022-05-12 compared with 2021-11-10 · 374 added, 396 removed, 297 unchanged (72% of the section changed)

2 unchanged sentences

Consolidated Balance Sheets

September 30,

Current assets:

2 unchanged sentences

$ 37,313,558  

Marketable securities

22,680,303  

Prepaid expenses, deposits and other current assets

4 unchanged sentences

37,823,573  

Property and equipment, net

15,578  

$ 33,574,129  

Intangible asset

$ 37,839,151  

Right of use asset

67,886  

149,162  

15,579  

15,771  

$ 40,880,503  

$ 27,729,551  

Liabilities and Stockholders ’

6 unchanged sentences

1,980,189  

Current operating lease liability

67,886  

113,469  

Total current liabilities

1 unchanged sentence

2,927,684  

Deferred income taxes

443,893  

Noncurrent operating lease liability

35,693  

Total liabilities

2,748,903  

2,915,369  

Commitments and Contingencies (Note 9)

Stockholders’

Common stock, $0.001 par value:

Series C convertible preferred stock, $0.001 par value:

10,000 shares authorized;

10,000 and 0 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively

Common stock, $0.001 par value:

1,000,000,000 shares authorized;

101,903,979 and 64,015,441 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively

101,904  

64,016  

2,038,392 and 2,038,185 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively

Additional paid-in capital

1 unchanged sentence

164,914,540  

Accumulated other comprehensive loss

( 49,658 )  

Accumulated deficit

9 unchanged sentences

Diffusion Pharmaceuticals Inc.

Consolidated Statements of Operations

Three Months Ended

September 30,

Nine Months Ended

September 30,

Consolidated Statements of Operations and Comprehensive Loss

Three Months Ended March 31,

Operating expenses:

2 unchanged sentences

$ 2,916,378  

General and administrative

2,128,552  

1,743,510  

Intangible asset impairment charge  

24,447  

Loss from operations

4,554,450  

General and administrative

4,684,335  

Interest income

( 27,809 )  

$ ( 4,526,641 )  

$ ( 4,643,919 )

Per share information:

Net loss per share of common stock, basic and diluted

$ ( 2.22 )  

Weighted average shares outstanding, basic and diluted

2,038,323  

1,649,969  

Comprehensive loss:

$ ( 4,526,641 )  

$ ( 4,643,919 )

Unrealized loss on marketable securities

( 49,658 )  

Loss from operations

Comprehensive loss

$ ( 4,576,299 )  

$ ( 4,643,919 )

See accompanying notes to unaudited interim consolidated financial statements.

Diffusion Pharmaceuticals Inc.

Consolidated Statements of Stockholders' Equity

Three Months Ended March 31, 2021 and 2022

Stockholders'

Capital  

Deficit  

Equity  

Balance at January 1, 2021

1,280,207  

1 unchanged sentence

$ 130,722,286  

Other income:

Interest income

$ ( 105,909,384 )  

$ 24,814,182  

Sale of common stock

673,171  

Loss from operations before income tax benefit

$ 31,093,629  

31,094,302  

Issuance of common stock upon exercise of warrants, net of issuance costs

84,600  

( 11,798,630 )

Income tax benefit

2,201,365  

2,201,450  

Stock-based compensation expense

181,280  

( 4,643,919 )  

Balance at March 31, 2021

2,037,978  

1 unchanged sentence

$ 164,198,560  

$ ( 10,123,249 )

Deemed dividend arising from warrant exchange

( 1,950,378 )

Net loss attributable to common stockholders

$ ( 110,553,303 )  

$ 53,647,295  

Series C Convertible

Preferred Stock

Accumulated Other Comprehensive

Stockholders'

Capital  

Deficit  

Equity  

Balance at January 1, 2022

2,038,185  

$ ( 12,073,627 )

Per share information:

Net loss per share of common stock, basic and diluted

$ 2,038  

1 unchanged sentence

$ ( 130,005,111 )  

Weighted average shares outstanding, basic and diluted

$ 34,911,467  

Sale of series C preferred stock to related parties

10,000  

Stock-based compensation expense and vesting of restricted stock units

278,131  

See accompanying notes to unaudited interim consolidated financial statements.

Diffusion Pharmaceuticals Inc.

Consolidated Statement of Changes in Stockholders' Equity

Three and Nine Months Ended September 30, 2020

Stockholders' Equity

Stockholders'

Balance at July 1, 2020

Issuance of common stock upon exercise of warrants

Stock-based compensation expense

Balance at September 30, 2020

( 101,847,327

Stockholders' Equity

Stockholders'

Balance at January 1, 2020

Sale of common stock and warrants, net of issuance costs

Issuance of common stock upon exercise of warrants

Stock-based compensation expense

September 30, 2020

( 101,847,327

See accompanying notes to unaudited interim consolidated financial statements.

Diffusion Pharmaceuticals Inc.

Consolidated Statement of Changes in Stockholders' Equity

Three and Nine Months Ended September 30, 2021

Stockholders' Equity

Stockholders'

Balance at July 1, 2021

( 114,331,276

Stock-based compensation expense

Balance at September 30, 2021

( 126,530,670

Stockholders' Equity

Stockholders'

Balance at January 1, 2021

( 105,909,384

Sale of common stock and warrants, net of issuance costs

Issuance of common stock upon exercise of warrants

Stock-based compensation expense

Balance at September 30, 2021

Unrealized loss on marketable securities

( 49,658 )  

( 4,526,641 )  

Balance at March 31, 2022

10,000  

$ 5,000  

2,038,392  

$ 2,038  

$ 165,192,671  

$ ( 49,658 )  

$ ( 134,531,752 )  

$ 30,618,299  

See accompanying notes to unaudited interim consolidated financial statements.

1 unchanged sentence

Consolidated Statements of Cash Flows

Nine Months Ended September 30,

Three Months Ended March 31,

Operating activities:

$ ( 4,526,641 )  

$ ( 4,643,919 )

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

24,447  

Stock-based compensation expense

Deferred income taxes

Intangible asset impairment charge

278,131  

181,280  

Amortization of premium and discount on marketable securities

( 13,546 )  

Changes in operating assets and liabilities:

Prepaid expenses, deposits and other assets

( 495,903 )  

Accounts payable, accrued expenses and other liabilities

28,146  

Net cash used in operating activities

( 4,729,813 )  

( 5,176,370 )

Cash flows used in investing activities:

Purchases of marketable securities

( 22,716,415 )  

Net cash used in investing activities

( 22,716,415 )  

Cash flows provided by financing activities:

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

Proceeds from the exercise of common stock warrants

Payment of financing costs

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

31,094,302  

Proceeds received from the exercise of common stock warrants

2,201,450  

Proceeds from the sale of series C preferred stock to related parties

Net cash provided by financing activities

Net increase in cash and cash equivalents

Cash and cash equivalents at beginning of period

33,295,752  

Net (decrease) increase in cash and cash equivalents

( 27,441,228 )  

28,119,382  

Cash and cash equivalents at beginning of year

37,313,558  

18,515,595  

Cash and cash equivalents at end of period

$ 9,872,330  

$ 46,634,977  

Supplemental disclosure of non-cash activities:

Unrealized loss on marketable securities

$ 49,658  

See accompanying notes to unaudited interim consolidated financial statements.

2 unchanged sentences

Organization and Description of Business

Diffusion Pharmaceuticals Inc., a Delaware corporation, is a 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.

Diffusion Pharmaceuticals Inc., 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.

On April 18, 2022, the Company effected a 1 -for- 50 reverse split of its common stock.

Any references in the unaudited condensed consolidated financial statements and related notes to share or per share amounts give retroactive effect to this reverse stock split.

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.

9 unchanged sentences

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 September 

The Company expects that its existing cash, cash equivalents and marketable securities as of March 

31, 2022 will enable it to fund its operating expenses and capital expenditure requirements through 2023.

Basis of Presentation and Summary of Significant Accounting Policies

The Summary of Significant Accounting Policies included in the Company's Annual Report for the year ended December 31, 2020 have not materially changed.

As of the date of this Quarterly Report, the Summary of Significant Accounting Policies included in the Company's Annual Report have not materially changed, except as set forth below.

DIFFUSION PHARMACEUTICALS INC.

3 unchanged sentences

In the opinion of management, the accompanying unaudited interim consolidated financial statements of the Company include all normal and recurring adjustments (which consist primarily of accruals, estimates and assumptions that impact the unaudited interim consolidated financial statements) considered necessary to present fairly the Company’s financial position as of 

September 

30, 2021, results of operations for the three and nine months ended September 

30, 2021 and 2020 and cash flows for the nine months ended September 

31, 2022, and its results of operations and cash flows for the three months ended March 

31, 2022 and 2021.

Operating results for the nine months ended 

September 

Operating results for the three months ended 

31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 

The unaudited interim consolidated financial statements presented herein do not contain the required disclosures under GAAP for annual financial statements.

The accompanying unaudited consolidated interim financial statements should be read in conjunction with the annual audited financial statements and related notes as of and for the year ended December 

31, 2020 filed with the SEC as part of the Company's Annual Report on Form 10 -K on March 16, 2021.

The accompanying unaudited interim consolidated financial statements should be read in conjunction with the annual audited financial statements and related notes as of and for the year ended December 

31, 2021 filed with the SEC as part of the Annual Report.

Use of Estimates

The preparation of unaudited interim consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of assets and liabilities at the date the financial statements and reported amounts of expense during the reporting period.

The COVID- 19 pandemic had no material impact on the Company's estimates and assumptions used in the preparation of the unaudited interim consolidated financial statements for the three and nine months ended September 

However, the full extent to which the ongoing COVID- 19 pandemic will directly or indirectly impact the Company's business, results of operations and financial condition, including sales, expenses, reserves and allowances, clinical trials, research and development costs and employee-related amounts, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID- 19, governmental and business responses to the pandemic, further actions taken to contain or treat COVID- 19, the ongoing economic impact on local, regional, national and international markets, and the speed of the anticipated economic recovery.

Due to the uncertainty of factors surrounding these estimates or judgments, actual results may materially vary from the Company’s estimates.

Estimates and assumptions are periodically reviewed, and the effects of revisions are reflected in the unaudited interim consolidated financial statements in the period they are determined.

The Company’s future assessment of the magnitude and duration of COVID- 19, as well as other factors, could result in material impacts to the Company’s consolidated financial statements in future reporting periods.

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.

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.

Intangible Asset

In the third quarter of 2021, the Board of Directors decided to no longer dedicate financial resources to the Company's DFN- 529 (formerly RES- 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.

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 and commercial paper with an original maturity of three months or less to be cash and cash equivalents.

Marketable securities

The Company classifies its marketable securities as available-for-sale, which include commercial paper and U.S.

government debt securities with original maturities of greater than three months from date of purchase.

The Company considers its marketable securities as available for use in current operations, and therefore classify these securities as current assets on the consolidated balance sheet.

These securities are carried at fair market value, with unrealized gains and losses reported in comprehensive loss and accumulated other comprehensive loss within stockholders’

Gains or losses on marketable securities sold will be based on the specific identification method.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Reverse Stock Split

On April 18, 2022, the Company filed a Certificate of Amendment to its Certificate of Incorporation, as amended, with the Secretary of State of the State of Delaware to effect the Reverse Stock Split at a ratio of 1 -to- 50 .

No fractional shares were issued in connection with the Reverse Stock Split.

Stockholders who otherwise would have been entitled to receive fractional shares of common stock are entitled to receive an amount in cash (without interest or deduction) equal to the fraction of one share to which such stockholder would otherwise be entitled multiplied by $ 12.93 , representing the split-adjusted average closing price of the Company’s common stock on the Nasdaq Capital Market for the five consecutive trading days immediately preceding the effective date of the Reverse Stock Split.

Proportional adjustments were made to the Company’s outstanding warrants, stock options and other equity securities and to the 2015 Equity Plan to reflect the Reverse Stock Split, in each case, in accordance with the terms thereof.

Unless the context otherwise requires, all share and per share amounts in this Quarterly Report have been adjusted to reflect the Reverse Stock Split.

Net Loss Per Common Share

2 unchanged sentences

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 as of the dates indicated below:

As of September 30,

The following potentially dilutive securities outstanding as of March 

31, 2022 and 2021 have been excluded from the computation of diluted weighted average shares outstanding, as they would be anti-dilutive:

Common stock warrants

7 unchanged sentences

178,359  

Recently 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, 2023.

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 the consolidated financial statements and related disclosures.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Cash, cash equivalents and marketable securities

The following is a summary of the Company's cash and cash equivalents as of the date indicated:

March 31, 2022

December 31, 2021

Cash in banking institutions

$ 1,326,178  

$ 30,308,075  

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 was effective for fiscal years beginning after December 15, 2020 and interim periods therein.

The Company adopted ASU No.

2019 - 12 in the first quarter of 2021 and the adoption did not have a material impact on the Company's consolidated financial statements.

Money market funds

5,046,607  

7,005,483  

Commercial paper

3,499,545  

$ 9,872,330  

$ 37,313,558  

The following is a summary of the Company's marketable securities as of March 31, 2022:

Amortized cost

Unrealized gains

Unrealized losses

Commercial paper

$ 19,716,092  

$ ( 39,939 )  

$ 19,676,153  

treasury bonds

3,013,869  

( 9,719 )  

3,004,150  

$ 22,729,961  

$ ( 49,658 )  

$ 22,680,303  

The Company did not have marketable securities as of December 31, 2021.

The Company's marketable securities generally have contractual maturity dates between 3 and 12 months.

Most of the Company’s marketable securities are in an unrealized loss position at March 31, 2022.

Unrealized losses on marketable securities as of March 31, 2022 were not significant and were primarily due to changes in interest rates, and not due to increased credit risks associated with specific securities.

Accordingly, no other-than-temporary impairment was recorded for the three months ended March 31, 2022 and there were no realized gains or losses recorded during the three months ended March 31, 2022.

Fair Value of Financial Instruments

Fair value is the price that could be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

Fair value determination in accordance with applicable accounting guidance requires that a number of significant judgments be made.

Additionally, fair value is used on a nonrecurring basis to evaluate assets for impairment or as required for disclosure purposes by applicable accounting guidance on disclosures about fair value of financial instruments.

Depending on the nature of the assets and liabilities, various valuation techniques and assumptions are used when estimating fair value.

The carrying amounts of certain of the Company’s financial instruments, including prepaid expense and accounts payable are shown at cost, which approximates fair value due to the short-term nature of these instruments.

The Company follows the provisions of FASB ASC Topic 820, Fair Value Measurement , for financial assets and liabilities measured on a recurring basis.

The guidance requires fair value measurements be classified and disclosed in one of the following three categories:

Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liabilities.

Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the Company’s assets that are measured at fair value on a recurring basis (amounts in thousands):

Fair value measurement at reporting date

Quoted prices in

active markets for

identical assets

Significant other

observable inputs

unobservable inputs

March 31, 2022:

Cash equivalents:

Money market funds

$ 5,046,607  

Commercial paper

3,499,545  

Total cash and cash equivalents

$ 5,046,607  

$ 3,499,545  

Marketable securities:

Commercial paper

19,676,153  

3,004,150  

Total marketable securities

$ 22,680,303  

Total financial assets

$ 5,046,607  

$ 26,179,848  

The fair value of the Company’s Level 2 marketable securities are estimated primarily based on benchmark yields, reported trades, market-based quotes, issuer spreads, two -sided markets, benchmark securities, bids, offers, and reference data including market research publications, which represent a market approach.

In general, a market approach is utilized if there is readily available and relevant market activity for an individual security.

This valuation technique may change from period to period, based on the relevance and availability of market data.

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following as of the dates indicated below:

September 30, 2021

December 31, 2020

Accrued payroll and payroll related expenses

7 unchanged sentences

786,579  

Other accrued expenses

127,999  

2 unchanged sentences

$ 1,980,189  

Stockholders' Equity and Common Stock Warrants

Private Placement of Series C Preferred Stock

On March 18, 2022, the Company issued and sold to Robert J.

Cobuzzi, Jr., Ph.D., its President & Chief Executive Officer, and William R.

Elder, its General Counsel & Corporate Secretary, an aggregate of 10,000 shares of Series C Preferred Stock at an offering price of $ 0.50 per share, representing 100% of the stated value per share of the Series C Preferred Stock, for aggregate gross proceeds of $5,000.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Stockholders' Equity and Common Stock Warrants

February 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 but prior to deducting other offering costs.

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.

The Series C Certificate provides that, among other things, (i) each share of Series C Preferred Stock is convertible into 0.02 shares of the Company's common stock, representing a conversion price of $ 25.00 per share, subject to certain conditions, (ii) each share of Series C Preferred Stock outstanding is counted on an as converted basis, together with the Company’s common stock as a single class, for purposes of determining the presence of a quorum at any meeting at which holders are asked to vote on matters related to the Reverse Stock Split (subject to any applicable exchange listing rules), (iii) each share of Series C Preferred Stock outstanding has the right to cast 1,600 votes per share of Series C Preferred Stock on the Reverse Stock Split on a “mirrored”

basis —

this means that the holders of the Series C Preferred Stock are required to vote their shares in a manner that “mirrors”

the proportions of “For”

and “Against”

votes cast by the holders of the Company’s common stock are voted on the Amendment (excluding, for the avoidance of doubt, any shares of common stock that are not voted), and (iv) the holders of outstanding shares of Series C Preferred Stock are entitled to dividends, on an as converted basis, equal to dividends actually paid, if any, on shares of common stock and participate in any liquidation of the Company on an as converted basis.

On April 18, 2022, following approval of the Reverse Stock Split by the Company's stockholders, all 10,000 shares of Series C Preferred Stock were converted into an aggregate of 200 shares of the Company's common stock in accordance with the terms of the Series C Certificate.

Common Stock Warrants

As of September 

During its evaluation of equity classification for the Company's common stock warrants issued in previous periods, 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 March 

31, 2022, the Company had the following warrants outstanding to acquire shares of its common stock:

2 unchanged sentences

Expiration dates

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

Common stock warrants issued in 2018 related to the January 2018 Offering

Common stock warrants issued related to the May 2019 Offering

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

23,639  

- $ 749.76  

Common stock warrants issued related to the May 2019 common stock offering

27,648  

- $ 306.04  

May and December 2024

Common stock warrants issued related to the November 2019 Offering

November 2024

Common stock warrants issued related to the December 2019 Offering

Common stock warrants issued related to the November 2019 common stock offering

$ 17.51  

Common stock warrants issued related to the December 2019 common stock offering

- $ 34.92  

December 2024 and June 2025

Common stock warrants issued related to the May 2020 Offering

May 2025

Common stock warrants issued related to May 2020 Investor Warrant Exercise

Common stock warrants issued related to the May 2020 common stock offering

11,424  

$ 65.65  

Common stock warrants issued related to the May 2020 investor warrant exercise

$ 29.7  

November 2025

Common stock warrants issued related to the February 2021 Offering

Common stock warrants issued related to the February 2021 common stock offering

33,649  

$ 64.08  

February 2026

During the nine months ended September 

30, 2021, 53,570 warrants expired and 4,230,000 warrants were exercised for aggregate proceeds of approximately $ 2.2 million.

111,891  

During the three months ended March 

31, 2022, 18,077 warrants expired.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Stock-Based Compensation

2 unchanged sentences

Accordingly, 81,531 shares were added to the reserve as of January 1, 2022, 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 September 

30, 2021, there were 407,333 shares available for future issuance under the 2015 Equity Plan.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

As of March 31, 2022, there were 49,039 shares available for future issuance under the 2015 Equity Plan.

The Company recorded stock-based compensation expense in the following expense categories of its unaudited interim consolidated statements of operations for the periods indicated:

Three Months Ended

September 30,

Nine Months Ended

September 30,

Research and development

1 unchanged sentence

$ 33,000  

$ 111,378  

$ 136,236  

General and administrative

1 unchanged sentence

148,280  

531,574  

448,061  

Total stock-based compensation expense

1 unchanged sentence

$ 181,280  

$ 642,952  

$ 584,297  

The following table summarizes the activity related to all stock option grants for the nine months ended September 

exercise price

contractual life

intrinsic value

The following table summarizes the activity related to all stock option grants for the three months ended March 

Balance at January 1, 2022

2 unchanged sentences

48,300  

Cancelled/forfeited

( 4,190 )  

Outstanding at September 30, 2021

Outstanding at March 31, 2022

116,564  

1 unchanged sentence

$ 23,163  

Exercisable at September 30, 2021

Exercisable at March 31, 2022

52,849  

1 unchanged sentence

$ 1,956  

Vested and expected to vest at September 30, 2021

Vested and expected to vest at March 31, 2022

116,564  

1 unchanged sentence

$ 23,163  

The weighted average grant date fair value of stock option awards granted during the nine months ended September 

30, 2021 was $ 0.87 .

The total fair value of options vested during the three months ended September 

30, 2021 and 2020 was $ 0.3 million and $ 0.3 million, respectively.

The total fair value of options vested during the nine months ended September 

30, 2021 and 2020 was $ 0.6 million and $ 0.6 million, respectively.

The weighted average grant date fair value of stock option awards granted was $ 10.90 during the three months ended March 31, 2022.

The total fair value of options vested during the three months ended March 31, 2022 and 2021 was $ 0.3 million and $ 0.2 million, respectively.

No options were exercised during any of the periods presented.

At September 

At March 

31, 2022, there was $ 1.3 million of unrecognized compensation expense that will be recognized over a weighted-average period of 1.97 years.

During the nine months ended September 30, 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 nine months ended September 

30, 2021, for service-based awards and performance conditions deemed probable of achievement and/or achieved.

For performance-based awards containing performance conditions which were not deemed probable of achievement at September 

30, 2021, no stock compensation expense was recognized and any previously recognized expense related to those awards originally deemed probable was reversed.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Options granted were valued using the Black-Scholes option-pricing model and the weighted average assumptions used to value the options granted during the nine months ended September 

30, 2021 and 2020 were as follows:

Options granted were valued using the Black-Scholes-Merton derivative instrument pricing model and assumptions used to value the options granted during the three months ended March 31, 2022 were as follows:

Expected term (in years)

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Expected volatility

123.8 %  

Dividend yield

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Restricted Stock Unit Awards

The Company issues restricted stocks ("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 an RSU is equal to the fair market value price of the Company’s common stock on the date of grant.

The Company issues restricted stock units ("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 shares

Weighted-average grant date fair value

Unvested balance at January 1, 2021

153,000  

$ 0.65  

138,800  

The following table summarizes activity related to RSU awards during the period indicated:

Number of Units

Weighted average grant

date fair value

Balance at January 1, 2022

$ 34.78  

Unvested balance at September 30, 2021

( 327 )  

Outstanding at March 31, 2022

$ 35.36  

The Company recognized approximately $ 16,000 and $ 4,000 in expense related to these awards during the three months ended September 30, 2021 and 2020, respectively.

The Company recognized approximately $ 27,000 and $ 12,000 in expense related to these awards during the nine months ended September 

30, 2021 and 2020, respectively.

At September 

( 1 ) The RSUs vested during the three months ended March 31, 2022 were settled on a hybrid basis.

The Company withheld 120 shares of common stock and, in lieu of delivering such shares, paid the RSU holder an amount in cash equal to the fair market value of such shares on vesting date, representing the holder's approximate tax liability associated with such vesting amount in cash equal to the fair market value of such shares on vesting date, representing the holder's approximate tax liability associated with such vesting.

The Company recognized approximately $ 16,000 and $ 5,000 in expense related to these awards during the three months ended March 

31, 2022 and March 31, 2021, respectively.

At March 

31, 2022, there was approximately $ 0.1 million of unrecognized compensation cost that will be recognized over a weighted average period of 1.90 years.

Commitments and Contingencies

Office Space Rental

The Company has a non-cancelable operating lease for office and laboratory space in Charlottesville, Virginia, which began in April 2017, and as of September 

30, 2021, has a remaining lease term of approximately 0.6 years.

The discount rate used to account for the Company's operating lease under ASC 842 is the Company’s estimated incremental borrowing rate of 10 %.

The original term of the lease ends in the second quarter of 2022 and the Company has an option to extend for another five ( 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 September 

The Company also entered into two month-to-month leases for office space during the nine months ended September 30, 2021.

The Company adopted the short-term lease election as afforded by ASC 842 and did not recognize a right-of-use asset and operating lease liability related to these short-term leases.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Rent expense related to the Company's operating leases for the three months ended September 

30, 2021 and 2020 was approximately $ 48,000 and $ 30,000 , respectively.

Rent expense for the nine months ended September 

30, 2021 and 2020 was approximately $ 0.1 million and $ 91,000 , respectively.

Future minimum rental payments under the Company's non-cancelable operating lease at September 

30, 2021 were as follows:

Rental Commitments

$ 29,801  

39,735  

69,536  

imputed interest

$ 67,886  

Office Space Lease Commitment

The Company has short term agreements to utilize membership-based co-working space in both Charlottesville, Virginia and Philadelphia, Pennsylvania.

Rent expense related to the Company's short-term agreements was approximately $ 9,000 and $ 31,000 for the three months ended March 

31, 2022 and 2021, respectively.

Research and Development Arrangements

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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.

The Company has established its 401 (k) Plan, which 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 $ 29,000 and $ 11,000 for the three months ended September 30, 

2021 and 2020, respectively and matched approximately $ 60,000 and $ 42,000 during the nine months ended September 30, 

2021 and 2020, respectively.

The Company made matching contributions under the 401 (k) Plan of approximately $ 27,000 and $ 16,000 for the three months ended March 31, 2022 and 2021, respectively.

Legal Proceedings

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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.

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 has been scheduled by the court for February 23, 2022 to set a trial date.

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.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

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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.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Subsequent Events

Lease Termination

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

The Carlton Lease was previously scheduled to expire on April 30, 2022 and, as of September 30, 2021, our aggregate amount of future minimum rental payments thereunder was approximately $ 69,536 .

In connection with the termination, we will make a one -time payment to the Carlton Landlord of approximately $ 14,000 , after deducting anticipated returns of deposits in accordance with the Carlton Lease.

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

Nasdaq Bid Price Deficiency Notice

As previously disclosed, on May 6, 2021, the Company received a written notice from the staff of the Listing Qualifications Department of Nasdaq relating to the minimum bid price requirement contained in Nasdaq Listing Rule 5550 (a)( 2 ).

This notice indicated that the Company was not in compliance with such rule because the bid price for the Company’s common stock had closed below $1.00 per share for the previous 30 consecutive business days.

In accordance with Nasdaq Listing Rule 5810 (c)( 3 )(A), the Company was provided 180 calendar days, or until November 2, 2021, to regain compliance with the Rule.

On November 3, 2021, the Company received an additional notice from the staff providing that, although the Company had not regained compliance with the bid price rule by November 2, 2021, in accordance with Nasdaq Listing Rule 5810 (c)( 3 )(A), the Staff has determined that the Company is eligible for an additional 180 calendar days from the date of such notice, or until May 2, 2022, to regain compliance.

To regain compliance, the bid price for the Company’s common stock must close at $1.00 per share or more for a minimum of 10 consecutive business days.

The Notice has no effect on the listing or trading of the Company’s common stock at this time, and the Company is currently evaluating its alternatives to resolve this listing deficiency, including, if necessary and subject to the approval of its board of directors and stockholders, implementing a reverse stock split.

Special Meeting, Series C Preferred Stock Conversion, Charter Amendment, and Reverse Stock Split

On April 18, 2022, at the Special Meeting, the Company's stockholders approved an amendment to the Company’s certificate of incorporation, as amended, to effect a reverse stock split of the Company’s outstanding shares of common stock by a ratio of any whole number between 1 -for- 2 and 1 -for- 50 , at any time prior to December 31, 2022, the implementation and timing thereof subject to the discretion of the Company’s board of directors.

Following the completion of the Special Meeting, in accordance with Section 8 (a) of the Series C Certificate, the Company delivered to the holders of the Series C Preferred Stock written notice of the Company’s intent to implement the Reverse Stock Split and the Mandatory Conversion (as defined in the Series C Certificate) of all 10,000 shares of Series C Preferred Stock outstanding into an aggregate of 200 shares of the Company’s common stock.

As described in further detail above under, Note 3.

Basis of Presentation and Summary of Significant Accounting Policies , on April 18, 2022, following the completion of the Special Meeting and the Series C Preferred Stock conversion,  the Company implemented the Reverse Stock Split at a ratio of 1 -for- 50 and beginning with the opening of trading on April 19, 2022, the Company’s common stock was available for trading on the Nasdaq Capital Market on a Reverse Stock Split adjusted basis.

Nasdaq Bid Price Requirement Compliance

On May 3, 2022, the Company received a written notice from the Nasdaq Staff confirming that the Company has regained compliance with Nasdaq Listing Rule 5550 (a)( 2 ) because the bid price for the Company’s common stock had closed above $1.00 per share for the previous ten ( 10 ) consecutive business days ending May 2, 2022.

As previously reported, on May 6, 2021, the Company received a written notice from the Nasdaq Staff indicating that the Company was not in compliance with Nasdaq Listing Rule 5550 (a)( 2 ) because the bid price for the Company’s common stock had closed below $1.00 per share for the previous 30 consecutive business day.

The May 3, 2022 letter confirmed this matter is now closed.

MANAGEMENT ’

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Risk Factors ”

in our Annual Report and under “

Part II —

Other Information –

Risk Factors ”

in our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2021 and June 30, 2021.

in our Annual Report.

These risks could cause our actual results to differ materially from any future performance suggested below.

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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.

TSC Development Update

Our Lead Indication:

Using TSC to Treat Hypoxic Solid Tumors

Solid tumors comprise approximately 90% of all adult cancers and, according to the American Cancer Society, roughly 1.9 million new cancer cases will be diagnosed in the U.S.

during 2021. 

It is also well-documented in the scientific literature that the prevalence of hypoxic regions across numerous primary solid tumor types directly contributes to treatment resistance whether it be radiotherapy, chemotherapy, and immunotherapy, increasing the metastatic potential of these tumors and the probability of unsuccessful treatment.

We believe TSC’s novel mechanism of action lends itself to treating this unmet medical need, so we are designing our Hypoxic Solid Tumor Program to support the use of TSC as a treatment of hypoxic solid tumors.

This program is being designed based on previously obtained data that we believe support the potential benefits of TSC as a treatment for hypoxic solid tumors, including preclinical evidence supporting TSC’s enhancement of radiotherapy and clinical evidence of TSC's effects in unresectable glioblastoma multiforme tumors from our previous Phase 2 study evaluating TSC in patients with GBM treated with standard of care radiation and chemotherapy.

Additionally, with the outcome of the TCOM Trial, originally reported in June 2021, we believe we now have direct evidence of TSC's ability to enhance oxygenation in humans, including additional dosing information that will be integral to designing a clinical study to treat hypoxic solid tumors. 

Our plan is to use the information obtained to date on TSC to submit a briefing document related to our development plan for discussion with the FDA during the first quarter of 2022. 

In addition to questions about clinical trial design and chemistry, manufacturing, and controls, we anticipate the submission will include the information required to obtain FDA feedback on potential accelerated pathways to approval for TSC.

In addition, the results of the Altitude Trial and ILD-DLCO Trial, which we anticipate reporting during the first half of 2022 as further described below under the heading, “Our Oxygenation Trials,”

will also be used to further guide the design of the program. 

We believe receiving FDA feedback on the proposed regulatory pathway underlying our Hypoxic Solid Tumor Program will enhance the probability of successfully developing and, if approved, commercializing TSC for use as a treatment for hypoxic solid tumors.

Accordingly, the start of the first study in our Hypoxic Solid Tumor Program, which we currently expect to be a Phase 2 clinical trial, will be subject to the timing of FDA feedback and the availability of clinical drug supply. 

Our Oxygenation Trials

TSC's Effects on Peripheral Tissue Oxygenation

In June 2021, we reported a positive trend in oxygenation from our TCOM Trial, which evaluated the effect of TSC versus placebo on peripheral tissue oxygenation in healthy normal volunteers using transcutaneous oxygen monitoring.

Analysis of the primary endpoint data indicated a positive dose-response trend in TCOM readings with TSC as compared to placebo that persisted through the measurement period, and the trends observed in the primary endpoint data indicated an improvement in peripheral oxygenation with TSC with no evidence of hyperoxygenation.

In September 2021, we issued a letter to our stockholders including a further discussion of the results of the TCOM Trial, as well as certain additional facts and figures from our supplemental analysis of the study data.

Effects of TSC on transcutaneous oxygen pressure (tcpO2).

The graph was created by subtracting the median placebo response from the dose and time matched median TSC response.

For example, the chart above was created by subtracting the median response observed in the TCOM Trial's placebo group from the median response observed in each TSC dosage group at each of the measurement times during the one-hour period following dosing.

As you can see in the chart, these data indicate peripheral tissue oxygenation increased relative to the placebo group following TSC administration and persisted through the one-hour measurement period, particularly at the two highest doses tested (2.0 mg/kg and 2.5 mg/kg).

We believe the results of the TCOM Trial provide clinical evidence that TSC facilitates the passive diffusion of oxygen from areas of high concentration to areas of low concentration without causing hyperoxygenation and, accordingly, represent a positive and meaningful step towards the accomplishment of the overall strategic objectives of our Oxygenation Trials set forth in November 2020.

Moreover, the doses at which the largest effects of TSC were observed in the TCOM study are higher than the doses tested in any of the recent clinical trials of TSC, and these data obtained from the TCOM Trial is being used to guide the design of our remaining Oxygenation Trials –

the Altitude Trial and the ILD-DLCO Trial.

We believe the two remaining Oxygenation Trials, the Altitude Trial and the ILD-DLCO Trial, remain integral to our overall development plan for TSC, as they are intended to provide further information regarding TSC’s mechanism of action and dose response characteristics, as well as support for what we view as the broad therapeutic potential of TSC to treat a variety of conditions complicated by hypoxia. 

As described below, the Altitude Trial is designed to provide specific information on TSC’s effects on oxygen consumption and the ILD-DLCO Trial is designed to evaluate the effects of TSC on the uptake of oxygen through the lungs.  Accordingly, we intend to continue to execute the Altitude Trial and the ILD-DLCO Trial to develop this additional data in parallel with designing our Hypoxic Solid Tumor Program.

Altitude Trial:

s Effects Under Induced Hypoxic Conditions

This trial will be a double-blind, randomized, placebo-controlled study which will evaluate the effects of TSC on maximal oxygen consumption, or VO2, and partial pressure of blood oxygen, or PaO2, in normal healthy volunteers subjected to incremental levels of physical exertion while exposed to hypoxic and hypobaric conditions (i.e., simulated altitude).

The trial will evaluate the difference in effect of TSC on oxygen availability and consumption compared to placebo.

We expect to dose the first patient in the Altitude Trial in the coming days, to complete dosing of patients in the study in late December 2021 or early January 2022, and anticipate reporting topline results from the study within two months of completion.

ILD-DLCO Trial:

TSC's Effects on Oxygen Transfer Efficiency

This trial will be a double-blind, randomized, placebo-controlled study which will evaluate the effects of TSC on the diffusion of carbon monoxide through the lungs, or DLCO, in patients with previously diagnosed interstitial lung disease who have an abnormal baseline DLCO test result.

DLCO will act as a surrogate measure of oxygen transfer efficiency, or uptake, from the alveoli of the lungs, through the plasma, and onto hemoglobin within red blood cells.

The study will evaluate the difference in effect of TSC on improvement in DLCO, as well as distance covered in a standard six-minute walk test.

We anticipate initiating the ILD-DLCO Trial in the late fourth quarter of 2021 and completing the study in the first quarter of 2022, with topline results reported within two months of study completion.

Further, during the third quarter of 2021, we received clearance of our IND for TSC from the Pulmonary, Allergy, and Critical Care division of the FDA, an important step as we prepare to initiate the ILD-DLCO Trial.

This also represents the fourth division with which we have an open IND for TSC –

joining the Cardiology and Nephrology, Neurology, and Oncology divisions –

which we believe underscores TSC’s broad therapeutic potential to treat a variety of conditions complicated by hypoxia.

The information we expect to obtain from the Altitude Trial and ILD-DLCO Trial during the first half of 2022 —

particularly when combined with the information we have acquired over the last year from the TCOM Trial and our COVID-19 Trial —

will continue to refine and enhance our understanding of TSC’s mechanism of action, dose-response effects, and, more specifically, effects on oxygen consumption and uptake of oxygen through the lungs. 

In addition to providing insights regarding additional, non-oncology indications in which the TSC platform may have potential, the results of the Altitude Trial and ILD-DLCO Trial will also inform our design of our Hypoxic Solid Tumor Program studies. 

TSC Supply Chain Update

As broadly reported by companies across industrial sectors, supply chain disruptions, shortages, and other issues have been widespread during 2021, and we have also recently been subject to delays and interruptions in our TSC drug supply.

As previously reported in our Annual Report , TSC is currently manufactured by our primary CMO partner at a facility that now manufactures COVID-19 vaccines under the Defense Production Act.

In response these delays and interruptions, we are in the process of evaluating opportunities to increase the robustness of our drug supply and overall supply chain to be more responsive to our needs.

We are actively managing this process and believe we are taking the necessary steps to ensure the availability of high-quality drug supply to support the next steps in TSC’s development.

However, TSC is a freeze-dried, injectable product requiring a sophisticated manufacturing process.

As a result, any change to all or a portion of our manufacturing process, together with uncertainty regarding the general availability of manufacturing materials as a result of more general global supply chain shortages and disruptions, could affect the cost and timing of the available clinical study drug supply of TSC.

Organizational Update

Enhancing Our Organization, Embracing Remote Work

During the third quarter, we continued to enhance our operating team with the addition of new employees in a variety of functions across our organization, including clinical operations, CMC, finance, and, more recently, medical writing.

As part of our growth strategy, we have embraced the remote work culture that became prevalent at many organizations during the COVID-19 pandemic.

We believe our people are critical to our ability to efficiently and successfully execute our stated strategy, and this remote operating paradigm allows us to enhance our available pool of talented human resources while also conserving financial resources.

For example, in November 2021, we negotiated and entered into an agreement providing for the early termination of our lease of the Carlton Avenue facility in Charlottesville, Virginia. We also believe in the power of collaboration.

In turn, and in lieu of the fixed office and laboratory space previously available to us under that agreement, we have recently entered into short term agreements to utilize membership-based co-working space in both Charlottesville, Virginia and Philadelphia, Pennsylvania.

We believe these arrangements will permit our team combine the advantages of remote and in-person work in environments intended to foster creativity and innovation.

Highlights from the First Quarter of 2022

Completed Dosing in the Altitude Trial  – On April 11, 2022, we announced the final participant in the Altitude Trial had completed dosing, and topline data is expected to be available in June 2022.

We also reported the clinical investigators will be presenting abstracts at the Undersea & Hyperbaric Medical Society’s Annual Scientific Meeting in Reno, Nevada scheduled for May 22 to 26, 2022 based on blinded, aggregated (placebo and treatment), interim physiological data from the first fifteen participants in the study.

Continued Progress the ILD-DLCO Trial – Enrollment of patients in the ILD-DLCO Trial, which commenced in December 2021, continued in the first quarter.

We currently expect to complete dosing in the second half of 2022, with topline results reported within two months of study completion.

Expanded Scientific Advisory Board – On February 24, 2022, we announced a significant expansion of our Scientific Advisory Board to include five prominent radiation and medical oncologists, who will help guide the design of our recently announced Hypoxic Solid Tumor Program.

Business Update

In the first quarter of 2022, we continued to advance 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 the date of the Quarterly Report, 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.

Evidence of clinical effect with TSC was reported from a Phase 2 clinical study conducted in patients with PAD with claudication.

In addition, post hoc analyses of two prior studies involving patients with COVID-19 and unresected GBM tumors have provided preliminary evidence of TSC’s potential.

Although the results small Phase 2 studies were not statistically significant, we believe the results were compelling and subsequent analyses helped identify certain data gaps that have been focus of recent development, including the relationship between TSC  dose and oxygenation.

During 2021, to address these identified gaps in our TSC knowledge base, 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 in the second Oxygenation Trial, the Altitude Trial, were dosed in November 2021 and on April 11, 2022, we announced the completion of dosing for the final participant in the study.

Topline data from the Altitude Trial are expected to be available in June 2022.

In December 2021 we announced the dosing of the first patients in the final Oxygenation Trial, the ILD-DLCO Trial.

We currently expect to complete dosing in this study in the second half of 2022 and to report top line results within two months of study completion.

The extensive preclinical and clinical data regarding TSC obtained to date, including data recently obtained from our Oxygenation Trials and our COVID-19 Trial completed in February 2021, provide significant information related to TSC’s effects on oxygenation, dose response characteristics, pharmacokinetics, and pharmacodynamics.

In November 2021, based on the available data and the significant unmet medical need, we announced our intention to focus the next steps in our efforts to develop TSC as an adjunct to standard of care therapy for hypoxic solid tumors.

We believe the aforementioned collection of information will allow us 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.

During the first quarter of 2022 continued to work with our advisors including our new Scientific Advisory Board members announced in February 2022, on the design of the Hypoxic Solid Tumor Program including the preliminary design of our Planned Phase 2 Hypoxic Tumor Trial protocol and updating our oncology-related IND previously filed with the FDA.

We currently expect to commence our Planned Phase 2 Hypoxic Tumor Trial in the second half of 2022, subject to FDA feedback and the availability of clinical drug supply.

In parallel, we continue to undertake preclinical studies and other opportunities to obtain additional data designed to demonstrate TSC’s potential uses in a broad spectrum of non-cancer indications, as well as our work to further improve the TSC manufacturing process and support the continued 

and support the continued availability of high-quality drug product.

Finally, we believe we can leverage what we have learned from the development of TSC and the significant skills and experience of our team to opportunistically identify and acquire or in-license novel product candidates that complement TSC and our overall strategy. 

We also believe diversifying our asset portfolio through and acquisition or in-license would reduce our Company’s overall risk profile as an investment.

Financial Summary

As of September 30, 2021, we had cash and cash equivalents of $40.3 million.

We have incurred operating losses since inception, have not generated any product revenue and have not achieved profitable operations.

We incurred net losses of $12.2 million and $20.6 million for the three and nine months ended September 30, 2021, respectively.

Our accumulated deficit as of September 30, 2021 was $126.5 million, and we expect to continue to incur substantial losses in future periods.

We 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 remaining Oxygenation Trials and our Hypoxic Solid Tumor Program;

any additional studies we may undertake, 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;

As of March 31, 2022, we had cash, cash equivalents and marketable securities of $32.6 million, in the aggregate.

We have incurred operating losses since inception, have not generated any product sales revenue and have not achieved profitable operations.

We incurred a net loss of $4.5 million for the three months ended March 31, 2022.

Our accumulated deficit as of March 31, 2022 was $134.5 million, and we expect to continue to incur substantial losses in future periods.

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 our Planned Phase 2 Hypoxic Tumor Trial;

any additional studies we may undertake, including other preclinical and clinical studies to support the filing of any new drug application with the FDA;

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 other product candidates that may be complementary or synergistic with TSC, including DFN-529 or any other product candidates we may acquire or in-license in the future;

the hiring of additional clinical, manufacturing, scientific, sales, or other personnel;

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 September 30, 2021 will enable us to fund our operating expenses and capital expenditure requirements through 2023.

We currently intend to use our existing cash, cash equivalents and marketable securities for working capital and to fund the research and development of TSC.

We expect that our cash, cash equivalents and marketable securities as of March 31, 2022 will enable us to fund our operating expenses and capital expenditure requirements through 2023.

Financial Operations Overview

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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

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Interest Income

Interest income is interest earned from our cash and cash equivalents.

Income Tax Benefit

The Company recorded an income tax benefit of $0.4 million during the three and nine months ended September 30, 2021, respectively.

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 September 30, 2021.

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.

In 2019, due to the significant changes to our stockholder base as a result of the equity financing we completed during that year, we performed an analysis under Section 382 of the Internal Revenue Code and, as a result, reduced the magnitude of our NOL carryforwards to account for the ownership changes.

In addition, the cumulative benefit of our NOLs was remeasured, resulting in tax expense recognized during the year ended December 31, 2019.

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 three or nine months ended September 30, 2021 give rise to any further limitations.

Results of Operations for Three Months Ended September  

30, 2021 Compared to Three Months Ended September 30, 2020

The following table sets forth our results of operations for the three months ended September 30, 2021 and 2020.

Three Months Ended September 30,

Operating expenses:

Research and development

Intangible asset impairment charge

General and administrative

Loss from operations

Other income:

Interest income

Loss from operations before income tax benefit

Income tax benefit

We recognized $2.1 million in R&D expenses during the three months ended September 30, 2021 compared to $3.1 million during the three months ended September 30, 2020.

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.

We recognized a non-recurring $8.6 million non-cash impairment charge related to the write down of our DFN-529 IPR&D asset.

G&A expenses were $1.9 million during the three months ended September 30, 2021 compared to $2.1 million during the three months ended September 30, 2020.

The decrease in G&A expenses was primarily due to a $0.5 million decrease in salaries related to executive separation payments recorded in the prior year period as well as a $0.2 million decrease in outside legal and professional fees.

This decrease was partially offset by an increase in salaries and other costs associated with the hiring of new employees to support our R&D efforts as well as an increase in insurance costs.

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.

We recognized an income tax benefit of $0.8 million during the three months ended September 30, 2020 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.

Results of Operations for Nine Months Ended September  

30, 2021 Compared to Nine Months Ended September 30, 2020

The following table sets forth our results of operations for the nine months ended September 30, 2021 and 2020.

Nine Months Ended

September 30,

Interest income is interest earned from our cash, cash equivalents and marketable securities.

Results of Operations for Three Months Ended March  

31, 2022 Compared to Three Months Ended March  

The following table sets forth our results of operations for the three months ended March 31, 2022, and 2021.

Three Months Ended March 31,

Operating expenses:

Research and development

Intangible asset impairment charge

General and administrative

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Interest income

Loss from operations before income tax benefit

Income tax benefit

We recognized $7.0 million in R&D expenses during the nine months ended September 30, 2021 compared to $6.8 million during the nine months ended September 30, 2020.

This increase was primarily attributable to a $1.2 million increase in expense related to drug manufacturing as described in part above under the heading “TSC Supply Chain Update.” and a $0.6 million increase in salary and related expenses due to increases in headcount.

These increases were offset by lower project spending due to the completion and/or wind-down of our clinical studies evaluating TSC in Covid-19, GBM, and stroke.

We recognized a nonrecurring $8.6 million non-cash impairment charge related to the write down of our DFN-529 IPR&D asset.

G&A expenses were $5.5 million during the nine months ended September 30, 2021 compared to $5.0 million during the nine months ended September 30, 2020.

The increase in G&A expense was primarily due to a $1.0 million increase in salaries and other costs associated with the hiring of new employees.

These amounts were slightly offset by $0.5 million in salaries related to executive separation payments recorded in the prior year period.

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.

We recognized an income tax benefit of $1.7 million during the nine months ended 2020 to reflect the utilization of indefinite deferred tax liabilities as a source of income against indefinite lived portions of our deferred tax assets.

We recognized $2.4 million in research and development expenses during the three months ended March 31, 2022 compared to $2.9 million during the three months ended March 31, 2021.

A significant portion of this decrease was attributable to the timing of clinical trials and drug manufacturing, offset by an increase in salaries and wages and stock-based compensation related to increased headcount.

General and administrative expenses increased by $0.4 million during the three months ended March 31, 2022 compared to the three months ended March 31, 2021, mainly due to an increase in salaries and wages and stock-based compensation related to increased headcount as well as an increase in outside professional fees.

The decrease in depreciation for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 is related to the disposal of property and equipment during the year-ended December 31, 2021.

The decrease in interest income for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 is primarily attributable to lower interest earned on cash and investments during the three months ended March 31, 2022 compared to the three months ended March 31, 2021.

Liquidity and Capital Resources

Working Capital

To date, we have funded our operations primarily through the sale and issuance of preferred stock, common stock and convertible promissory notes.

As of September 30, 2021, we had $40.3 million in cash and cash equivalents, working capital of $38.0 million and an accumulated deficit of $126.5 million.

As of March 31, 2022, we had $9.9 million in cash and cash equivalents, $22.7 million in marketable securities, working capital of $30.6 million and an accumulated deficit of $134.5 million.

We expect to continue to incur net losses for the foreseeable future.

We intend to use our existing cash and cash equivalents to fund our working capital and research and development of our product candidates.

The following table sets forth our cash flows for the nine months ended September 30, 2021 and 2020:

Nine Months Ended September

We intend to use our existing cash, cash equivalents and marketable securities to fund our working capital and research and development of our product candidates.

The following table sets forth our cash flows for the three months ended March 31, 2022 and 2021:

Three Months Ended March 31,

Net cash (used in) provided by:

Operating activities

Investing activities

Financing activities

Net increase in cash and cash equivalents

Net (decrease) increase in cash and cash equivalents

Operating Activities

Net cash used in operating activities of $11.5 million during the nine months ended September 30, 2021 was primarily attributable to our net loss of $20.6 million and a change in our deferred income taxes of $0.4 million.

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, $0.6 million in stock-based compensation expense, and a net change in our operating assets and liabilities of $0.2 million.

Net cash used in operating activities of $10.2 million during the nine months ended September 30, 2020 was primarily attributable to our net loss of $10.1 million and our change in deferred income taxes of $1.7 million.

These amounts were partially offset by a net change in operating assets and liabilities of $1.4 million, $0.6 million in stock-based compensation expense, and $0.1 million in depreciation expense.

The net change in our operating assets and liabilities was primarily attributable to an increase in accounts payable and accrued expenses and was slightly offset by an increase in our prepaid expenses, deposits and other current assets.

Net cash used in operating activities of $4.7 million during the three months ended March 31, 2022 was primarily attributable to our net loss of $4.5 million and our net change in operating assets and liabilities of $0.5 million.

This amount was offset by $0.3 million in stock-based compensation expense.

The net change in our operating assets and liabilities is primarily attributable to an increase in our prepaid expenses, deposits and other current assets.

Net cash used in operating activities of $5.2 million during the three months ended March 31, 2021 was primarily attributable to our net loss of $4.6 million and our net change in operating assets and liabilities of $0.7 million.

This amount was offset by $0.2 million in stock-based compensation expense and depreciation expense.

The net change in our operating assets and liabilities is primarily attributable to a decrease in our accrued expenses and other current liabilities due to the timing of our payments to our vendors and employees as well as an increase in our prepaid expenses, deposits and other current assets.

Investing Activities

During the three months ended March 31, 2022, we purchased $22.7 million in marketable securities with cash.

There were no investing activities during the three months ended March 31, 2021.

Financing Activities

Net cash provided by financing activities was $33.3 million during the nine months ended September 30, 2021, which 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.

Net cash provided by financing activities of $17.9 million during the nine months ended September 30, 2020, was primarily attributable to $10.8 million in gross proceeds received in connection with the May 2020 Offering and $8.0 million in gross proceeds received in connection with the exercise of previously outstanding warrants to purchase common stock.

These cash inflows were offset in part by the payment of $1.0 million in financing costs.

Net cash provided by financing activities was $5,000 during the three months ended March 31, 2022, attributable to proceeds received from the sale of our Series C Convertible Preferred Stock.

Net cash provided by financing activities was $33.3 million during the three months ended March 31, 2021, attributable to net proceeds of $31.1 million received from the sale of our common stock and $2.2 million in proceeds received from the exercise of common stock warrants.

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 the TSC platform, as well as associated investments into our manufacturing, regulatory, and other related capabilities.

As of the date of this Quarterly Report, most our cash resources for clinical development are dedicated to our remaining Oxygenation Trials and our Hypoxic Solid Tumor Program, near-term investments intended to improve the quality and robustness of our supplier relationships and overall supply chain, and general operating expenses.

We currently 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 currently 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 Quarterly 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 September 30, 2021, we did not have any credit facilities in place under which we could borrow funds or any other sources of committed capital.

As of March 31, 2022, 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, including as a result of unanticipated market shocks, such as the COVID-19 pandemic and ongoing global supply chain disruptions, or inflationary pressure.

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.

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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.

Critical Accounting Policies

The Critical Accounting Policies included in our Form 10-K for the year ended December 31, 2020, filed with the SEC pursuant to Section 13 or 15(d) under the Securities Act on March 16, 2021 have not changed.

As of the date of this Quarterly Report, the Critical Accounting Policies included in our Annual Report have not changed.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a “smaller reporting company”

as defined by Item 10 of Regulation S-K, promulgated by the SEC under the U.S.

Securities Act of 1933, as amended, we are not required to provide the information required by this Item 3.

as defined by Item 10 of Regulation S-K we are not required to provide the information required by this Item 3.

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-Q

Item 1. Financial Statements