What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2022-11-14 compared with 2022-08-12 · 187 added, 235 removed, 575 unchanged (42% of the section changed)

2 unchanged sentences

Consolidated Balance Sheets

September 30,

Current assets:

28 unchanged sentences

1,000,000,000 shares authorized:

2,038,914 and 2,038,185 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively

2,039,236 and 2,038,185 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively

Additional paid-in capital

16 unchanged sentences

Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

Operating expenses:

4 unchanged sentences

$ 6,994,866  

Intangible asset impairment charge

8,639,000  

General and administrative

14 unchanged sentences

( 207,897 )  

Loss from operations before income tax benefit

( 2,798,322 )  

2 unchanged sentences

( 21,065,179 )

Income tax benefit

( 443,893 )  

$ ( 2,798,322 )  

$ ( 12,199,394 )  

$ ( 11,515,464 )  

$ ( 20,621,286 )

Per share information:

24 unchanged sentences

Consolidated Statement of Changes in Stockholders' Equity

Three and Six Months Ended June 30, 2021 and 2022

Three and Nine Months Ended September 30, 2021 and 2022

Series C Convertible

4 unchanged sentences

Deficit 

Equity  

Balance at April 1, 2022

10,000  

$ 5,000  

2,038,392  

$ 2,038  

Balance at July 1, 2022

2,038,914  

2 unchanged sentences

$ ( 86,583 )  

Conversion of Series C preferred stock to common stock

$ ( 138,722,253 )  

7 unchanged sentences

( 2,798,322 )

Balance at June 30, 2022

Balance at September 30, 2022

2,039,236  

8 unchanged sentences

Stockholders'

Capital  

Deficit 

Equity  

Balance at January 1, 2022

2,038,185  

$ 2,038  

$ 164,914,540  

$ ( 130,005,111 )  

$ 34,911,467  

( 130,005,111

Sale of Series C preferred stock to related parties

10,000  

Conversion of Series C preferred stock to common stock

( 10,000 )  

( 5,000 )  

Stock-based compensation expense and vesting of restricted stock units

556,261  

Unrealized loss on marketable securities

( 86,583 )  

( 8,717,142 )  

Balance at September 30, 2022

( 141,520,575

Balance at June 30, 2022

2,038,914  

$ 2,038  

$ 165,475,801  

$ ( 86,583 )  

$ ( 138,722,253 )  

$ 26,669,003  

Stockholders' Equity

Stockholders'

Capital  

Deficit  

Equity  

Balance at April 1, 2021

2,037,978  

$ 2,038  

$ 164,198,560  

$ ( 110,553,303 )  

$ 53,647,295  

Sale of common stock and warrants, net of issuance costs

Issuance of common stock upon exercise of warrants

Balance at July 1, 2021

( 114,331,276

Stock-based compensation expense

297,280  

( 3,777,973 )  

Balance at September 30, 2021

( 126,530,670

Balance at June 30, 2021

2,037,978  

$ 2,038  

$ 164,495,840  

$ ( 114,331,276 )  

$ 50,166,602  

Stockholders' Equity

Stockholders'

Capital  

Deficit  

Equity  

Balance at January 1, 2021

1,280,207  

$ 1,280  

$ 130,722,286  

$ ( 105,909,384 )  

$ 24,814,182  

( 105,909,384

Sale of common stock and warrants, net of issuance costs

673,171  

31,093,629  

31,094,302  

Issuance of common stock upon exercise of warrants

84,600  

2,201,365  

2,201,450  

Stock-based compensation expense

478,560  

( 8,421,892 )  

Balance at September 30, 2021

( 126,530,670

Balance at June 30, 2021

2,037,978  

$ 2,038  

$ 164,495,840  

$ ( 114,331,276 )  

$ 50,166,602  

See accompanying notes to unaudited interim consolidated financial statements.

1 unchanged sentence

Consolidated Statements of Cash Flows

Six Months Ended June 30,

Nine Months Ended September 30,

Operating activities:

8 unchanged sentences

( 122,157 )  

Intangible asset impairment charge

8,639,000  

Deferred income taxes

Changes in operating assets and liabilities:

3 unchanged sentences

( 657,032 )  

358,703  

Net cash used in operating activities

25 unchanged sentences

$ 40,335,045  

Supplemental disclosure of non-cash activities:

Supplemental disclosure of non-cash investing and financing activities:

Unrealized loss on marketable securities

4 unchanged sentences

Organization and Description of Business

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

The Company’s lead product candidate, TSC, is being investigated 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, including hypoxic solid tumors.

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

In October 2022, the Company announced that its Board has authorized a thorough review and evaluation of a range of potential strategic opportunities in the interest of enhancing stockholder value including transactional opportunities to better leverage the potential of TSC and the Company’s other assets.

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

11 unchanged sentences

as defined in Rule 415 (a)( 4 ) under the Securities Act of 1933, as amended.

To date, the Company has not sold any shares pursuant to the 2022 Sales Agreement.

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 currently expects that its existing cash, cash equivalents and marketable securities as of June 

30, 2022 will enable it to fund its operating expenses and capital expenditure requirements into the first quarter of 2024, without giving effect to any business development activities we may undertake.

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

30, 2022 will enable it to fund its operating expenses and capital expenditure requirements into the first quarter of 2024, subject to the outcome and timing of the Company's ongoing strategic review process.

DIFFUSION PHARMACEUTICALS INC.

5 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 

30, 2022, and its results of operations for the three and six months ended June 

30, 2022 and 2021 and cash flows for the six months ended June 

September 

30, 2022, and its results of operations for the three and nine months ended September 

30, 2022 and 2021 and cash flows for the nine months ended September 

30, 2022 and 2021.

Operating results for the six months ended 

Operating results for the nine months ended 

September 

30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 

14 unchanged sentences

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.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Marketable Securities

4 unchanged sentences

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

7 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 as of June 

The following potentially dilutive securities outstanding as of September 

30, 2022 and 2021 have been excluded from the computation of diluted weighted average shares outstanding, as they would be anti-dilutive:

As of June 30,

As of September 30,

Common stock warrants

7 unchanged sentences

211,815  

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Recently Issued Accounting Pronouncements

Recently Adopted Accounting Pronouncements

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

5 unchanged sentences

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 dates indicated:

June 30, 2022

September 30, 2022

December 31, 2021

9 unchanged sentences

37,313,558  

The following is a summary of the Company's marketable securities as of June 

The following is a summary of the Company's marketable securities as of September 

Amortized cost

14 unchanged sentences

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 June 

Unrealized losses on marketable securities as of June 

All of the Company’s marketable securities are in an unrealized loss position at September 

Unrealized losses on marketable securities as of September 

30, 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 six months ended June 

30, 2022 and there were no realized gains or losses recorded during the six months ended June 

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Accordingly, no other-than-temporary impairment was recorded for the nine months ended September 

30, 2022 and there were no realized gains or losses recorded during the nine months ended September 

Fair Value of Financial Instruments

19 unchanged sentences

inputs (Level 3)

June 30, 2022:

September 30, 2022:

Cash equivalents:

15 unchanged sentences

$ 20,263,466  

The fair values 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.

2 unchanged sentences

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

June 30, 2022

September 30, 2022

December 31, 2021

16 unchanged sentences

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.

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

4 unchanged sentences

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 June 

As of September 

30, 2022, the Company had the following warrants outstanding to acquire shares of its common stock:

4 unchanged sentences

23,639  

599.71 1 749.76 76

January 2023  

$ 599.71 - $ 749.76  

Common stock warrants issued related to the May 2019 Offering

27,648  

250.09 9 306.04 04

$ 250.09 - $ 306.04  

May and December 2024

3 unchanged sentences

Common stock warrants issued related to the December 2019 Offering

21.68 8 34.92 92

$ 21.68 - $ 34.92  

December 2024 and June 2025

10 unchanged sentences

111,891  

During the six months ended June 30, 2022, 18,077 warrants expired.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

During the nine months ended September 30, 2022, 18,077 warrants expired.

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 June 

As of September 

30, 2022, there were 23,664 shares available for future issuance under the 2015 Equity Plan.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

Six Months Ended

September 30,

Nine Months Ended

September 30,

Research and development

13 unchanged sentences

$ 642,952  

The following table summarizes the activity related to all stock option grants for the six months ended June 

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

exercise price

7 unchanged sentences

( 7,603 )  

Expired  

144.62  

Outstanding at June 30, 2022

( 439 )  

1,575.00  

Exercisable at June 30, 2022

Outstanding at September 30, 2022

141,500  

$ 128.77  

Vested and expected to vest at June 30, 2022

Exercisable at September 30, 2022

68,062  

$ 251.37  

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

Vested and expected to vest at September 30, 2022

141,500  

$ 128.77  

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

30, 2022 was $ 9.87 .

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

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

30, 2022 and 2021 was $ 0.4 million and $ 0.3 million, respectively.

The total fair value of options vested during the six months June 

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

30, 2022 and 2021 was $ 0.7 million and $ 0.6 million, respectively.

No options were exercised during any of the periods presented.

At June 

At September 

30, 2022, there was $ 1.0 million of unrecognized compensation expense that will be recognized over a weighted-average period of 1.67 years.

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 six months ended June 

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, 2022 and 2021 were as follows:

4 unchanged sentences

Dividend yield

Restricted Stock Unit Awards

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 awards during the period indicated:

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Restricted Stock Awards

grant date fair

2 unchanged sentences

( 1,347 )  

Outstanding at June 30, 2022

Outstanding at September 30, 2022

$ 36.02  

( 1 )  The RSUs vested during the 

six  months ended 

June 30, 2022 

( 1 ) The RSUs vested during the nine months ended September 

30, 2022 were settled on a hybrid basis.

The Company withheld 

308  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 June 

The Company withheld 496 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 the vesting date, representing the holder's approximate tax liability associated with the vesting.

The Company recognized approximately $ 17,000 and $ 16,000 in expense related to these awards during the three months ended September 

30, 2022 and 2021, respectively.

The Company recognized approximately $ 32,000 and $ 10,000 in expense related to these awards during the six months ended June 

The Company recognized approximately $ 49,000 and $ 27,000 in expense related to these awards during the nine months ended September 

30, 2022 and 2021, respectively.

At June 

At September 

30, 2022, there was approximately $ 79,000 of unrecognized compensation cost that will be recognized over a weighted average period of 1.49 years.

1 unchanged sentence

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 for the three months ended June 30, 2022 and 2021 was approximately $ 2,000 and $ 29,000 , respectively.

Rent expense related to the Company's short-term agreements was approximately $ 11,000 and $ 60,000 for the six months ended June 

As of September 30, 2022, the Company had 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 for the three months ended September 30, 2022 and 2021 was approximately $ 5,000 and $ 48,000 , respectively.

Rent expense related to the Company's short-term agreements was approximately $ 16,000 and $ 0.1 million for the nine months ended September 

30, 2022 and 2021, respectively.

7 unchanged sentences

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 $ 26,000 and $ 24,000 for the three months ended and matched contributions under the 401 (k) Plan of approximately $ 53,000 and $ 40,000 for the six months ended June 

The Company made matching contributions under the 401 (k) Plan of approximately $ 26,000 and $ 11,000 for the three months ended and matched contributions under the 401 (k) Plan of approximately $ 79,000 and $ 60,000 for the nine months ended September 

30, 2022 and 2021, respectively.

15 unchanged sentences

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.

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

On October 20, 2022, the parties filed a joint stipulation to continue the trial and certain deadlines related to the mediation in order to allow plaintiff's counsel to continue to seek treatment for an ongoing medical issue.

On November 1, 2022, based on the parties joint stipulation, the court entered an order continuing the trial date to October 25, 2023.

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

16 unchanged sentences

Enhancing Oxygen, Fueling Life

We are a biopharmaceutical company developing novel therapies to enhance the body’s ability to deliver oxygen to the areas where it is needed most.

Our lead product candidate, TSC, is being investigated 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, including hypoxic solid tumors.

We are a biopharmaceutical company developing novel therapies that may enhance the body’s ability to deliver oxygen to the areas where it is needed most.

Business Update

Altitude Trial

During the second quarter, we reported positive effects from our second Oxygenation Trial, the Altitude Trial.

This was a double-blind, randomized, placebo-controlled crossover dose exploration study designed to investigate TSC’s effects on oxygen enhancement using an experimental model to induce hypoxia in study participants.

The primary endpoints measured in this study were maximal oxygen consumption and partial pressure of arterial blood oxygen in normal healthy volunteers subjected to incremental levels of physical exertion while exposed to hypoxic and hypobaric conditions at a simulated altitude of 15,000 feet above sea level.

The secondary endpoints were to assess the effect of TSC on SpO2 and lactate.

A total of 30 healthy volunteers were enrolled in the trial with each subject serving as their own control by completing the experiment twice in a random, blinded order in the same day with a 3-hour rest and wash out period between experimental intervals.

During one ascent, study subjects received IV placebo administration and the other ascent the same subject received a single IV dose of TSC at one of three dose levels (0.5 mg/kg, 1.5 mg/kg, or 2.5 mg/kg).

In the trial, following exercise under hypoxic conditions, an increase in pH and a decrease in lactate were observed in the study subjects treated with the highest dose of TSC (2.5 mg/kg), both at the end of the exercise period and at 10 minutes post-exercise relative to placebo.

These data suggest the 2.5 mg/kg dose of TSC decreased blood acidity (i.e., lactic acid accumulation) and enhanced metabolic recovery at 10 minutes after completion of exercise under the stressful conditions of simulated high altitude and exercise.

These positive changes observed in blood markers of oxygen utilization results in the Altitude Trial suggest TSC may enhance oxygen availability at the cellular level and reinforce our belief in the therapeutic potential of TSC.

Ongoing Evaluation of Strategic Opportunities

On October 25, 2022, we announced that our Board authorized a thorough review and evaluation of a range of potential strategic opportunities in the interest of enhancing stockholder value including transactional opportunities to better leverage the potential TSC and the Company’s other assets.

We are undertaking this expanded review as part of our previously disclosed, ongoing efforts to identify acquisition and partnership transactions that complement, supplement, or de-risk our current development programs and support the Board’s commitment to enhancing stockholder value.

Our Board has determined to expand its evaluation to a broader range of options which could include a joint venture, licensing, sale or divestiture of some of the Company’s proprietary technologies or a sale of the Company, in addition to the previously announced opportunities under consideration.

Over the past two years, we have obtained encouraging data on the potential effects of TSC on oxygenation, including the results of our Altitude, TCOM, and COVID-19 Trials.

We believe these data further support TSC's potential benefits for patients, particularly as an adjuvant treatment to standard of care therapy for hypoxic solid tumors, like glioblastoma multiforme.

However, despite the accelerated, tumor oxygenation data readouts expected from our Study 200-208 trial design described below, we increasingly believe the likelihood of realizing TSC's value and benefits may be more likely achieved in an organization with larger infrastructure and greater resources given the recent downturn in the public financing environment and associated increase in our expected cost of capital as a standalone, single asset company which is one of the rationales underlying the strategic review authorized by our Board.

As of September 30, 2022 we had cash, cash equivalents and marketable securities of $12.68 per share of common stock outstanding.

We believe our strong balance sheet and talented team of employees provide us the opportunity to leverage what we have learned from the development of TSC to evaluate a range of potential strategic opportunities to further enhance stockholder value.

We believe supplementing, diversifying and expanding our asset portfolio through an acquisition, in-license, merger or other opportunistic transaction has the potential to increase our Company's attractiveness as an investment opportunity and reduce its overall risk profile.

There is no timeline for this review and there is no assurance the Board’s review will result in any transaction being consummated.

Diffusion does not intend to comment on this process or make further disclosures until it determines an update is appropriate.

Phase 2 Trial in Patients with GBM Incorporating Innovative Imaging Methodology (Study 200-208)

Taken together, the combination of positive effects observed in each of the TCOM, Altitude, and COVID-19 Trials affirmed our belief in TSC's potential as an adjuvant treatment to standard of care therapy for hypoxic solid tumors.

As such, on July 26, 2022, we announced that we had aligned with the FDA on the design of an open-label, dose-escalation, Phase 2 safety and efficacy study of TSC administered with standard of care to newly diagnosed GBM patients.

This trial has been designated Study "200-208," and we currently expect to initiate the trial by the end of 2022 and to dose the first patient in the study in the first quarter of 2023, subject to the outcome of our ongoing business development processes described below.

GBM is an aggressive, deadly, and treatment-resistant type of malignant brain tumor, affecting approximately 13,000 newly diagnosed patients each year in the United States.

While our process to evaluate strategic opportunities is ongoing, the entire Diffusion organization remains focused on executing our strategy to enhance value for our stockholders.

We continue to prioritize and advance what we continue to believe to be value-creating initiatives within our standalone business, including continued progress towards the initiation of Study 200-208, further exploration of potential accelerated pathways for regulatory approval of TSC, and taking steps to preserve capital without sacrificing meaningful growth opportunities.

On July 26, 2022, we announced we had aligned with the FDA on the design of an open-label, dose-escalation, Phase 2 safety and efficacy study of TSC administered with standard of care to newly diagnosed GBM patients, which has been designated Study "200-208."GBM is an aggressive, deadly, and treatment-resistant type of malignant brain tumor, affecting approximately 13,000 newly diagnosed patients each year in the United States.

Few treatment options are available for patients with GBM, and none have extended life expectancy beyond a few months.

In fact, according to the National Brain Tumor Society, the five-year survival rate for GBM is only 6.8 percent with an average survival time of eight months.

Study 200-208 will include a dose-escalation phase, enrolling patients in a 3+3+3 design, to evaluate the safety, tolerability, pharmacokinetics, and pharmacodynamics of TSC at doses of 1.5 mg/kg, 2.0 mg/kg and 2.5 mg/kg administered in combination with concomitant standard of care radiotherapy plus temozolomide.

The tissue microenvironment of tumors such as GBM is well known to be hypoxic, and therefore less sensitive to radiation therapy, an important part of standard of care therapy.

As such, Study 200-208 has been designed to evaluate TSC as an adjuvant treatment to standard of care therapy for hypoxic solid tumors.

The study will include a dose-escalation phase, enrolling patients in a 3+3+3 design, to evaluate the safety, tolerability, pharmacokinetics, and pharmacodynamics of TSC at doses of 1.5 mg/kg, 2.0 mg/kg and 2.5 mg/kg administered in combination with concomitant standard of care radiotherapy plus temozolomide.

An additional 17 subjects will be treated at the highest tolerable dose identified in the dose escalation phase.

The primary objective of the study is to evaluate the safety and tolerability of TSC for the treatment of patients with newly diagnosed GBM when administered with standard of care.

Secondary objectives of the study are to evaluate progression-free survival at six months by magnetic resonance imaging, assessment using Response Assessment in Neuro-Oncology criteria, and to evaluate overall survival at 12 months.

The primary objective of the study is to evaluate the overall survival of patients with newly diagnosed GBM when treated with TSC administered with standard of care.

Secondary objectives of the study are to evaluate progression-free survival at six months and seven months by magnetic resonance imaging, assessment using Response Assessment in Neuro-Oncology criteria.

Study 200-208 will vary in a variety of ways from the GBM trials we have conducted in the past, including three particularly notable differentiators:

1 unchanged sentence

TSC will be administered five days each week approximately 30-60 minutes prior to radiotherapy, as compared to the three days per week regimen in our prior GBM trials;

The trial will incorporate an innovative use of PET scans to directly evaluate the oxygen enhancing effects of TSC on tumor hypoxia using radiotracers, with initial data readouts expected to be available within one year of the study’s initiation.

Business Development

Our current strategy for TSC is focused on advancing it through development with the ultimate objective of obtaining market authorizations and entering commercialization, whether alone, with a partner, or through a partner, to provide treatment options to patients suffering from life-threatening medical conditions like GBM.

We believe that our recent clinical development efforts, including the completion of our TCOM and Altitude Trials and our design of Study 200-208, are positive steps for our Company and our stockholders and create the potential to drive meaningful value if we are successful in advancing TSC to the subsequent development milestones we have identified.

However, drug development is an extremely expensive, risky, and time-consuming endeavor, particularly so for drugs being developed to treat oncological indications.

Accordingly, while we continue our internal efforts to advance the development of TSC, including Study 200-208, we are also taking active steps to identify potential partnership and other opportunities to obtain additional resources for our programs, including opportunities that are non-dilutive to our stockholders.

We also 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 our overall strategy and/or are synergistic with our team's core competencies and strengths.

We have taken, and intend to continue to take, active steps to identify assets and/or companies for acquisition and/or partnership, as well as a range of other transactions, across a variety of therapeutic indications, that we believe may complement, supplement and/or de-risk our current development programs, as well as provide additional value for our stockholders.

At-The-Market Sales Agreement

In July 2022, we entered into the 2022 Sales Agreement with BTIG, pursuant to which we may sell, from time to time, shares of our common stock having an offering price of up to $20 million in sales deemed to be “at-the-market”

equity offerings as defined in Rule 415 of the Securities Act, subject to the offering limits in General Instruction I.B.6 of Form S-3.

As of the date of this Quarterly Report, we have not sold any shares of common stock pursuant to the Sales Agreement.

ILD-DLCO Trial Update

From our initial announcement of the Oxygenation Trials in early 2021, we have stated our belief that positive data from any one or more of the three Oxygenation Trials would provide evidence of a definitive effect of TSC on oxygenation, as well as guide the subsequent steps of our development strategy focused on demonstrating the clinical and therapeutic benefits of TSC in a relevant patient population affected by hypoxia.

As noted above, the positive effects observed in and data obtained from both the TCOM and Altitude Trials have been used to design and align with the FDA on a novel GBM trial design for Study 200-208 and to develop our Hypoxic Solid Tumor Program, more generally.

On August 9, 2022, in order to, among other things, dedicate more of our human and other resources to Study 200-208 and our business development activities, as well as ongoing challenges enrolling patients in clinical trials for respiratory indications during the ongoing COVID-19 pandemic, we made the decision to terminate recruitment and enrollment in the ILD-DLCO Trial and begin winding the trial down.

The trial will incorporate an innovative use of PET scans to directly evaluate the oxygen enhancing effects of TSC on tumor hypoxia using radiotracers, with initial data readouts from the dose-escalation phase expected to be available within one year of the first patient being dosed.

We currently intend to use the PET scan data from the dose escalation phase of Study 200-208 to support a discussion with the FDA on a planned pathway to approval of TSC as a treatment for newly diagnosed patients with GBM when administered as an adjunct to radiotherapy as part of standard of care therapy.

We intend to initiate these discussions with the FDA concurrently with our planned enrollment of an additional 17 subjects to be treated at the highest tolerable dose identified in the dose escalation phase.

Our internal clinical development efforts continue to be focused on engaging study sites and related activities that will enable us to dose the first patient in Study 200-208 in the first quarter of 2023.

However, the actual timing of the study's initiation, the dosing of the first patient and subsequent downstream milestones are subject to the outcome and timing of our ongoing strategic review process described above and the pace of enrollment in the study.

ILD-DLCO Trial

In August 2022, satisfied that the positive results observed in our TCOM and Altitude Trials had accomplished our original goals for the Oxygenation Trials, we announced our decision to terminate recruitment and enrollment in our ILD-DLCO Trial and dedicate additional time and resources to standing up our Hypoxic Solid Tumor Program and the 200-208 Study, as well as our business development activities.

At the time the ILD-DLCO study was terminated, 18 of the planned 27 patients had been enrolled and treated in accordance with the planned 2:1 randomization with the 12 patients in the TSC cohort receiving a single, intravenous dose of 2.5mg/kg.

Analyses of this partial dataset indicate TSC was safe and well tolerated among all 12 TSC-treated patients at the 2.5 mg/kg dose, which as noted above is the highest dose currently planned to be administered in the 200-208 Study.

Although there was no significant change observed in the study’s primary endpoint, diffusion of carbon monoxide into the lungs measured at 30 min post-TSC vs baseline DLCO, the TSC-treated patient cohort did statistically separate from placebo at 60 min post-dose in the 6-minute walk test when compared to the pre-dose baseline, though the change was less than the clinically meaningful change typically found in the scientific literature (30m distance gained or 20% improvement vs baseline (pre-TSC) 6-minute walk test).

Further, there was no significant change in the pre-TSC vs.

post-TSC Borg Dyspnea Scale measurement or heart rate recovery at completion of the 6-minute walk test.

We believe the data from the ILD-DLCO trial supporting the safety and tolerability of TSC administered at 2.5 mg/kg iv in patients with ILD-DLCO reinforce our plans to target this dose in the 200-208 Study as a treatment for newly diagnosed patients with GBM when administered as an adjunct to radiotherapy as part of standard of care therapy.

Financial Summary

As of June 30, 2022, we had cash, cash equivalents, and marketable securities of $28.5 million, in the aggregate.

As of September 30, 2022, we had cash, cash equivalents, and marketable securities of $25.9 million, in the aggregate.

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

We incurred net losses of $4.2 million and $8.7 million for the three and six months ended June 30, 2022, respectively.

Our accumulated deficit as of June 30, 2022 was $138.7 million, and we expect to continue to incur substantial losses in future periods.

We incurred net losses of $2.8 million and $11.5 million for the three and nine months ended September 30, 2022, respectively.

Our accumulated deficit as of September 30, 2022 was $141.5 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 and any other assets we may in-license or acquire, including any costs related to:

5 unchanged sentences

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

and investments in operational, financial, and management information systems.

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 and any business development activities we may undertake.

We currently expect that our cash, cash equivalents and marketable securities as of June 30, 2022 will enable us to fund our operating expenses and capital expenditure requirements into the first quarter of 2024, without giving effect to any business development activities we may undertake.

investments in operational, financial, and management information systems.

Subject to the outcome of our ongoing strategic review process, 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 and any future business development activities we may undertake.

We currently expect that our cash, cash equivalents and marketable securities as of September 30, 2022 will enable us to fund our operating expenses and capital expenditure requirements into the first quarter of 2024, subject to the outcome and timing of the aforementioned strategic review process.

Financial Operations Overview

7 unchanged sentences

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

3 unchanged sentences

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

Results of Operations for Three Months Ended June  

30, 2022 Compared to Three Months Ended June  

The following table sets forth our results of operations for the three months ended June 30, 2022 and 2021.

Three Months Ended June 30, 2022

Results of Operations for Three Months Ended September  

30, 2022 Compared to Three Months Ended September  

The following table sets forth our results of operations for the three months ended September 30, 2022 and 2021.

Three Months Ended

September 30, 2022

Operating expenses:

Research and development

Intangible asset impairment charge

General and administrative

1 unchanged sentence

Interest income

We recognized $2.1 million in R&D expenses during the three months ended June 30, 2022 compared to $2.0 million during the three months ended June 30, 2021.

This increase 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.

G&A expenses were $2.1 million during the three months ended June 30, 2022 compared to $1.8 million during the three months ended June 30, 2021.

The increase was mainly due to an increase in professional fees related to the April reverse stock-split as well as increased salary expense related to additional headcount.

The decrease in depreciation for the three months ended June 30, 2022 compared to the three months ended June 30, 2021 is related to the disposal of property and equipment during the year-ended December 31, 2021.

Results of Operations for Six Months Ended June  

30, 2022 Compared to Six Months Ended June  

The following table sets forth our results of operations for the six months ended June 30, 2022 and 2021.

Six Months Ended

Loss from operations before income tax benefit

Income tax benefit

We recognized $0.8 million in R&D expenses during the three months ended September 30, 2022 compared to $2.1 million during the three months ended September 30, 2021.

This decrease was attributable to the timing of clinical trials and drug manufacturing, as well as a vendor-related refund.

The decrease in intangible asset impairment charge is related to the nonrecurring $8.6 million non-cash impairment charge related to the write down of our DFN-529 IPR&D asset during the three months ended September 30, 2021.

G&A expenses were $2.1 million during the three months ended September 30, 2022 compared to $1.9 million during the three months ended September 30, 2021.

The increase was mainly due to increased professional fees related to ongoing business development activity.

The decrease in depreciation for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 is related to the disposal of property and equipment during the year-ended December 31, 2021.

The decrease in income tax benefit of $0.4 million during the three months ended September 31, 2022 compared to the three months ended September 31, 2021 is 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.

Results of Operations for Nine Months Ended September  

30, 2022 Compared to Nine Months Ended September  

The following table sets forth our results of operations for the nine months ended September 30, 2022 and 2021.

Nine Months Ended

September 30,

Operating expenses:

Research and development

Intangible asset impairment charge

General and administrative

Loss from operations

Other income:

Interest income

We recognized $4.5 million in R&D expenses during the six months ended June 30, 2022 compared to $4.9 million during the six months ended June 30, 2021.

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.

G&A expenses were $4.3 million during the six months ended June 30, 2022 compared to $3.6 million during the six months ended June 30, 2021.

Loss from operations before income tax benefit

Income tax benefit

We recognized $5.3 million in R&D expenses during the nine months ended September 30, 2022 compared to $7.0 million during the nine months ended September 30, 2021.

This decrease was attributable to the timing of clinical trials and drug manufacturing as well as a vendor-related refund, offset by an increase in salaries and wages and stock-based compensation related to increased headcount.

G&A expenses were $6.4 million during the nine months ended September 30, 2022 compared to $5.5 million during the nine months ended September 30, 2021.

The increase in G&A expense was primarily due to an increase in professional fees related to the April reverse stock-split as well as increased salary expense related to additional headcount.

The decrease in depreciation for the six months ended June 30, 2022 compared to the six months ended June 30, 2021 is related to the disposal of property and equipment during the year-ended December 31, 2021.

The decrease in interest income for the six months ended June 30, 2022 compared to the six months ended June 30, 2021 is primarily attributable to lower interest earned on cash and investments.

The decrease in depreciation for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 is related to the disposal of property and equipment during the year-ended December 31, 2021.

The increase in interest income for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 is primarily attributable to higher interest earned on cash and investments.

The decrease in income tax benefit of $0.4 million during the nine months ended September 30, 2022 compared to the nine months ended September 31, 2021 is 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.

Liquidity and Capital Resources

1 unchanged sentence

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

As of June 30, 2022, we had $6.0 million in cash and cash equivalents, working capital of $26.7 million and an accumulated deficit of $138.7 million.

As of September 30, 2022, we had $6.6 million in cash and cash equivalents, working capital of $24.1 million and an accumulated deficit of $141.5 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 six months ended June 30, 2022 and 2021:

Six Months Ended June 30,

We intend to use our existing cash and cash equivalents to fund our working capital and research and development of our product candidates, subject to the outcome and timing of our ongoing strategic review process.

The following table sets forth our cash flows for the nine months ended September 30, 2022 and 2021:

Nine Months Ended

September 30,

Net cash (used in) provided by:

4 unchanged sentences

As of December 31, 2021, we did not own any marketable securities.

The decrease in cash and cash equivalents during the six months ended June 30, 2022 is primarily attributable to purchases of marketable securities during the period intended to preserve capital, fulfill the Company's liquidity needs, and maximize investment performance in accordance with the Company's investment policies and guidelines.

The decrease in cash and cash equivalents during the nine months ended September 30, 2022 is primarily attributable to purchases of marketable securities during the period intended to preserve capital, fulfill the Company's liquidity needs, and maximize investment performance in accordance with the Company's investment policies and guidelines.

Operating Activities

Net cash used in operating activities of $8.7 million during the six months ended June 30, 2022 was primarily attributable to our net loss of $8.7 million and our net change in operating assets and liabilities of $0.5 million.

This amount was offset by $0.6 million in stock-based compensation 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.

Net cash used in operating activities of $8.5 million during the six months ended June 30, 2021 was primarily attributable to our net loss of $8.4 million and our net change in operating assets and liabilities of $0.6 million.

This amount was offset by $0.5 million in stock-based compensation expense and depreciation expense.

Net cash used in operating activities of $11.5 million during the nine months ended September 30, 2022 was primarily attributable to our net loss of $11.5 million and our net change in operating assets and liabilities of $0.6 million.

This amount was offset by $0.7 million in stock-based compensation expense as well as $0.1 million of amortization of premium and discount on marketable securities.

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 a decrease in our prepaid expenses, deposits and other current assets.

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.

Investing Activities

Net cash used in investing activities during the six months ended June 30, 2022 was attributable to the purchase of $31.6 million of marketable securities and maturities of $9.0 million of marketable securities.

Net cash used in investing activities during the nine months ended September 30, 2022 was attributable to the purchase of $38.0 million of marketable securities and maturities of $18.8 million of marketable securities.

Financing Activities

Net cash provided by financing activities was $5,000 during the six months ended June 30, 2022, which was attributable to net proceeds received from the sale of our Series C Preferred Stock.

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

Net cash provided by financing activities was $5,000 during the nine months ended September 30, 2022, which was attributable to net proceeds received from the sale of our Series C Preferred Stock.

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.

Capital Requirements

2 unchanged sentences

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 currently believe we have adequate cash resources to continue operations into the first quarter of 2024 (without giving effect to any business development activities we may undertake), we anticipate that we will need additional funding in order to complete development of TSC and any other assets we may in-license or acquire which, if available, could be obtained through additional capital raising transactions, entry into strategic partnerships or collaborations, or alternative financing arrangements.

As of June 30, 2022, we did not have any credit facilities in place under which we could borrow funds or any other sources of committed capital.

In July 2022, we entered into an at-the-market sales agreement, or the 2022 Sales Agreement with BTIG, as agent, pursuant to which the Company may sell up to an aggregate of $20.0 million in shares of the Company’s common stock, from time to time through BTIG, by any method permitted that is deemed an “at the market offering”

While we currently believe we have adequate cash resources to continue operations into the first quarter of 2024 (subject to the outcome and timing of our ongoing strategic review process), we anticipate that we will need additional funding in order to complete development of TSC and any other assets we may in-license or acquire which, if available, could be obtained through additional capital raising transactions, entry into strategic partnerships or collaborations, or alternative financing arrangements.

In July 2022, into an at-the-market sales agreement, or the 2022 Sales Agreement with BTIG, as agent, pursuant to which the Company may sell up to an aggregate of $20.0 million in shares of the Company’s common stock, from time to time through BTIG, by any method permitted that is deemed an “at the market offering”

as defined in Rule 415(a)(4) under the Securities Act of 1933, as amended.

9 unchanged sentences

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.

7 unchanged sentences

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