Portions of the registrant's definitive Proxy Statement on Schedule 14A for its 2021 Annual Meeting of Stockholders are incorporated by reference into the indicated parts of this Form 10-K, as specified in the responses to the item numbers involved. Such Proxy Statement will be filed within 120 days after December 31, 2020, the end of the fiscal year to which this Annual Report relates.

Unless the context otherwise requires, in this Annual Report, (i) references to the “Company,” “we,” “our,” or “us” refer to Diffusion Pharmaceuticals Inc. and its subsidiaries and (ii) references to “common stock” refer to the common stock, par value $0.001 per share, of the Company. We have also used several other defined terms in this Annual Report, which are explained or defined below:

This Annual Report (including, for purposes of this Note Regarding Forward-Looking Statements, any information or documents incorporated herein by reference) includes express and implied forward-looking statements. By their nature, forward-looking statements involve risks and uncertainties because they relate to events, competitive dynamics and industry change, and depend on the economic circumstances that may or may not occur in the future or may occur on longer or shorter timelines than anticipated. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Annual Report, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition, liquidity and prospects may differ materially from the forward-looking statements contained in this Annual Report. In addition, even if our results of operations, financial condition, liquidity, and prospects are consistent with the forward-looking statements contained in this Annual Report, they may not be predictive of actual results or reflect unanticipated developments in future periods.

Forward-looking statements appear in a number of places throughout this Annual Report. We may, in some cases, use terms such as “believes,” “estimates,” “anticipates,” “expects,” “plans,” “intends,” “may,” “could,” “might,” “will,” “should,” “approximately,” or other words that convey uncertainty of future events or outcomes to identify these forward-looking statements. Forward-looking statements also include statements regarding our intentions, beliefs, projections, outlook, analyses, or expectations, including our intentions, beliefs, projections, outlook, analyses, or expectations concerning, among other things:

As a result of these and other factors, known and unknown, actual results could differ materially from our intentions, beliefs, projections, outlook, analyses, or expectations expressed in any forward-looking statements in this Annual Report. Accordingly, we cannot assure you that the forward-looking statements contained in this Annual Report will prove to be accurate or that any such inaccuracy will not be material. You should also understand that it is not possible to predict or identify all such factors, and you should not consider any such list to be a complete set of all potential risk or uncertainties. In light of the foregoing and the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. For all forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Any forward-looking statement that we make in this Annual Report speaks only as of the date of such statement, and, except as required by applicable law or by the rules and regulations of the SEC, we undertake no obligation to update such statements to reflect events or circumstances after the date of this Annual Report or to reflect the occurrence of unanticipated events. Comparisons of current and any prior period results are not intended to express any ongoing or future trends or indications of future performance, unless explicitly expressed as such, and should only be viewed as historical data.

Unless the context otherwise requires, in this Annual Report, all share and per share amounts related to our common stock give effect to (i) our 1-for-15 reverse stock split effective December 13, 2018 and (ii) our 1-for-10 reverse stock split effective August 17, 2016.

This Annual Report contains certain trademarks, trade names, and service marks of ours, including “DIFFUSIO2N.” All other trade names, trademarks, and service marks appearing in this Annual Report are, to the knowledge of Diffusion, the property of their respective owners. To the extent any such terms appear without the trade name, trademark, or service mark notice, such presentation is for convenience only and should not be construed as being used in a descriptive or generic sense.

We are ~~an innovative~~a biopharmaceutical company developing novel therapies that enhance the body’s ability to deliver oxygen to the areas where it is needed most. Our lead product candidate, TSC, is being developed to enhance the diffusion of oxygen to tissues with low oxygen levels, also known as hypoxia, a serious complication of many of medicine’s most intractable and difficult-to-treat conditions.

In addition to TSC, our product candidate DFN-529, a novel, allosteric PI3K/Akt/mTOR pathway inhibitor, is in early-stage development. We previously completed two Phase 1 clinical trials evaluating DFN-529 in age-related macular degeneration. DFN-529 was also previously in preclinical development in oncology, specifically GBM.Our Strategy

~~Highlights~~Our goal is to become a leading biopharmaceutical company focused on the development and commercialization of novel therapies that enhance the body’s ability to deliver oxygen to areas where it is needed most and improve treatment outcomes for patients suffering from ~~2020 and Early 2021~~conditions complicated by hypoxia. To achieve this strategy, we are focused on the following key objectives:

~~Our Strategic Priorities for 2021~~

•

Maximize the commercial value of our pipeline. We have invested, and plan to continue to invest, significant time, effort, and resources into the development and maintenance of our intellectual property portfolio as we seek to retain worldwide development and commercial rights to our product candidates. In parallel with advancing our development programs, we will evaluate the commercial landscape for TSC with the intent of improving patient access to maximize our chances of commercial success, should the product be approved.

Since the founding of Diffusion LLC, we have been principally focused on the development of TSC for the treatment of hypoxia and as a platform to enhance standard-of-care treatment for conditions complicated by hypoxia. Prior to 2020, these efforts generated a substantial amount of data related to TSC, including data related to chemistry, manufacturing, and controls, preclinical safety and/or efficacy data in a wide array of experimental models, single dose safety, tolerability, and pharmacokinetic data, and clinical data and other information related to TSC's potential as a supplement to standard-of-care treatment in GBM, peripheral artery disease, and stroke.

In March 2020, the COVID-19 pandemic accelerated in the U.S. resulting in numerous delays and other challenges for biopharmaceutical companies conducting clinical studies in indications not related to COVID-19, including our TSC Stroke Trial. In early April 2020, we announced plans to initiate a clinical research program to evaluate TSC in patients with COVID-19 due to the anticipated persistence of the COVID-19 pandemic coupled with our belief in the potential of TSC to improve low tissue oxygen levels, a common symptom and complicating factor in the treatment of COVID-19. We believe this decision was both opportunistic and a natural extension of the previous development work conducted with TSC, and in September 2020 we commenced the TSC COVID Trial.

In November 2020, we announced that, following changes to our management team in the prior two months, we had initiated a thorough review of our then-existing development program for TSC and commenced plans to modify the program with the intent of accomplishing two principal strategic objectives:

Our lead product candidate, TSC, is being developed to enhance the diffusion of oxygen to tissues with low oxygen levels, also known as hypoxia.

Hypoxia is a condition in which there is an insufficient supply of oxygen to meet the energy demands of the cells in a tissue (e.g., skeletal muscle). Hypoxia is associated with the pathophysiology of many ~~acute~~of medicine’s most intractable and ~~chronic~~difficult-to-treat conditions, including cancers, ~~heart attack, stroke, ARDS,~~cardiovascular diseases, cerebrovascular diseases, respiratory diseases, skin and soft tissue diseases, and neurodegenerative ~~diseases and other intractable and difficult-to-treat conditions, further complicating treatment of the underlying condition by medical providers.~~diseases.

~~Oxygen is fuel~~All currently approved treatments for ~~life. The constant uptake and delivery of oxygen within our body is necessary to sustain life whether at rest~~hypoxia work by augmenting or ~~under stress, in sickness and in health.~~

~~Normally,~~supplementing the ~~body’s supply of oxygen sustains life by meeting the demand for oxygen at the cellular level. This~~systemic availability of ~~sufficient~~oxygen. For example, respirators use pressure to push oxygen ~~enables efficient and sustainable generation of energy to support~~across the metabolic demands of the cells. Low oxygen content in the blood stream, also known as hypoxemia, often leads to hypoxia, a condition in which a region of the body's tissues is deprived of sufficient oxygen to produce the energy it needs to survive. This state can only be sustained for very brief periods of time, sometimes just minutes, before the body tissue experiences ischemia, damage, and, eventually, cellular death.

~~Under normal conditions, when oxygen is inhaled through the~~ lungs it diffuses from this area of high oxygen concentration in the air sacs of the lungs, or alveoli, into pulmonary circulation where the oxygen concentration is lower. This diffusion process is passive. Oxygen moves across cell layers and vessel walls into the blood stream in a manner that does not require energy and avoids over-oxygenating the body. Once oxygen reaches the blood stream, it is rapidly taken up onto our red blood cells while a very small amount dissolves in the plasma. The hemoglobin within the red blood cells act as mass transport carriers for oxygen. Red blood cells are pumped throughout our circulatory system by the heart, reaching every cell in our body. Upon reaching its cellular destination, the oxygen is released from the hemoglobin and again passively diffuses from the area of high concentration in the bloodstream to the lower concentration areas in the tissues.

Our body's ability to deliver sufficient oxygen in this manner is determined by several factors, including the amount of oxygen in the air we breathe, our cardiac output (i.e., how well the heart circulates the oxygen), our hemoglobin content (i.e., how many transporters there are to carry the oxygen), and the level of oxygen saturation of hemoglobin, which can carry up to four oxygen molecules. A variety of medical interventions are available to augment or supplement these factors in the oxygen delivery process in order to increase ~~mass~~ oxygen ~~delivery. For example, there are~~concentration, certain medications and devices such as external mechanical pumps are designed to improve cardiac output, and blood transfusions are used to increase the concentration of red blood cells and oxygen-carrying hemoglobin ~~content~~molecules.

While these treatments are effective in certain circumstances, there are significant associated risks such as lung damage resulting from the use of respirators, toxic side effects and drug-to-drug interactions of medications that increase cardiac output, infections related to blood transfusions, and the risk of creating excessive oxygen-related tissue toxicity, or hyperoxia, by providing a patient with excessive amounts of oxygen, among others. In addition, in certain other indications, these currently approved therapies are ineffective in treating the associated hypoxia. For example, in the ~~blood, and other passive and mechanical methods to increase~~treatment of cancer, re-oxygenating hypoxic, cancerous tissue cells cannot typically be accomplished simply by increasing the systemic availability of oxygen. ~~However,~~

We believe TSC is the first therapy specifically designed to enhance the efficiency of the oxygen diffusion process. Furthermore, in animal models, TSC’s diffusion-enhancing mechanism of action has been observed to affect hypoxic tissue preferentially while these existing strategies can be very effective in certain circumstances, they do not specifically focus on enhancing the diffusion process by which oxygen moves from a high concentration area in the bloodstream to a lower concentration are in hypoxic tissue. Accordingly, we believe there remains a significant unmet need in the treatment of hypoxia.avoiding excessive oxygen-related tissue toxicity.

An additional, important factor in oxygen uptake and delivery is how efficiently the oxygen moves or diffuses across the many impediments that can slow the movement of oxygen through the body, such as the red blood cell walls, water molecules in plasma, cellular layers of the blood vessels, and other tissues. Currently, there is no well-known or widely-used medical method to augment or supplement this factor in the oxygen delivery process.

~~We believe that TSC's novel mechanism of action would be the first therapy specifically designed to enhance the oxygen diffusion process, thereby~~By supporting normal, physiologic levels of oxygen diffusion at the uptake and delivery ~~points.~~points of the circulatory system, we believe TSC presents a significant opportunity to improve the current standard-of-care treatment for conditions complicated by hypoxia.

Blood plasma is approximately ~~90.0%~~90% water. The water ~~and these water~~ molecules in the plasma are constantly moving, bound together in a loosely organized matrix by hydrogen bonds. Due to oxygen’s passive diffusion process through the plasma from areas of high oxygen concentration to areas of low oxygen concentration, a treatment that can reduce the factors that resist this movement should make oxygen more available to hypoxic tissues.

~~Representation of oxygen molecules moving from red blood cells, across the concentration gradient, to oxygen-consuming tissues.~~

TSC was designed to enhance the level of organization among the water molecules by increasing the amount of hydrogen bonding. This creates a less dense matrix of water molecules, reducing the resistance to oxygen diffusion across the concentration gradient. In animal models, this diffusion-enhancing mechanism of action has been observed to affect hypoxic tissue preferentially while avoiding excessive oxygen-related tissue toxicity, also known as hyperoxia.

~~Representation of the indirect course of oxygen molecule movement through~~ “~~unorganized~~” ~~or randomly moving water molecules (left panel) versus the more direct path through~~ “~~organized~~” ~~molecules allowed by TSC (right panel).~~

TSC has been observed to be safe and well-tolerated at most doses tested in over 180 subjects included to-date in clinical studies. A maximum tolerated dose was identified in the initial clinical study of TSC conducted in normal healthy volunteers, and subsequent clinical studies have been conducted with lower doses. These studies have included patients with variety of medical conditions often complicated by hypoxia, including our clinical studies conducted in patients afflicted with GBM, peripheral artery disease with intermittent claudication, stroke, and, most recently, COVID-19. In each of these conditions and many others, hypoxia is a significant contributor to morbidity and mortality, and a considerable treatment obstacle for medical providers.

In the TSC COVID Trial, which we completed in February 2021, we evaluated the safety and tolerability of TSC administered on a more frequent dosing regimen than had been previously tested in a clinical trial setting. No dose-limiting toxicities or serious adverse events were observed among any patients in the TSC COVID Trial, including those who received the highest tested dose of TSC, 1.5 mg/kg administered intravenously every six hours for a period of at least five and up to 15 days.

Hypoxia is a critical, complicating factor in many intractable and difficult-to-treat conditions affecting people of all ages, including cancers, cardiovascular disease, stroke, respiratory disease including ARDS, skin and soft tissue diseases, and neurodegenerative diseases. We have previously evaluated TSC in a variety of preclinical and clinical studies. We believe that the data we have obtained through certain preclinical studies provide support for TSC’s ability to improve oxygenation, while data obtained through the clinical trials we have undertaken to date suggest TSC is safe and well-tolerated at the doses tested, including administration of TSC to more than 180 human subjects and patients with GBM, acute stroke, COVID-19, acute lung injury, and peripheral artery disease with intermittent claudication.

TSC has been evaluated in a variety of preclinical models intended to mimic relevant human conditions known to be complicated by hypoxia. In these studies, a ~~number~~variety of positive effects have been observed in connection with TSC administration, including:

Positron emission tomography scans showing reduction in hypoxia in a rat C6 glioma brain tumor model 45 min after TSC administration.

~~• Improving survival in a rat brain tumor model when added to radiotherapy, whether or not combined with chemotherapy.~~The TSC Oxygenation Trials: Demonstrating Proof of Concept, Dose Response Relationships, and Potential Indications for Future Development

~~• Improving~~While our clinical trials evaluating TSC conducted prior to 2021 provided certain preliminary signals regarding TSC’s mechanism of action and dose response characteristics, none of those studies were designed to demonstrate proof of concept by directly measuring TSC’s effects on tissue oxygenation ~~without hyper-oxygenation~~and a variety of ~~normal tissue~~questions remained regarding TSC’s dose response characteristics, pharmacokinetics, and ~~reducing infarct size in a rat ischemic stroke model.~~pharmacodynamics.

~~• Demonstrating a functional benefit in a rabbit ischemic stroke model, with or without tPA at one-hour post-clot infection and with tPA at three hours post-clot infection.~~

~~• Improving arterial PaO2~~Given these identified gaps in our knowledge, in November 2020, we communicated our plan to design and execute our Oxygenation Trials, a series of short-term clinical studies using experimental models to evaluate the clinical effects of TSC on oxygenation, each designed to look at the effects of TSC on a different component of the oxygenation pathway. By quantifying the magnitude of effects of TSC on tissue oxygen levels ~~in a rat model~~and other direct clinical parameters assessing oxygen levels, and thereby demonstrating proof of ~~ARDS.~~concept of TSC’s effects on tissue oxygenation, as well as supplementing our knowledge of TSC’s dose response characteristics, pharmacokinetics and pharmacodynamics, we believe the data obtained from the Oxygenation Trials will allow us to significantly increase our clinical development strategy’s likelihood of success.

~~Glioblastoma Multiforme~~TCOM Trial: TSC's Effects on Peripheral Tissue Oxygenation

In March 2021, we initiated and completed enrollment in the first of the Oxygenation Trials, our TCOM Trial. In June 2021, we reported a positive trend in peripheral tissue oxygenation as compared to placebo among participants receiving TSC that persisted through the duration of the one-hour, post-dosing measurement period. Although the magnitude of this effect was not statistically significant due to limitations in the study design, the trends in the primary endpoint data indicated an improvement in peripheral oxygenation with TSC with no evidence of hyperoxygenation.

The figure below was created during a supplemental analysis of the TCOM Trial results 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. These data highlight the persistent increase in peripheral tissue oxygenation relative to the placebo group through the duration of the one-hour measurement period following TSC administration, particularly at the two highest doses tested.

We believe the TCOM Trial provides clinical evidence to support the hypothesis that TSC ~~may be able~~enhances the passive diffusion of oxygen from areas of high concentration to ~~benefit cancer patients by re-oxygenating hypoxic cancer tissue, making~~areas of low concentration without causing hyperoxygenation and that the ~~cells more susceptible~~data obtained from the study represent a positive and meaningful step towards the accomplishing of the Oxygenation Trials’ strategic objectives originally set forth in November 2020. These data have and will continue to guide the next steps of our development strategy, including the design of our Hypoxic Solid Tumor Program.

On November 22, 2021, we announced dosing of the first participants in our second Oxygenation Trial, the Altitude Trial. This study is a double-blind, randomized, placebo-controlled crossover study designed to evaluate the effects of TSC on maximal oxygen consumption and partial pressure of blood oxygen in normal healthy volunteers subjected to incremental levels of physical exertion while exposed to “simulated altitude.” The study will enroll 30 healthy volunteers and give each volunteer a single dose of TSC at one of three different doses. Due to enrollment delays experienced during early 2022 related to the ~~therapeutic~~omicron variant wave of the COVID-19 pandemic, we now anticipate completing dosing in the Altitude Trial in the second quarter of 2022, with topline results reported within two months of study completion.

On December 16, 2021, we announced dosing of the first patients in our third and final Oxygenation Trial, the ILD-DLCO Trial. This study is a double-blind, randomized, placebo-controlled, crossover study designed to evaluate the effects of TSC on the diffusion of carbon monoxide through the lungs, or DLCO, in patients with previously diagnosed ILD who have a baseline DLCO test result that is abnormal. DLCO is used in the study 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 enroll 27 patients with confirmed ILD who will be randomized in a 2:1 ratio to a single dose of TSC or placebo via IV bolus. The study is statistically powered to evaluate the difference in effect of TSC versus placebo on improvement in DLCO measurements. In addition, patients will undergo a standard six-minute walk test intended to assess functional improvement in exercise capacity. Due to enrollment delays experienced during early 2022 related to the omicron variant wave of the COVID-19 pandemic, the effect of the omicron variant on patients with pulmonary diseases such as ILD, and staffing issues at the facilities where the ILD-DLCO Trial is being conducted, we now anticipate completing dosing in the ILD-DLCO Trial by the middle of 2022, with topline results reported within two months of study completion.

TSC has been observed to be safe and well-tolerated at most doses tested in over 220 subjects included to-date in clinical studies at a variety of doses administered via intravenous infusion. Our clinical studies have included patients with a variety of medical conditions often complicated by hypoxia, including patients afflicted with GBM, peripheral artery disease with intermittent claudication, stroke, COVID-19, and interstitial lung disease. In each of these conditions and many others, hypoxia is a significant contributor to morbidity and mortality, and a considerable treatment obstacle for medical providers.

During 2021, we obtained additional data further demonstrating TSC's safety at higher doses and increased dosing frequencies from our COVID Trial and Oxygenation Trials. In the COVID Trial, completed in February 2021, TSC was administered on a different dosing regimen than any of our prior trials, with patients receiving an infusion multiple times per day for up to 15 days. In the TCOM Trial, based in part on a recommendation from the COVID Trial’s safety monitoring committee, arms evaluating even higher doses of TSC were included. No dose-limiting toxicities or serious adverse events were observed among any patients or participants in the either trial, including those who received the highest tested doses of TSC.

We believe TSC’s novel mechanism of action supports the objective of developing TSC as a treatment for hypoxic solid tumors because TSC’s ability to enhance the oxygenation of hypoxic tissues may increase the effectiveness of standard-of-care radiation therapy and chemotherapy. ~~In particular, GBM is an especially deadly form~~

Solid tumors comprise approximately 90% of ~~brain~~all adult cancers and, according to the American Cancer Society, it was expected that roughly 1.9 million new cancer ~~that each year affects approximately 12,000 patients~~cases would 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, or immunotherapy, increasing the metastatic potential of these tumors and ~~approximately 35,000 patients worldwide,~~the probability of unsuccessful treatment.

Many of the challenges faced by practitioners in treating some of the most fatal and difficult-to-treat tumor types, including GBM, pancreatic cancer, and other solid tumors, are a product of those tumors’ highly hypoxic nature. Cancerous tumors are specifically susceptible to developing hypoxia due to a combination of rapid growth, structural abnormalities of the tumor microvessels, and disturbed circulation within the tumor. Hypoxic conditions within the tumor microenvironment have numerous negative consequences for ~~which TSC has received an Orphan Drug Designation from the FDA.~~patient outcomes and treatment, including:

• increased resistance to ionizing radiation, chemotherapy, immunotherapy and other treatment methods;

We have previously obtained and published evidence supporting TSC’s ability to enhance oxygenation of C6 glioma tumors in animals, as well as clinical evidence of TSC’s effects in unresectable GBM tumors from our previously completed a Phase 2 clinical trial ~~that evaluated~~evaluating 59 patients with newly diagnosed GBM. This open-label, historically controlled trial demonstrated a favorable safety and tolerability profile for TSC when combined with standard of care treatment for GBM. Although not prospectively defined, a post hoc subgroup analysis of inoperable patients suggested a higher proportion of TSC-treated patients survived at two years compared to those in the historical control group.

~~Based upon~~In November 2021, based on the available preclinical and clinical data and the significant unmet medical need, we announced our intention to focus near-term efforts on developing TSC as an adjunct to standard of care therapy for hypoxic solid tumors. Through the combination of our past experiences, new knowledge gained from our Oxygenation Trials and COVID Trial regarding TSC’s effects on oxygenation, dose response characteristics, pharmacokinetics, and pharmacodynamics, and further analyses and discussions of all available data with our Scientific Advisory Board and other external advisors, we believe we now have the ~~inoperable patient subgroup in~~necessary information to design the Phase 2 trial and guidance from the FDA received at our End-of-Phase-2 meeting, we initiated the TSC GBM Trial in the newly diagnosed inoperable GBM patient population in December 2017. The TSC GBM Trial was designed to enroll 236 patients in total, with 118 in the treatment arm and 118 in the control arm. The trial began with an FDA-mandated, open-label, dose-escalation safety run-in for which enrollment was completed and has closed. A total of 19 patients were enrolled in an attempt to ensure that at least 8 patients completed the FDA-specified 42-month exposure period. At a meeting in the third quarter of 2019, the data safety monitoring board for the trial concluded that no adverse safety signal was present and unanimously recommended the trial continue as planned, with TSCHypoxic Solid Tumor Program to be ~~used in combination with temozolomide, an anti-cancer chemotherapy drug, during~~more efficient and increase our likelihood of success compared to the ~~adjuvant treatment chemotherapy period. However, we determined we did not have adequate resources at the time~~Company’s past efforts to fully support the randomized portion of the TSC GBM Trial and commencement of enrollment in the randomization portion of the TSC GBM Trial was suspended. Further consideration of if, when, and how to continue the development ofdevelop TSC as a cancer treatment, ~~for GBM — including any restart~~which were terminated in 2019 due to financial constraints.

As part of the ~~TSC GBM~~ongoing design of our Planned Phase 2 Hypoxic Tumor Trial —– the first trial in our Hypoxic Solid Tumor Program which we currently expect to commence in the second half of 2022, subject to FDA feedback and the availability of clinical drug supply – we are currently drafting a trial protocol which we intend to file with the FDA. In parallel, we will ~~take place following completion of~~continue our work to optimize the TSC ~~Oxygenation Trials.~~manufacturing process and support the continued availability of high-quality drug product and undertake preclinical studies and other opportunities to continue developing data designed to demonstrate TSC’s potential uses in a broad spectrum of non-cancer indications.

Beyond cancer, hypoxia is a complicating factor in many other intractable and difficult-to-treat conditions as well, including cardiovascular diseases, cerebrovascular diseases, respiratory diseases, skin and soft tissue diseases, and neurodegenerative diseases. In addition to our oncology programs past and present, we have previously conducted a variety of preclinical and clinical studies evaluating the effects of TSC in several of these other indications complicated by hypoxia, including COVID-19, stroke, and peripheral artery disease with intermittent claudication, and we intend to continue to pursue potential partnering opportunities in non-oncology indications.

We believe TSC has potential applications in both ischemic and hemorrhagic stroke through mitigation of stroke-induced hypoxia and related damage to brain tissue. A stroke occurs when blood flow to the brain is blocked, referred to as an ischemic stroke, or a blood vessel in the brain ruptures, referred to as a hemorrhagic stroke, causing damage to surrounding brain tissue. According to the U.S. Centers for Disease Control and Prevention, stroke is the fifth leading cause of death and a leading cause of adult disability in the U.S. The hypoxic conditions in the brain of stroke patients may be a significant factor contributing to morbidity and mortality and, based upon certain preclinical safety and efficacy data and additional clinical safety data, we believe TSC could enhance the diffusion of oxygen into brain tissue to reduce stroke-induced hypoxia and neuronal death.

~~In October 2019, we began enrolling patients in our TSC Stroke Trial, a randomized~~Our Phase 2 ~~trial designed to evaluate TSC in the treatment of acute ischemic or hemorrhagic stroke. The TSC Stroke~~COVID-19 Trial was planned to enroll 160 total patients, evenly split between the TSC treatment arm and the control arm, with all patients to receive TSC or placebo treatment, as applicable, while in the ambulance to ensure treatment as soon as possible after the onset of clinical symptoms. However, due to a variety of factors, including challenges related to the trial's on-ambulance treatment design and overall healthcare system capacity related to the onset of the COVID-19 pandemic during the first half of 2020, we voluntarily terminated the TSC Stroke Study in the second half of 2020 in order to prioritize resources to shorter duration studies, including the TSC COVID Trial and the TSC Oxygenation Trials. Further consideration of if, when, and how to continue the development of TSC as a treatment for stroke will take place following completion of the TSC Oxygenation Trials.

We believe TSC’s oxygen-enhancing mechanism of action could potentially provide benefit to patients ~~with low oxygen levels at risk of developing ARDS and multiple organ failure,~~suffering from respiratory indications, such as ~~patients with~~ COVID-19.

OnIn September ~~10,~~ 2020, we announced the dosing of the first ~~two~~ patients in our ~~TSC~~ COVID Trial evaluating TSC in hospitalized COVID-19 patients at the ~~NIID~~National Institute of Infectious Diseases in Bucharest, Romania. The trial enrolled 24 patients divided into four sequential cohorts of six patients, with each patient in a cohort receiving the same intravenous doses of 0.25 mg/kg, 0.5 mg/kg, 1.0 mg/kg, or 1.5 mg/kg. All patients were administered intravenous doses of TSC every six hours for a minimum of five days and up to 15 days. On February 9, 2021, we completed dosing of the twenty-fourth and final patient in the trial.

The primary endpoint of the ~~TSC~~ COVID Trial was to evaluate the safety and tolerability of TSC administered every six hours for at least five and up to 15 days, a more frequent dosing regimen than had been used in our previous clinical studies. Secondary endpoints included pharmacokinetic measurement of TSC levels after dosing, relative improvements in blood oxygen levels, and certain other clinical parameters related to ~~COVID-19.~~COVID-19, such as improvement in WHO ordinal scale by day 7 and through day 29, time on oxygen supplementation, and hospital length of stay.

~~On February 9, 2021, we completed dosing of~~Data from the ~~twenty-fourth~~trial, evaluated by the study’s independent safety monitoring committee, indicated TSC was safe and ~~final patient in the TSC COVID Trial. No~~well-tolerated and that no dose-limiting toxicities or serious adverse events were observed among any patients in the study, including those who received the highest dose ~~of 1.5 mg/kg every 6 hours. Evaluation of secondary endpoint data is ongoing and we anticipate this data will be available early~~administered in the ~~second quarter of 2021. Further consideration of if, when, and how to continue~~trial. Additionally, while the ~~development of TSC as a treatment for COVID-19 — including any commencement of enrollment in the previously announced Phase 2b portion of the TSC~~ COVID Trial ~~— will take place following completion of the TSC Oxygenation Trials.~~

~~Our Anticipated Next Steps in the TSC Development Program: The TSC Oxygenation Trials~~

~~To this end, we plan to execute three short-term clinical trials during 2021, each of which we expect to conduct in the U.S. and fund with cash-on-hand. We believe positive data from any one~~not designed or more of the three TSC Oxygenation Trials would provide evidence of a definitive effect of TSC on oxygenation, whether through increased uptake in the lungs, enhanced delivery, increased utilization at the tissue level, or some combination thereof. Positive data from any of these studies, if obtained, will also guide the subsequent steps of our development strategy focused on demonstrating the clinical and therapeutic benefits of TSC in relevant patient populations across the hypoxia continuum.

The first of the three Oxygenation Trials is the TSC TCOM Trial, which we expect to initiate before the end of March 2021. The TSC TCOM Trial is designed as a double-blind, randomized, placebo-controlled study in healthy volunteers breathing 100.0% oxygen. The study is designed to evaluate the effects of TSC on peripheral tissue oxygenation using a TCOM device. The TCOM device directly measures the release of oxygen from the blood vessels through the skin and is commonly used to predict the likelihood of wound healing, the potential for success with hyperbaric therapy, and to map the appropriate location for limb amputation. The TSC TCOM Trial will test single, ascending doses of TSC in an attempt to establish the exposure-response relationship between TSC and enhanced oxygen delivery and will be statistically powered to evaluate efficacy, the ~~difference in tissue oxygenation levels versus placebo. We anticipate this study will be completed~~safety monitoring committee also observed that patients receiving the highest dose administered had improved outcomes in the ~~second quarter~~trial’s secondary and exploratory endpoints compared to those receiving lower doses. Further, no patients that received TSC required dialysis or developed acute kidney injury, nor were there any reports of ~~2021, with topline results available within two months following study completion.~~

~~The~~pulmonary embolism or deep vein thrombosis. Based on their observations, the safety monitoring committee also recommended the Company consider testing of higher TSC ~~Induced Hypoxia Trial: TSC's Effects Under Induced Hypoxic Conditions~~

~~The second TSC Oxygenation Trial is our planned TSC Induced Hypoxia Trial, which we expect to initiate~~doses and a continuous intravenous infusion in the third quarter of 2021. The TSC Induced Hypoxia Trial is expected to 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 exposed to simulated altitude conditions that induce hypoxia. Subjects in the TSC Induced Hypoxia Trial will be subjected to incremental levels of physical exertion while exposed to hypoxic and hypobaric conditions. The primary endpoints in the TSC Induced Hypoxia Trial will be change from baseline in VO2 and PaO2 after receiving a single intravenous dose of TSC. The study will be statistically powered to evaluate the difference in effect of escalating doses of TSC versus placebo in an attempt to establish a dose-response relationship on oxygen consumption and availability. We anticipate this study will be completed in the second half of 2021, with topline results available within two months of study completion.

The third TSC Oxygenation Trial is our planned TSC DLCO Trial, which we expect to initiate in the third quarter of 2021. The TSC DLCO Trial is expected to be a double-blind, randomized, placebo-controlled study which will evaluate the effects of TSC on the diffusion of carbon monoxide through the lungs, also known as DLCO, in patients with previously diagnosed interstitial lung disease who have a baseline DLCO test result that is abnormal. DLCO testing is commonly performed as part of standard pulmonary function testing and aids in the diagnosis or dyspnea, also known as shortness of breath, as well as to track improvement or progression over time on prescribed treatments. In the TSC DLCO Trial, 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 TSC DLCO Trial TSC will test single, ascending doses of TSC in an attempt to establish the exposure-response relationship between TSC and oxygen transfer efficiency. The study will be statistically powered to evaluate the difference in effect of TSC on improvement in DLCO versus placebo. We anticipate this study will be completed in the second half of 2021, with topline results available within two months of study completion.

Assuming success in one or more of the three TSC Oxygenation Trials, we expect to identify and announce the specific, hypoxia-related indications we will target in advancing TSC's development in the fourth quarter of 2021 and intend to initiate our Planned Phase 2 Hypoxia-related Indication Trial in the first quarter of 2022.

Our product candidate DFN-529 is a novel PI3K/Akt/mTOR pathway inhibitor which has completed two Phase 1 clinical trials for age-related macular degeneration and was previously in preclinical development in oncology, specifically for GBM. DFN-529 has shown activity in both in vitro and in vivo GBM animal models and has been demonstrated to be orally bioavailable and capable of crossing the blood brain barrier. We are currently in discussions with multiple third-party research scientists regarding the potential initiation of further studies to evaluate the effects of DFN-529 in preclinical cancer models. We believe these additional data may help guide us in choosing an appropriate clinical development pathway for DFN-529. We also continue to explore business options for DFN-529, including out-licensing opportunities and other strategic partnerships.future studies.

In recent years, the majority of our research and development expenditures have been directed to the development of TSC. For example, during the year ended December 31, ~~2020,~~2021, we incurred approximately ~~$9.4~~$8.5 million in costs related to research and development of our products, ~~an increase~~a decrease of approximately ~~$2.8~~$0.9 million compared to the year ended December 31, ~~2019.~~2020. The majority of these costs were related to the development of TSC and related personnel, including costs associated with the ~~TSC~~Oxygenation Trials and the COVID Trial, which ~~commenced in September 2020 and~~ was completed in February ~~2021, as well as the wind down of the TSC Stroke Trial, which commenced in October 2019 and was terminated in the second half of 2020.~~

2021. We expect this trend to continue for the foreseeable future, including planned expenditures related to completion of the ~~TSC~~remaining Oxygenation Trials, the initiation of the Hypoxic Solid Tumor Program, and other costs associated with the conduct of additional, supportive preclinical studies and general research and development activities related to ~~TSC. We intend to focus the remainder of our foreseeable research~~TSC and ~~development expenditures will on the development of DFN-529, including additional preclinical studies evaluating DFN-529 in cancer models that~~any other product candidates we ~~are~~may acquire or in-license in the ~~early stages of planning.~~future.

As a development-stage company, we continuously evaluate opportunities to improve the value of our development pipeline, including potential acquisition and in-licensing opportunities. Our efforts include ongoing evaluation and modification of our development plans intended to maximize the probability of technical, developmental, and regulatory success while enhancing patient and stockholder value. These activities have, and we expect they will continue to be for the foreseeable future, focused on opportunities that are synergistic with our overall corporate strategy to develop novel treatments for the treatment of hypoxia and conditions complicated by hypoxia.

We believe that a strong intellectual property portfolio is critical to our success. We are committed to obtaining and maintaining appropriate patent and other protections for our products candidates and other technologies, preserving and protecting our trade secrets and other confidential and proprietary information, and fiercely defending our intellectual property portfolio against any potential infringement by third parties. We attempt to protect our intellectual property through among other things, the filing of applications for patent, trademark, and other appropriate intellectual property protections, the use of confidentiality agreements with consultants, contractors and other third parties, our employee policies regarding confidentiality, invention disclosure, and the assignment of inventions, as well as regular meetings of members of our internal development and legal teams, which contains key members of our management team. We are also committed to operating our business without infringing on the intellectual property of others.

In general, patents extend for varying periods according to the date of patent filing or grant and the legal term of patents in various countries where patent protection is obtained, with term adjustments or extensions possible in certain cases based on patent office delays or pursuant to certain administrative and legislative exceptions. The actual protection afforded by a patent, which can vary from country to country, depends on the type of patent, the scope of its coverage and the availability of legal remedies in the country.

We continue to invest significant time, effort, and resources into the development and maintenance of our patent portfolio. As of December 31, ~~2020,~~2021, we owned 1617 issued U.S. patents and 36more than 35 issued non-U.S. patents, and had numerous patent applications pending worldwide including issued patents and applications in major markets such as the U.S., E.U., China, Japan, and India. The normal life (i.e. with no adjustments or extensions) of our key issued patents related to the composition of matter of TSC extends to 2026, with potential patent term extensions to 2031, and the normal life of our patents related to an oral formulation of TSC extends to 2031, with potential patent term extensions to 2036. ~~Additional~~The normal life of our key issued patents related to methods of use of TSC extends to 2037, not including potential patent term extensions. For additional information regarding patent term extensions, ~~can be found under the heading,~~ see "Business — Government Regulation— The Hatch-Waxman Amendments — Patent Term Restoration and Marketing Exclusivity. In addition, TSC has been granted Orphan Drug designation by the FDA for the treatment of both GBM and metastatic brain cancer, which may provide us with ~~certain rights~~a right of exclusivity under certain FDA regulations. ~~Additional~~For additional information regarding orphan and ultra-orphan ~~can be found under the heading,~~designations, see "Business — Government Regulation — Certain Other FDA Regulations — The Orphan Drug Act of 1983.”

TSC is currently formulated as a freeze-dried, injectable product, requiring a sophisticated manufacturing process.

We do not currently own or operate any facilities suitable for manufacturing TSC or any of our other product candidates on a scale required to support either clinical development or commercialization. We currently use third-party CMOs to manufacture API, other starting materials, and finished drug product for our preclinical studies and clinical trials and we intend to continue doing so for the foreseeable future. We anticipate this strategy will be scalable in a manner sufficient to support the production capacity required to support continued clinical development and ultimate commercialization. However, we do not have any formal agreements at this time with any CMO to cover commercial production of TSC or any other product candidate. Although the use of third party CMOs to manufacture pharmaceutical products is common within the industry, this dependence on third-party CMOs exposes our business to certain risks, including those described in ~~Part I~~ – ~~Item 1A. Risk~~under the heading, “Risk Factors – Risks Related to Our Dependence on Third Parties.”

Recently, many companies across a variety of sectors have reported disruptions, shortages, and other supply chain-related issues. In the ~~Development, Regulatory Approval,~~biopharmaceutical sector, delays and ~~Commercialization~~interruptions in the supply chain were particularly pronounced as CMOs redirected resources under the Defense Production Act and to otherwise support the COVID-19 vaccine roll-out across the globe.

During 2021, we were able to effectively manage our supply of TSC and ~~Our Other Product Candidates~~.its component materials in a manner that avoided any significant interruptions to our clinical programs. We also took actions designed to increase the robustness of our drug supply and overall supply chain to mitigate risks related to the availability of our drug supply in the future. However, as constraints on the supply chain continue to impact the cost and general availability of manufacturing materials, related delays and shortages could affect the cost and timing of our available clinical study drug supply of TSC.

Currently, medical options to improve oxygenation without risk of hyper-oxygenation are limited and we believe that TSC's diffusion enhancing mechanism of action make it a first-in-class, novel, small molecule. However, there are several companies currently developing or marketing oxygen enhancing products, therapeutics, or devices that may nevertheless be competitive with TSC, if approved, including ~~NuvOx Pharma LLC,~~ Hemoglobin Oxygen Therapeutics LLC, Hemotek Medical Inc., NuvOx Pharma LLC, Omniox, Inc., and ~~Cardax,~~VirTech Bio Inc. In addition, in the first quarter of 2021, we became aware of a third party affiliated with a former outside consultant of the Company which claims to be in early-stage development of a product candidate that purportedly may operate through a similar mechanism of action to TSC. It is unclear if this ~~particular~~Company’s product candidate would, if developed and approved, actually be competitive with TSC.

Our industry is highly competitive and subject to rapid and significant change. Potential competitors in the United States are numerous and include major pharmaceutical and specialty pharmaceutical companies, smaller biopharmaceutical companies, research universities, and others. The biopharmaceutical and pharmaceutical industries are characterized by rapidly advancing technologies, intense competition, and a strong emphasis on developing proprietary therapeutics. Numerous companies are engaged in the development, patenting, manufacturing, and marketing of health care products competitive with those that we are developing. Many of our competitors have longer operating histories, greater name recognition, substantially greater financial resources, and larger research and development staffs than we do, as well as substantially greater experience than us in developing products, obtaining regulatory approvals, and manufacturing and marketing pharmaceutical products. In addition, a significant amount of research is carried out at academic and government institutions. These institutions are aware of the commercial value of their findings and are aggressive in pursuing patent protection and negotiating licensing arrangements to collect royalties for use of technology that they have developed. One or more of these companies or other entities may have one or more products under development that would be competitive with TSC.

We currently have no marketed products and, accordingly, currently have no sales or marketing personnel.

Pharmaceuticals like TSC ~~DFN-529,~~ and other product candidates we may develop are highly regulated by governmental authorities in the U.S. and other countries at the federal, state, and local levels. These regulations are numerous and extensive in their scope, relating to, among other things, the research and development, manufacture, storage, quality control and testing, approval, labeling and packaging, promotion, marketing, and advertising, distribution, post-approval monitoring and reporting, export and import, and record keeping of pharmaceutical products.

Generally, before a new pharmaceutical product can be marketed, considerable data demonstrating its quality, safety and efficacy must be obtained, organized into a format specific for each applicable regulatory authority, submitted for review, and approved by the competent regulatory authority. In the United States, the competent regulatory authority is the FDA, which, pursuant to the FDC Act, is responsible for the review and approval of all data required to support a license to commercially market pharmaceuticals such as ~~TSC and DFN-529.~~TSC.

The process of obtaining regulatory approvals and the subsequent compliance with FDA regulations requires the expenditure of substantial time and financial resources and failure to comply with the applicable requirements at any time during the product development process, approval process, or, if approved, following approval may subject an applicant to administrative or judicial sanctions. These sanctions could include, among other actions, the FDA’s refusal to approve pending applications, withdrawal of an approval, license revocation, a clinical hold, untitled or warning letters, voluntary or mandatory product recalls, market withdrawals, product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of government contracts, restitution, disgorgement and civil or criminal penalties, any of which could have a material adverse effect on our business, financial position, or results of operations.

The preclinical and clinical testing and approval process requires substantial time, effort, and financial resources and satisfaction of FDA pre-market approval requirements typically takes many years, though the actual time required may vary substantially based upon the type, complexity, and novelty of the applicable product or indication to be treated. We cannot be certain that any approvals for TSC ~~DFN-529,~~ or any product candidates we attempt to develop in the future will be granted on a timely basis or at all.

Preclinical studies include laboratory evaluation of product chemistry, formulation, and toxicity, as well as animal trials to assess the characteristics and potential safety and efficacy of the drug. The results of preclinical testing are submitted to the FDA as part of an IND along with other information related to the drug, including information regarding its chemical make-up, manufacturing process, and quality controls, as well as a proposed clinical trial protocol. Long-term preclinical tests, such as animal tests of reproductive toxicity and carcinogenicity, may continue after the IND is submitted.

Following completion of preclinical studies and the submission on an IND to the FDA, a 30-day waiting period is required. If the FDA has neither commented on nor questioned the IND within this 30-day period, the clinical trial proposed in the IND may begin.

Clinical trials involve the administration of an investigational new drug to healthy volunteers or patients under the supervision of a qualified investigator. These trials must be conducted in compliance with federal regulations as well as GCP, an international standard meant to protect the rights and health of patients and to define the roles of clinical trial sponsors, administrators, and monitors. Each trial is conducted under a protocol detailing the objectives of the trial, the parameters to be used in monitoring safety, and the effectiveness criteria to be evaluated. Each protocol involving testing on U.S. patients and subsequent protocol amendments must be submitted to the FDA as part of the IND.

Clinical trials to support NDAs for marketing approval are typically conducted in three sequential phases, but the phases may overlap, especially in certain indications such as cancer.

• ~~Phase 1~~ - In Phase 1 trials, an investigational new drug is introduced into healthy human subjects and is evaluated to assess pharmacological actions, side effects associated with increasing doses and, in certain cases, early evidence on efficacy.

• ~~Phase 2~~ - In Phase 2 trials, the drug is introduced to a limited patient population in a particular indication to determine metabolism, pharmacokinetics, the effectiveness of the drug for the indication, dosage tolerance and optimum dosage, and to identify potential adverse effects and safety risks.

• ~~Phase 3~~

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Phase 1 - In Phase 1 trials, an investigational new drug is introduced into healthy human subjects and is evaluated to assess pharmacological actions, side effects associated with increasing doses and, in certain cases, early evidence on efficacy.

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Phase 2 - In Phase 2 trials, the drug is introduced to a limited patient population in a particular indication to determine metabolism, pharmacokinetics, the effectiveness of the drug for the indication, dosage tolerance and optimum dosage, and to identify potential adverse effects and safety risks.

•

Phase 3 - In Phase 3 trials, if a drug has demonstrated evidence of effectiveness and an acceptable safety profile in prior Phase 2 trials, the drug is introduced to a larger patient population in the relevant indication to obtain the additional information about clinical efficacy and safety in a larger number of patients, typically at geographically dispersed clinical trial sites, to permit the FDA to evaluate the overall benefit-risk relationship of the drug, and to provide adequate information for the labeling of the drug, if approved.

Not all drug development programs are required to follow the order and content of all three phases. For example, in August 2018, the FDA released a draft guidance entitled “Expansion Cohorts: Use in First-In-Human Clinical Trials to Expedite Development of Oncology Drugs and Biologics,” which outlines how drug developers can utilize an adaptive trial design commonly referred to as a seamless trial design in early stages of oncology drug development, i.e., the first-in-human clinical trial, to compress the traditional three phases of trials into one continuous trial called an expansion cohort trial. Information to support the design of individual expansion cohorts is included in IND applications and assessed by FDA. Expansion cohort trials can potentially bring efficiency to drug development and reduce developmental costs and time.

Post-approval trials, sometimes referred to as Phase 4 clinical trials, may be conducted after initial marketing approval. These trials are used to gain additional experience from the treatment of patients in the intended therapeutic indication and are commonly intended to generate additional safety data regarding use of the product in a clinical setting. In certain instances, the FDA may mandate the performance of Phase 4 clinical trials as a condition of approval of an NDA.

Progress reports detailing the results of the clinical trials, among other information, must be submitted at least annually to the FDA and written IND safety reports must be submitted to the FDA and the investigators 15 calendar days after the trial sponsor determines the information qualifies for reporting for serious and unexpected suspected adverse events, findings from other studies or animal or in vitro testing that suggest a significant risk for human subjects and any clinically important increase in the rate of a serious suspected adverse reaction over that listed in the protocol or investigator brochure. The sponsor also must notify the FDA of any unexpected fatal or life-threatening suspected adverse reaction as soon as possible but in no case later than seven calendar days after the sponsor’s initial receipt of the information.

Phase 1, Phase 2, Phase 3, and other types of clinical trials may not be completed successfully within any specified period, if at all. The FDA or the sponsor may suspend or terminate a clinical trial at any time on various grounds, including a finding that the patients are being exposed to an unacceptable health risk.

After completion of the required clinical testing, an NDA is prepared and submitted to the FDA containing data intended to provide substantial evidence that the drug is safe and effective in the relevant indication, and FDA approval of the NDA is required before commercial marketing of the product may begin in the United States. The NDA must include the results of all preclinical, clinical, and other testing and a compilation of data relating to the product’s pharmacology, chemistry, manufacturing, and controls. The cost of preparing and submitting an NDA is substantial, and the submission of most NDAs is also subject to substantial initial and ongoing fees.

The FDA has 60 days from its receipt of an NDA to determine whether the NDA will be accepted for filing based on the agency’s threshold determination that it is sufficiently complete to permit substantive review. Once the submission is accepted for filing, the FDA begins an in-depth review subject to certain performance goals agreed upon by the FDA. Priority review can be applied in certain instances, including with respect to drugs that the FDA determines offer major advances in treatment or provide a treatment where no adequate therapy exists. The review process, whether standard or priority, may be extended by the FDA for three additional months to consider certain late-submitted information or information intended to clarify information already provided in the submission.

Before approving an NDA, the FDA will typically inspect one or more clinical sites to assure compliance with GCP. Additionally, the FDA will inspect the facility or facilities at which the drug is manufactured to confirm compliance with cGMP. The FDA may also refer applications for novel drug products, or drug products that present difficult questions of safety or efficacy, to an advisory committee. This advisory committee is typically a panel that includes clinicians and other experts in the relevant indication or subject matter who review and evaluate the NDA and provide a recommendation to the FDA as to whether the application should be approved. The FDA is not bound by the recommendation of an advisory committee, but it generally follows such recommendations.

After the FDA evaluates the NDA, the clinical sites, the manufacturing facilities, and, as needed, receives a recommendation from the advisory committee, it issues either an approval letter or a complete response letter. A complete response letter generally outlines the deficiencies in the submission and may require substantial additional testing, or information, in order for the FDA to reconsider the application. The FDA has committed to reviewing such resubmissions in two to six months depending on the type of new information included.

An FDA approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications. Moreover, product approval may require substantial post-approval testing and surveillance to monitor the drug’s safety or efficacy including, in certain cases, REMS as described in more detail under the heading —“—Certain Other FDA Regulations – Risk Evaluation and Mitigation Strategies ~~and Other Post-Approval Requirements~~.” Once granted, product approvals may be withdrawn if compliance with regulatory standards is not maintained or problems are identified following initial marketing.

Further, changes to some of the conditions established in an approved application, including changes in indications, labeling, or manufacturing processes or facilities, require submission and FDA approval of a new NDA or NDA supplement before the change can be implemented. An NDA supplement for a new indication typically requires clinical data similar to that in the original application, and the FDA uses similar procedures and actions in reviewing NDA supplements as it does in reviewing NDAs.

The Drug Price Competition and Patent Term Restoration Act, commonly referred to as the Hatch-Waxman Amendments, is a 1984 U.S. federal law which established the modern system of generic drug regulation in the U.S. The Hatch-Waxman Amendments were enacted to encourage the manufacture of generic drugs by outlining the process for generic pharmaceutical manufacturers to file an abbreviated new drug application and to provide certain related protections to drug development innovators, namely a new kind of market exclusivity period and the ability to potentially extend patent life by a portion of the time a drug is under regulatory review by the FDA.

In seeking approval for a drug through an NDA, applicants are required to list with the FDA each patent whose claims cover the applicant’s product. Upon approval of a drug, each of the patents listed in the application for the drug is then published in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book. Drugs listed in the Orange Book can, in turn, be cited by potential generic competitors in support of approval of an ANDA.

An ANDA provides for marketing of a drug product that has the same active ingredients in the same strengths and dosage form as the listed drug and has been shown through bioequivalence testing to be therapeutically equivalent to the listed drug. Other than the requirement for bioequivalence testing, ANDA applicants are not required to conduct, or submit results of, preclinical or clinical tests to prove the safety or effectiveness of their drug product. Drugs approved in this way are commonly referred to as “generic equivalents” to the listed drug and can often be substituted by pharmacists under prescriptions written for the original listed drug.

An ANDA applicant is required to make certain certifications to the FDA concerning any such patents listed in the Orange Book for the approved reference drug intended to confirm that the proposed generic equivalent will not infringe on any intellectual property related to the reference drug, commonly referred to as a Paragraph IV certification. The ANDA process gives the owner of the reference drug an opportunity to assert a patent infringement claim if it believes its intellectual property rights are being infringed upon following the submission of a Paragraph IV certification.

An ANDA will not be approved until all patents and non-patent exclusivity periods listed in the Orange Book for the reference drug have expired.

Certain of our current and future product candidates, including TSC, may be eligible for patent term restoration and marketing exclusivity under the Hatch-Waxman Amendment.

The Hatch-Waxman Amendments permit restoration of the patent term of up to five years as compensation for patent term lost during product development and the FDA regulatory review process. Patent term restoration, however, cannot extend the remaining term of a patent beyond a total of 14 years from the product’s approval date. The patent term restoration period is generally ~~50.0%~~50% of the amount of time between the effective date of an IND and the submission date of an NDA, plus the time between the submission date of an NDA and the approval of that application, except that the review period is reduced by any time during which the applicant failed to exercise due diligence. Only one patent applicable to an approved drug is eligible for such an extension and the application for the extension must be submitted prior to the expiration of the patent. The USPTO, in consultation with the FDA, reviews and approves the application for any patent term extension or restoration.

Marketing exclusivity provisions under the FDC Act can also delay the submission or the approval of certain marketing applications. The FDC Act provides three years of marketing exclusivity for an NDA, or supplement to an existing NDA, if new clinical investigations, other than bioavailability studies, that were conducted or sponsored by the applicant are deemed by the FDA to be essential to the approval of the application, for example investigations related to new indications, dosages, or strengths of an existing drug. This three-year exclusivity covers only the modification for which the drug received approval on the basis of the new clinical investigations and does not prohibit the FDA from approving ANDAs for drugs containing the active agent for the original indication or condition of use. The FDC Act also provides a five-year period of non-patent marketing exclusivity within the United States to the first applicant to obtain approval of an NDA for a new chemical entity, meaning the FDA has not previously approved any other new drug containing the same active moiety, which is the molecule or ion responsible for the action of the drug substance.

During the exclusivity period, the FDA may not accept for review an ANDA or a 505(b)(2) NDA submitted by another company for another drug based on the same active moiety, regardless of whether the drug is intended for the same indication as the original innovator drug or for another indication, where the applicant does not own or have a legal right of reference to all the data required for approval. However, an application may be submitted after four years if it contains a certification of patent invalidity or non-infringement to one of the patents listed with the FDA by the innovator NDA holder. Three-year and five-year exclusivity will not delay the submission or approval of a full NDA. However, an applicant submitting a full NDA would be required to conduct or obtain a right of reference to all of the nonclinical studies and adequate and well-controlled clinical trials necessary to demonstrate safety and efficacy.

Under the Orphan Drug Act, the FDA may grant orphan designation to a drug product intended to treat a rare disease or condition, which is generally a disease or condition that affects fewer than 200,000 individuals in the United States, or more than 200,000 individuals in the United States and for which there is no reasonable expectation that the cost of developing and making the product available in the United States for this type of disease or condition will be recovered from sales of the product. Our lead product candidate, TSC, has been granted Orphan Drug designations by the FDA ~~with respect to~~for the ttreatment of both GBM and metastatic brain cancer.

Orphan drug designation must be requested before submitting an NDA. After the FDA grants orphan drug designation, the identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. For example, we previously announced that TSC was granted orphan drug designation by the FDA for the treatment of GBM and metastatic brain cancer in July 2011 and in December 2012, respectively. However, orphan drug designation on its own does not convey any advantage in or shorten the duration of the regulatory review and approval process but may result in certain financial and marketing incentives if approved.

If a product that has orphan designation subsequently receives the first FDA approval for the disease or condition for which it has such designation, the product is entitled to orphan drug exclusivity, which means that the FDA may not approve any other applications to market the same drug for the same indication for seven years from the date of such approval, except in limited circumstances, such as a showing of clinical superiority to the product with orphan exclusivity by means of greater effectiveness, greater safety, or providing a major contribution to patient care, or in instances of drug supply issues. Competitors, however, may receive approval of either a different product for the same indication or the same product for a different indication. In the latter case, because health care professionals are free to prescribe products for off-label uses, the competitor’s product could be used for the orphan indication despite our orphan exclusivity. Orphan drug exclusivity could also block the approval of one of our products for seven years if a competitor obtains approval before we do for the same drug and same indication, as defined by the FDA, for which we are seeking approval, or if our product is determined to be contained within the scope of the competitor’s product for the same indication or disease. If we pursue marketing approval for an indication broader than the orphan drug designation we have received, we may not be entitled to orphan drug exclusivity. Orphan drug status in the E.U. has similar, but not identical, requirements and benefits.

The FDA has a fast track program that is intended to expedite or facilitate the process for reviewing new drugs that meet certain criteria. Specifically, new drugs are eligible for fast track designation if they are intended to treat a serious or life-threatening condition and preclinical or clinical data demonstrate the potential to address unmet medical needs for the condition. Fast track designation applies to both the product and the specific indication for which it is being studied. The sponsor can request the FDA to designate the product for fast track status any time before receiving NDA approval, but ideally no later than the pre-NDA meeting. Any product submitted to the FDA for marketing, including under a fast track program, may be eligible for other types of FDA programs intended to expedite development and review, such as priority review and accelerated approval. Any product is eligible for priority review if it treats a serious or life-threatening condition and, if approved, would provide a significant improvement in safety and effectiveness compared to available therapies. The FDA will attempt to direct additional resources to the evaluation of an application for a new drug designated for priority review in an effort to facilitate the review.

A product may also be eligible for accelerated approval, if it treats a serious or life-threatening condition and generally provides a meaningful advantage over available therapies. In addition, it must demonstrate an effect on a surrogate endpoint that is reasonably likely to predict clinical benefit or on a clinical endpoint that can be measured earlier than IMM that is reasonably likely to predict an effect on IMM or other clinical benefit. As a condition of approval, the FDA may require that a sponsor of a drug receiving accelerated approval perform adequate and well-controlled post-marketing clinical trials. If the FDA concludes that a drug shown to be effective can be safely used only if distribution or use is restricted, it will require such post-marketing restrictions, as it deems necessary to assure safe use of the product. If the FDA determines that the conditions of approval are not being met, the FDA can withdraw its accelerated approval for such drug.

Additionally, a drug may be eligible for designation as a breakthrough therapy if the product is intended, alone or in combination with one or more other drugs, to treat a serious or life-threatening condition and preliminary clinical evidence indicates that the product may demonstrate substantial improvement over currently approved therapies on one or more clinically significant endpoints. The benefits of breakthrough therapy designation include the same benefits as fast track designation, plus intensive guidance from the FDA to ensure an efficient drug development program.

Even if a product qualifies for one or more of these programs, the FDA may later decide that the product no longer meets the conditions for qualification or the time period for FDA review or approval may not be shortened. Furthermore, fast track designation, priority review, accelerated approval, and breakthrough therapy designation do not change the standards for approval, but may expedite the development or approval process.

In 2012, Congress authorized the FDA to award priority review vouchers to sponsors of certain rare pediatric disease product applications. This program is designed to encourage development of new drug and biological products for prevention and treatment of certain rare pediatric diseases. Specifically, under this program, a sponsor who receives an approval for a drug or biologic for a “rare pediatric disease” may qualify for a voucher that can be redeemed to receive a priority review of a subsequent marketing application for a different product. The sponsor of a rare pediatric disease drug product receiving a priority review voucher may transfer (including by sale) the voucher to another sponsor. The voucher may be further transferred any number of times before the voucher is used, as long as the sponsor making the transfer has not yet submitted the application. The FDA may also revoke any priority review voucher if the rare pediatric disease drug for which the voucher was awarded is not marketed in the U.S. within one year following the date of approval.

For purposes of this program, a “rare pediatric disease” is a (a) serious or life-threatening disease in which the serious or life-threatening manifestations primarily affect individuals aged from birth to 18 years, including age groups often called neonates, infants, children, and adolescents; and (b) a rare ~~diseases~~disease or ~~conditions~~condition within the meaning of the Orphan Drug Act. On December 27, 2020, the Rare Pediatric Disease Priority Review Voucher Program was extended. Under the current statutory sunset provisions, after September 30, 2024, FDA may only award a voucher for an approved rare pediatric disease product application if the sponsor has rare pediatric disease designation for the drug, and that designation was granted by September 30, 2024. After September 30, 2026, FDA may not award any Rare Pediatric Disease Priority Review Voucher.

Sponsors of clinical trials of FDA-regulated products are required to register and disclose to the public certain clinical trial information, including information related to the product, patient population, phase of investigation, study sites, investigators, and other aspects of the trial design. Sponsors are also obligated to discuss the results of their clinical trials after completion. However, disclosure of the results of these trials can be delayed until the new product or new indication being studied has been approved as competitors may otherwise use this or other publicly-available information to gain knowledge regarding the progress of development programs and gain a competitive advantage.

Risk Evaluation and Mitigation Strategies and Other Post-Approval Requirements

As a condition of NDA approval, the FDA may require a REMS to help ensure that the benefits of the drug’s continued approval outweigh the potential risks. In determining whether a REMS is necessary, the FDA must consider the size of the population likely to use the drug, the seriousness of the disease or condition to be treated, the expected benefit of the drug, the duration of treatment, the seriousness of known or potential adverse events, and whether the drug is a new molecular entity. If the FDA determines a REMS is necessary, the drug sponsor must agree to the REMS plan at the time of approval. REMS can include medication guides, communication plans for healthcare professionals, and ~~ETASU, or~~ elements to assure safe use. ~~ETASU~~Elements to assure safe use can include, but are not limited to, special training or certification for prescribing or dispensing, dispensing only under certain circumstances, special monitoring requirements, and the use of patient registries. The requirement for a REMS can materially affect the potential market and profitability of a drug product.

Even if the FDA does not require a REMS, once an NDA is approved, a product will be subject to certain post-approval regulations. For instance, the FDA closely regulates the post-approval marketing and promotion of drugs, including standards and regulations for direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational activities, and promotional activities involving the internet. Adverse event reporting and the submission of periodic reports are also required following FDA approval of an NDA.

In addition to regulations in the U.S., we are and will be subject to the regulations of other countries in which we conduct any of our clinical trials or engage in commercial sales or other distribution of our products, if approved. Whether or not we obtain FDA approval for conduct of a clinical trial or distribution of a product, we must obtain approval from the competent regulatory authority of any country or economic area in which we would seek to commence a clinical trial or market products. For example, conduct of the ~~TSC~~ COVID Trial ~~at the NIID~~ in Bucharest, Romania, required certain approvals from regulatory authorities in Romania and the E.U. Certain countries outside of the United States have a process similar to the FDA’s IND process which requires the submission of a CTA prior to the commencement of human clinical trials. In the E.U., for example, a CTA must be submitted to each country’s national health authority and an independent ethics committee, which operates similar to an IRB under U.S. regulations. Once the CTA is approved in accordance with a country’s requirements, the clinical trial may proceed in the applicable country. The approval process and requirements governing the conduct of clinical trials, product licensing, pricing, and reimbursement vary greatly from place to place, and the time may be longer or shorter than that required for FDA approval.

In particular, in the E.U. a company may submit marketing authorization applications (comparable to an NDA submission in the US to the FDA) under either a centralized or decentralized procedure. The centralized procedure, which is compulsory for medicines produced by biotechnology or those medicines intended to treat AIDS, cancer, neurodegenerative disorders, or diabetes and is optional for medicines which are highly innovative, provides for the grant of a single marketing authorization that is valid for all E.U. member states. The decentralized procedure provides for mutual recognition of national approval decisions. Under this decentralized procedure, the holder of a national marketing authorization in any E.U. member state may submit an application to the remaining member states. Within ninety days of receiving the applications and assessments report, each member state must decide whether to recognize approval. If a member state does not recognize the marketing authorization, the disputed points are eventually referred to the European Commission, whose decision is binding on all member states. The E.U. also has procedures similar to those of the FDA pursuant to which a company may obtain marketing exclusivity for a product for up to 11 years and/or orphan drug designation and related exclusivity for up to ten years, as well as other expedited approval pathways available to certain drugs.

In addition, in some non-U.S. jurisdictions, the proposed pricing for a product candidate must be approved before it may be lawfully marketed. The requirements governing drug pricing vary widely from country to country. For example, the E.U. provides options for its member states to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. A member state may approve a specific price for the medicinal product or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the medicinal product on the market. There can be no assurance that any country that has price controls or reimbursement limitations for pharmaceutical products will allow favorable reimbursement and pricing arrangements for any of our product candidates. Historically, product candidates launched in the E.U. do not follow price structures of the U.S. and generally tend to be significantly lower.

Healthcare providers, physicians, and third party payors, including governmental payors such as Medicare and Medicaid, will play a significant role in the recommendation and prescription of any products for which we obtain marketing approval. Our future arrangements with third party payors, healthcare providers, and physicians may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we market, sell, and distribute any drugs for which we obtain marketing approval.

These laws include, without limitation, state and federal anti-kickback, false claims, physician transparency, and patient data privacy and security laws and regulations, and other federal, state, and local regulations and legislation impacting the pharmaceutical and biopharmaceutical industries, including but not limited to those described below.

The scope and enforcement of each of these laws is uncertain and subject to rapid change in the current environment of healthcare reform. Federal and state enforcement bodies have recently increased their scrutiny of interactions between healthcare companies and healthcare providers, which has led to a number of investigations, prosecutions, convictions, and settlements in the healthcare industry. If our operations are found to be in violation of any of these laws or any other related governmental regulations that may apply to us, we may be subject to significant civil, criminal, and administrative penalties, damages, fines, imprisonment, disgorgement, exclusion of drugs from government funded healthcare programs, such as Medicare and Medicaid, reputational harm, additional oversight, and reporting obligations if we become subject to a corporate integrity agreement or similar settlement to resolve allegations of non-compliance with these laws and the curtailment or restructuring of our operations.

In the United States and foreign jurisdictions, there have been a number of proposed changes regarding the healthcare system and its regulation that could prevent or delay marketing approval of our product candidates, restrict or regulate post-approval activities, and affect our ability to profitably sell any product candidates for which we obtain marketing approval. We expect that further implementation of current laws, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that we, or any strategic collaborators, may receive for any approved products. Further, there has recently been heightened governmental scrutiny over the manner in which manufacturers set prices for their marketed products, which have resulted in several recent Congressional inquiries and proposed bills designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for products.

We are subject to numerous environmental, health, and safety laws and regulations. From time to time and in the future, our operations may involve the use of hazardous and flammable materials, including chemicals and biological materials, and may also produce hazardous waste products. Even if we contract with third parties for the disposal of these materials and waste products, we cannot completely eliminate the risk of contamination or injury resulting from these materials. In the event of contamination or injury resulting from the use or disposal of our hazardous materials, we could be held liable for any resulting damages, and any liability could exceed our resources. We also could incur significant costs associated with civil or criminal fines and penalties for failure to comply with such laws and regulations.

In addition, we may incur substantial costs in order to comply with current or future environmental, health, and safety laws and regulations. Current or future environmental laws and regulations may impair our research, development or production efforts. In addition, failure to comply with these laws and regulations may result in substantial fines, penalties or other sanctions.

As a public company, we incur significant legal, accounting and other expenses to comply with the reporting requirements of the Exchange Act and applicable requirements of SOX and the Dodd-Frank Act, as well as rules and regulations subsequently implemented by the SEC and Nasdaq, including the establishment and maintenance of effective disclosure and financial controls, changes in corporate governance practices and required filing of annual, quarterly and current reports with respect to our business and operating results. These requirements increase our legal and financial compliance costs and make some activities more time-consuming and costly. In addition, our management and other personnel devote significant time and attention to these public company requirements.

As of December 31, ~~2020,~~2021, we had 1216 full-time employees, ~~and one part-time employee,~~ up from 12 employees as of December 31, ~~2019, and as of March 15, 2021, we have added one additional full-time employee in 2021.~~2020. We also regularly work with several independent consultants and other contract organizations to support our business and we regularly evaluate additional talent to help support our product manufacturing, development, financial, and other capabilities.

We believe that an inclusive culture is required to understand and develop products that benefit all patients. By embracing differences, we aim to foster an environment of respect and trust in an effort to facilitate creativity, spark passion, and help us achieve better outcomes for all those who work at and with Diffusion. We are committed to creating and maintaining a workplace free from discrimination or harassment, including on the basis of any class protected by applicable law, and our recruitment, hiring, development, training, compensation, and advancement practices are based on qualifications, performance, skills, and experience without regard to gender, race, or ethnicity. Our management team and employees are expected to exhibit and promote honest, ethical, and respectful conduct in the workplace, including adhering to the standards for appropriate behavior set forth in our code of conduct.

We operate in a highly competitive environment for human capital, particularly as we seek to attract and retain talent with relevant experience in the biotechnology and pharmaceutical sectors. Therefore, we strive to provide a total rewards package to our employees that is competitive with our peer companies, including competitive pay, a comprehensive healthcare benefits package (including an ~~80.0%~~80% employer contribution to family medical coverage), ~~health savings accounts with a company contribution,~~ 25 days of paid leave, ~~the~~a company-sponsored 401(k) savings plan, short-term and long-term disability, and other benefits, as well as remote working and flexible work ~~schedules, and other benefits.~~

schedules. We also offer every full-time employee the benefit of equity ownership in Diffusion through stock option grants. We believe these grants both help promote alignment between our employees and our stockholders and provide retention benefits, as the awards generally vest over a three-year period.

We do not have any employees that are represented by a labor union or that have entered into a collective bargaining agreement with the Company.

At Diffusion, we believe that health matters to everyone, and the safety health, and wellness of our employees is one of our top priorities. We are committed to developing and fostering a work environment that is safe, professional, and promotes teamwork, diversity, and trust in order to afford all of our employees the opportunity to contribute to the best of their abilities.

~~During 2020,~~Over the past two years, in response to the COVID-19 pandemic, we ~~took~~have taken certain measures and responded to changes in our operational needs, including actions designed to provide a safe work environment for our employees. These actions included investing in technology solutions to support increased work-from-home capabilities, shifting work schedules to reduce the number of people present in our offices, requiring mask wearing and social distancing, making hand sanitizer readily available, and other measures intended to comply with health and safety protocols as required by federal, state, and local governmental agencies, as well as guidance from the U.S. Centers for Disease Control and Prevention and similar public health authorities.

We believe our people are among our most important assets. We focus on attracting, retaining, and cultivating talented individuals and believe in investing in our people to help them grow. Employees are encouraged to attend scientific, clinical, technological, and other relevant meetings and conferences and we strive to provide employees access to a broad set of internal resources intended to help them be successful, including a variety of training and educational materials. During 2021, we intend to implement a new, comprehensive employee evaluation program tied to the achievement of individual, team, and company goals to help further support, retain, and develop our people and further promote alignment of interests between our employees, future target customers, and our stockholders.

The information set forth in "Part III — Item 10 — Directors, Officers, and Corporate Governance," of this Annual Report is incorporated herein by reference.

We were originally incorporated under the laws of the State of Nevada on January 10, 1995 and reincorporated under the laws of the State of Delaware on June 18, 2015 under the name, “RestorGenex Corporation.” On January 8, 2016, we completed the merger of our wholly owned subsidiary with and into Diffusion LLC, which was treated as a "reverse acquisition" under GAAP pursuant to which Diffusion LLC's historical results of operations replaced the Company's for all periods prior to the merger. Immediately following the closing of the merger, we changed our name from "RestorGenex Corporation" to "Diffusion Pharmaceuticals Inc."

On May 6, 2021, we received a written notice from the Nasdaq Staff indicating that we were not in compliance with the Bid Price Rule because the bid price for our common stock had closed below $1.00 per share for the previous 30 consecutive business days. On November 3, 2021, after failing to regain compliance with the Bid Price Rule within 180 days of our receipt of the first notice, we received an additional notice from the Staff providing that, although the Company had not regained compliance with the Bid Price Rule by the previously stated deadline, in accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company would be granted an additional 180 calendar days, or until May 2, 2022, to regain compliance with the Bid Price Rule. As part of our efforts to regain compliance with the Bid Price Rule, on February 28, 2022, we filed a definitive proxy statement related to a special meeting of our stockholders scheduled for Thursday, April 14, 2022 at which our stockholders will vote upon proposal, approved and recommended for stockholder approval by the Board, to amend our Certificate of Incorporation to effect a reverse stock split of our 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 timing and implementation of which will be subject to the discretion of the Board. 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.

Our principal corporate office is located at ~~1317 Carlton Avenue,~~300 East Main Street, Suite ~~200,~~201, Charlottesville, Virginia 22902, and our telephone number is (434) 220-0718.

Our website, www.diffusionpharma.com, including the Investor Relations section, investors.diffusionpharma.com, and our social media channels – Facebook (www.facebook.com/diffusionpharmaceuticalsinc/), Twitter (www.twitter.com/diffusionpharma) and LinkedIn (https://www.linkedin.com/company/diffusion-pharmaceuticals/) -- contain a significant amount of information about the Company. We encourage investors to visit these websites and social media channels as information is frequently updated and new information is shared. However, the information included on our website and available through our social media channels is not incorporated by reference into, and should not be considered part of, this Annual Report or any other filings we make with the SEC.

We make available on or through our website certain reports that we file with or furnish to the SEC in accordance with Exchange Act. These include our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, and our Current Reports on Form 8-K, as well as any amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. We make this information available free of charge as soon as reasonably practicable after we electronically file the information with, or furnish it to, the SEC. The SEC also maintains a website, www.sec.gov, that contains reports, proxy and information statements, and other information regarding the Company and other issuers that file electronically with the SEC. We also make available, free of charge and through our website, the charters of the committees of the Board, our Corporate Governance Guidelines, and our Code of Business Conduct and Ethics.

Investing in our common stock involves a high degree of risk. Set forth below are certain material risks and uncertainties known to us that could adversely ~~effect~~affect our business, financial condition, or results of operations or could cause our actual results to differ materially from our expectations expressed elsewhere in this Annual Report. The occurrence of the events contemplated by one or more of the factors we describe below could cause the market price of our common stock to decline, resulting in the loss of all or part of any investment in our common stock. Furthermore, other risks that are currently unknown to us or that we currently believe to be immaterial may also, nevertheless, adversely ~~effect~~affect our business, financial condition, or results of operations in a way that is material.

Before investing in our common stock, you should carefully consider these risks and uncertainties, together with all other information in this Annual Report, including our consolidated financial statements and related notes, the information included in, Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations,~~of this Annual Report,~~ and the information incorporated herein by reference.

Risks Related to the Development, Regulatory Approval, and Commercialization of TSC and Our Other Product Candidates

The success of Diffusion is dependent on the successful development, regulatory approval, and, ultimately, commercialization of TSC and our other product candidates. However, the drug development process is expensive, time-consuming and uncertain. Our efforts to develop, obtain regulatory approval for, and commercialize TSC or any other product candidate could fail at any stage of the development process for a variety of reasons, including the possibility that TSC fails to adequately demonstrate efficacy or proof of concept in the ~~TSC~~ Oxygenation Trials. Furthermore, because the results of preclinical studies and early-stage clinical trials are not necessarily predictive of future results, even if we are able to advance TSC or another product candidate into additional clinical trials – for example, beyond our Planned Phase 2 ~~Hypoxia-related Indication~~Hypoxic Solid Tumor Trial ~~we intend to commence assuming success in the TSC Oxygenation Trials~~ – we may not continue to experience favorable results.

The success of Diffusion, including our ability to finance our operations and generate revenue in the future, will depend primarily on the successful development, regulatory approval, and, ultimately, commercialization of our product candidates. Currently, the majority of our product development resources are dedicated to our lead product candidate, TSC. ~~We are also in early-stage development of our second product candidate, DFN-529, and, in~~In the future, we may also seek to develop or commercialize additional product candidates, including product candidates that we may in-license or acquire to supplement our internally developed portfolio.

The drug development process is very expensive, time-consuming, difficult to design and implement, and its outcome is inherently uncertain. Most product candidates that commence clinical trials are never approved by regulatory authorities for commercialization and success in early-stage clinical trials does not ensure that later clinical trials will demonstrate the efficacy and safety of an investigational drug in a manner adequate to support regulatory approval. Countless other companies, including many with greater resources and experience, have failed or suffered significant setbacks attempting to navigate the drug development process, including failed attempts to develop treatments for hypoxia and indications on the hypoxia-continuum that we may ultimately choose to target with TSC, and there can be no assurance that we will have success where others have failed.

Our product candidates, including TSC, remain in early stages of the development process and we expect that the additional clinical trials necessary to support an NDA will take several years to complete. We do not know whether the clinical trials we may conduct will demonstrate adequate efficacy and safety or otherwise provide adequate information to result in regulatory approval to market any of our product candidates in any particular jurisdiction. Furthermore, the timeline for our clinical trials may be delayed in the future for a variety of ~~reason,~~reasons, including delays related to regulatory and IRB review and approval, slower than anticipated rates of enrollment in or early withdrawals from the trial, third party performance issues beyond our control including any CRO engaged in the conduct of the trial, discovery of series or unexpected toxicities or side effects, or a lack of effectiveness.

Whether we are able to successfully develop TSC or any of our other product candidates will depend on a large number of factors, including the following:

Any of these factors, many of which are beyond our control, could result in significant delays or an inability to develop, obtain regulatory approvals for, or commercialize our product candidates, and we may ultimately be able to receive regulatory approval or generate revenue from the sale of TSC or any other product candidate.

A number of companies in the pharmaceutical and biopharmaceutical industry have suffered significant setbacks in later-stage Phase 3 clinical development even after promising results in earlier preclinical studies or clinical trials. If later-stage clinical trials do not produce favorable results for TSC or any other product candidate, or we are unable to complete the necessary clinical trials for any reason (including a lack of funding), our ability to achieve regulatory approval or successfully commercialize may be compromised. At any time, we may decide or be forced by circumstance to delay or discontinue the development or commercialization of TSC or any of our other product candidates, including as a result of unfavorable results in later-stage clinical trials, changes in our internal product, technology or indication focus, the appearance of new technologies that make our product candidate obsolete, competition from a competing product, or changes in (or failure to comply with) applicable regulatory requirements. If we decide or are forced to terminate the TSC development program or any future program in which we have invested significant resources, we will not receive any return on our investment despite the allocation of significant resources, we may not be able to execute on our business plan effectively, and our business, financial condition, or results of operations may be materially and adversely ~~effected.~~affected.

Even if we are able to successfully complete the clinical trials and over development activities necessary to submit an NDA to the FDA or an application for marketing approval to an equivalent non-U.S. regulatory authority, we may be unable to obtain regulatory approval for TSC ~~DFN-529,~~ or any other product candidates we may attempt to develop in future, for the indications for which we initially seek approval or at all. The FDA and similar non-U.S. regulatory authorities have significant discretion in the approval process, including the ability to delay, limit, or deny approval of product candidates. The delay, limitation, or denial of regulatory approval for any of our product candidates, and TSC in particular, would limit or restrict altogether our ability to commercialize the product and generate revenue, which could materially and adversely impact our business, financial condition, orand results of operations.

We currently have no products approved for sale, and we may never obtain regulatory approval to commercialize TSC ~~DFN-529,~~ or any other product candidates we may attempt to develop in the future. The research, testing, manufacturing, safety surveillance, efficacy, quality control, recordkeeping, labeling, packaging, storage, approval, sale, marketing, distribution, import, export, and reporting of safety and other post-market information related to drug products are subject to extensive regulation by the FDA and other regulatory authorities in the United States and abroad, which often differ from country to country. We will not be permitted to market TSC or any of our other current product candidates in the U.S. until we receive approval of an NDA or other applicable regulatory filing from the FDA, and we will not be permitted to market TSC or any of our other current product candidates in any non-U.S. countries until we receive the requisite approval from the applicable regulatory authorities.

To gain approval to market a new drug, such as TSC, the FDA and similar non-U.S. regulatory authorities require the submission of an NDA (or similar application) that contains preclinical and clinical data adequately demonstrating the safety, purity, potency, efficacy, and compliant manufacturing of the product for the intended indication. The FDA and their non-U.S. counterparts have substantial discretion in the drug approval process, including the ability to delay, limit, or deny approval of applications for many reasons, including:

Historically, of the large number of drugs in development at any given time, only a small percentage successfully complete the regulatory approval processes and are ultimately commercialized. Our product candidates may not be approved for sale and marketing by the FDA or any other governmental authority, even if they meet specified endpoints in our clinical trials. The FDA or applicable foreign regulatory agencies may ask us to conduct additional costly and time-consuming clinical trials in order to obtain marketing approval or approval to enter into a further phase of clinical development, or may change the requirements for approval even after such agency has reviewed and commented on the design for the clinical trials.

Any delay in obtaining, or inability to obtain, the regulatory approvals necessary to market and sell our product candidates would delay or prevent commercialization and would materially and adversely ~~effect~~affect our business, financial condition, orand result of operations. Furthermore, if we determine in the future that the development, approval, or commercial prospects of any product candidate are insufficient to justify our continued expenditure of the associated development and other costs, we may choose to delay, suspend, or abandon our development or commercialization efforts with respect thereto, which would reduce or eliminate our potential return on investment for those product candidates.

Our ability to develop our product candidates depends, and, if TSC or any of our other product candidates are approved, our ability to successfully commercialize our products will depend, in part on our ability to successfully obtain sufficient quantities of the necessary APIs, other component substances and materials, and finished drug product for our product candidates. We are currently entirely dependent on third parties for the manufacture and supply of our product candidates and their component parts, including, with respect to TSC, a sole supplier. We may be unable to continue to develop or commercialize our product candidates or face significant delays in that process if we are unable to successfully obtain these materials or manufacture drug product in sufficient quantities.

Maintaining an adequate supply of TSC and our other product candidates to meet our needs is critical to the success of our business. However, manufacturing and supply of APIs, other substances and materials and finished drug products is a complex and technically challenging process, and changes beyond our direct control can impact the quality, volume, price, and successful delivery of our product candidates or impede, delay, limit or prevent the successful development and commercialization of our product candidates. Mistakes and mishandling are not uncommon in the biopharmaceutical and pharmaceutical industry and can affect successful production and supply significantly.

As of the date of this Annual Report, we have no internal manufacturing capabilities and therefore we do not have direct control over our ability to maintain drug supply sufficient to serve our needs for our ongoing and planned clinical trials or, if any of our product candidates are approved, commercialization. Although we are ultimately responsible for ensuring compliance with regulatory requirements such as cGMPs, we are dependent on our third party CMOs and other contract suppliers and manufacturers for the manufacture of our drug product, including both APIs and finished products, as well as day-to-day compliance with cGMPs and certain other manufacturing-related regulatory requirements. Facilities used by our contract suppliers and manufacturers to produce the APIs and other substances and materials or finished products for commercial sale must pass inspection, provide regulators with certain technical information, and be approved by the FDA and other relevant regulatory authorities to confirm compliance with cGMP requirements and other regulatory requirements. If the safety of TSC or any of our other product candidates (or any component thereof) is found in the future to be compromised, we may not be able to successfully commercialize or obtain regulatory approval for the product candidate, and we may be held liable for injuries sustained as a result.

Any disruption in our relationship with these third parties or their ability to manufacture the APIs and finished drug product we need for our clinical trials and other development activities could result in significant delays in our anticipated development timelines and/or significant additional supply costs. Such a disruption could be the result of any number of reasons, including contractual disputes with our partners, regulatory issues atwith our ~~partner~~partners or at their facilities (whether or not related to Diffusion or our drug product), financial issues faced by our partners (including bankruptcy or insolvency), damages to our ~~partners facility~~partners’ facilities or equipment, communication breakdowns, or acts of God. For example, during 2021 we ~~are currently facing~~faced certain delays in the manufacturing process for planned, new batches of TSC drug product due to the fact that, in connection with the U.S. federal government’s Operation Warp Speed initiative in response to the COVID-19 pandemic, the facility at which our former, primary CMO partner conducts significant portions of the TSC manufacturing process ~~has~~had been mandated to devote the majority of the facility’s available resources to the manufacture of components of the COVID-19 vaccine. If our CMO is unable to manufacture sufficient quantities of drug supply to meet our needs in a timely fashion or in accordance with the specifications contracted for, we may be forced to delay our development plans for TSC, find alternative suppliers, or pursue other available remedies, which could result in additional costs and the diversion of management’s time.

Amplifying this risk is the fact that, notwithstanding the improvements made to our supply chain during 2021 described under, "Business - Product Development - Chemistry, Manufacturing, and Controls,"we currently depend upon a sole source ~~for~~to manufacture ofour API for TSC and other aspects of our manufacturing process, limiting our available options to troubleshoot these issues. Although we ~~are currently in the process of identifying~~actively manage this third-party relationship to ensure continuity, quality, and ~~developing~~compliance with regulations and we intend to identify and develop alternative manufacturing and supply alternatives in the future, this process remains ongoing, will take time, and will involve significant costs. Even with these efforts, some events beyond our control, including global instability due to political unrest or from an outbreak of pandemic or contagious disease, such as COVID-19, could result in supply chain disruptions or the complete or partial failure of these manufacturing services. Any such failure or disruptions could materially adversely affect our business, financial condition, cash flows, and results of operations. Furthermore, due to the significant regulatory oversight of the pharmaceutical manufacturing process, any changes in the identity of our third-party partners or in our manufacturing processes – even if in the best interests of the Company and successful – could result in regulatory and other delays, as well as significant additional costs. In addition, if our current supplier terminated our arrangement or failed to meet our supply needs for any reason prior to the time we are able to identify sufficient alternative manufacturing capacity, we may be forced to delay our development plans significantly.

Our CMO and other manufacturing and supply partners are also engaged to supply and manufacture materials or products for other biopharmaceutical and pharmaceutical companies, exposing them to regulatory risks unrelated to the work they are doing for Diffusion but which may nevertheless impact their ability to meet their contractual requirements to us or otherwise impede their ability to supply us with sufficient quantities of drug product. Failure to meet the regulatory requirements for the production of those materials and products may also affect the regulatory clearance of a contract supplier’s or manufacturer’s facility. If the FDA or a comparable foreign regulatory agency does not approve these facilities for the supply or manufacture of our product candidates or if it withdraws its approval in the future, even if such lack of approval is unrelated to Diffusion or our product candidates, we may need to find alternative supply or manufacturing facilities.

In addition, to date we have only manufactured TSC and our other product candidates in relatively small quantities for preclinical studies and clinical trials. As we prepare for additional, later-stage clinical trials and potential commercialization, we will need to take steps to substantially increase the scale at which we are able to ~~product~~produce TSC, its API, and its other component parts. In order to meet these needs, our CMOs and suppliers will need ~~to be able~~ to produce our API, other components, and finished product in larger quantities, more cost effectively and, in certain cases, at higher yields than they currently achieve. These third-party contractors may not be able to successfully increase the manufacturing capacity for any of such drug substance and product candidates in a timely or cost-effective manner or at all. Even if such a scale up is possible, it may require additional processes, technologies, and validation studies, which are costly, may not be successful, and which the FDA and foreign regulatory authorities would need to review and approve prior to any commercial sale of TSC or any other product candidate. In addition, quality issues may arise during those scale-up activities because of the inherent properties of a product candidate itself or in combination with other components added during the process of manufacturing, packaging, shipping, or storage.

Our reliance on contract manufacturers and suppliers further exposes us to the possibility that they, or third parties with access to their facilities, will have access to and may misappropriate our trade secrets or other proprietary information. In addition, the manufacturing facilities of certain of our suppliers are located outside of the United States. This may give rise to difficulties in importing our ~~products or~~ product candidates or their components into the United States or other countries as a result of, among other things, regulatory agency approval requirements or import inspections, incomplete or inaccurate import documentation or defective packaging.

Any of these factors could cause a delay or termination of preclinical studies, clinical trials, other development activities, regulatory submissions or approvals of our product candidates, or, if any of our product candidates is approved, commercial supply, and could result in significant, unanticipated costs or an ~~ability~~inability to effectively develop our products candidates or commercialize our approved products on a timely basis, or at all, which could materially and adversely ~~effect~~affect our business, financial condition, orand results of operations.

We expect to rely on third-party CROs and other third parties to conduct and oversee our clinical trials and other aspects of our development process for TSC and our other product candidates. If these third parties do not meet our requirements or otherwise conduct the trials or perform the other services for which they are engaged, we may not be able to successfully develop, obtain regulatory approval for, or commercialize our product candidates when expected or at all. Furthermore, if we are not able to establish and maintain the necessary collaborative relationships with our CROs and other third party partners, we may have to alter our development and commercialization plans.

Conducting our clinical trials in a safe, compliant, and timely manner is critical to our success. We currently rely on third-party CROs to conduct and oversee our clinical trials and other aspects of our product development, as well as various medical institutions, clinical investigators, contract laboratories, consultants, and other third parties to design and conduct our trials, to analyze the results therefrom, and to ensure that the trials are conducted in accordance with our clinical protocols and all applicable regulatory requirements, including the FDA’s regulations and GCPs. These CROs and other third parties play a significant role in the conduct of these trials and the subsequent collection and analysis of data therefrom, as we control only certain aspects of their activities and rely heavily on them to execute our trials in a safe, compliant, and timely manner. Although we intend to internalize portions of some of these functions during 2021 and beyond as our organization grows, we expect to continue to rely on these third parties to a significant degree in the future.

If any of our CROs, clinical trial sites, or other third party partners terminates their involvement in one of our clinical trials (or with Diffusion entirely) for any reason, we may not be able to enter into alternative arrangements sufficient to meet our needs, on a timely basis, on commercially reasonable terms, or at all. In addition, if our relationship with clinical trial sites is terminated, we may incur significant additional costs or experience the loss of follow-up information on patients enrolled in our ongoing clinical trials, unless we are able to transfer the care of those patients to another qualified clinical trial site.

We, as well as the CROs and other third-party contractors acting on our behalf, are required to comply with GCP and GLP requirements in all of our clinical trials, which are enforced through periodic inspections of trial sponsors, principal investigators, and trial sites. If we or any of these third parties fail to comply with applicable GCP, GLP, or other regulatory requirements, the clinical data generated in our clinical trials may be deemed unreliable and we may be required to perform additional clinical trials to supplement or replace such data before receiving approval of a product candidate from the FDA ~~or a non-U.S.~~foreign regulatory authority. Our clinical trials must also generally be conducted with product produced under cGMP regulations. Our and our partners’ compliance with these various regulations may be reviewed by regulatory inspections at any time, processes over which we will have very little control or immediate visibility, and a failure to comply with these regulations and policies by us, our CROs, or any of our other third party partners may result in significant delays in our development programs. In addition, principal investigators for our clinical trials may serve as scientific advisors or consultants to us from time to time and could receive cash or equity compensation in connection with such services. If these relationships and any related compensation result in perceived or actual conflicts of interest, the integrity of the data generated at the applicable clinical trial site may be questioned by the FDA.

In addition, in order to fund or otherwise further development of our current or future product candidates, we may collaborate with other pharmaceutical and biotechnology companies on their development and potential commercialization of those product candidates. We would face significant competition in seeking appropriate partners and whether we reach a definitive agreement for a collaboration will depend on many factors, including, our assessment of ~~the~~a partner’s resources and experience, the terms and conditions of the proposed collaboration, the likelihood of approval by the FDA or other regulatory authorities; the potential market for the subject product candidate; uncertainty with respect to our ownership of our intellectual property; and industry and market conditions generally. These types of collaborations are complex and time-consuming to negotiate and document and could ultimately result in lower returns on investment for our stockholders than would have been achieved developing the product candidate without a partner. Further, if we were to breach our obligations under the agreements governing any such future collaboration, we may face substantial consequences, including potential termination of the collaboration, and our rights to our partners’ product candidates, in which we have invested substantial time and money, would be lost.

Any failure to successfully enter into and maintain the necessary relationships with CROs and our other current and future third party partners and collaborators could materially and adversely ~~effect~~affect our business, financial condition, orand results of operations.

General Risks Related to the Development, Regulatory Approval, and Commercialization of TSC and Our Other Product Candidates

Our business, financial condition, or results of operations may also be materially adversely ~~effected~~affected by a number of general risks related to the development and regulatory approval of our product candidates that are not specific to our Company, including:

• Our ~~TSC~~ COVID Trial, which we completed in February 2021, was conducted ~~at the NIID~~ in Bucharest, Romania and we may in the future conduct additional clinical trials for TSC or our other product candidates outside the U.S. In connection with an application for marketing approval, the FDA may determine not to accept data from clinical trials conducted outside of the U.S. if they determine the data presented therefrom cannot be considered valid without further inspection of the clinical trial site, are not applicable to the U.S. population and U.S. medical practice, or as a result of certain other factors. There can be no assurance that the FDA will accept any data we obtain from the ~~TSC~~ COVID Trial or other trials we may conduct outside the U.S. in the future.

• We face a number of risks related to the potential for one or more of our future product candidates to cause undesirable side effects, have other unexpected properties, contain manufacturing defects, or be subject to misuse or abuse. The occurrence of one or more of these events with respect to a product candidate or product could delay or prevent its regulatory approval, limit its commercial potential, result in additional pre- or post-approval regulatory requirements, or subject us to product liability exposure to consumers, health care providers, or others. Product liability claims could be brought in the future even if a product candidate is ultimately approved for commercial sale and manufactured in facilities licensed and regulated by the appropriate governmental authorities, and if product liability claims brought against us in the future were to be successful, we could incur substantial liability if our insurance coverage for those claims proved to be inadequate.

• Our employees, independent contractors, principal investigators, consultants, vendors, CROs, and other third parties we work with in the course of our development activities may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, during the course of their employment or other engagement with us. Any such misconduct or improper activities, whether intentional or negligent, could result in regulatory sanctions or other penalties against the Company, exclusion from federal healthcare programs such as Medicare and Medicaid, the incurrence of substantial defense costs, and serious harm to our reputation.

In addition, although we currently have no marketed products, in the event TSC or any of our other product candidates are approved for marketing and commercial sale by the FDA or any other regulatory authority, our business, financial condition, or results of operations may be materially adversely ~~effected~~affected by a number of general risks related to the commercialization of such products that are not specific to our Company, including:

• Even if our product candidates obtain regulatory approval, they may fail to achieve the broad degree of physician and patient adoption and use necessary for commercial success. The degree and rate of physician and patient adoption will depend on a number of factors, including the clinical indications for which a product candidate is approved and its effectiveness compared to other therapies, cost and the availability of reimbursement and other coverage from third party payors, our ability to educate patients and healthcare providers regarding a new therapy, and the effectiveness of our sales and marketing efforts. Furthermore, we will face significant competition, often from products sold and marketed by companies with far greater resources than Diffusion, and our failure to effectively compete may prevent us from achieving significant market penetration.

• With respect to any such future products available only by prescription, if we are unable to achieve and maintain coverage and adequate levels of reimbursement from third party payors – including governmental health programs such as Medicare and Medicaid and private insurance companies – and access to such third party payors’ drug formularies, the commercial success of those products may be severely hindered. If any such products do not demonstrate attractive efficacy profiles, they may not qualify for coverage and reimbursement and, even if we obtain coverage for a given product, the resulting reimbursement payment rates might not be adequate, may require co-payments that patients find unacceptably high, and may vary from payor to payor, and there is no assurance that coverage and reimbursement levels necessary to achieve commercial success will be ~~obtained..~~obtained.

• Any such future products candidates that we commercialize will be subject to ongoing and continued regulatory review, including rules and regulations of the FDA and similar non-U.S. governmental authorities relating to advertising, marketing and labeling (including restrictions on the promotion of off-label use), potential REMS requirements, routine manufacturing and other review, and required compliance with GLP. If we or a regulatory agency discovers previously unknown problems with any such product, or any facility at or process by which it is manufactured, we may face restrictions on the sale or distribution of such product or on our Company as a whole, including regulatory actions requiring us to modify marketing or sales materials, suspend manufacturing or ongoing trials, initiate a recall or ~~withdrawal~~withdraw the product from the market entirely, enter into a consent decree, or submit to other civil or criminal investigations and penalties. If we are not able to achieve and maintain regulatory compliance, we may not be permitted to market our product candidates, which would adversely affect our ability to generate revenue and achieve or maintain profitability.

• The biopharmaceutical and pharmaceutical industries are highly regulated and the potential for future legislative reform provides uncertainty and potential threats to our business and our potential future revenue and profitability of any such future products. In the U.S., there have been, and we expect there will continue to be, a number of legislative and regulatory changes to the healthcare system intended to contain or reduce the costs of medical products and medical services including those described inunder the heading Part I – Item 1. Business – Certain Other Legislation and Regulations – Current Healthcare Laws and Regulations ~~of this Annual Report.~~. Additional state and federal healthcare reform measures may be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our products once approved or additional pricing pressures. We cannot predict the likelihood, nature, or extent of government regulation that may arise from future legislation or administrative or executive action, whether in the U.S. or other market territories we may pursue.

Since the founding of Diffusion LLC in 2001, we have been principally focused on the development of TSC for the treatment of hypoxia and as a platform to enhance standard-of-care treatment for conditions complicated by hypoxia. Many of our issued patents were issued early in our Company’s history. While we are regularly engaged in further research and development activities with respect to TSC and our other product candidates that may result in novel developments and findings that ultimately lead to further intellectual property opportunities, if the terms of any of our key patents expire before or soon after our therapeutic candidates are approved, or if manufacturers of biosimilar drugs successfully challenge our patents, our business, financial condition, or results of operations may be materially adversely effected.

Patents have a limited duration. In the United States, if all maintenance fees are timely paid, the natural expiration of a patent is generally 20 years from its earliest non-provisional filing date in the U.S. Various extensions may be available, including under the Hatch-Waxman Amendments as described elsewhere in this Annual Report, but the life of a patent, and the protection it affords, is limited. Even if patents covering TSC and our product candidates, including with respect to their manufacture or use, are obtained, once the patent life has expired, we may be open to additional competition from competitive medications, including biosimilar medications. In the case of Diffusion, the normal lives (in other words, prior to the application of any patent term restoration of marketing exclusivity periods that may be available) of our issued U.S. patents related to TSC begin to expire in 2023, which may be prior to the time that we are able to obtain regulatory approval for and, if approved, commercialize TSC.

Even if patent term extension or other protections such as marketing exclusivity are available upon the regulatory approval (if any) of TSC or any of our other product candidates, the benefits provided by these regulatory and legislative mechanisms is limited and typically less robust than full patent protection. For example, the five-year extension of patent life potentially available under the Hatch-Waxman Amendments cannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval, and only one patent applicable to an approved drug may be extended. Receiving such an extension is also subject to compliance with applicable deadlines for application and certain other regulatory requirements. Moreover, the length of the extension could be less than we request. If we are unable to obtain patent term extension or the term of any such extension is less than we request, the period during which we can enforce our patent rights for that product will be shortened and our competitors may obtain approval to market competing products sooner than we expect. Also, the scope of our right to exclude during any patent term extension period may be limited or may not cover a competitor’s product or product use.

Given the amount of time required for the development, testing, and regulatory review of new drug candidates, patents protecting any drug candidate might expire before or shortly after such drug candidate is approved or commercialized. Similarly, our patents and patent applications may not provide us with sufficient time or rights to commercialize our product candidates or exclude others from commercializing products similar ours. If our patent protections for our product candidates have expired, this could include manufacturers of identical, biosimilar drugs.

If we are unable to obtain new, patent claims with respect to our existing product candidates and other technologies, in particular those related to our lead product candidate TSC, that both adequately protect our intellectual property position for commercial purposes and extend the term of overall protection as compared to our existing issued patents, we may be reliant on these types of patent term extensions and similar exceptions for such protection during the ultimate commercialization of TSC. This limited protection could have a material and adverse effect on our business, financial condition, or results of operations.

We may not be able to obtain or enforce patent rights or other intellectual property rights that cover our product candidates and technologies that are of sufficient breadth to prevent third parties from competing against us.

The pharmaceutical industry is characterized by rapidly advancing technologies, intense competition, and a strong emphasis on developing proprietary therapeutics. Numerous companies are engaged in the development, patenting, manufacturing, and marketing of health care products competitive with those that we are developing, and we face competition from a number of sources, such as pharmaceutical companies, generic drug companies, biotechnology companies and academic and research institutions. Accordingly, our ability to obtain and maintain patent protection in both the U.S. and non-U.S. jurisdictions will be critical to our ability to successfully develop, obtain regulatory approval for, and, in particular, commercialize TSC and our other product candidates. These protections are and will be essential to preserving and protecting our novel inventions, proprietary developments, and trade secrets and to preventing third parties from infringing upon them. In particular, our ability to protect any of our product candidates from unauthorized or infringing use by third parties depends in substantial part on our ability to obtain and maintain valid and enforceable patents in the U.S. and worldwide.

Our patent portfolio includes patents and patent applications in the U.S. and other major markets covering our technology with varying scope, including issued U.S. patents related to composition of matter, formulation, methods of delivery, and methods of use and the scope of coverage vary from country to country. Although we believe that our intellectual property position is strong and are currently assessing our operations and existing portfolio for additional intellectual property opportunities, we do not have – and may be unable to obtain – patent protection for every aspect of our technology. For aspects of our technology for which we do not have patent coverage, or in countries where we do not have granted patents, we may not have any ability to prevent the unauthorized use of our technologies or technologies substantially similar to ours, and any patents that we may obtain in the future may be narrow in scope and thus easily circumvented by competitors. Further, in countries where we do not have granted patents, third parties may be able to make, use or sell products identical to or substantially similar to, our product candidates.

Due to legal standards relating to patentability, validity, enforceability and claim scope of patents covering pharmaceutical inventions, our ability to obtain, maintain and enforce patents is uncertain and involves complex legal and factual questions. The patent application process, also known as patent prosecution, is expensive and time-consuming, and we may not be able to prepare, file, and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we will fail to identify patentable aspects of inventions made in the course of development and commercialization activities before it is too late to obtain patent protection on them. While we are currently engaged in efforts to obtain additional intellectual property and patent protections for TSC, there is no assurance we will obtain such protections through our applications. Therefore, these and any of our patents and applications may not be prosecuted and enforced in an optimal manner. It is also possible that defects of form in the preparation or filing of our patents or patent applications may exist, or may arise in the future, such as with respect to inadvertent prior public disclosures, proper priority claims, inventorship, claim scope, or patent term adjustments. If our current or future third party development partners are not fully cooperative or disagree with us as to the prosecution, maintenance, or enforcement of any patent rights, those patent rights could be compromised and we might not be able to prevent third parties from making, using and selling competing products. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how. Accordingly, we cannot guarantee that any patents will issue from any of our currently pending patent applications, which could impair our ability to prevent competition from third parties.

Even for aspects of our technology for which we have obtained, or obtain in the future, patent protection, the complexity of legal and factual questions underlying such claims means they may not provide us with sufficient protection for our product candidates to afford a commercial advantage against competitive products or processes, including those from branded and generic pharmaceutical companies. We cannot guarantee that the claims of these patents are or will be held valid or enforceable by the courts or will provide us with any significant protection against competitive products or otherwise be commercially valuable to us. Third parties may design around or challenge the validity, enforceability or scope of such issued patents or any other issued patents we own or license, which may result in such patents being narrowed, invalidated or held unenforceable. If the breadth or strength of protection provided by the patents we hold or pursue with respect to our product candidates is challenged, it could dissuade companies from collaborating with us to develop, or threaten our ability to commercialize, our product candidates. Changes in either the patent laws or in the interpretations of patent laws in the ~~United States~~U.S. and other countries may diminish the value of our intellectual property.

In addition, patents have a limited lifespan, presenting further challenges in effectively protecting our technologies and associated commercial position. In the U.S., the natural expiration of a patent is generally 20 years after it is filed. Various extensions may be available under a variety of legislative and regulatory avenues but often the life afforded by these extensions and the protections they afford are ~~often~~ limited relative to full patent protection. The extensive period of time between patent filing and regulatory approval for a product candidate limits the time during which we can market a product candidate under patent protection, which may particularly affect the profitability of our early-stage product candidates. ~~In particular,~~Even if patents covering our products are obtained, once the patent life has expired, we may be open to competition from competitive products. If one of our products requires extended development, testing and/or regulatory review, patents protecting such products might expire before or shortly after such products are commercialized. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours, which could have a material adverse effect on our business, financial condition and results of operations.

To this point, we have been developing TSC since the founding of Diffusion LLC in the early 2000s and, as a result, portions of our patent portfolio, including certain patents related to TSC’s composition of matter, will expire beginning in ~~2023. If~~2023, which may be prior to the ~~other~~time that we are able to obtain regulatory approval for and, if approved, commercialize TSC. Moreover, the normal life (i.e., with no adjustments or extensions) of our key issued patents related to the composition of matter of TSC extends to 2026, with potential patent term extensions to 2031, and the normal life of our patents related to an oral formulation of TSC extends to 2031, with potential patent term extensions to 2036. While the Company is actively engaged in efforts to obtain additional patent protection covering our product candidates, there is no assurance that we will successfully obtain such patent protection.. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours. For example, we are aware of other companies that currently ~~or that may issue in~~use different formulations of TSC, which could adversely affect the ~~future are not adequate to protect our technologies, our competitive position may be harmed and we may face generic or other competition sooner than we otherwise would.~~Company.

Furthermore, the laws of some foreign jurisdictions do not provide intellectual property rights to the same extent as in the United States and many companies have encountered significant difficulties in protecting and defending such rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to pharmaceuticals, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally in those countries. If we encounter such difficulties in protecting or are otherwise precluded from effectively protecting our intellectual property in foreign jurisdictions, our business prospects could be substantially harmed.

Proprietary trade secrets and unpatented know-how are also very important to our business. Although we have taken steps to protect our trade secrets and unpatented know-how by entering into confidentiality agreements with third parties, and intellectual property protection agreements with certain employees, consultants and advisors, third parties may still obtain this information or we may be unable to protect our rights. We also have limited control over the protection of trade secrets used by our suppliers, manufacturers and other third parties. There can be no assurance that binding agreements will not be breached, that we would have adequate remedies for any breach or that our trade secrets and unpatented know-how will not otherwise become known or be independently discovered by our competitors. If trade secrets are independently discovered, we would not be able to prevent their use. Enforcing a claim that a third party illegally obtained and is using our trade secrets or unpatented know-how is expensive and time-consuming, and the outcome is unpredictable. In addition, courts outside the U.S. may be less willing to protect trade secret information.

If we are unable to adequately obtain or enforce our patent and other intellectual property rights for any reason, it could materially and adversely ~~effect~~affect our business, financial condition, orand results of operations. For more information about our intellectual property and our competition, see the information included in ~~Part~~under the heading, “Part I – Item 1. Business – Products, Product Development, and Our Competition ~~of this Annual Report~~.– Our Intellectual Property” and “— Our Competition.”

If we become involved in lawsuits to protect or enforce our patents or other intellectual property, or if we are sued for infringing intellectual property rights of third parties, it will be costly and time-consuming, and an unfavorable outcome in that litigation could have a material adverse effect on our business, financial condition, or results of operations.

Our ultimate commercial success depends upon our ability to develop, manufacture, market, and sell our product candidates and use our proprietary technologies in the U.S. and non-U.S. markets. In order to do so, it is critical that we prevent third parties from infringing on our intellectual property rights and that we operate our business without infringing on the intellectual property rights of others.

However, numerous U.S. and non-U.S. issued patents and pending patent applications owned by third parties exist in fields relating to TSC and our other product candidates, their potential methods of delivery, potential indications they may be used to treat, and their other features, and, as more patents are issued over time, the risk increases that others may assert that our product candidates, technologies, or methods of delivery or use infringe their patent or other intellectual property rights, or that we discover a third party infringing on our rights. Moreover, it is not always clear to industry participants, including us, which patents cover various drugs, biologics, drug delivery systems, or their methods of use, which of these patents may be valid and enforceable, and what inventions or technologies may be claimed by non-public patent applications. Patent applications in the U.S. and many foreign jurisdictions are typically not published until 18 months after their first non-provisional filing and publications in the scientific literature often lag behind actual discoveries, meaning we cannot be certain whether others, including our competitors, have filed patent applications for technology covered by patents or our pending applications and whether any such filing has priority over our own applications or patents.

In the biopharmaceutical and pharmaceutical industries in particular, there is a substantial amount of litigation involving patent and other intellectual property rights. This type of litigation may occur unexpectedly but may also be prompted by specific events, such as a patent application being made public by the USPTO or a non-U.S. governmental authority or under Paragraph IV of the Hatch-Waxman Amendments. For more information regarding the Hatch-Waxman Amendments and Paragraph IV thereunder, see the information in included under the heading, “Part I – Item 1. Business – Government Regulation – The Hatch-Waxman Amendments ~~of this Annual Report.~~.”

As of the date of this Annual Report, no litigation asserting infringement claims has been brought against us, nor have we filed such a claim against any third party. However, we cannot assure you that the development or future commercialization of any of our product candidates or other technologies will not result in claims that our activities infringe on the existing or future intellectual property rights of third parties. Furthermore, potential competitors may infringe our intellectual property, including our patents. For example, in the first quarter of 2021, we became aware of a third party affiliated with a former outside consultant of the Company which claims to be in early-stage development of a product candidate that purportedly may operate through a similar mechanism of action to TSC.

We may be required to file infringement claims to stop third-party infringement or unauthorized use or, if a third party claims we are infringing on their rights, respond to such claims. This process can be expensive and time consuming, and could result in a court deciding that a patent of ours is not valid or is unenforceable, that a third party is not required to stop using a technology we believe ~~infringe~~infringes on our rights, significant costs, or the diversion of management’s time. An adverse determination in any litigation or other proceedings could put one or more of our patents at risk of being invalidated, interpreted narrowly, or amended such that they do not cover our product candidates in a manner sufficient to support our development and commercialization needs or that such product candidate needs to be significantly redesigned, or put our pending patent applications at risk of not issuing, or issuing with limited and potentially inadequate scope. Further, some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources.

In addition, interference, derivation, or other proceedings brought at the USPTO may be necessary to determine the priority or patentability of inventions with respect to our patents or patent applications. Litigation or USPTO proceedings brought by us may fail or may be invoked against us by third parties. Even if we are successful in these proceedings, domestic or foreign litigation or USPTO or foreign patent office proceedings may result in substantial costs and the diversion of management’s time. We may not be able to prevent all misappropriation of our proprietary rights, particularly in countries with a legal framework that offers limited intellectual property protections or where the costs of enforcement outweigh the commercial and other benefits of maintaining intellectual property protections.

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation or other proceedings, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation or other proceedings, including as a result of public announcements of the results of hearings, motions or other interim proceedings or developments, or public access to related documents. This type of disclosure could put us at a significant competitive disadvantage by disclosing important trade secrets or other proprietary information to our competitors and other third parties.

Any litigation or other challenge related to our intellectual property could materially and adversely ~~effect~~affect our business, financial condition, orand results of operations.

Our business, financial condition, or results of operations may also be materially adversely ~~effected~~affected by a number of general risks related to our intellectual property that are not specific to our Company, including:

• As is common in the biopharmaceutical and pharmaceutical industries, some of our employees were formerly employed by companies in the industry, including our competitors or potential competitors, and some of our consultants actively work for other companies in the industry. As a result, although we have in place policies which prohibit the use of third-party confidential information in violation of any obligation to a former employer or otherwise, we may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed to us alleged trade secrets of their former employers or their former or current customers. In addition, if any of our current employees or consultants are engaged by a competitor in the future, it is possible that they may appropriate or otherwise improperly use our proprietary and confidential information. Any of the foregoing events could result in significant costs and the diversion of time and resources.

• Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated as a result of any non-compliance with these requirements. We may also abandon certain intellectual property protections that we would otherwise maintain if we determine such protections are not expected to provide sufficient value relative to the cost of ongoing maintenance.

• Patent laws and other intellectual property protections available in the U.S., E.U., or other jurisdictions are subject to change. These changes may be unpredictable, weaken our overall intellectual property position, increase our costs related to maintenance and enforcement, or otherwise diminish the value of patents in general, thereby impairing our ability to protect our product candidates and maximize our return on investment thereon.

Risks Related to Our Business, Financial Position, Results of Operation, and Organizational Structure

We will require additional capital to fund our operations which may not be available on acceptable terms or at all. If we fail to obtain necessary financing, we may be forced to delay or curtail our clinical trials and other development activities or be unable to complete the development and commercialization of our product candidates due to a lack of sufficient resources.

Although we expect that our existing cash resources will enable us to fund our operating expenses and capital expenditure requirements ~~including expected costs related to the planned TSC Oxygenation Trials and our Planned Phase 2 Hypoxia-related Indication Trial,~~ through 2023, we expect to continue to spend substantial amounts as we continue to develop TSC and our other product ~~candidates,~~candidates. As a result, we will need to obtain additional financing in the future in order to complete the development of TSC and fund our other development and operational activities.

We cannot be certain that the additional funding we will require will be available on acceptable terms or at all. Investors may demand significant discounts to market prices or that we agree to restrictive covenants or other limitations on our ability to operate our business, and conditions in the capital markets may make equity and debt financing more difficult to obtain or negatively impact our ability to complete a financing transaction at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back, discontinue the development or commercialization of one or more of our product candidates, or seek alternative financing opportunities such as collaborations or licensing opportunities. For example, prior to completing the May 2020 Offering and February 2021 Offering, we determined that we did not have adequate resources to fully support the randomized portion of the ~~TSC~~ GBM Trial and commencement of enrollment in the trial was suspended following the run-in portion.

Furthermore, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves the associated risks and uncertainties. Although we have based this estimate on assumptions that we believe to be reasonable, they may prove to be wrong, we could utilize our available capital resources sooner than we currently expect, and actual results could vary greatly from our expectations expressed in this Annual Report as a result. The magnitude and timing of our future funding requirements, both near and long-term, will depend on many factors, including, but not limited to:

We currently generate no revenue from the sale of products, have incurred significant losses since our inception, have a history of net losses and negative cash flow from operations, expect to incur losses for the foreseeable future, and may never become profitable. In addition, our operating results may fluctuate significantly, which makes our future operating results difficult to predict and could cause our operating results to fall below expectations. As a result, any investment in our common stock is speculative and risky.

We are a clinical stage biotechnology company and, as a result, we have a limited operating history from which to assess how we will respond to competitive, economic, or other challenges to our business, and our business and prospects must be considered in light of the risks and uncertainties frequently encountered by similarly situated companies.

We have limited cash resources, have generated substantial net losses and negative cash flow from operations since our inception, and we continue to incur significant research, development, and other expenses related to our ongoing operations, including the development of TSC and our other product candidates. To date, we have not yet obtained regulatory approvals for any of our product candidates and, accordingly, have not generated any revenues from the sale of products. We expect to continue to incur losses and negative cash flow for the foreseeable future. Furthermore, our future operating results may fluctuate due to a variety of other factors, many of which are outside of our control and may be difficult to predict, including the delays in our product development programs including as a result of regulatory review, increased expenditures related to manufacturing or the enforcement of intellectual property rights, other litigation costs, changes in accounting policies, or other unanticipated events.

Our ability to generate sufficient revenues from TSC or any of our other product candidates, if approved, will depend on numerous factors described throughout this Annual Report. Even if we are able to successfully develop and receive regulatory approval for TSC or any of our other product candidates, we do not know if or when any such product will achieve commercial success or generate revenue for us, and we will incur significant costs associated with the commercialization that will need to be offset by revenue before achieving a profit. We may also in the future enter into collaboration agreements and license agreements with other companies that include milestone expenditures and payments, in which case our ability to generate revenue or achieve profitability may be dependent on the achievement of those milestones. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods, and our prior losses and expected future losses have had and will continue to have an adverse effect on our stockholders’ equity. Furthermore, due to the uncertainty of the drug development process, we are often unable to predict the timing or amount of increased expenses, or when we will be able to achieve or maintain profitability, if at all.

We will need to further increase the size and complexity of our organization in the future including, if TSC or any of our other product candidates are approved for commercial sale, establishing sales and marketing capabilities. We may experience difficulties in executing our growth strategy or managing any growth that we do experience if we are unable to recruit and retain talented individuals in key positions.

Our ability to succeed in the highly competitive pharmaceuticals industry depends upon our ability to attract and retain highly qualified personnel. As of the date of this Annual Report, we have 1314 full-time employees and ~~one~~no part-time ~~employee, including our new Senior Director of Quality Assurance hired during the first quarter of 2021.~~employees. Particularly given our near-term plans for the TSC development program and our compliance requirements with the FDA, SEC, and other regulatory bodies, we believe that our current staffing levels are inadequate to support our future needs. We anticipate adding additional personnel to our team throughout the organization during ~~2021~~2022 in an effort to support the development of TSC, grow our business more generally, and optimize the size of our organization. In addition, assuming success in our ongoing and planned clinical trials, we expect to further supplement and grow our scientific, clinical, regulatory, financial, and other human resources to support our planned research, development, and commercialization plans for TSC and our other product ~~candidates..~~candidates.

Our ability to effectively manage our anticipated growth will depend on multiple factors, including, among others, our ability to:

• effectively retain current talent and effectively recruit sufficient numbers of new talented employees;

• manage our third-party supply and manufacturing operations effectively and in a cost-effective manner,

• while increasing production capabilities for our current product candidates to commercial levels;

• establish and maintain relationships with development and commercialization ~~partners~~partners;

• manage our development and commercialization efforts effectively and in a cost-effective manner; and

• continue to improve our operational, clinical, financial, management and regulatory compliance controls and reporting systems and ~~procedures;~~procedures.

We are highly dependent on our management and scientific personnel, including our executive officers, certain other key employees and consultants, and the members of our Board. The loss of the services of any of these individuals could impede, delay, or prevent completion of our ongoing and planned clinical trials, regulatory approval, or commercialization of TSC or any of our other product candidates. If we lose the services of any of these individuals, we might not be able to find suitable replacements on a timely basis or at all, and our business could be harmed as a result. All of our employees, including our executive officers with whom we have employment agreements, are employed on an at-will basis and their employment can be terminated by us or them at any time. As part of our efforts to retain our valuable employees, we, among other things, provide a generous salary and benefits package, as described in more detail in under the heading, "Part I — Item 1. Business – Our People and Human Capital Resources ~~of this Annual Report~~– Employees."

Nevertheless, we may be unable to attract or retain qualified management and other key personnel in the future due to the intense competition among biotechnology, pharmaceutical, and other businesses. There may be a limited number of persons with the requisite skills to serve in these positions, and we cannot assure you that we will be able to identify or employ qualified personnel for any such position on acceptable terms, if at all, and the high levels of competition within the industry may mean that we will be required to expend significant financial resources in our employee recruitment and retention efforts. Many of the other pharmaceutical companies with whom we compete for qualified personnel have greater financial and other resources, different risk profiles and longer histories in the industry than we do. They also may provide more diverse opportunities and better chances for career advancement. If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience constraints that will harm our ability to implement our business strategy and achieve our business objectives. Furthermore, as we currently have no marketed products, we currently have no sales or marketing personnel or capabilities. To commercialize TSC or any of our other product candidates, if approved, ~~in the~~ we will need to build our marketing, sales, distribution, and other related capabilities or arrange with third parties to perform these services, and we may not be successful in doing so.

In addition, we have historically utilized the services of certain outside independent contractors to perform a number of critical functions for our company, including with respect to clinical development, regulatory matters, accounting, and human resources, a practice we expect to continue and may choose to expand in the future. We rely on these independent contractors and effectively managing our relationships with them is and will remain a priority. However, there can be no assurance that we will be able to manage these relationships effectively, that such contractors will be able or choose to continue working with us in the future, or that we will be able to find additional or replacement services if and as needed, on economically reasonable terms or at all.

If we are not able to effectively manage our growth and expand our organization through a combination of effectively retaining our existing employees and third-party contractors and successfully recruiting new employees and contractors, we may be unable to effectively execute on our product development and other strategic plans, which mymay adversely ~~effect~~affect our business, financial condition, or results of operations.

If we decide to in-license or acquire one or more additional product candidates or otherwise enter into a strategic transaction, it could impact our liquidity, increase our expenses, and present significant distractions to our management team.

We currently only have ~~two~~one product ~~candidates~~candidate under active development, ~~our lead product candidate, TSC, and our second product candidates, DFN-529.~~TSC. We may in the future implement a strategy to in-license or acquire one or more additional product candidates to supplement our pipeline. We may also consider a variety of other strategic transactions, including spin-offs, partnerships, joint ventures, restructurings, divestitures, business combinations, and minority investments. Any such transaction would expose us to a number of risks and uncertainties, including the potential incurrence of recurring, non-recurring (including unknown liabilities), or other charges (including amortization expenses, write-downs, or other impairment charges), increase of short- and long-term expenditures, or dilution to our stockholders, as well as posing significant integration, implementation, or retention challenges and diverting our management team’s focus on other priorities, including the TSC development program. Any of the foregoing could have a material adverse effect on our business, financial condition, or results of operation. which could adversely affect our operations and financial results. There can be no assurance that we will undertake such a transaction or, if we do, that we will successfully complete the transaction or that the transaction will be additive to our business, financial condition, or results of operations.

Our ability to utilize our NOL carryforwards and other deferred tax assets may be limited as a result of past and future issuances of our common stock.

As of December 31, ~~2020,~~2021, we had ~~$11.7~~$23.4 million in federal and state NOL carryforwards available to reduce future taxable income, if any, for income tax purposes. If not utilized, the NOL carryforwards will begin expiring during the year ending December 31, 2034. Under Section 382 of the Tax Code, if a corporation undergoes an “ownership change,” generally defined as a greater than ~~50.0%~~50% change, measured by value, in its equity ownership over a three-year period, the corporation’s ability to use its pre-ownership change NOL carryforwards and other pre-ownership change tax attributes – such as research tax credits – to offset its post-ownership change income may be limited. In the year ended December 31, 2019, as a result of the issuance of a significant number of shares our common stock pursuant to the May 2019 Offering, November 2019 Offering, and December 2019 Offering, we performed an analysis under Section 382 of the Tax Code and, as a result of such analysis and a determination that such an ownership change had taken place, we reduced our NOL carryforwards. In the event we issue additional shares of common stock to fund our future development efforts and those issuances result in additional ownership changes for purposes of Section 382 of the Tax Code, as we did in the May 2020 Offering and the February 2021 Offering, our NOL carryforwards could be further reduced.

General Risks Related to Our Business, Financial Condition, Results of Operations, and Organizational Structure

Our business, financial condition, or results of operations may also be materially adversely affected by a number of general risks related thereto and to our organizational structure that are not specific to our Company, including:

• If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. Furthermore, our disclosure controls and procedures are subject to inherent limitations, human error, and other systematic breakdowns, and therefore may not prevent or detect all errors or acts of fraud. As a result, stockholders could lose confidence in our financial and other public reporting, which could harm our business, financial condition, or results of operations.

• As our Company, the industry in which we operate, and the world-at-large become increasingly virtual, our acquisition and implementation of additional information technology solutions and our compliance with global privacy and data security requirements could result in additional costs and liabilities or inhibit our ability to collect and process data globally. Furthermore, any failure to comply with applicable requirements or best practices – as well as other events outside of our control – could result in a security breach or other disruption to our information technology systems, limit our capacity to effectively monitor and control our operations, compromise our or third parties’ confidential information, or otherwise adversely affect our business, financial condition, or results of operations.

• We incur significant costs as a result of our public company status and devote substantial management time to operating as a public company, including complying with the applicable requirements of the Securities Act, the Exchange Act, the Dodd-Frank Act, SOX, and the rules and regulations of Nasdaq. If, in the future, we are required to include in our annual report an attestation of our independent registered public accounting firm regarding internal control over financial reporting, the amount of these compliance costs would increase significantly.

• Although we have in place business continuity and disaster recovery plans, our business, financial condition, or results of operations could be negatively affected by volatility, disruptions, or other uncertainty caused by market fluctuations, economic downturns or unfavorable global economic conditions, pandemics, natural disasters or other catastrophic events, events of war, terrorism, or other man-made problems, or other geopolitical events outside of our control, including the COVID-19 pandemic and Brexit.

• If we fail to comply with applicable laws and regulations, including the healthcare laws and regulations described inunder the heading, Part I – Item 1. Business – Certain Other Legislation and Regulations – Current Healthcare Laws and Regulations ~~of this Annual Report~~ and applicable environmental, health, and safety laws and regulations, we could become subject to fines, penalties, or other consequences.

If we cannot continue to satisfy the NASDAQ Capital Market continued listing standards and other NASDAQ rules, our Common Stock could be delisted, which would harm our business, the trading price of our Common Stock, our ability to raise additional capital and the liquidity of the market for our Common Stock.

Our common stock is currently listed on the NASDAQ Capital Market. To maintain the listing of our common stock on the NASDAQ Capital Market, we are required to meet certain listing requirements, including, among others, either: (i) a minimum bid price of $1.00 per share, a market value of publicly held shares (excluding shares held by our executive officers, directors and 10% or more stockholders) of at least $1 million and stockholders’ equity of at least $2.5 million; or (ii) a minimum bid price of $1.00 per share, a market value of publicly held shares (excluding shares held by our executive officers, directors and 10% or more stockholders) of at least $1 million and a total market value of listed securities of at least $35 million. There is no assurance that we will regain and continue to meet the Bid Price Rule and Nasdaq’s other listing requirements.

~~Risks Related~~As previously disclosed, on May 6, 2021, we received a written notice from the Staff indicating that the Company was not in compliance with the Bid Price 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. On November 3, 2021, after failing to ~~Ownership~~regain compliance with the Bid Price Rule within 180 days of ~~Our Common~~receipt of the first notice, we received an additional notice from the Staff providing that, although the Company had not regained compliance with the Bid Price Rule by the previously stated deadline, in accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company would be granted an additional 180 calendar days, or until May 2, 2022, to regain compliance with the Bid Price Rule.

To regain compliance with the Bid Price Rule, the bid price for our common stock must close at $1.00 per share or more for a minimum of 10 consecutive business days. NASDAQ’s written notice has no effect on the listing or trading of our common stock at this time, and we are currently evaluating our alternatives to resolve this listing deficiency. We have filed with the SEC a proxy statement relating to the Special Meeting, to be held on April 14, 2022, at which our stockholders will vote on a proposal to approve an amendment to our Certificate of Incorporation to effect the Reverse Stock Split, with the final decision of whether to proceed with the Reverse Stock Split, the effective time of the Reverse Stock Split, and the exact ratio of the Reverse Stock Split to be determined by the Board, in its discretion, at any time prior to December 31, 2022. However, there can be no assurance that the Reverse Stock Split will be approved at the Special Meeting or, if approved, will result in a sustained higher stock price, if effected, that will allow us to regain compliance with the Bid Price Rule and meet the NASDAQ stock price listing requirements, and there is no guarantee we will continue to satisfy the other NASDAQ Capital Market continued listing standards.

In the event that our common stock is delisted from NASDAQ and is not eligible for quotation or listing on another market or exchange, trading of our common stock could be conducted only in the over-the-counter market or on an electronic bulletin board established for unlisted securities such as the Pink Sheets or the OTC Bulletin Board. In such event, it could become more difficult for us to raise capital and for our stockholders to dispose of, or obtain accurate price quotations for, our common stock, and there would likely also be a reduction in our coverage by securities analysts and the news media, which could cause the price of our common stock to decline further.

Our stock price is volatile and any investment in our securities may suffer a decline in value. In addition, this volatility may subject our business to additional risks, such as an increased risk of securities ~~litigation or inability to meet the continued listing requirements of Nasdaq.~~litigation.

During the year ended December 31, ~~2020,~~2021, the closing market price for our common stock as reported by Nasdaq varied between a high of ~~$1.50~~$1.70 on ~~July 21, 2020~~February 16, 2021 and December 31, 2021 and a low of ~~$0.26~~$0.31 on ~~March 16, 2020.~~December 29-31, 2021. As a result of fluctuations in the price of our common stock, you may be unable to sell shares or our common stock at or above the price you paid for them, even if your holding period is relatively short. The market price of our common stock is likely to continue to be volatile and subject to significant price and volume fluctuations in response to market, industry and other factors, including the degree of analyst coverage of our stock, their valuations and recommendations, and whether any such analysts publish inaccurate or unfavorable research about our business. If the results of our business do not meet these analysts’ forecasts, the expectations of investors or the financial guidance we provide to investors in any period, the market price of our common stock could decline. Furthermore, despite this volatility, due to the fact that we have never declared or paid cash dividends on our common stock and do not currently anticipate declaring or paying any cash dividends in the foreseeable future, we expect that only appreciation of the price of our common stock, if any, will provide a return to our stockholders for the foreseeable future.

Historically, the stock markets in general, and the markets for biotechnology stocks in particular, have experienced significant volatility that has at times been unrelated to the ~~business,~~ financial condition or results of operations of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock and, consequently, adversely affect the price at which you are able to sell any shares of our common stock that you own. In the past, following periods of volatility in the market or significant price declines in individual securities or the market as a whole, securities class-action litigation has often been instituted against companies. Such litigation, if instituted against us, could result in substantial costs and diversion of management’s attention and resources, which could materially and adversely affect our business, financial condition, or results of ~~operations.~~operations and growth prospects.

In addition, our common stock is currently listed on the Nasdaq Capital Market. To maintain the listing of our common stock on the Nasdaq Capital Market, we are required to meet certain listing requirements, including, among others, maintaining a minimum closing bid price for our common stock. Particularly given the historical volatility experienced by our common stock, there is no assurance that we will continue to meet the minimum closing price requirement and other listing requirements of Nasdaq.

We have funded our operations to date through the issuance of securities, including common stock, warrants to purchase common stock, convertible preferred stock, and convertible debt securities, and we expect that in the future we will need to raise additional capital through similar means to fund our continued development efforts for TSC and our other liquidity needs. Assuming funding is available on acceptable terms, any future issuance of common stock or securities convertible for or exchangeable into common stock will result in dilution to our existing stockholders and could depress the market price of our common stock. Furthermore, the terms of future financing ~~transaction~~transactions may contain provisions that restrict our operations or require us to relinquish certain rights to our product candidates or other technologies.

Although we believe we have sufficient cash resources to fund ~~the TSC Oxygenation Trials, our Planned Phase 2 Hypoxia-related Indication Trial, and~~ our other operating expenses and capital expenditure requirements through 2023, we will in the future need to raise additional funds to continue our operations, fund additional clinical trials evaluating TSC and our other product candidates, and, if approved, commercializing TSC. We plan to continue to finance our operations with a combination of equity issuances, debt arrangements, and, potentially, licensing, or other partnering relationships. In addition, our Board may determine at any time to raise additional capital if it believes the terms are in the best interests of our stockholders.

Accordingly, new issuances of a substantial number of shares of our common stock could occur at any time. For example, in February 2021, we issued ~~33,658,538~~approximately 33.7 million shares of our common stock in connection with the completion of the February 2021 Offering. Any issuance or sale of shares, or the perception in the market of an intent to issue or sell shares in the near-term, by the Company or holders of a large number of shares could reduce the market price of our common stock. We also cannot assure you that any such sale of common stock or other securities will be at a price per share that is equal to or greater than the price per share paid by you for our common stock. Furthermore, a depressed stock price could limit our ability to raise necessary capital through the sale of additional equity securities on terms that are acceptable.

We may also seek additional capital through other methods, either alone or in combination with the issuance of additional securities, including debt financings, receivables or royalty financings, strategic partnerships and alliances, and licensing arrangements, any of which could be coupled with an equity component, such as warrants to purchase stock. The incurrence of indebtedness could result in increased fixed payment obligations, liens and other security interests being placed on certain of our assets, and certain restrictive covenants being imposed on the operation of our business, such as limitations on our ability to incur additional debt or acquire intellectual property rights. We may also in the future raise additional funds through strategic partnerships, alliances, and licensing arrangements with third parties, any of which could require us to relinquish valuable rights to TSC or our other product candidates. The restrictions imposed by any of these ~~arrangement~~arrangements could materially decrease any potential returns on our investment in TSC or our other product candidates, or otherwise materially and adversely ~~effect~~affect our business, financial condition, or results of operations.

Our organizational documents impose certain anti-takeover provisions and make the Delaware Chancery Court the exclusive forum for certain stockholder actions, which could depress the trading price of our common stock.

Our certificate of incorporation, as amended, and our Bylaws contain provisions that may make the acquisition of our company, a proxy contest, or the nomination of a director candidate by a stockholder more difficult than such actions would be in the absence of such provisions, including that:

only our Board has the right to fill a vacancy on the Board created by an expansion or by the resignation, death, or removal of a director, which prevents stockholders from being able to fill vacancies on our Board;

In addition our Bylaws provide that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware is the sole and exclusive forum for certain actions, including derivative actions brought on the Company's behalf, stockholder actions claiming breaches of a fiduciary duty owed by any of our directors or officers, and claims arising under our organizational documents, in each case, subject to said Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein. Although this provision would not apply to any stockholder claims under the Exchange Act, there is uncertainty regarding whether a court would enforce such a forum selection provision as written ~~would apply~~ to stockholder claims under the Securities Act. Nevertheless, this forum selection provision may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees, or agents, which may discourage lawsuits against us and such persons.

The limitations on certain stockholder rights imposed by these provisions could also depress the trading price of our common stock.

~~Our principal executive~~On November 8, 2021, the Company entered into a Deed of Lease Termination Agreement with the Carlton Landlord providing for the early termination of the Carlton Lease related to the Company's prior corporate headquarters. The Carlton Lease was previously scheduled to expire on April 30, 2022. In connection with the termination, the Company made a one-time payment to the Carlton Landlord of approximately $14,000, net of a security deposit subsequently returned in accordance with the Carlton Lease. In lieu of the fixed office ~~is located~~and laboratory space previously available to us under the Carlton Lease, the Company has entered into short term agreements to utilize membership-based co-working space in ~~a leased facility in~~both Charlottesville, Virginia ~~where we lease approximately 8,000 square feet of office space for approximately $10,000 per month. The current term of our Charlottesville lease will expire in April 2022.~~and Philadelphia, Pennsylvania.

The information in Note 6, Commitments and Contingencies — Legal Proceedings to our consolidated financial statements set forth in, Part II — Item 8 — Financial Statements of this Annual Report is incorporated herein by reference.

In addition, from time to time, we are subject to various pending or threatened legal actions and proceedings, including those that arise in the ordinary course of its business, which may include employment matters, breach of contract disputes and stockholder litigation. Such actions and proceedings are subject to many uncertainties and to outcomes that are not predictable with assurance and that may not be known for extended periods of time. We record a liability in our consolidated financial statements for costs related to claims, including future legal costs, settlements and judgments, when we have assessed that a loss is probable and an amount can be reasonably estimated. If the reasonable estimate of a probable loss is a range, we record the most probable estimate of the loss or the minimum amount when no amount within the range is a better estimate than any other amount. We disclose a contingent liability even if the liability is not probable or the amount is not estimable, or both, if there is a reasonable possibility that a material loss may have been incurred. In the opinion of management, as of the date hereof, the amount of liability, if any, with respect to these matters, individually or in the aggregate, will not materially affect our consolidated results of operations, financial position or cash flows.

Our common stock trades publicly on the Nasdaq Capital Market under the symbol “DFFN.”

As of March 15, ~~2021,~~2022, there were ~~353~~343 record holders of our common stock. This does not include beneficial owners of our common stock whose stock is held in nominee or “street name”.

To date, we have not declared or paid any cash dividends on our common stock and do not intend to do so in the near future.

The information set forth in, Part III — Item 12 – ~~Security~~(Security Ownership of Certain Beneficial Owners and Management and Related Stockholder ~~Matters~~Matters) of this Annual Report is incorporated herein by reference to the extent required by Item 201(d) of Regulation S-K.

The information required by Item 6 of Form 10-K has been omitted from this Annual Report pursuant to the amendments to Regulation S-K adopted by the SEC on November 19, 2020.

This discussion and analysis contains information related to historical and prospective events intended to enable you to assess our ~~business,~~ financial condition and results of operations. The information contained in this discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes contained elsewhere in this Annual Report, as well as the risks and uncertainties discussed in under the heading, "Part I1A –— ~~Item 1A.~~ Risk ~~Factors~~ Factors.~~of this Annual Report.~~"

~~Since the founding of Diffusion LLC,~~In 2022, we ~~have been focused~~plan to continue and further our focus on the development of TSC for the treatment of hypoxia and as a platform to enhance standard-of-care treatment for conditions complicated by ~~hypoxia. Prior to 2020, these efforts generated~~hypoxia with a substantial amount of data related to TSC, including data related to chemistry, manufacturing, and controls, preclinical safety and/or efficacy data in a wide array of experimental models, single dose safety, tolerability, and pharmacokinetic data, and clinical data and other information related to TSC's potential as a supplement to standard-of-care treatment in GBM, peripheral artery disease, and stroke.particular near-term focus on hypoxic solid tumors.

~~• To evaluate TSC in clinical models designed to establish proof of concept for improvement in oxygenation.~~

The completion of the TSC COVID Trial in February 2021 provided the first multiple daily dose safety and tolerability data for TSC. We expect corresponding pharmacokinetic and other secondary endpoint data from this trial to be available early in the second quarter of 2021. Obtaining these data represents the first, major step in our ongoing efforts to implement our modified development strategy, intended to strategically gap-fill, supplement, and expand on our past development work in TSC, with the ultimate goal of maximizing the probability of regulatory approval and, if TSC is approved, commercial success.

~~During the next twelve months, we intend to continue to execute our strategy and accomplish the following principal, strategic objectives, all of which we expect to be able to fund with cash-on-hand:~~

~~• Complete the TSC Oxygenation Trials~~ ~~– As described in more detail under the heading —~~ ~~Our Anticipated Next Steps in the TSC Development Program: The TSC Oxygenation Trials~~, the next phase in our development plan is to evaluate TSC's effects in clinical models of oxygenation in an effort to establish a dose-response relationship. We expect to commence the TSC TCOM Trial before the end of March 2021 with data expected in the second quarter of 2021, and we intend to commence both the TSC DLCO Trial and TSC Induced Hypoxia Trial in the third quarter of 2021 with data expected from each study expected within two months of their respective completion.

~~• Initiate Phase 2 Trial of TSC in Hypoxia-related Indication~~ – We believe positive data from one or more of the three TSC Oxygenation Trials would provide definitive evidence of TSC's enhancement of oxygenation, whether through increased uptake in the lungs, enhanced delivery, increased utilization at the tissue level, or some combination thereof. Positive data from any of these studies, if obtained, will guide the subsequent steps of our development strategy focused on demonstrating the clinical and therapeutic benefits of TSC in relevant patient populations on the hypoxia continuum. In particular, if successful in one or more of the three TSC Oxygenation Trials, we intend to initiate a Phase 2, controlled, clinical outcome study evaluating TSC in one or more appropriate hypoxia-related indications, which we refer to as our Planned Phase 2 Hypoxia-related Indication Trial, by the first quarter of 2022.

~~• Continue to Improve Our Efficiency and Effectiveness~~ – This will include evaluating, refining, and improving our policies, procedures, and processes related to chemistry, manufacturing, and controls, quality assurance, information technology, intellectual property, human capital, and other areas, including as described in more detail under the headings, — ~~Products, Product Development, and Our Competition~~ ~~and —~~ ~~Our People and Human Capital Resources~~ in ~~Part I~~ – ~~Item 1. Business~~ ~~of this Annual Report.~~

~~Our Anticipated Next Steps in the TSC Development Program: The TSC Oxygenation Trials~~

Following completion of the TSC COVID Trial in February 2021, the next step we have planned in the development of TSC is the design and execution of a trilogy of clinical studies using short-term, experimental models to evaluate the clinical effects of TSC on oxygenation. As of March 15, ~~2021,~~2022, TSC has been administered to more than ~~180~~220 subjects ~~in our~~across 11 clinical trials. Data from these clinical trials ~~have contributed significantly to~~support our understanding of the safety, tolerability, pharmacokinetics and ~~pharmacokinetics~~pharmacodynamic effects of TSC. In addition, post hoc analyses of two ~~of our~~ prior studies involving patients with ~~peripheral artery disease~~PAD with claudication and unresected GBM tumors have provided preliminary ~~signals suggesting TSC's effect on oxygenation.~~evidence of TSC’s potential. However, ~~neither of~~the data available from these studies and the post hoc analyses of their outcomes are limited in several meaningful ways. For example, neither study was ~~statistically~~ powered to formally ~~evaluate~~demonstrate efficacy at a statistically significant level, there was no evaluation of whether TSC increased oxygenation in the target tissues in either study, and, ~~we therefore believe that further, robust clinical development of TSC requires a prospective~~in the GBM Trial, no dose exploration ~~of the relationship between the level of exposure (dose) and response (change in oxygenation).~~was conducted.

~~To this end,~~During 2021, to address these identified gaps in our TSC knowledge base, further inform our identification of potential indications appropriate for TSC, and guide the future of our TSC development program, we ~~plan to execute the~~designed and executed on our Oxygenation Trials. The Oxygenation Trials are a series of three short-term, ~~TSC Oxygenation Trials during 2021, each of which we expect~~clinical studies designed to ~~conduct in the U.S. and fund with cash-on-hand. We believe positive data from any or more~~provide clinical evidence of the ~~three~~relationship between TSC ~~Oxygenation Trials would provide evidence of a definitive effect~~dose and the effects on oxygenation, each specifically tailored to evaluate the effects of TSC on ~~oxygenation, whether through increased uptake in~~a different component of the ~~lungs, enhanced~~oxygen delivery ~~increased utilization at~~pathway. We completed the ~~tissue level, or some combination thereof. Positive data from any~~first of these studies, ~~if obtained, will also guide~~ the ~~subsequent steps~~TCOM Trial, in March 2021. The first participants and patients in the remaining two Oxygenation Trials, the Altitude Trial and the ILD-DLCO Trial, were dosed in November 2021 and December 2021, respectively. We currently expect to complete dosing in the Altitude Trial in the second quarter of 2022 and to complete dosing in the ILD-DLCO Trials in the middle of 2022 and, in each case, to report top-line results within two months of study completion.

In November 2021, based on the available preclinical and clinical data and the significant unmet medical need, we announced our intention to focus near-term efforts on developing TSC as an adjunct to standard of care therapy for hypoxic solid tumors. Through the combination of our ~~development strategy focused~~past experiences, new knowledge gained from our Oxygenation Trials and COVID Trial regarding TSC’s effects on ~~demonstrating~~oxygenation, dose response characteristics, pharmacokinetics, and pharmacodynamics, and further analyses and discussions of all available data with our Scientific Advisory Board and other external advisors, we believe we now have the ~~clinical~~necessary information to design the Hypoxic Solid Tumor Program to be more efficient and ~~therapeutic benefits~~increase our likelihood of success compared to the Company’s past efforts to develop TSC as a cancer treatment, which were terminated in ~~relevant patient populations across the hypoxia continuum.~~2019 due to financial constraints.

~~Assuming success in one or more~~As part of the ~~three TSC Oxygenation Trials, we expect to identify and announce the specific, hypoxia-related indications we will target in advancing TSC's development in the fourth quarter~~ongoing design of ~~2021 and intend to initiate~~ our Planned Phase 2 ~~Hypoxia-related Indication~~Hypoxic Tumor Trial – the first trial in our Hypoxic Solid Tumor Program which we currently expect to commence in the ~~first quarter~~second half of ~~2022.~~2022, subject to FDA feedback and the availability of clinical drug supply – we are currently drafting a trial protocol which we intend to file with the FDA. In parallel, we will continue our work to optimize the TSC manufacturing process and support the continued availability of high-quality drug product and undertake preclinical studies and other opportunities to continue developing data designed to demonstrate TSC’s potential uses in a broad spectrum of non-cancer indications.

As of December 31, ~~2020,~~2021, we had a cash and cash equivalents balance of ~~$18.5~~$37.3 million. We have incurred operating losses since inception, have not generated any product sales revenue, and have not achieved profitable operations. We incurred net losses of ~~$14.2~~$24.1 million and ~~$11.8~~$14.2 million for the years ended December 31, ~~2020~~2021 and ~~2019,~~2020, respectively. To date, we have funded our operations and short-term liquidity needs primarily through the issuance and sale of common stock, warrants to purchase common stock, convertible debt, and convertible preferred stock. We expect to continue funding our operations through similar means for the foreseeable future, assuming the availability of additional capital, though we may enter into strategic partnerships or other alternative transactions in order to fund our ongoing capital requirements.

Our accumulated deficit as of December 31, ~~2020,~~2021, was ~~$105.9~~$130.0 million and we expect to continue to incur substantial losses in future periods for the foreseeable future. We also anticipate that our operating expenses will increase substantially as we continue to advance the development of TSC, including any costs related to:

~~our ongoing and planned clinical trials, including the ongoing and planned TSC Oxygenation Trials and our Planned Phase 2 Hypoxia-related Indication Trial;~~

We intend to use our existing cash and cash equivalents for working capital and to fund the research and development of ~~TSC, including the TSC TCOM Trial, the TSC VO2 Trial, and the TSC DLCO Trial.~~TSC. We expect that our ~~existing~~ cash and cash equivalents as of December 31, ~~2020, combined with the $36.7 million of aggregate gross proceeds received by the Company in connection with the completion of the February~~ 2021 Offering (before deducting underwriting discounts and commissions and offering expenses payable by us) and the exercise of certain warrants to purchase common stock during the first quarter of 2021 prior to the date of this Annual Report, will enable us to fund our operating expenses and capital expenditure requirements ~~including expected costs related to the planned TSC Oxygenation Trials and our Planned Phase 2 Hypoxia-related Indication Trial~~ through 2023.

We have not yet generated any revenue from product sales. We do not expect to generate revenue from product sales for the foreseeable future.

R&D expenses include, but are not limited to, third-party CRO arrangements and employee-related expenses, including salaries, benefits, stock-based compensation, and travel expense reimbursement. R&D activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical studies. As we advance our product candidates, we expect the amount of R&D costs will continue to increase for the foreseeable future. R&D costs are charged to expense as incurred.

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.

G&A expenses consist principally of salaries and related costs for executive and other personnel, including stock-based compensation, other employee benefit costs, expenses associated with investment bank and other financial advisory services, and travel expenses. Other G&A expenses include, facility-related costs, communication expenses and professional fees for legal, patent prosecution and maintenance, consulting, accounting, and other professional services.

The Company recorded an income tax benefit of $0.4 million during the year ended December 31, 2021. The income tax benefit was due to the tax effect of the reduction in the deferred tax liability associated with the basis difference from the IPR&D indefinite lived intangible asset. The Company maintains a full valuation allowance against its deferred tax assets due to the Company’s history of losses as of December 31, 2021.

~~We recognize income tax benefit to utilize indefinite deferred tax liabilities as a source of income against indefinite lived portions of our deferred tax assets.~~ 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. ~~These limitations may, in certain cases, limit the amount of income tax benefit that can be utilized annually to offset taxable income or tax liabilities in future periods.~~ 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 year ended December 31, 2021 give rise to any further limitations.

Certain of our critical accounting policies require estimates that involve the application of significant judgment by management in selecting the appropriate assumptions in determining the estimate. By their nature, these judgments are subject to an inherent degree of uncertainty. We develop these judgments based on our historical experience, terms of existing contracts, our observance of trends in the industry, and information available from other outside sources, as appropriate. Actual results may differ from these judgments under different assumptions or conditions. Different, reasonable estimates could have been used for the current period. Additionally, changes in accounting estimates are reasonably likely to occur from period to period. Both of these factors could have a material impact on the presentation of our financial condition, changes in financial condition, or results of operations. We believe the accounting policies described below are among the most critical to aid in fully understanding and evaluating our financial statements, as they require estimates which involve our most subjective or complex judgments.

Our sole intangible asset as of December 31, 2020 consisted of DFN-529, which was acquired in 2016 pursuant to our merger with RestorGenex Corporation and iswas accounted for as an IPR&D intangible asset. The fair value of the IPR&D asset was determined as of the acquisition date using the cost approach, often referred to as current replacement cost, which establishes a value based on the cost of reproducing or replacing the asset. The cost approach was chosen as we were not able to estimate an income stream attributable to the IPR&D asset, given the fact that the related products had only completed limited preclinical and clinical trials and the timeline to commercial viability, if the FDA approval process were to be successful, iswas uncertain, would take a number of years, and the costs would behave been significant. AsIn the third quarter of 2021, we made a determination to no longer dedicate resources to our DFN-529 intangible asset and any future development efforts ~~for~~were abandoned. In connection with this decision, we concluded that DFN-529 continue, based on the facts and circumstances at the time of a future valuation for the purposes of assessing impairment, it is possible that the value for the IPR&D asset could be substantially reduced or eliminated, which could resultwas impaired in a maximum pre-tax charge to operations equal to the current carrying value of the asset, or $8.6 million as of December 31, 2020. We most recently tested the IPR&D intangible asset for impairment on October 1, 2020, which is our annual impairment testing date. In addition to our annual impairment testing, upon the occurrence of certain triggering events, we may determine that an interim IPR&D impairment analysis is warranted. There was no impairment to the IPR&D asset during the years ended December 31, 2020 and 2019.its entirety.

Results of Operations for Year Ended December 31, ~~2020~~2021 Compared to Year Ended December 31, ~~2019~~2020

The following table summarizes our results of operations for the years ended December 31, ~~2020~~2021 and ~~2019:~~2020:

Research and development expenses were $8.5 million during the year ended December 31, 2021 compared to $9.4 million during the year ended December 31, 2020, ~~compared~~a decrease of 10%. This decrease was due to ~~$6.6~~lower project spending due to the completion and/or wind-down of our clinical studies evaluating TSC in Covid-19, GBM, and stroke.

In the third quarter of 2021, the Company made a determination to no longer dedicate resources to the Company’s DFN-529 intangible asset and any future development efforts were abandoned. As a result, we recognized a nonrecurring $8.6 million non-cash impairment charge related to the write down of our DFN-529 IPR&D asset.

General and administrative expenses were $7.4 million during the year ended December 31, ~~2019, an increase of 42.4%. A significant portion of this increase was attributable~~2021 compared to the TSC COVID Trial, which was initiated in September 2020, and our related ramp-up, including a $1.1 million increase in manufacturing costs and a $2.2 million increase in clinical trial and other related R&D expenses. Other R&D costs, including share based compensation, also increased by $0.3 million. These increases were slightly offset by decreases of $0.3 million and $0.2 million related to the wind-down of our TSC GBM Trial and our TSC Stroke Trial, respectively and a decrease in salaries and wages expenses of $0.3 million.

~~General and administrative expenses were~~ $6.4 million during the year ended December 31, 2020, ~~compared~~an increase of 16%. The increase was primarily due to ~~$4.8 million during~~increased headcount resulting in higher compensation expense and other costs associated with the hiring of new employees as well as an increase in expense related to consulting services.

For the year ended December 31, ~~2019,~~2021, we recognized an ~~increase~~income tax benefit of ~~33.3%. The increase in G&A expense was primarily~~$0.4 million due to ~~a $0.7 million increase~~the tax effect of the reduction in ~~professional fees and a $0.9 million increase in salaries, wages, and stock-based compensation expense, including non-recurring expenses related to~~ the ~~retirement, resignation, and separation of our former Chief Executive Officer~~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 ~~2020.~~

Interest income increased slightly for the year ended December 31, 2020 compared to the year ended December 31, 2019 on an absolute basis due to our having a larger cash and cash equivalents balance and therefore earning more interest during the year ended December 31, 2020 compared to the year ended December 31, 2019.

2021. For the year ended December 31, 2020, we recognized an income tax benefit of $1.7 million to reflect the utilization of indefinite deferred tax liabilities as a source of income against indefinite lived portions of ~~the~~ our deferred tax assets. ~~As a result of a deemed change in ownership under~~Prior to 2021, we recognized the ~~provisions of Section 382 of the Tax Code, the cumulative benefit of our NOLs was remeasured during 2019 resulting in the reversal of an~~full income tax benefit allowed by the 2017 Tax Act to utilize indefinite deferred tax liabilities as a source of ~~$0.4 million recorded in 2018. Accordingly, net~~income against indefinite lived portions of ~~a $0.1 million benefit related to losses incurred during the year, we recognized an income~~our deferred tax ~~expense of $0.3 million for the year ended December 31, 2019.~~assets.

The following table summarizes our working capital as of December 31, ~~2020~~2021 and ~~2019:~~2020:

We expect to continue to incur net losses for the foreseeable future. We intend to use our existing cash and cash equivalents for working capital and to fund the research and development of TSC and our other product candidates ~~included the TSC Oxygenation Studies and our Planned Phase 2 Hypoxia-related Indication Trial,~~ through 2023.

The following table sets forth our cash flows for the years ended December 31, ~~2020~~2021 and ~~2019:~~2020:

For the year ended December 31, ~~2020,~~2021, net cash used in operating activities increased ~~$3.7~~$0.9 million, or ~~37.5%,~~7% compared to the year ended December 31, ~~2019.~~2020.

Net cash used in operating activities of $14.5 million during the year ended December 31, 2021 was primarily attributable to our net loss of $24.1 million and a $0.4 million change in deferred income taxes. These amounts were partially offset by a $8.6 million non cash impairment charge in connection with the write down of our DFN-529 IPR&D asset, our net change in operating assets and liabilities of $0.4 million, and non-cash charges comprised of $0.9 million of stock-based compensation expense, the loss on the disposal of property and equipment of $0.1 million and depreciation expense of $0.1 million.

Net cash used in operating activities of $13.6 million during the year ended December 31, 2020 was primarily attributable to our net loss of $14.2 million and a $1.7 million change in deferred income taxes. This amount was offset by our net change in operating assets and liabilities of $1.5 million, and non-cash charges comprised of $0.7 million of stock-based compensation expense and depreciation expense of $0.1 million.

Net cash used in operating activities of $9.9 million during the year ended December 31, 2019 was primarily attributable to our net loss of $11.8 million and a $0.3 million change in deferred income taxes. This amount was offset by our net change in operating assets and liabilities of $1.0 million, and non-cash charges comprised of $0.5 million of stock-based compensation expense and depreciation expense of $0.1 million.

~~Cash flows~~During the year ended December 31, 2021, we received $4,000 from ~~investing activities represent our sources~~the sale of property and ~~uses of cash from our investments, including purchases and sales of equipment and other assets. During each of~~equipment. For the ~~years~~year ended December 31, 2020, ~~and 2019,~~ we had no ~~such~~ cash ~~flows.~~flows from investing activities.

For the year ended December 31, ~~2020,~~2021, net cash provided by financing activities increased ~~$1.8~~$15.4 million, or ~~11.5%,~~86% compared to the year ended December 31, ~~2019.~~2020.

Net cash provided by financing activities of $33.3 million during the year ended December 31, 2021 was attributable to net proceeds of $31.1 million received from the sale of our common stock in connection with the February 2021 Offering and $2.2 million in proceeds received from the exercise of previously issued common stock warrants.

Net cash provided by financing activities of $17.9 million during the year ended December 31, 2020 was primarily attributable to the $10.8 million in proceeds (net of underwriting discounts and commissions payable by us) received in connection with the May 2020 Offering and $8.0 million in proceeds received in connection with the exercise of common stock warrants stock during the year. These cash inflows were offset in part by the payment of $1.0 million in additional financing costs.

Net cash provided by financing activities of $16.0 million during the during the year ended December 31, 2019 was primarily attributable to the $12.3 million in aggregate proceeds (net of underwriting discounts and commissions payable by us) received in connection with the May 2019 Offering, the November 2019 Offering, and the December 2019 Offering and $3.9 million in proceeds received in connection with the exercise of common stock warrants during the year. These cash inflows were offset in part by the payment of $0.2 million in additional financing costs.

We expect to continue to incur substantial expenses and generate significant operating losses as we continue to pursue our business strategy of developing TSC. Our operations have consumed substantial amounts of cash since inception and we expect to continue to spend substantial amounts of cash to advance the clinical development of TSC ~~DFN-529,~~ and ~~our~~any other product ~~candidates.~~candidates we may in-license or acquire in the future. As of the date of this Annual Report, most of our cash resources for clinical development are dedicated to our ongoing and planned ~~TSC Oxygenation Trials and our Planned Phase 2 Hypoxia-related Indication Trial.~~clinical trials. While we believe we have adequate cash resources to continue operations through 2023, we anticipate that we will need additional funding in order to complete development of TSC which, if available, could be obtained through additional capital raising transactions, entry into strategic partnerships or collaborations, or alternative financing arrangements.

As of December 31, ~~2020,~~2021, we did not have any credit facilities in place under which we could borrow funds or any other sources of committed capital. In the future, we may seek to raise additional funds through various sources. However, we can give no assurances that we will be able to secure additional sources of funds to support our operations, or if such funds are available to us, that such additional financing will be sufficient to meet our needs or be on terms acceptable to us. This risk may increase if economic and market conditions deteriorate. If we are unable to obtain additional financing when needed, we may need to terminate, significantly modify, or delay the development of TSC or our product candidates, or we may need to obtain funds through collaborations or otherwise on terms that may require us to relinquish rights to our technologies or product candidates that we might otherwise seek to develop or commercialize independently. If we are unable to raise adequate additional capital as and when required in the future, we could be forced to cease development activities and terminate our operations, and you could experience a complete loss of your investment.

To the extent that we raise additional capital in the future through the sale of our common stock or securities convertible or exchangeable for common stock such as common stock warrants, convertible preferred stock, or convertible debt instruments, the interests of our current stockholders may be diluted or otherwise impacted. In particular, specific rights granted to future holders of preferred stock or convertible debt securities may include voting rights, preferences as to dividends and liquidation, conversion and redemption rights, sinking fund provisions, and restrictions on our ability to merge with or sell our assets to a third party. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

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.

The information in Note 3, Basis of Presentation and Summary of Significant Accounting Policies to our consolidated financial statements set forth in, "Part II — Item 8 — Financial Statements" of this Annual Report is incorporated herein by reference.

As a "smaller reporting company" (as such term is defined in Rule 12b-2 of the Exchange Act), we are not required to provide the information described in Item 305 of Regulation S-K and, accordingly, the information required by Item 6 of Form 10-K has been omitted from this Annual Report.

3. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements of the Company have been prepared in accordance with GAAP. Any reference in these notes to applicable guidance is meant to refer to GAAP as found in the Accounting Standards Codification and Accounting Standards Updates of the Financial Accounting Standards Board.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period.

On an ongoing basis, the Company evaluates its estimates using historical experience and other factors, including the current economic environment. Significant items subject to such estimates are assumptions used for purposes of determining stock-based compensation and accounting for research and development activities. Management believes its estimates to be reasonable under the circumstances. Actual results could differ significantly from those estimates.

5258

DIFFUSION PHARMACEUTICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fair Value of Financial Instruments

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

Concentration of Credit Risk

Financial instruments that potentially expose the Company to concentrations of credit risk consist principally of cash on deposit with multiple financial institutions, the balances of which frequently exceed federally insured limits.

Cash and Cash Equivalents

The Company considers any ~~highly liquid~~highly-liquid investments, such as money market funds, with an original maturity of three months or less to be cash and cash equivalents.

Property and Equipment

The Company records property and equipment at cost less accumulated depreciation and amortization. Costs of renewals and improvements that extend the useful lives of the assets are capitalized. Maintenance and repairs are expensed as incurred. Depreciation is recognized on a straight-line basis over the estimated useful lives of the assets, which generally range from 2 to 15 years. The Company amortizes leasehold improvements over the shorter of the estimated useful life of the asset or the term of the related lease. Upon retirement or disposition of assets, the costs and related accumulated depreciation and amortization are removed from the accounts with the resulting gains or losses, if any, reflected in results of operations. In November 2021, the Company terminated the lease of its prior corporate headquarters and in connection with the termination the Company disposed of all of its related property and equipment.

~~Long-Lived Assets~~

Long-lived assets are reviewed for potential impairment whenever events indicate that the carrying amount of such assets may not be recoverable. The Company does this by comparing the carrying value of the long-lived assets with the estimated future undiscounted cash flows expected to result from the use of the assets, including cash flows from disposition. If it is determined an impairment exists, the asset is written down to its estimated fair value. The Company has not recognized any impairment of long-lived assets during the years ended December 31, 2020 and 2019.

Intangible Asset

~~The~~In the third quarter of 2021, the Board of Directors made a determination to no longer dedicate financial resources to the Company's DFN-529 intangible asset and any future internal development efforts were abandoned. In connection with this decision, the Company ~~has an indefinite-lived IPR&D asset, DFN-529, which has~~concluded that DFN-529 was impaired in its entirety and as such, the Company recognized a ~~balance~~non-cash impairment charge of $8.6 million ~~at both December 31, 2020 and December 31, 2019. DFN-529 is a PI3K/Akt/mTOR pathway inhibitor~~during the third quarter of 2021. The abandonment also resulted in ~~preclinical development for oncology.~~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.

Intangible assets deemed to have indefinite lives are not amortized but rather are assessed for impairment annually on October 1 of the Company’s fiscal year or more frequently if impairment indicators exist. There was no impairment to the Company’s DFN-529 intangible asset recognized during the years ended December 31, 2020 and 2019.

Research and Development

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

At the end of the reporting period, the Company compares payments made to ~~third-party~~third-party service providers to the estimated progress toward completion of the research or development objectives. Such estimates are subject to change as additional information becomes available. Depending on the timing of payments to the service providers and the progress that the Company estimates has been made as a result of the services provided, the Company may record net prepaid or accrued expenses relating to these costs.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

~~DIFFUSION PHARMACEUTICALS INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

Patent Costs

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

Income Taxes

As a corporation, the Company uses the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Company recognizes the benefit of an uncertain tax position that it has taken or expects to take on its income tax return it files, if such a position is more likely than not to be sustained.

FASB ASC ~~740-10~~Subtopic 740-10,Accounting for Uncertainty of Income Taxes, (“ASC 740-10”) defines the criterion an individual tax position must meet for any part of the benefit of the tax position to be recognized in financial statements prepared in conformity with GAAP. The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not such tax position will be sustained on examination by the taxing authorities, based solely on the technical merits of the respective tax position. The tax benefits recognized in the financial statements from such a tax position should be measured based on the largest benefit having a greater than ~~50.0%~~50% likelihood of being realized upon ultimate settlement with the tax authority. In accordance with the disclosure requirements of ASC ~~740-10,~~740-10, the Company’s policy on income statement classification of interest and penalties related to income tax obligations is to include such items as part of total interest expense and other expense, respectively.

Stock-based Compensation

The Company measures stock-based awards at grant-date fair value and records compensation expense on a straight-line basis over the vesting period of the award. The Company uses the Black-Scholes Model to value its stock option awards. Estimating the fair value of stock option awards requires management to apply judgment and make estimates, including the volatility of the Company’s common stock, the expected term of the Company’s stock options, the expected dividend yield and the fair value of the Company’s common stock on the measurement date. As a result, if factors change and management uses different assumptions, stock-based compensation expense could be materially different for future awards.

For certain stock option grants, the expected term was estimated using the “simplified method” for employee options as the Company has limited historical information to develop reasonable expectations about future exercise patterns and post vesting employment termination behavior for its stock option grants. The simplified method is based on the average of the vesting tranches and the contractual life of each grant. During the year ended December 31, 2020, it became apparent that the expected term of the Company's stock options was commensurate with the contractual life (i.e. 10 years) of the stock option and therefore the Company began to use the contractual life as the expected term.

For stock price volatility, the Company uses a combination of ~~their~~its own historical stock price and comparable public companies as a basis for its expected volatility to calculate the fair value of option grants. The Company assumes no dividend yield because dividends are not expected to be paid in the near future, which is consistent with the Company’s history of not paying dividends. The risk-free interest rate is based on U.S. Treasury notes with a term approximating the expected ~~life~~term of the option. The Company accounts for forfeitures in the periods they occur.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Net Loss Per Common Share

Basic net loss per share is computed by dividing net loss ~~attributable~~applicable to common stockholders by the weighted average number of shares of common stock outstanding during each period. Diluted net loss per share includes the effect, if any, from the potential exercise or conversion of securities, such as convertible debt, convertible preferred stock, common stock warrants, stock options and unvested restricted stock that would result in the issuance of incremental shares of common stock. In computing the basic and diluted net loss per share applicable to common stockholders, the weighted average number of shares remains the same for both calculations due to the fact that when a net loss exists, dilutive shares are not included in the calculation as the impact is anti-dilutive.

~~DIFFUSION PHARMACEUTICALS INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

	December 31,				December 31,
	2020		2019		2021		2020
Common stock warrants		9,100,112		22,385,141		6,499,469		9,100,112
Stock options		2,240,204		309,276		3,626,223		2,240,204
Unvested restricted stock units						275,450		153,000
		11,340,316		22,694,417		10,401,142		11,493,316

Recently Issued But Not Yet Adopted Accounting Pronouncements

In ~~December 2019,~~ June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses, Measurement of Credit Losses on Financial Instruments (Topic 326). The standard amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. For available-for-sale debt securities, entities will be required to recognize an allowance for credit losses rather than a reduction in carrying value of the asset. Entities will no longer be permitted to consider the length of time that fair value has been less than amortized cost when evaluating when credit losses should be recognized. This new guidance is effective for the Company as of January 1, 2022. The Company is currently evaluating the impact of this ASU but does not expect that adoption of this standard will have a material impact on its consolidated financial statements and related disclosures.

Recently Adopted Accounting Pronouncements

In December 2019, the FASB issued ASU No. ~~2019-12, Income~~2019-12, “Income Taxes (Topic ~~740)~~740): Simplifying the Accounting for Income Taxes.” This guidance applies to all entities and aims to reduce the complexity of tax accounting standards while enhancing reporting disclosures. This guidance is effective for fiscal years beginning after December 15, 2020 and interim periods therein. Early adoption is permitted for any annual periods for which financial statements have not been issued and interim periods therein. The Company ~~is currently analyzing the impact of ASU No. 2019-12 on the consolidated financial statements.~~

~~Recently Adopted Accounting Pronouncements~~

~~In August 2018, the FASB issued ASU 2018-03,~~ ~~Disclosure Framework- Changes to the Disclosure Requirements for Fair Value Measurements,~~ ~~which changes the fair value measurement disclosure requirements of ASC 820. The goal of the ASU is to improve the effectiveness of ASC 820's disclosure requirements. The Company~~ adopted this standard in January ~~2020~~ 2021 and the adoption did not have a material impact on its related disclosures.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4.~~Property and Equipment~~

~~Property and equipment consists of the following:~~

December 31,

2020

2019

Laboratory equipment
$ 182,357 $ 182,357
Furniture and office equipment
151,442 151,442
Leasehold improvements
430,000 430,000
Total property and equipment
763,799 763,799
Less: accumulated depreciation and amortization
(614,601 ) (511,433 )
Property and equipment, net
$ 149,198 $ 252,366

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

5. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following:

December 31,

2020

2019

Accrued payroll and payroll related expenses
$ 653,899 $ 182,708
Accrued professional fees
31,809 48,338
Accrued clinical studies expenses
1,055,398 57,378
Other
35,364 70,108
Total
$ 1,776,470 $ 358,532

~~DIFFUSION PHARMACEUTICALS INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

	December 31,
	2021		2020
Accrued payroll and payroll related expenses	$	879,971	$	653,899
Accrued professional fees		247,704		31,809
Accrued clinical studies expenses		786,579		1,055,398
Other		65,935		35,364
Total	$	1,980,189	$	1,776,470

6.5. Commitments and Contingencies

Office Space Lease Commitment

On November 8, 2021, the Company entered into a Deed of Lease Termination Agreement with the Carlton Landlord providing for the early termination of the Carlton Lease related to the Company's prior corporate headquarters. The Carlton Lease was previously scheduled to expire on April 30, 2022. In connection with the termination, the Company ~~has~~made a ~~non-cancelable operating lease for~~one-time payment to the Carlton Landlord of approximately $14,000, net of a security deposit subsequently returned in accordance with the Carlton Lease. In lieu of the fixed office and laboratory space ~~in Charlottesville, Virginia, which began in April 2017 and, as of December 31, 2020, has a remaining lease term of approximately 1.3 years. The discount rate used~~previously available to ~~account for~~us under the ~~Company's operating lease is the Company’s estimated incremental borrowing rate of 10.0%. The original term of the lease ends in the second quarter of 2022 and~~Carlton Lease, the Company has ~~an option~~entered into short term agreements to ~~extend for another 5 years. This option to extend was not recognized as part of the Company's measurement of the right-of-use asset~~utilize membership-based co-working space in both Charlottesville, Virginia and ~~operating lease liability as of December 31, 2020.~~Philadelphia, Pennsylvania.

Rent expense related to the Company's operating lease for both the years ended December 31, ~~2020~~2021 and ~~2019~~2020 was approximately $0.1 million. ~~Future minimum rental payments under the Company's non-cancelable operating lease at December 31, 2020 were as follows:~~

Rental
Commitments

2021
$ 118,519
2022
39,735
Total
158,254
Less: imputed interest
(9,092 )
$ 149,162

Research and Development Arrangements

In the course of normal business operations, the Company enters into agreements with universities and contract research organizations, or CROs, to assist in the performance of research and development activities and contract manufacturers to assist with chemistry, manufacturing, and controls related expenses. Expenditures to CROs represent a significant cost in clinical development for the Company. The Company could also enter into additional collaborative research, contract research, manufacturing, and supplier agreements in the future, which may require upfront payments and long-term commitments of cash.

Defined Contribution Retirement Plan

The Company has established ~~its 401(k) Plan, which~~a 401(k) defined contribution plan that covers all employees who qualify under the terms of the plan. Eligible employees may elect to contribute to the ~~401(k)~~401(k) Plan up to ~~90.00%~~90% of their compensation, limited by the IRS-imposed maximum. The Company provides a safe harbor match with a maximum amount of ~~4.0%~~4% of the participant’s compensation. The Company made matching contributions under the ~~401(k)~~401(k) Plan of approximately ~~$56,000~~$75,000 and $68,000 for the years ended December 31, ~~2020~~2021 and ~~2019,~~2020, respectively.

5662

DIFFUSION PHARMACEUTICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Legal Proceedings

On August 7, 2014, a complaint was filed in the Superior Court of Los Angeles County, California by Paul Feller, the former Chief Executive Officer of the ~~Company's~~Company’s legal predecessor under the caption Paul Feller v. RestorGenex Corporation, Pro Sports & Entertainment, Inc., ProElite, Inc. and Stratus Media Group, GmbH (Case No. ~~BC553996)~~BC553996). The complaint asserts various causes of action, including, among other things, promissory fraud, negligent misrepresentation, breach of contract, breach of employment agreement, breach of the covenant of good faith and fair dealing, violations of the California Labor Code and common counts. The plaintiff is seeking, among other things, compensatory damages in an undetermined amount, punitive damages, accrued interest and an award of attorneys’ fees and costs. On December 30, 2014, the Company filed a petition to compel arbitration and a motion to stay the action. On April 1, 2015, the plaintiff filed a petition in opposition to the Company’s petition to compel arbitration and a motion to stay the action. After a related hearing ~~for the petition and motion~~ on April 14, 2015, the ~~Court~~court granted the Company’s petition to compel arbitration and a motion to stay the action. On January 8, 2016, the plaintiff filed an arbitration demand with the American Arbitration Association. On November 19, 2018 at an Order to Show Cause Re Dismissal Hearing, the ~~Court~~court found sufficient grounds not to dismiss the case and an arbitration hearing was scheduled, originally for November ~~2020. In August~~ 2020but later postponed due to the ~~ongoing COVID-19~~COVID-19 pandemic and related restrictions on gatherings in the State of ~~California,~~California. In addition, following the November 2018 hearing, an automatic stay was placed on the arbitration ~~hearing~~in connection with the plaintiff filing for personal bankruptcy protection. On October 22, 2021, following a determination by the bankruptcy trustee not to pursue the claims and release them back to the plaintiff, the parties entered into a stipulation to abandon arbitration and return the matter to state court. A case management conference was ~~postponed~~held on February 23, 2022 at which a trial date of May 24, 2023 was set, and the parties have agreed to ~~August 16, 2021.~~ stipulate to mediation in advance of the trial.

The Company believes the claims in this matter isare without merit and intends to defend ~~the arbitration~~itself vigorously. However, at this stage, the Company is unable to predict ~~its~~the outcome and ~~the~~ possible loss or range of loss, if any, associated with its resolution or any potential effect the matter may have on the Company’s financial position. Depending on the outcome or resolution of this matter, it could have a material effect on the Company’s financial ~~position.~~position, results of operations and cash flows.

7.6. Stockholders' Equity and Common Stock Warrants

~~2020~~2021 Common Stock Offering

In ~~May 2020,~~ February 2021, the Company completed the February 2021 Offering in which it offered and sold 33,658,538 shares of its common stock in an underwritten, public offering for a purchase price to the public of $1.025 per share, inclusive of shares offered and sold pursuant to the exercise in full by the underwriter of its 30-day option to purchase additional shares. The February 2021 Offering resulted in aggregate net proceeds to the Company of $31.1 million, after deducting underwriting commissions, discounts, and expenses. In addition, at the closings of the February 2021 Offering, the Company issued to designees of the underwriter of the transaction warrants to purchase up to an aggregate of 1,682,927 shares of common stock to designees. The underwriter warrants have an exercise price of $1.28125 per share and a term of five years from the date of issuance.

2020 Common Stock Offering

In May 2020, the Company completed the May 2020 Offering, a public offering of 11,428,572 shares of common stock for a purchase price of $1.05 per share for net proceeds of $10.3 million after deducting commissions, discounts, and other offering costs. In addition, at the closing of the May 2020 Offering, the Company issued warrants to purchase up to 571,429 shares of common stock to designees of the placement agent for the May 2020 Offering. The placement agent's warrants have an exercise price of $1.3125 per share and a term of five years from the date of issuance.

Additionally, also in May 2020, the Company entered into a warrant exercise agreement with an investor who held the Prior Warrant, a previously outstanding warrant to purchase up to an aggregate of 5,000,000 shares of our common stock at an exercise price of $0.35 per ~~share(the Prior Warrant).~~share. In consideration for the exercise of the Prior Warrant for cash and an additional $0.125 per each share of common stock ~~resulting from~~in the ~~exercise,~~Prior Warrant being exercised, the exercising investor received new unregistered warrants to purchase up to an aggregate of 5,000,000 shares of common stock in a private placement. The warrants are exercisable immediately at an exercise price of $0.5263 per share and exercisable until November 8, 2025. ~~The~~During the year ended December 31, 2020, the Company recognized a deemed dividend of $2.0 million to reflect the consideration given as an inducement for the investor to exercise the warrants. This deemed dividend iswas recorded in the Company's consolidated statement of operations during the year ended December 31, 2020 as an increase to the net loss ~~attributable~~applicable to common stockholders for purposes of computing net loss per share, basic and diluted.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

~~2019 Common Stock Offerings~~

In December 2019, Company completed the December 2019 Offering, an offering of 6,266,787 shares of its common stock and warrants to purchase 6,266,787 shares of common stock. The shares of common stock and warrants were sold for a combined purchase price of $0.5585 per share for net proceeds of $3.0 million. The December 2019 Offering warrants are exercisable beginning on the date of their issuance until June 13, 2025 at an initial exercise price equal to $0.4335 per share.

In addition, at the closing of the December 2019 Offering, the Company issued warrants to purchase up to 313,339 shares of common stock to designees of the placement agent. The placement agent's warrants have an exercise price of $0.6981 per share and a term of five years from the date of issuance.

~~DIFFUSION PHARMACEUTICALS INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

In November 2019, the Company completed the November 2019 Offering, a registered direct public offering of 5,104,429 shares of its common stock, and 6,324,143 pre-funded warrants each to purchase one share of common stock, together with warrants to purchase up to 22,857,144 shares of common stock at a combined public offering price of $0.35 per share and associated warrants for total net proceeds of $3.3 million. The warrants were issued with an exercise price of $0.35 per warrant and are exercisable beginning on their date of issuance. Of the warrants issued, 11,428,572 have a term of 18 months and 11,428,572 have a term of 5 years. During the year ended December 31, 2019, 11,091,716 of those warrants were exercised for additional proceeds of $3.9 million.

In addition, at the closing of the November 2019 Offering, the Company issued warrants to purchase up to 571,429 shares of common stock to designees of the placement agent. The placement agent's warrants have an exercise price of $0.4375 per share and a term of five years from the date of issuance.

In May 2019, the Company completed the May 2019 Offering, a registered direct public offering of 1,317,060 shares of common stock and a private placement of warrants to purchase 1,317,060 shares of common stock. The shares of common stock and warrants were sold for a combined purchase price of $4.895 for total net proceeds of $5.6 million. The warrants are exercisable beginning on the date of their issuance until November 29, 2024 at an initial exercise price equal to $5.00.

In addition, at the closing of the May 2019 Offering, the Company issued warrants to purchase up to 65,853 shares of common stock to designees of the placement agent. The placement agent's warrants have an exercise price of $6.11875 per share, a term of 5 years from the date of issuance and otherwise substantially similar terms to the form of the investor warrant.

Common Stock Warrants

During its evaluation of equity classification for the Company's common stock warrants issued in 2020 and 2019, the Company considered the conditions as prescribed within ASC ~~815-40,~~815-40, Derivatives and Hedging, Contracts in an Entity’s own Equity. The conditions within ASC ~~815-40~~815-40 are not subject to a probability assessment. The warrants do not fall under the liability criteria within ASC 480 Distinguishing Liabilities from Equity as they are not puttable and do not represent an instrument that has a redeemable underlying security. The warrants do meet the definition of a derivative instrument under ASC 815, but are eligible for the scope exception as they are indexed to the Company’s own stock and would be classified in permanent equity if freestanding.

As of December 31, ~~2020,~~2021, the Company had the following warrants outstanding to acquire shares of its common stock:

	Outstanding		Range of exercise price per share			Expiration dates	Outstanding		Range of exercise price per share			Expiration dates
Common stock warrants issued in 2017 related to Series A convertible preferred stock offering		903,870		$33.30		March 2022		903,870		$33.30		March 2022
Common stock warrants issued in 2018 related to the January 2018 common stock offering		1,181,421	$12.00	-	$15.00	January 2023		1,181,421	$12.00	-	$15.00	January 2023
Common stock warrants issued related to the May 2019 Offering		1,382,913	$5.00	-	$6.11875	May and December 2024		1,382,913	$5.00	-	$6.11875	May and December 2024
Common stock warrants issued related to the November 2019 Offering		497,140	$0.35	-	$0.4375	May 2024		213,570		$0.35		May 2024
Common stock warrants issued related to the December 2019 Offering		313,339	$0.4335	-	$0.6981	December 2024 and June 2025		313,339		$0.6981		December 2024
Common stock warrants issued related to the May 2020 Offering		571,429		$1.31		March 2025		571,429		$1.3125		March 2025
Common stock warrants issued related to the May 2020 Investor Warrant Exercise		4,250,000	$0.5263	-	$0.5938	November 2025		250,000		$0.5938		November 2025
Common stock warrants issued related to the February 2021 Offering								1,682,927		$1.28		February 2026
		9,100,112						6,499,469

During the year ended December 31, 2021, 53,570 warrants expired and 4,230,000 warrants were exercised for proceeds of approximately $2.2 million. During the year ended December 31, 2020, no0 warrants expired and 19,106,504 warrants were exercised for gross proceeds of $8.0 million. ~~During the year ended December 31, 2019, 1,767 warrants expired and 17,415,859 warrants were exercised for net proceeds of $3.9 million.~~

5864

DIFFUSION PHARMACEUTICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8.7. Stock-Based Compensation

2015 Equity Plan

The 2015 Equity Plan provides for increases to the number of shares reserved for issuance thereunder each January 1 equal to 4.0% of the total shares of the Company’s common stock outstanding as of the immediately preceding December 31, unless a lesser amount is stipulated by the Compensation Committee of the Company's board of directors. Accordingly, ~~2,560,618~~4,076,571 shares were added to the reserve as of January 1, ~~2021, which~~2022. All such shares may be issued in connection with the grant of stock-based awards, including stock options, restricted stock, restricted stock units, stock appreciation rights and other types of awards as deemed appropriate, in each case, in accordance with the terms of the 2015 Equity Plan. As of December 31, ~~2020,~~2021, there were no580,925 shares of common stock available for future issuance under the 2015 Equity Plan. Further, the Company granted options to purchase 270,000 shares of common stock to employees during the year ended December 31, 2020 that were granted outside of the 2015 Equity Plan as an inducement material to the employee’s acceptance of employment with the Company in accordance with Nasdaq Listing Rule 5635(c)(4). Generally, the options have a ten ~~(10)~~ (10) year contractual term and vest in equal monthly installments over three ~~(3)~~ (3) years.

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

	Year ended December 31,				Year ended December 31,
	2020		2019		2021		2020
Research and development	$	164,791	$	54,155	$	154,041	$	164,791
General and administrative		571,328		461,607		743,219		571,328
Total stock-based compensation expense	$	736,119	$	515,762	$	897,260	$	736,119

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

	Number of Options			Weighted average exercise price per share		Weighted average remaining contractual life (in years)		Aggregate Intrinsic Value		Number of Options			Weighted average exercise price per share		Weighted average remaining contractual life (in years)		Aggregate Intrinsic Value
Balance at January 1, 2019		203,736		$	88.14
Balance at January 1, 2020											309,276		$	55.78
Granted											1,931,100			0.68
Expired											(172	)		142.50
Balance at December 31, 2020											2,240,204		$	8.28			$	289,067
Granted		117,270			2.62						1,815,767			0.89
Forfeited		(11,583	)		83.81						(429,748	)		1.37
Expired		(147	)		276.00
Balance at December 31, 2019		309,276		$	55.78		6.98		—
Granted		1,931,100			0.68
Expired		(172	)		142.50
Outstanding at December 31, 2020		2,240,204		$	8.28		8.90	$	289,067
Exercisable at December 31, 2020		1,129,733		$	15.64		8.28	$	219,010
Vested and expected to vest at December 31, 2020		2,240,204		$	8.28		8.90	$	289,067
Outstanding at December 31, 2021											3,626,223			5.40		8.52		—
Exercisable at December 31, 2021											2,140,524		$	8.58		8.09		—
Vested and expected to vest at December 31, 2021											3,626,223		$	5.40		8.52		—

The weighted average grant date fair value of stock option awards granted was ~~$0.64~~$0.89 and ~~$2.16~~$0.64 during the years ended December 31, ~~2020~~2021 and ~~2019,~~2020, respectively. The total fair value of options vested during the years ended December 31, ~~2020~~2021 and ~~2019~~2020 were $0.8 million and $0.7 million, ~~and $0.6 million,~~ respectively. NoNaN options were exercised during any of the periods presented. At December 31, ~~2020,~~2021, there was ~~$0.8~~$1.1 million of unrecognized compensation cost related to unvested options that will be recognized as expense over a weighted-average period of ~~2.2~~1.7 years. During the year ended December 31, 2021, the Company granted 385,267 performance-based stock options with an exercise price of $1.11 per share, subject to vesting based on the satisfaction of specified performance criteria. Compensation expense for the performance-based awards is recorded over the estimated service period for each milestone when the performance conditions are deemed probable of achievement. The Company recorded stock-based compensation expense of approximately $0.1 million year ended December 31, 2021, for service-based awards with performance conditions deemed probable of achievement and/or achieved. For performance-based awards containing performance conditions which were not deemed probable of achievement at December 31, 2021, no stock compensation expense was recognized and any previously recognized expense related to those awards originally deemed probable was reversed.

5965

DIFFUSION PHARMACEUTICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The grant date fair value of employee stock options is determined using the Black-Scholes Model. The following assumptions were used during the years ended December 31, ~~2020~~2021 and ~~2019:~~2020:

	2020			2019			2021			2020
Expected term (in years)	5.31	—	10.00	5.25	—	5.77		10		5.31	—	10
Risk-free interest rate	0.4%	—	1.7%	1.9%	—	2.5%	1.3%	—	1.7%	0.4%	—	1.7%
Expected volatility	113.4%	—	124.8%	112.4%	—	114.4%	122.6%	—	125.8%	113.4%	—	124.8%
Dividend yield	—	—	—	—	—	—		0%			0%

Restricted Stock Unit Awards

~~During the year ended December 31, 2020, the~~The Company ~~granted 153,000~~issues restricted stock ~~units~~("RSU") to newly elected, non-executive members of the board of directors ~~of the Company. The weighted average grant date fair value of the restricted stock units granted during the year ended December 31, 2020 was $0.65. The shares begin to~~that vest in six, tri-monthly installments beginning 18 months after the respective grant date. The fair value of a RSU is equal to the fair market value price of the Company’s common stock on the date of grant. RSU expense is recorded on a straight-line basis over the service period.

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

	Number of Units			Weighted average grant date fair value
Balance at January 1, 2021		153,000		$	0.65
Granted		138,800			0.72
Vested⁽¹⁾		(16,350	)		0.51
Outstanding at December 31, 2021		275,450		$	0.70

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

The Company recognized approximately $54,000 and $18,000 in expense related to these units during the ~~year~~years ended December 31, ~~2020.~~2021 and December 2020, respectively. At December 31, ~~2020,~~2021, there was approximately ~~$82,000~~$0.1 million of unrecognized compensation cost that will be recognized over a weighted average period of ~~2.4~~2.12 years.

9.8. Income Taxes

Since inception, the Company has incurred net losses, and until 2018, had not recorded any U.S. federal or state income tax benefits for the losses. In 2018, as a result of the change in net operating loss carryforward period associated with the 2017 Tax Act, the Company recognized an income tax benefit to reflect the adjustment allowed by the 2017 Tax Act to utilize indefinite deferred tax liabilities as a source of income against indefinite lived portions of the Company’s deferred tax assets. In 2019, as a result of a change in ownership under the provisions of Internal Revenue Code Section 382, the cumulative benefit of net operating losses was remeasured which resulted in tax expense to reverse the 2018 benefit recorded and record a benefit relative to losses incurred in 2019 after the date of the change in ownership.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Significant components of the Company's deferred tax assets for federal income taxes consisted of the following:

Deferred tax assets	December 31, 2020			December 31, 2019			December 31, 2021			December 31, 2020
Net operating loss carryforwards	$	3,864,189		$	1,504,496		$	6,033,726		$	3,864,189
Stock-based compensation		1,571,227			1,381,750
Stock option compensation								1,641,354			1,571,227
Orphan Drug credits		541,384			81,700			647,937			541,384
Lease liability		38,394			63,589			0			38,394
Capitalized start-up costs and other		10,709,631			9,187,898			12,403,925			10,709,631
Valuation allowance		(14,906,646	)		(12,051,440	)		(20,726,942	)		(14,906,646	)
Deferred tax assets		1,818,179			167,993			0			1,818,179

Deferred tax liabilities
Intangible assets		(2,223,678	)		(2,223,678	)		0			(2,223,678	)
Right of use asset		(38,394	)		(63,589	)		0			(38,394	)
Deferred tax liabilities		(2,262,072	)		(2,287,267	)		0			(2,262,072	)

Net deferred tax liability	$	(443,893	)	$	(2,119,274	)	$	0		$	(443,893	)

The Company does not have unrecognized tax benefits as of December 31,2021 or December 31, ~~2020 or December 31, 2019.~~ 2020. The Company recognizes interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense.

The Company had NOL carryforwards for federal and state income tax purposes at December 31,2021 and 2020 of approximately:

Combined NOL Carryforwards:	December 31, 2021		December 31, 2020
Federal	$	23,442,045	$	15,013,388
State		23,436,624		15,007,966

The pre-2018 net operating loss carryforwards begin expiring in 2021 for both federal and state income tax purposes. In November 2019, the Company increased the number of shares outstanding resulting in a change of ownership, under the provisions of Internal Revenue Code Section 382 and similar state provisions. These provisions limit the Company’s ability to utilize these net operating loss carryforwards to offset future income. The amounts above reflect the amount of NOLs that the Company expects to be able to utilize as a result of the limitation. The Company recorded a 100% valuation allowance of the deferred tax assets as of December 31, 2021 because of the uncertainty of their realization.

6067

DIFFUSION PHARMACEUTICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Combined NOL Carryforwards:

December 31,
2020

December 31,
2019

Federal
$ 15,013,388 $ 5,844,972
State
15,007,966 5,844,972

The pre-2018 net operating loss carryforwards begin expiring in 2020 for both federal and state income tax purposes. In November 2019, as a result of a change of ownership, under the provisions of Internal Revenue Code Section 382 and similar state provisions, the Company’s ability to utilize their net operating loss carryforwards to offset future income was limited. The Company recorded a valuation allowance against a portion of their deferred tax assets as of December 31, 2020 because of the uncertainty of their realization.

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

Rate reconciliation:	December 31, 2020			December 31, 2019			December 31, 2021			December 31, 2020
Federal tax benefit at statutory rate		(21.0	)%		(21.0	)%		(21.0	)%		(21.0	)%
State tax, net of Federal benefit		(4.7	)%		(2.5	)%		(4.7	)%		(4.7	)%
Orphan drug credit		(2.9	)%		25.3	%		(0.4	)%		(2.9	)%
Change in valuation allowance		18.1	%		(7.5	)%		24.3	%		18.1	%
Stock compensation		—	%		8.6	%
Other		—	%		0.1	%
Total provision		(10.5	)%		3.0	%		(1.8	)%		(10.5	)%

The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company’s ~~2017~~2018 to ~~2019~~2021 tax years remain open and subject to examination.

~~10. Related Party Transactions~~

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

~~11.~~~~Subsequent Events~~

~~2021 Warrant Exercises~~

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

~~2021 Common Stock Offering~~

In February 2021, the Company completed the February 2021 Offering in which it offered and sold 33,658,538 shares of its common stock in an underwritten, public offering for a purchase price to the public of $1.025 per share, inclusive of shares offered and sold pursuant to the exercise-in-full by the underwriter of its 30-day option to purchase additional shares. The February 2021 Offering resulted in aggregate net proceeds to the Company of $31.2 million, after deducting underwriting commissions, discounts, and expenses but prior to deducting other offering costs. 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.review until utilized.

6168

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The term “disclosure controls and procedures” means our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a – 15(e) and 15d – 15(e)). Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered in this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed in reports filed under the Exchange Act is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Our principal executive officer and principal financial officer do not expect that our disclosure controls or internal controls will prevent all error and all fraud. Although our disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented if there exists in an individual a desire to do so. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our Chief Executive Officer and ~~Senior Vice President, Finance,~~Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, ~~2020.~~2021.

Attestation Report of the Independent Registered Public Accounting Firm

This report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. As a "smaller reporting company" (as such term is defined in Rule 12b-2 of the Exchange Act), pursuant to Section 989G of the Dodd-Frank Act, we are exempt from the requirement subjecting management’s report to attestation by our independent registered public accounting firm.

Change in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting that occurred during our fourth quarter ended December 31, ~~2020~~2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B.

OTHER INFORMATION

None.

6270

PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

CORPORATE GOVERNANCE

Introduction

Our common stock is currently listed for quotation on the Nasdaq Capital Market under the symbol “DFFN.” As required by the Listing Rules of the Nasdaq Capital Market, the Board has adopted certain governance standards, including its standard of independence.

Corporate Governance Guidelines

Our Board has adopted Corporate Governance Guidelines, a copy of which can be found on the Investor Relations—Corporate Governance section of our corporate website at www.diffusionpharma.com. Among the topics addressed in our Corporate Governance Guidelines are:

•

Board size, composition and qualifications;

•

Retirement, term limits, and resignation policy;

•

Selection of directors;

•

Board compensation;

•

Board leadership;

•

Loans to directors and executive officers;

•

Board committees;

•

Chief Executive Officer evaluation;

•

Board and committee meetings;

•

Board and committee evaluations;

•

Executive sessions of outside directors;

•

Director continuing education;

•

Meeting attendance by directors and non-directors;

•

Succession planning;

•

Appropriate information and access;

•

Related person transactions;

•

Ability to retain advisors;

•

Communication with directors;

•

Conflicts of interest and director independence;

•

Director attendance at annual meetings of stockholders; and

•

Board interaction with corporate constituencies;

•

Change of principal occupation and board memberships.

•

Stock ownership by directors and executive officers;

Directors & Director Independence

The ~~information required~~Board has determined that six of our seven current directors — Robert Adams, Eric Francois, Mark T. Giles, Jane H. Hollingsworth, Diana Lanchoney, and Alan Levin — are “independent directors” under the Listing Rules of the Nasdaq Capital Market.

Board Leadership Structure

The Board believes that our stockholders are best served if the Board retains the flexibility to adapt its leadership structure to applicable facts and circumstances, which necessarily change over time. Accordingly, under our Corporate Governance Guidelines, the office of Chairman of the Board and Chief Executive Officer may or may not be held by ~~Item 10~~one person. The Board believes it is best not to have a fixed policy on this issue and that it should be free to make this determination based on what it believes is best under the circumstances.

Currently, Jane H. Hollingsworth serves as the Chair of ~~Form 10-K~~the Board and Robert J. Cobuzzi, Jr. serves as our Chief Executive Officer. The Board believes that it is currently in the best interests of the Company’s stockholders to separate these offices. This separation allows for our Board Chair to act as a bridge between the Board and the operating organization, while our Chief Executive Officer focuses on running the Company’s business. The Board believes that this separation allows for a more effective utilization of the proven leadership capabilities, breadth of industry experience and business success of the individuals holding both positions, and that the Company and its stockholders are best currently served by this leadership structure.

Executive Sessions

Generally, at regular meetings of the Board, our independent directors meet in executive session with no company management present during a portion of the meeting. Ms. Hollingsworth typically presides over these executive sessions and serves as a liaison between the independent directors and our Chief Executive Officer.

Board Meetings and Attendance

During 2021, the Board held nine meetings, including one joint meeting with the Compensation Committee. Each of our directors attended 75 percent or more of the meetings of the Board and all committees on which he or she served during 2021. In addition, the Company’s directors are expected to participate in the annual meetings of stockholders, and all of the Company’s directors participated in the 2021 annual meeting of stockholders.

Board Committees

The Board has three standing committees: the Audit Committee, the Compensation Committee, and the Nominating and Corporate Governance Committee. Each of these committees has the composition and responsibilities described below. The Board, from time to time, may establish other committees to facilitate the management of the Company and may change the composition and the responsibilities of the existing committees. Each of the three standing committees has a charter which can be found on the Investor Relations—Corporate Governance section of our corporate website at www.diffusionpharma.com.

Audit Committee

Responsibilities

The primary responsibilities of the Audit Committee include:

• overseeing our accounting and financial reporting processes, systems of internal control over financial reporting and disclosure controls and procedures on behalf of the Board and reporting the results or findings of its oversight activities to the Board;

• having sole authority to appoint, retain and oversee the work of our independent registered public accounting firm and establishing the compensation to be paid to the independent registered public accounting firm;

• establishing procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls and/or auditing matters and for the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters;

• reviewing and pre-approving all audit services and permissible non-audit services to be performed for us by our independent registered public accounting firm as provided under the federal securities laws and rules and regulations of the SEC; and

• overseeing our system to monitor and manage risk, and legal and ethical compliance programs, including the establishment and administration (including the grant of any waiver from) a written code of ethics applicable to each of our principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions.

The Audit Committee has the authority to engage the services of outside experts and advisors as it deems necessary or appropriate to carry out its duties and responsibilities.

Composition and Audit Committee Financial Expert

The current members of the Audit Committee are Messrs. Francois, Giles, and Levin and Ms. Hollingsworth. Mr. Levin is the chair of the Audit Committee.

Each current member of the Audit Committee qualifies as “independent” for purposes of membership on audit committees under the Listing Rules of the Nasdaq Capital Market and the rules and regulations of the SEC and is “financially literate” under the Listing Rules of the Nasdaq Capital Market. In addition, the Board has determined that Mr. Levin qualifies as an “audit committee financial expert” as defined by the rules and regulations of the SEC and meets the qualifications of “financial sophistication” under the Listing Rules of the Nasdaq Capital Market as a result of his experience in senior financial positions. Stockholders should understand that these designations related to the Audit Committee members’ experience and understanding with respect to certain accounting and auditing matters are disclosure requirements of the SEC and the Nasdaq Capital Market and do not impose upon any of them any duties, obligations or liabilities that are greater than those generally imposed on a member of the Audit Committee or of the Board.

Meetings

The Audit Committee met five times during 2021.

Processes and Procedures for Complaints

The Audit Committee has established procedures for the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls, or auditing matters, and the submission by our employees, on a confidential and anonymous basis, of concerns regarding questionable accounting or auditing matters. Our personnel with such concerns are encouraged to discuss their concerns with their supervisor first, who in turn will be responsible for informing our Chief Executive Officer of any concerns raised. If an employee prefers not to discuss a particular matter with his or her own supervisor, the employee may instead discuss such matter with our Chief Executive Officer. If an individual prefers not to discuss a matter with the Chief Executive Officer or if the Chief Executive Officer is unavailable and the matter is urgent, the individual is encouraged to contact the Chair of the Audit Committee, Mr. Levin.

Compensation Committee

Responsibilities

The primary responsibilities of the Compensation Committee include:

• determining the annual salaries, incentive compensation, long-term incentive compensation, special or supplemental benefits or perquisites and any and all other compensation applicable to our Chief Executive Officer and other executive officers;

• determining any revisions to corporate goals and objectives with respect to compensation for our Chief Executive Officer and other executive officers and establishing and leading a process for the full Board to evaluate the performance of our Chief Executive Officer and other executive officers in light of those goals and objectives;

• administering our equity-based compensation plans, including determining specific grants of options and other awards for executive officers and other employees under our equity-based compensation plans; and

• establishing and leading a process for determination of the compensation applicable to the non-employee directors on the Board.

The Compensation Committee has the authority to engage the services of outside experts and advisors as it deems necessary or appropriate to carry out its duties and responsibilities.

Composition

The current members of the Compensation Committee are Messrs. Adams and Francois, Ms. Hollingsworth, and Dr. Lanchoney. Mr. Adams is the chair of the Compensation Committee. Each of the four current members of the Compensation Committee is an “independent director” under the Listing Rules of the Nasdaq Capital Market and a “non-employee director” within the meaning of Rule 16b-3 under the Exchange Act.

Meetings

The Compensation Committee met seven times during 2021, including one joint meeting with the Board.

Processes and Procedures for Consideration and Determination of Executive Compensation

The Compensation Committee has authority to determine all compensation applicable to our executive officers. In setting executive compensation for our executive officers, the Compensation Committee considers, among other things, the following primary factors: each executive’s position within the Company and the level of responsibility; the ability of the executive to affect key business initiatives; the executive’s individual experience and qualifications; compensation paid to executives of comparable positions by companies similar to our Company; Company and individual performance; and the executive’s current and historical compensation levels. The Compensation Committee has also from time to time – including during 2021 – retained the services of its independent consulting firm, Radford, to provide advice with respect to executive compensation, such as developing a group of comparable peer companies and reviewing executive and director compensation levels. In making decisions regarding the form and amount of compensation to be paid to our executives, the Compensation Committee may consider information gathered by, and the recommendations of, Radford, when necessary and appropriate.

In making decisions regarding the form and amount of compensation to be paid to our executive officers (other than our Chief Executive Officer), the Compensation Committee considers and gives weight to the recommendations of our Chief Executive Officer recognizing that due to his reporting and otherwise close relationship with each executive, the Chief Executive Officer often is in a better position than the Compensation Committee to evaluate the performance of each executive (other than himself). In making decisions regarding the form and amount of compensation to be paid to our Chief Executive Officer, the Compensation Committee considers the recommendation of the Chief Executive Officer with respect to his own compensation and the Compensation Committee’s own assessment of the Chief Executive Officer’s annual performance and input from other Board members. The Compensation Committee meets in executive session regularly and makes all executive compensation decisions about the Chief Executive Officer without the presence of the Chief Executive Officer or any executive or employee of our company.

Processes and Procedures for Consideration and Determination of Director Compensation

The Board has delegated to the Compensation Committee the responsibility, among other things, to establish and lead a process for determining compensation payable to our non-employee directors. The Compensation Committee makes recommendations regarding compensation payable to our non-employee directors to the entire Board, which then makes the final decision.

In making decisions regarding compensation to be paid to our non-employee directors, the Board considers factors such as its own views as to the form and amount of compensation to be paid, the current and anticipated time demands placed on non-employee directors and other factors that may be relevant, including the recommendations of Radford, when necessary and appropriate.

Nominating and Corporate Governance Committee

Responsibilities

The primary responsibilities of the Nominating and Corporate Governance Committee are:

• identifying individuals qualified to become Board members;

• recommending director nominees for each annual meeting of our stockholders and director nominees to fill any vacancies that may occur between meetings of stockholders;

• general management and director succession planning;

• being aware of best practices in corporate governance and developing and recommending to the Board a set ~~forth~~of corporate governance standards to govern the Board, its committees, our company and our employees in the ~~Proxy Statement~~conduct of our business and affairs;

• developing and overseeing a Board and Board committee evaluation process; and

• reviewing and discussing with our Chief Executive Officer and reporting periodically to the Board plans for executive officer development and succession plans for the Chief Executive Officer and other key executive officers and employees; and

The Nominating and Corporate Governance Committee has the authority to engage the services of outside experts and advisors as it deems necessary or appropriate to carry out its duties and responsibilities.

Composition

The current members of the Nominating and Corporate Governance Committee are Messrs. Adams, Giles, and Levin and Dr. Lanchoney. Mr. Giles is the chair of the Nominating and Corporate Governance Committee. Each of the four current members of the Nominating and Corporate Governance Committee is an “independent director” within the meaning of the Listing Rules of the Nasdaq Capital Market.

Meetings

The Nominating and Corporate Governance Committee met three times during 2021.

Processes and Procedures for Consideration Director Nominations

In selecting nominees for the Board, the Nominating and Corporate Governance Committee first determines whether the incumbent directors are qualified to serve, and wish to continue to serve, on the Board. The Nominating and Corporate Governance Committee believes that our Company and stockholders benefit from the continued service of certain qualified incumbent directors because those directors have familiarity with and insight into our Company’s affairs that they have accumulated during their tenure with Diffusion. Appropriate continuity of Board membership also contributes to the Board’s ability to work as a collective body. Accordingly, it is the practice of the Nominating and Corporate Governance Committee, in general, to re-nominate an incumbent director at the upcoming annual meeting of stockholders if the director wishes to continue his or her service with the Board, the director continues to satisfy the Nominating and Corporate Governance Committee’s criteria for membership on the Board, the Nominating and Corporate Governance Committee believes the director continues to make important contributions to the Board and there are no special, countervailing considerations against re-nomination of the director.

In identifying and evaluating new candidates for election to the Board, the Nominating and Corporate Governance Committee intends to first solicit recommendations for nominees from persons whom the Nominating and Corporate Governance Committee believes are likely to be familiar qualified candidates having the qualifications, skills and characteristics required for Board nominees from time to time. Such persons may include members of the Board and senior management of Diffusion. In addition, the Nominating and Corporate Governance Committee may engage a search firm to assist it in identifying qualified candidates. The Nominating and Corporate Governance Committee then intends to review and evaluate each candidate whom it believes merits serious consideration, taking into account available information concerning the candidate, any qualifications or criteria for Board membership established by the Nominating and Corporate Governance Committee, the existing composition of the Board (including with respect to diversity), and other factors that it deems relevant. In conducting its review and evaluation, the Nominating and Corporate Governance Committee may solicit the views of our management, other Board members and any other individuals it believes may have insight into a candidate. The Nominating and Corporate Governance Committee may designate one or more of its members and/or other Board members to interview any proposed candidate.

The Nominating and Corporate Governance Committee will consider recommendations for the nomination of directors submitted by our stockholders. The Nominating and Corporate Governance Committee will evaluate candidates recommended by stockholders in the same manner as those recommended described above.

There are no formal requirements or minimum qualifications that a candidate must meet in order for the Nominating and Corporate Governance Committee to recommend the candidate to the Board. The Nominating and Corporate Governance Committee believes that each nominee should be evaluated based on his or her merits as an individual, taking into account the needs of the Company and the Board. However, in evaluating candidates, there are a number of criteria that the Nominating and Corporate Governance Committee generally views as relevant and is likely to consider. Some of these factors include:

•

whether the candidate is an “independent director” under applicable independence tests under the federal securities laws and rules and regulations of the SEC;

•

whether the candidate is “financially sophisticated” and otherwise meets the requirements for serving as a member of an audit committee;

•

whether the candidate is an “audit committee financial expert” under the rules and regulations of the SEC for purposes of serving as a member of the Audit Committee;

•

the needs of the Company with respect to the particular talents and experience of our directors;

•

the personal and professional integrity and reputation of the candidate;

•

the candidate’s level of education and business experience;

•

the candidate’s business acumen;

•

the candidate’s level of understanding of our business and industry and other industries relevant to our business;

•

the candidate’s ability and willingness to devote adequate time to the work of the Board and its committees;

•

the fit of the candidate’s skills and personality with those of other directors and potential directors in building a board of directors that is effective, collegial and responsive to the needs of our company;

•

whether the candidate possesses strategic thinking and a willingness to share ideas;

•

the candidate’s diversity of experiences, expertise and background, in general and as compared to other directors on the Board; and

•

the candidate’s ability to represent the interests of all stockholders and not a particular interest group.

While we do not have a stand-alone diversity policy, in considering whether to recommend any director nominee, including candidates recommended by stockholders, the Nominating and Corporate Governance Committee will consider the factors described above. The Nominating and Corporate Governance Committee seeks nominees with a broad diversity of experience, expertise, and backgrounds. The Nominating and Corporate Governance Committee does not assign specific weights to particular criteria and no particular criterion is necessarily applicable to all prospective nominees. We believe that the backgrounds and qualifications of the directors, considered as a group, should provide a significant mix of experience, knowledge and abilities that will allow the Board to fulfill its responsibilities.

Board Oversight of Risk

The Board as a whole has responsibility for risk oversight, with more in-depth reviews of certain areas of risk being conducted by the relevant Board committees that report on their deliberations to the full Board. The oversight responsibility of the Board and its committees is enabled by management reporting processes that are designed to provide information to the Board about the identification, assessment and management of critical risks and management’s risk mitigation strategies. The areas of risk that we focus on include regulatory, operational, financial (accounting, credit, liquidity and tax), legal, compensation, competitive, health, safety and environment, economic, political and reputational risks.

The committees of the Board oversee risks associated with their respective principal areas of focus. The Audit Committee’s role includes a particular focus on the qualitative aspects of financial reporting to stockholders, our processes for the management of business and financial risk, our financial reporting obligations, and our compliance with significant applicable legal, ethical and regulatory requirements. The Audit Committee, along with management, is also responsible for developing and participating in a process for review of important financial and operating topics that present potential significant risk to our company. The Compensation Committee is responsible for overseeing risks and exposures associated with our compensation programs and arrangements, including our executive and director compensation programs and arrangements. The Nominating and Corporate Governance Committee oversees risks relating to our corporate governance matters and policies and management and director succession planning.

We recognize that a fundamental part of risk management is understanding not only the risks a company faces and what steps management is taking to manage those risks, but also understanding what level of risk is appropriate for our Company. The involvement of the full Board in setting our business strategy is a key part of the Board’s assessment of management’s appetite for risk and also a determination of what constitutes an appropriate level of risk for our company.

We believe our current Board leadership structure is appropriate and helps ensure proper risk oversight for our company for a number of reasons, including: (1) general risk oversight by the full Board in connection with its role in reviewing our key long-term and short-term business strategies and monitoring on an on-going basis the implementation of our key business strategies; (2) more detailed oversight by our Board committees that are currently comprised of and chaired by our independent directors and (3) the focus of our Chairman of the Board on allocating appropriate Board agenda time for discussion regarding the implementation of our key business strategies and specifically risk management.

Code of Business Conduct and Ethics

Our Code of Business Conduct and Ethics applies to all of our directors, executive officers and other employees, and meets the requirements of the SEC. A copy of our Code of Business Conduct and Ethics is available on the Investor Relations—Corporate Governance—Code of Business Conduct and Ethics section of our corporate website at www.diffusionpharma.com.

Policy Regarding Director Attendance at Annual Meetings of Stockholders

It is the policy of the Board that directors standing for re-election should attend our annual meeting of stockholders, if their schedules permit.

Process Regarding Stockholder Communications with Board

Stockholders may communicate with the Board or any one particular director by sending correspondence, to our General Counsel & Corporate Secretary via e-mail to info@diffusionpharma.com or via mail to 300 East Main Street, Suite 201, Charlottesville, Virginia 22902, with an instruction to forward the communication to the Board or one or more particular directors. Our General Counsel & Corporate Secretary will forward promptly all such stockholder communications to the Board or the one or more particular directors, with the exception of any advertisements, solicitations for periodical or other subscriptions and other similar communications.

DIRECTORS

Number of Directors

Our Bylaws provide that the Board will consist of at least one member, or such other number as may be determined by the Board or our stockholders. The Board has currently fixed the number of directors at seven.

Information About Our Directors

The table below sets forth, as of March 15, 2022, certain information that has been furnished to us by our current directors.

Name	Age	Director Since
Robert Adams	71	2016
Robert J. Cobuzzi, Jr., Ph.D.	57	2020
Eric Francois	47	2021
Mark T. Giles	67	2016
Jane H. Hollingsworth	63	2020
Diana Lanchoney, M.D.	55	2021
Alan Levin	59	2016

In addition, the paragraphs below provide further information about each current director, including all positions he or she holds, his or her principal occupation and business experience for the past five years, and the names of other publicly held companies of which he or she currently serves as a director or served as a director during the past five years. We believe that all of our directors and director nominees display personal and professional integrity; satisfactory levels of education and/or business experience; broad-based business acumen; an appropriate level of understanding of our business and its industry and other industries relevant to our business; the ability and willingness to devote adequate time to the work of the Board and its committees; a fit of skills and personality with those of our other directors that helps build a board of directors that is effective, collegial and responsive to the needs of our company; strategic thinking and a willingness to share ideas; a diversity of experiences, expertise and background; and the ability to represent the interests of all of our stockholders. The information presented below regarding each director and nominee for director also sets forth specific experience, qualifications, attributes and skills that led the Board to the conclusion that he or she should serve as a director in light of our business and structure.

Robert Adams — Mr. Adams has served as a director since January 2016 and as a director of Diffusion LLC since 2002. Prior to his retirement in 2015, Mr. Adams was a partner in the intellectual property law firm of Nixon & Vanderhye P.C, where he had practiced for over 25 years, focusing on patent litigation and international patent licensing and negotiations. During that time period, Mr. Adams was lead litigation counsel in more than 50 major intellectual property lawsuits, where he directly handled, for example, all intellectual property valuations and settlements on behalf of his U.S. and foreign clients. Moreover, Mr. Adams served as the head negotiator for a well-known Japanese consumer products company for 15 years in various complicated licensing situations. Those negotiations typically involved the cross-licensing of up to hundreds of U.S. and foreign patent rights. His lead licensing activities on behalf of that client included, among other things, multi-year negotiations with Texas Instruments, Advanced Micro Devices and Freescale. Mr. Adams received a B.A. from the University of Maryland and a J.D. from George Washington University (with honors), and is a member of the Virginia State Bar.

The Board believes Mr. Adams’ perspective and experience as a director of Diffusion, as well as the depth and breadth of his intellectual property experience, provide him with the qualifications to serve as a director.

Robert J. Cobuzzi, Jr., Ph.D. – Dr. Cobuzzi has served as a director since January 2020 and as our President and Chief Executive Officer since September 2020. Cobuzzi also currently serves as a Venture Partner and Chairman of the Business Development Board for Sunstone Life Science Ventures, an early-stage, European-focused investor in human therapeutics. He also serves on behalf of Sunstone as a Board Observer for Synendos Therapeutics, a venture-backed, Swiss-based biopharmaceutical company focused on developing therapeutics for neuropsychiatric disorders. Previously, Dr. Cobuzzi served as an Advisor to the Mitochondrial Disease Research Program at the Children’s Hospital of Philadelphia, an internationally recognized hospital and research center devoted to children, from January 2019 to April 2020, and as President and Chief Executive Officer of MitoCUREia, Inc., an affiliated company, from July 2019 to July 2020. From 2005 to 2018, Dr. Cobuzzi served in various roles at Endo International PLC, a specialty branded and generic pharmaceuticals manufacturer, most recently serving as President of Endo Ventures Ltd. Dr. Cobuzzi received his Bachelor of Arts in Biochemistry and Art History from Colby College and his Ph.D. in Molecular and Cellular Biochemistry from Loyola University Chicago. He served as a Post-doctoral Fellow in Experimental Therapeutics at Roswell Park Cancer Institute.

The Board believes Dr. Cobuzzi’s experience and insight with drug development and business development and funding, both in the U.S. and abroad, as well as his experience and background as our Chief Executive Officer, provide him with the qualifications to serve as a director.

Eric Francois – Mr. Francois has served as a director since June 2021. Since November 2021, Mr. Francois has served as a Managing Director at the investment banking firm of Credit Suisse. From November 2015 until November 2021, Mr. Francois served as Chief Financial Officer of Scynexis, Inc., a pharmaceutical company pioneering innovative medicines to potentially help millions of patients worldwide in need of new options to overcome and prevent difficult-to-treat and drug-resistant infections. He previously served as co-founder and Chief Operating Officer of Topi, Inc., a technology startup, from July 2013 to October 2015, where he was responsible for all marketing, commercial and financial activities and helped grow the company from inception to over 250 clients worldwide. Previously, Mr. Francois served from September 2007 to July 2013 as a Director in the Equity Capital Markets Group at Lazard Ltd where he led capital raisings and advisory assignments for healthcare and biotechnology companies. He started his career in September 2000 at Cowen and Company in the Equity Capital Markets and Convertible Debt Groups. Mr. Francois holds a B.A. in Economics and Business Administration and a M.A. in Marketing from Pantheon-Sorbonne University, France.

The Board believes that the combination of Mr. Francois’s perspective and industry experience, his experience in financial reporting, corporate finance, and capital raising transactions, and his executive-level experience in the pharmaceutical industry all provide him with the qualifications and skills to serve as a director.

Mark T. Giles — Mr. Giles has served as a director since January 2016 and as a director of Diffusion LLC since 2008. Since July 2007, Mr. Giles has been the sole managing member of Panda Holdings, LLC, which engages in the investment and management of private capital. Since February 2015, Mr. Giles has been a general partner of Anchormark Holdings, LLC, which engages in the investment and management of private capital. Prior to joining Panda Holdings and Anchormark Holdings, Mr. Giles served as the Chief Executive Officer of Virginia National Bank from July 1998 until June 2007 and thereafter continued to serve as the non-executive Chairman until December 2011. Prior to joining Virginia National Bank, Mr. Giles also served as the president of two publicly traded bank holding companies and subsidiary banks in Texas and practiced law with the banking group of a Houston law firm. He chairs the board of Expedition Trust Company. Mr. Giles received a B.S. from the McIntire School of Commerce at the University of Virginia and a J.D. from the University of Virginia School of Law.

The Board believes Mr. Giles’ perspective and experience as a director of Diffusion, as well as the depth and breadth of his business and legal experience, provide him with the qualifications to serve as a director.

Jane H. Hollingsworth – Ms. Hollingsworth has served as a director since September 2020. She currently serves as the founding Managing Partner of Militia Hill Ventures, an organization that creates, builds, and invests in life sciences companies, a role she has held since 2013. While at Militia Hill, Jane co-founded and currently serves as Executive Chair of Eliksa Therapeutics, a regenerative medicine company, co-founded and served as Executive Chair of Spirovant Sciences, a gene therapy company sold to Sumitomo Dainippon Pharma, and served as Executive Chair and CEO of Immunome Inc., a cancer immunotherapy company. Prior to founding Militia Hill, Ms. Hollingsworth co-founded and served as Chief Executive Officer of NuPathe, Inc., a neuroscience focused biopharmaceutical company. . She also co-founded and served as EVP of Auxilium Pharmaceuticals, a urology and rare disease focused biopharmaceutical company. Ms. Hollingsworth also currently serves on the board of various industry and community organizations, including Afimmune Ltd., Ribonova, the University City Science Center, the Kimmel Center for the Performing Arts and Breatcancer.Org. Ms. Hollingsworth received her B.A. from Gettysburg College and her J.D. from Villanova University.

The Board believes Ms. Hollingsworth’s industry perspective and experience, including as chief executive officer and director of a publicly-traded biopharmaceutical company, as well as her depth of her other operating and senior management experience in our industry and educational background, provide her with the qualifications to serve as a director.

Diana Lanchoney, M.D. – Dr. Lanchoney has served as a director since June 2021. Since 2014, Dr. Lanchoney has served as a Vice President of CSL Behring, Inc., a global biopharmaceutical company manufacturing plasma-derived and recombinant therapeutic products, since October 2021 as Vice President, R&D Strategy Implementation, from January 2018 to October 2021 as Vice President, Clinical Pharmacology and Translational Development and prior to that as Vice President, R&D Project Management, from October 2014 to December 2017. Prior to joining CSL, Dr. Lanchoney served in positions of increasing responsibility with Merck & Co., a global pharmaceutical company, most recently as Associate Vice President, Corporate Strategy. Dr. Lanchoney received her B.A. in Economics and German Studies from Tufts University and her M.D. from the University of Pennsylvania.

The Board believes Dr. Lanchoney’s professional and academic background and experience provide her with the qualifications to serve as a director, including the depth and breadth of her experience with clinical development, corporate strategy, and pharmaceutical industry partnering.

Alan Levin — Mr. Levin has served as a director since January 2016 and as a director of Diffusion LLC since June 2015. He previously served as Executive Vice President and Chief Financial Officer of Endo Health Solutions Inc., a global specialty healthcare company, from June 2009 until his retirement in September 2013. Prior to joining Endo, Mr. Levin worked with Texas Pacific Group, a leading private equity firm, and one of their start-up investments. Before that, he was Senior Vice President & Chief Financial Officer of Pfizer, Inc. where he worked for 20 years in a variety of executive positions of increasing responsibility, including Treasurer and Senior Vice President of Finance & Strategic Management for the company’s research and development organization. Mr. Levin received a bachelor’s degree from Princeton University and a master’s degree from New York University’s Stern School of Business. Mr. Levin is a certified public accountant. Mr. Levin currently serves as a member of the board of directors of Biocryst Pharmaceuticals, Inc., a Nasdaq-traded biopharmaceuticals company. He is also a member of the Advisory Board of Auven Therapeutics, a private equity fund; and the Critical Path Institute, a nonprofit collaboration between the Food and Drug Administration and pharmaceutical industry participants focused on streamlining and accelerating the development and regulatory pathways for innovative medicines. From December 2013 to July 2019, he was a member of the board of directors of Aceto Corporation, a Nasdaq-traded company specialized in generics and pharmaceutical intermediate products.

The Board believes that the combination of Mr. Levin’s perspective and experience as a director of Diffusion; his experience in financial reporting, treasury and corporate finance (including his prior positions as chief financial officer of Endo and Pfizer, Inc.); and his executive-level experience in the pharmaceutical industry all provide him with the qualifications and skills to serve as a director.

Overview of Non-Employee Director Compensation Program

As described in more detail under the heading “Corporate Governance—Compensation Committee—Responsibilities,” the Board has delegated to the Compensation Committee the responsibility, among other things, to establish and lead a process for the determination of compensation payable to our non-employee directors. The Compensation Committee makes recommendations regarding compensation payable to our non-employee directors to the entire Board, which then makes final decisions regarding such compensation. Dr. Cobuzzi, our Chief Executive Officer, is not compensated separately for serving on the Board while also serving as an employee.

As further described below, the principal elements of our non-employee director compensation program for 2021 included cash compensation in the form of annual cash retainers and long-term equity-based incentive compensation, in the form of stock options and restricted stock units.

Cash Compensation

The cash compensation paid to our non-employee members of the Board consists of the following cash retainers:

Description	Annual Cash Retainer
Board Member	$	40,000
Chair of the Board	$	25,000
Audit Committee Chair	$	15,000
Compensation Committee Chair	$	10,000
Nominating and Corporate Governance Committee Chair	$	8,000
Audit Committee Member (other than Chair)	$	7,500
Compensation Committee Member (other than Chair)	$	5,000
Nominating and Corporate Governance Committee Member (other than Chair)	$	4,000

The annual cash retainers are paid in regular installments and otherwise in accordance with the Company’s standard payroll practices. The Compensation Committee has also reserved the right to make a portion of such payments in the form of equity rather than cash under certain conditions. During the fiscal year 2021, all retainers were paid in cash.

Long-Term Equity-Based Incentive Compensation

In addition to cash compensation, our non-employee directors receive long-term equity-based incentive compensation in the form of options to purchase shares of our common stock and restricted stock units. Upon a non-employee director’s initial appointment to the Board, he or she shall receive a stock option award to purchase a number of shares of common stock equal to 0.114% of our shares of common stock outstanding on the grant date, vesting in 18 equal monthly installments following his or her appointment to the Board. In addition, upon appointment he or she also receives a restricted stock unit award for an equivalent number of shares, vesting in six tri-monthly installments commencing on the 18-month anniversary of his or her appointment to the Board. Directors appointed prior to January 1, 2020 received the entirety of this initial appointment award in the form of an option.

In addition, each non-employee director annually receives a stock option award to purchase a number of shares of common stock equal to 0.114% of our shares of common stock outstanding on the grant date, vesting in equal monthly installments over one year, unless otherwise provided by the Compensation Committee.

All option awards granted to our non-employee directors have a ten-year term and an exercise price equal to the fair market value of our common stock on the grant date.

Director Compensation Table for 2021

The table below provides summary information concerning the compensation of each individual who served as a non-employee director of the Company during the year ended December 31, 2021:

Name	Fees Earned or Paid in Cash		Stock Awards (1)		Option Awards (2)			All Other Compensation			Total
Robert Adams	$	57,616	$	-	$	57,084		$	-		$	114,700
Robert J. Cobuzzi, Jr., Ph.D. (3)	$	0	$	-	$	170,735	(3)	$	612,617	(3)	$	783,352
Eric Francois (4)	$	27,185	$	49,968	$	114,167		$	-		$	141,352
John L. Gainer, Ph.D. (4)	$	19,288	$	-	$	-		$	-		$	19,288
Mark T. Giles	$	57,911	$	-	$	57,084		$	-		$	114,995
Jane H. Hollingsworth	$	67,374	$	-	$	57,084		$	-		$	124,458
David G. Kalergis (4)	$	28,932	$	-	$	-		$	-		$	28,932
Diana Lanchoney (4)	$	25,373	$	49,968	$	114,167		$	-		$	139,540
Alan Levin	$	61,411	$	-	$	57,084		$	-		$	118,495

The amounts shown in this column reflect the grant date fair value of restricted stock unit awards granted during 2021 to the identified directors upon their respective initial appointments to the Board, calculated in accordance with the provisions of ASC Topic 718 and determined without regard to forfeitures. See the assumptions used in the Black-Scholes Model in Note 7 to the audited financial statements included in our Annual Report. As of December 31, 2021, the aggregate number of shares underlying restricted stock units granted to our directors were as follows: Dr. Cobuzzi – 98,100, 16,350 of which were vested; Mr. Francois – 69,400, none of which were vested; Ms. Hollingsworth – 54,900, none of which were vested; and Dr. Lanchoney – 69,400, none of which were vested.

The amounts shown in this column reflect the grant date fair value of option awards granted during 2021 to the identified directors and former directors, calculated in accordance with the provisions of ASC Topic 718 and determined without regard to forfeitures. See the assumptions used in the Black-Scholes Model in Note 7 to the audited financial statements included in our Annual Report. As of December 31, 2021, the aggregate number of shares subject to options awarded to our each of our directors and former directors were as follows: Mr. Adams – 177,745, of which 136,125 were vested; Dr. Cobuzzi – 761,726, of which 410,041 were vested; Dr. Gainer – 258,770, of which 258,770 were vested; Mr. Francois – 166,600, of which 69,417 were vested; Mr. Giles – 177,191, of which 135,541 were vested; Ms. Hollingsworth – 150,700, of which 101,562 were vested; Mr. Kalergis – 291,592, of which 291,592 were vested; Dr. Lanchoney – 166,600, of which 69,417 were vested; and Mr. Levin –176,557, of which 134,907 were vested.

Reflects compensation for Dr. Cobuzzi’s service as our President and Chief Executive Officer. See “Item 11. Executive Compensation -- Summary Compensation Table” for additional information. Dr. Cobuzzi does not receive any additional compensation for his service as a director.

Dr. Gainer and Mr. Kalergis did not stand for re-election to the Board at our 2021 annual meeting of stockholders and their service on the Board ended upon Mr. Francois’ and Dr. Lanchoney’s election to the Board at such meeting on June 25, 2021.

EXECUTIVE OFFICERS

Information About Our Executive Officers

The table below sets forth, as of March 15, 2022, certain information concerning our executive officers. Biographical information for Dr. Cobuzzi is included above under the heading, “Directors — Information About Our Directors," and incorporated herein by reference.

Name	Age	Position with Diffusion
Robert J. Cobuzzi, Jr., Ph.D.	57	President and Chief Executive Officer
William K. Hornung	53	Chief Financial Officer
Christopher D. Galloway, M.D.	51	Chief Medical Officer
William R. Elder	39	General Counsel & Corporate Secretary

William K. Hornung – Mr. Hornung serves as our Chief Financial Officer, a position he has held since September 2018. Prior to his appointment as Chief Financial Officer, Mr. Hornung served as the Chief Business Officer at Diffusion from July 2017 through September 2018. Previously, Mr. Hornung served as Chief Financial Officer of Contravir Pharmaceuticals from June 2014 to November 2015 and helped the company up-list to Nasdaq and raise nearly $30 million. Prior to Contravir, from 2002 through 2014 Mr. Hornung held positions of increasing responsibility with PTC Therapeutics, most recently serving as Vice President of Finance from April 2012 to March 2014. While at PTC Therapeutics he oversaw the IPO process and raised more than $1 billion. From 1998 through 2002, Mr. Hornung was with Elan Pharmaceuticals (formerly The Liposome Company) in various financial roles. At Liposome and Elan he was responsible for strategic planning and operations of the company's UK-based European headquarters. Earlier in his career Mr. Hornung worked for a clinical research organization where he was responsible for project management and nearly all financial aspects of the company. Mr. Hornung holds a Bachelor of Science in Accounting from the William Paterson State University of New Jersey.

Christopher D. Galloway, M.D. – Dr. Galloway has served as our Chief Medical Officer since October 2020. Prior to joining Diffusion, Dr. Galloway served as senior medical director in critical care for La Jolla Pharmaceutical Company from August 2018 to September 2020, where he chaired and oversaw La Jolla’s investigator-initiated and collaborative research programs and supported the commercial and medical teams in connection with the launch of GIAPREZA™(angiotensin II), which has been approved by the U.S. Food and Drug Administration as a vasoconstrictor to increase blood pressure in adults with septic or other distributive shock. Prior to his time at La Jolla, Dr. Galloway served as medical director for global clinical development at Rakuten Medical Inc. (f/k/a Aspyrian Therapeutics, Inc.), a biotechnology company developing cell-targeting investigative immuno-oncology therapies, from December 2016 to July 2018 and as medical affairs director within Merck & Co., Inc.’s immunotherapy division from August 2015 to November 2016. Dr. Galloway received his doctor of medicine from the University of Texas Medical Branch at Galveston, completed his residency in emergency medicine at Carolinas Medical Center in Charlotte, NC, and received a B.A. in biology from the University of Texas at Austin. He is licensed to practice medicine in the State of Colorado and is a diplomate of the American Board of Emergency Medicine.

William R. Elder – Mr. Elder has served as our General Counsel & Corporate Secretary since September 2020. Prior to joining Diffusion, Mr. Elder principally served as president and chief executive officer of BillyVonElds, LLC, a season-long and daily fantasy sports company, where he managed all corporate, legal, and operational aspects of the business from April 2019 to September 2020. From July 2020 to September 2020, Mr. Elder also served as a part-time consultant to Diffusion. From 2011 to February 2019, Mr. Elder served as a corporate and securities associate for Dechert LLP, an international law-firm, where Mr. Elder’s practice focused primarily on counseling public companies on securities laws and regulatory requirements, corporate governance matters, and financial transactions in the equity and debt markets. He received his J.D. from the University of Pennsylvania Law School, an M.S. in finance from Villanova University, and a B.A. in economics from Tufts University.

ITEM 11.

EXECUTIVE COMPENSATION

Summary Compensation Table

The table below provides summary compensation information ~~required by Item 11~~concerning compensation awarded for service during the years ended December 31, 2021 and December 31, 2020 to the individuals that served as our named executive officers during the year ended December 31, 2021.

Name and Principal Position	Year	Salary (1)		Bonus Compensation (2)		Stock Awards (3)		Option Awards (4)		All Other Compensation (5)		Total

Robert J. Cobuzzi, Jr., Ph.D. (6)	2021	$	410,000	$	164,000	$	-	$	170,735	$	38,617	$	783,352
Chief Executive Officer	2020	$	129,046	$	67,650	$	50,031	$	512,233	$	58,535	$	817,495
William K. Hornung	2021	$	324,929	$	96,667	$	-	$	84,838	$	29,084	$	535,518
Chief Financial Officer	2020	$	298,100	$	93,902	$	-	$	130,083	$	17,866	$	539,951
Christopher D. Galloway, M.D. (6)	2021	$	375,000	$	127,500	$	-	$	86,393	$	37,092	$	625,985
Chief Medical Officer	2020	$	66,827	$	37,500	$	-	$	190,882	$	4,599	$	299,808
William R. Elder (6)	2021	$	256,250	$	76,234	$	-	$	66,246	$	5,877	$	404,607
General Counsel	2020	$	68,270	$	24,750	$	-	$	147,429	$	25,266	$	265,715

Represents cash portion of base salary as described below under “—Employment Agreements.”

Represents the annual cash incentive bonuses for service during the applicable year by our named executive officers as described further below under “—2021 Bonus Compensation”.

The amount shown in this column reflects the grant date fair value of a restricted stock unit award made to Dr. Cobuzzi in connection with his initial appointment to the Board in January 2020, calculated in accordance with the provisions of ASC Topic 718 and determined without regard to forfeitures. The assumptions used in the Black-Scholes model are disclosed in Note 7 to the audited financial statements included in this Annual Report.

The amounts shown in this column reflect the grant date fair value of option awards granted for service during the applicable year, calculated in accordance with the provisions of ASC Topic 718 and determined without regard to forfeitures. Amounts shown for 2020 include time-based awards for service during 2020 granted in March 2021 and (i) with respect to Dr. Cobuzzi, $49,971 granted in January 2020 in connection with his initial appointment to the Board, $50,867 granted in June 2020 in connection with his service as a non-employee director during 2020, and $354,483 granted in September 2020 in connection with his initial appointment as Chief Executive Officer; (ii) with respective to Dr. Galloway, $162,083 granted in October 2020 in connection with his initial appointment as Chief Medical Officer, and (iii) with respect to Mr. Elder, $54,523 granted in September 2020 in connection with his initial appointment as General Counsel. Amounts shown for 2021 include the full grant date fair value of milestone-based, performance awards also granted in March 2021. Pursuant to the terms of the corresponding award agreements, two-thirds of the underlying shares originally granted were automatically forfeited due to the first patient in the ILD-DLCO Trial not being dosed on or before September 30, 2021. The Company announced dosing of the first patients in the ILD-DLCO Trial on December 16, 2021.

The amounts reported in this column for 2020 represent (w) with respect to Dr. Cobuzzi, (i) $50,076 in fees for his service as a non-employee director from January 2020 to September 2020 prior to his appointment as Chief Executive Officer in September 2020 (including fees for committee service), (ii) $5,162 in 401(k) Plan matching contributions by the Company, and (iii) $3,297 in Company-paid health insurance premiums, (x) with respect to Mr. Hornung, (i) $6,459 in 401(k) Plan matching contributions by the Company and (ii) $11,407 in Company-paid health insurance premiums, (y) with respect to Dr. Galloway, (i) $2,500 in 401(k) Plan matching contributions by the Company and (ii) $2,099 in Company-paid health insurance premiums, and (z) with respect to Mr. Elder, (i) $24,775 in fees for his service as a consultant to the Company from July 2020 to September 2020 prior to his appointment as General Counsel & Corporate Secretary and (ii) $491 in Company-paid health insurance premiums. The amounts reported in this column for 2021 represent (w) with respect to Dr. Cobuzzi, (i) $11,600 in 401(k) Plan matching contributions by the Company and (iii) $27,017 in Company-paid health insurance premiums, (x) with respect to Mr. Hornung, (i) $11,600 in 401(k) Plan matching contributions by the Company and (ii) $17,484 in Company-paid health insurance premiums, (y) with respect to Dr. Galloway, (i) $11,600 in 401(k) Plan matching contributions by the Company and (ii) $25,492 in Company-paid health insurance premiums, and (z) with respect to Mr. Elder, $5,877 in Company-paid health insurance premiums.

Dr. Cobuzzi began his employment as President & Chief Executive Officer on September 8, 2020 and began his service as a director on January 7, 2020, Dr. Galloway began his employment as Chief Medical Officer on October 19, 2020, and Mr. Elder began his employment as General Counsel & Corporate Secretary on September 23, 2020. Accordingly, during 2020, each received pro-rated compensation in accordance with his respective term of service.

Employment Agreements

Robert J. Cobuzzi, Jr., Ph.D., President & Chief Executive Officer

Effective September 8, 2020, we entered into an employment agreement with Dr. Cobuzzi pursuant to which he serves as our President & Chief Executive Officer. The employment agreement has an indefinite term. Dr. Cobuzzi is currently entitled to an initial annual base salary of ~~Form 10-K~~$410,000, subject to increase at the discretion of the Board. Dr. Cobuzzi has the opportunity to earn a target annual bonus of 50 percent of his base salary. The Board may, in its discretion, pay a portion of Dr. Cobuzzi’ annual salary and annual bonus in the form of equity or equity-based compensation, provided that commencing with the year following the year in which a “change of control” (as defined in the employment agreement) occurs, Dr. Cobuzzi’ entire base salary and annual bonus will be ~~set forth~~paid in cash. For 2021, Dr. Cobuzzi’ entire pro-rated base salary was paid in cash. The employment agreement contains certain severance and change of control provisions as described in more detail under the heading “—Post-Termination Severance and Change in Control Arrangements.” The employment agreement also contains certain non-competition and non-solicitation provisions (each applicable during employment and for 24 months thereafter), as well as confidentiality and non-disparagement provisions (each applicable during employment and at all times thereafter).

William K. Hornung, Chief Financial Officer

Effective September 21, 2018, we entered into an amended and restated employment agreement with Mr. Hornung pursuant to which he serves as our Chief Financial Officer. The employment agreement has an indefinite term. Mr. Hornung was entitled to an annual base salary of $298,100 during 2020, subject to increase at the discretion of the Board. Mr. Hornung has the opportunity to earn a target annual bonus of 35 percent of his base salary. The Board may, in its discretion, pay a portion of Mr. Hornung’s annual salary and annual bonus in the ~~Proxy Statement~~form of equity or equity-based compensation, provided that commencing with the year following the year in which a “change of control” (as defined in the employment agreement) occurs, Mr. Hornung’s entire base salary and annual bonus will be paid in cash. For 2021, Mr. Hornung’s entire base salary was paid in cash. The employment agreement contains certain severance and change of control provisions as described in more detail under the heading “—Post-Termination Severance and Change in Control Arrangements.” The employment agreement also contains certain non-competition and non-solicitation provisions (each applicable during employment and for 18 months thereafter), as well as confidentiality and non-disparagement provisions (each applicable during employment and at all times thereafter).

Christopher D. Galloway, Chief Medical Officer

Effective October 19, 2020, we entered into an employment agreement with Dr. Galloway pursuant to which he serves as our Chief Medical Officer. The employment agreement has an indefinite term. Dr. Galloway is ~~incorporated herein~~entitled to an initial annual base salary of $375,000, subject to increase at the discretion of the Board. Dr. Galloway has the opportunity to earn a target annual bonus of 40 percent of his base salary. The employment agreement contains certain severance and change of control provisions as described in more detail under the heading “—Post-Termination Severance and Change in Control Arrangements.” The employment agreement also contains certain non-competition (applicable during employment and for 12 months thereafter) and non-solicitation provisions (applicable during employment and for 24 months thereafter), as well as confidentiality and non-disparagement provisions (each applicable during employment and at all times thereafter).

William R. Elder, General Counsel & Corporate Secretary

Effective September 23, 2020, we entered into an employment agreement with Mr. Elder pursuant to which he serves as our General Counsel & Corporate Secretary. The employment agreement has an indefinite term. Mr. Elder is entitled to an initial annual base salary of $250,000, subject to increase at the discretion of the Board. Mr. Elder has the opportunity to earn a target annual bonus of 30 percent of his base salary. The Board may, in its discretion, pay a portion of Mr. Elder’s annual salary and annual bonus in the form of equity or equity-based compensation, provided that commencing with the year following the year in which a “change of control” (as defined in the employment agreement) occurs, Mr. Elder’s entire base salary and annual bonus will be paid in cash. For 2021, Mr. Elder’s entire pro-rated base salary was paid in cash. The employment agreement contains certain severance and change of control provisions as described in more detail under the heading “—Post-Termination Severance and Change in Control Arrangements.” The employment agreement also contains certain non-competition and non-solicitation provisions (each applicable during employment and for 24 months thereafter), as well as confidentiality and non-disparagement provisions (each applicable during employment and at all times thereafter).

Long-Term Equity Incentive Compensation and Other Compensatory Arrangements

The Compensation Committee administers the 2015 Equity Plan in which our named executive officers participate, the bonus payments made to our named executive officers provided for in the employment agreements described under the heading “—Employment Agreements,” and any other compensation-related matters as they otherwise determine in their discretion. The option grants made for service during 2020 to the named executive officers vest and become exercisable in equal (or as near equal as possible) installments over a 36-month period until fully vested, subject to their continued employment through the applicable vesting date.

During 2021, the Compensation Committee determined that 50% of any annual long-term equity incentive awards granted to our named executive officers for service during the year would be granted at the outset of the year in the form of performance-based options the vesting of which will be dependent on the achievement of specified performance metrics during the year of grant. The remaining 50 percent were granted in the form of option awards subject to time-based vesting early in the subsequent year (i.e. 2022) at the discretion of the Compensation Committee in accordance with past practice. In 2022, the Compensation Committee determined to return to the Company's historic practice of granting all such awards as options subject to time-based vesting.

2021 Bonus Compensation

Executive bonuses are determined by ~~reference.~~the Compensation Committee. The Compensation Committee determines whether bonuses are earned and the amounts of the bonus payout by considering a number of factors, the principal factor being based upon the performance goals developed by the Compensation Committee. Other important factors include clinical trial progress, business development activities, status of public filings, capital raising transactions, and stock price performance.

Outstanding Equity Awards at Fiscal Year End

Option Awards

The table below provides information regarding unexercised stock option awards held by each of our named executive officers that remained outstanding as of December 31, 2021. Unless otherwise indicated, each grant was awarded under our 2015 Equity Plan.

Name	Award Type	Grant Date	Shares Underlying Unexercisable Options Exercisable		Shares Underlying Unexercisable Options Unexercisable		Exercise Price		Expiration Date
Robert J. Cobuzzi, Jr., Ph.D.	NQO	1/7/2020		118,600		—	$	0.51	1/7/2030
	NQO	6/17/2020		61,300		—	$	1.00	6/17/2030
	NQO	9/8/2020		197,917		277,083	$	0.79	9/8/2030
	NQO	3/1/2021		14,920		38,793	$	1.11	3/1/2031
	NQO**	3/1/2021		17,904		35,809	$	1.11	3/1/2031
William K. Hornung	NQO	1/2/2018		6,000		—	$	17.70	1/2/2028
	NQO	1/2/2019		16,334		—	$	2.10	1/2/2029
	NQO	1/2/2020		35,067		17,533	$	0.46	1/2/2030
	NQO	3/1/2021		34,103		88,668	$	1.11	3/1/2031
	NQO**	3/1/2021		8,897		17,793	$	1.11	3/1/2031
Christopher D. Galloway, M.D.	NQO*	10/19/2020		77,778		122,222	$	0.85	10/19/2030
	NQO	3/1/2021		7,550		19,630	$	1.11	3/1/2031
	NQO**	3/1/2021		9,060		18,119	$	1.11	3/1/2031
William R. Elder	NQO*	9/22/2020		29,167		40,833	$	0.82	9/22/2030
	NQO	3/1/2021		24,357		63,327	$	1.11	3/1/2031
	NQO**	3/1/2021		6,947		13,894	$	1.11	3/1/2031

* - Non-plan based equity award grant made as an inducement to the individual’s acceptance of employment with the Company in accordance with Nasdaq Listing Rule 5635(c)(4).

** - Pursuant to the terms of the corresponding award agreements, two-thirds of the underlying shares originally granted were automatically forfeited due to the first patient in the ILD-DLCO Trial not being dosed on or before September 30, 2021. The Company announced dosing of the first patients in the ILD-DLCO Trial on December 16, 2021.

Restricted Stock Unit Awards

The table below provides information regarding restricted stock unit awards held by each of our named executive officers that remained outstanding as of December 31, 2021, if any. Each grant was awarded under our 2015 Equity Plan.

Name	Award Type	Grant Date		Number of Shares That Have Not Vested				Market Value of Shares That Have Not Vested*
Robert J. Cobuzzi, Jr., Ph.D.	RSU	1/7/2020			81,750			$	25,343

* - Based on a price per share of $0.31, the closing price of our common stock on December 31, 2021 as reported by Nasdaq. The award was granted to Dr. Cobuzzi in connection with his appointment as a non-employee director in January 2020 and vests in six tri-monthly installments. The first such installment vested on October 31, 2021.

401(k) Retirement Plan

We maintain our 401(k) Plan pursuant to which all eligible employees are entitled to make pre-tax and after-tax contributions of their compensation. In addition, the Company makes discretionary matching contributions at a rate of 100% for contributions up to 3% of the participant’s eligible compensation and 50% for any additional contributions up to 5% of the participant’s eligible compensation. The matching contributions received by our named executive officers in 2021 and 2020 are reported in the “All Other Compensation” column of the Summary Compensation Table above.

Post-Termination Severance and Change in Control Arrangements

As described under the heading “—Employment Agreements,” we have entered into employment agreements with each of Drs. Cobuzzi and Galloway and Messrs. Hornung and Elder that provide for certain severance and change of control benefits, subject to the execution and non-revocation of a release of claims by the executive or his estate (as applicable).

Under Dr. Cobuzzi’s employment agreement, if his employment is terminated by us other than for “cause,” death or “disability,” or by Dr. Cobuzzi for “good reason” (as such terms are defined in the employment agreement), Dr. Cobuzzi will be entitled to any unpaid bonus earned in the year prior to the termination, a pro-rata portion of the bonus earned during the year of termination, continuation of base salary for 12 months, plus 12 months of COBRA premium reimbursement, provided that if such termination occurs within 60 days before or within 24 months following a “change of control” (as defined in the employment agreement), then Dr. Cobuzzi will be entitled to receive the same severance benefits as described above, except that he will receive (a) a payment equal to two times the sum of his base salary and the higher of his target annual bonus opportunity and the bonus payment he received for the year immediately preceding the year in which the termination occurred instead of 12 months of base salary continuation, and (b) a payment equal to 36 times the monthly COBRA premium for him and his eligible dependents instead of 12 months of COBRA reimbursements (the payments in clauses (a) and (b) are paid in a lump sum in some cases and partly in a lump sum and partly in installments over 12 months in other cases). In addition, if Dr. Cobuzzi’s employment is terminated by us without cause or by Dr. Cobuzzi for good reason, in either case, upon or within 24 months following a change of control, then Dr. Cobuzzi will be entitled to full vesting of all equity awards received by him from us (with any equity awards that are subject to the satisfaction of performance goals deemed earned at not less than target performance, and with any equity award that is in the form of a stock option or stock appreciation right to remain outstanding and exercisable for 24 months following the termination date (but in no event beyond the expiration date of the applicable option or stock appreciation right)).

Under the employment agreements for each of Dr. Galloway and Messrs. Hornung and Elder, in the event that his employment is terminated by us other than for “cause”, death or “disability” or upon his resignation for “good reason” (as such terms are defined in the applicable employment agreement), the applicable executive will be entitled to any unpaid bonus earned in the year prior to the termination, a pro-rata portion of the bonus earned during the year of termination, continuation of base salary for 9 months, plus 12 months of COBRA premium reimbursement, provided that if such termination occurs within 60 days before or within 24 months following a “change of control” (as defined in the applicable employment agreement), then he will be entitled to receive the same severance benefits as described above, except that he will receive (a) a payment equal to 1.5 times the sum of his base salary and the higher of his target annual bonus opportunity and the bonus payment he received for the year immediately preceding the year in which the termination occurred instead of 9 months of base salary continuation and (b) a payment equal to 18 times the monthly COBRA premium for him and his eligible dependents instead of 12 months of COBRA reimbursements (the payments in clauses (a) and (b) are paid in a lump sum in some cases and in installments over 9 or 12 months in other cases). In addition, if the applicable executive’s employment is terminated by the Company without cause or by the applicable executive for good reason, in either case, upon or within 24 months following a change of control, then the applicable executive will be entitled to full vesting of all equity awards received by him from us (with any equity awards that are subject to the satisfaction of performance goals deemed earned at not less than target performance, and with any equity award that is in the form of a stock option or stock appreciation right to remain outstanding and exercisable for 24 months following the termination date (but in no event beyond the expiration date of the applicable option or stock appreciation right)).

Under the employment agreements for each of our current named executive officers, in the event that the executive’s employment is terminated due to his death or disability, he (or his estate) will be entitled to any unpaid bonus earned in the year prior to the termination, a pro-rata portion of the bonus earned during the year of termination, 12 months of COBRA premium reimbursement and accelerated vesting of (a) all equity awards received in payment of base salary or an annual bonus and (b) with respect to any other equity award, the greater of the portion of the unvested equity award that would have become vested within 12 months after the termination date had no termination occurred and the portion of the unvested equity award that is subject to accelerated vesting (if any) upon such termination under the applicable equity plan or award agreement (with performance goals deemed earned at not less than target performance, and with any equity award that is in the form of a stock option or stock appreciation right to remain outstanding and exercisable for 12 months following the termination date or, if longer, such period as provided under the applicable equity plan or award agreement (but in no event beyond the expiration date of the applicable option or stock appreciation right)).

Further, under the terms of the stock option agreements with our named executives officers, upon a completion of a “change of control” (as defined in the 2015 Equity Plan), options held by our named executive officers will become immediately vested and remain exercisable through their expiration date regardless of whether the holder remains in the employment or service of the Company after the change of control. Alternatively, in connection with a change of control, the Compensation Committee may, in its sole discretion, cash out the options.

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

~~The~~Based on information ~~required~~available to us and filings with the SEC, the following table sets forth certain information regarding the beneficial ownership (as defined by Rule 13d-3 under the Exchange Act) of our outstanding common stock as of March 1, 2022 for (i) each person or group of affiliated persons known by us to be the beneficial owner of more than 5% of our common stock, if any, (ii) each of our current directors; (iii) each of our current executive officers (as defined in Item 12402(a)(3) of ~~Form 10-K will~~Regulation S-K under the Exchange Act); and (iv) all of our current directors and named executive officers as a group. As of March 1, 2022, to our knowledge, no beneficial owner owned 5% or more of the shares of common stock then outstanding.

Beneficial ownership and percentage ownership are determined in accordance with the rules of the SEC and include voting or investment power with respect to shares of stock. This information does not necessarily indicate beneficial ownership for any other purpose. Under these rules, shares of common stock issuable under shares of preferred stock, stock options or warrants that are exercisable or convertible within 60 days of March 1, 2022 are deemed outstanding for the purpose of computing the beneficial ownership percentage of the holder thereof, but are not deemed outstanding for the purpose of computing the beneficial ownership percentage of any other person. Ownership is based upon information provided by each respective director and officer and public documents filed with the SEC, including Forms 3 and 4, Schedules 13D and 13G and certain other documents, which information may not be ~~set forth~~accurate as of the Record Date.

Unless otherwise indicated and subject to applicable community property laws, to our knowledge, each stockholder named in the ~~Proxy Statement~~following table possesses sole voting and investment power over their shares of common stock, except for those jointly owned with that person’s spouse. Unless otherwise indicated below, the address of each person listed on the table is ~~incorporated herein~~c/o Diffusion Pharmaceuticals Inc., 300 East Main Street, Suite 201, Charlottesville, Virginia 22902.

Name and Address of Beneficial Owner	Shares of Common Stock Beneficially Owned (1)		Common Stock Beneficial Ownership Percentage (2)
*Current Directors*
Robert Adams (3)		166,515		0.2	%
Robert J. Cobuzzi, Jr., Ph.D. (4)		551,507		0.5	%
Eric Francois (5)		104,125		0.1	%
Mark T. Giles (6)		210,173		0.2	%
Jane H. Hollingsworth (7)		162,661		0.2	%
Diana Lanchoney, M.D. (8)		104,125		0.1	%
Alan Levin (9)		156,158		0.2	%
*Current Named Executive Officers*
William R. Elder (10)		115,827		0.1	%
Christopher D. Galloway, M.D. (11)		171,063		0.2	%
William K. Hornung (12)		142,717		0.1	%
All Current Directors, Director Nominees, and Named Executive Officers as a Group (ten persons) (13)		1,884,871		1.8	%

* Indicates less than 0.1%

1. Includes shares of common stock held as of March 1, 2022 plus shares of common stock that may be acquired upon exercise of options, warrants and other rights exercisable within 60 days of the March 1, 2022.

2. Based on 101,924,581 shares of common stock issued and outstanding as of March 1, 2022. The percentage ownership and voting power for each person (or all directors and executive officers as a group) is calculated by ~~reference.~~assuming (i) the exercise or conversion of all preferred stock, options, warrants and convertible securities exercisable or convertible within 60 days of March 1, 2022 held by such person and (ii) the non-exercise and non-conversion of all outstanding preferred stock, warrants, options and convertible securities held by all other persons (including our other directors and executive officers).

3. Consists of (a) 1,706 shares held directly by Mr. Adams, (b) 631 shares held jointly with Mr. Adams’ wife, (c) 1,260 shares held for the benefit of Mr. Adams in his 401(k) retirement account, and (d) 162,918 shares of common stock issuable upon the exercise of options exercisable within 60 days of March 1, 2022.

4. Consists of (a) 34,602 shares held directly by Dr. Cobuzzi and (b) 516,905 shares of common stock issuable upon the exercise of options exercisable within 60 days of March 1, 2022.

5. Consists of 104,125 shares of common stock issuable upon the exercise of options exercisable within 60 days of March 1, 2022.

6. Consists of (a) 294 shares held for the benefit of Mr. Giles in his individual retirement account, (b) 53,513 shares held by MTG Investment Holdings, LLC, and (c) 156,366 shares of common stock issuable upon the exercise of options exercisable within 60 days of March 1, 2022. Mr. Giles is the sole member of MTG Investment Holdings, LLC and may be deemed to be the beneficial owner of such securities. Mr. Giles disclaims beneficial ownership of such securities except to the extent of his pecuniary interest therein.

7. Consists of (a) 32,876 shares held directly by Ms. Hollingsworth and (b) 129,875 shares of common stock issuable upon the exercise of options exercisable within 60 days of March 1, 2022.

8. Consists of 104,125 shares of common stock issuable upon the exercise of options exercisable within 60 days of March 1, 2022.

9. Consists of (a) 1,654 shares held by Mr. Levin directly and (b) 154,504 shares of common stock issuable upon the exercise of options exercisable within 60 days of March 1, 2022.

10. Consists of (a) 15,000 shares held directly by Mr. Elder and (b) 100,827 shares of common stock issuable upon the exercise of options exercisable within 60 days of March 1, 2022.

11. Consists of (a) 20,000 shares held for the benefit of Dr. Galloway in his individual retirement account, (b) 10,000 shares held for the benefit of Dr. Galloway’s wife in her individual retirement account, and (c) 141,063 shares of common stock issuable upon the exercise of options exercisable within 60 days of March 1, 2022.

12. Consists of 142,717 shares of common stock issuable upon the exercise of options exercisable within 60 days of March 1, 2022.

13. Includes 1,713,425 shares of common stock issuable upon the exercise of options exercisable within 60 days of March 1, 2022.

Delinquent Section 16(a) Reports

Section 16(a) of the Exchange Act requires our directors and executive officers and all persons who beneficially own more than 10 percent of the outstanding shares of our common stock to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock. Directors, executive officers and greater than 10 percent beneficial owners also are required to furnish us with copies of all Section 16(a) forms they file.

To our knowledge, based on a review of the copies of such reports and amendments to such reports furnished to us with respect to the year ended December 31, 2021, and based on written representations by our directors and executive officers, all required Section 16 reports under the Exchange Act, for our directors, executive officers and beneficial owners of greater than 10 percent of our common stock were filed on a timely basis during the year ended December 31, 2021, except for the following, each of which were not timely filed: Forms 3 relating to Mr. Francois' and Dr. Lanchoney's respective elections to the Board on June 25, 2021, each filed on October 15, 2021; and a Form 4 relating to a July 1, 2021 grant of options and restricted stock units to Dr. Lanchoney in connection with her election to and service on the Board, filed on October 15, 2021.

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Certain Relationships and Related Party Transactions

Our Audit Committee is charged with the responsibility of reviewing and approving or ratifying all related person transactions in accordance with the Listing Rules of the Nasdaq Capital Market and other applicable law, rules and regulations and any related policies and procedures adopted by or on behalf of the Company and then in effect.

Since January 1, 2020 there has been no transaction to which we have been a party in which (i) the amount involved in the transaction exceeds $120,000 and (ii) any of our directors, executive officers or, to our knowledge, beneficial owners of more than 5% of our capital stock had or will have a direct or indirect material interest. Furthermore, no family relationships exist among any of our directors or executive officers.

Director Independence

The information required by Item 13 of Form 10-K ~~will be set forth in~~with respect to director independence included above under the ~~Proxy Statement~~heading, "Item 10. Directors, Executive Officers and Corporate Governance — Corporate Governance," is incorporated herein by reference.

ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

Independent Registered Public Accounting Firm

The ~~information required~~Audit Committee selected KPMG LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2021. The Audit Committee's selection of KPMG LLP was ratified by ~~Item 14~~our stockholders at our 2021 annual meeting of ~~Form 10-K will~~stockholders.

Independent Registered Public Accounting Firm’s Fees

The table below presents fees billed to us for professional services rendered by KPMG LLP for the years ended December 31, 2021 and December 31, 2020.

	Aggregate Amount Billed
	2021		2020
Audit Fees	$	365,000	$	508,060
Audit-Related Fees	$	—	$	—
Tax Fees	$	—	$	80,000
All Other Fees	$	—	$	—
Total	$	365,000	$	588,060

Tax fees billed in 2020 represent fees paid to KPMG LLP in connection with an analysis under Section 382 of the Tax Code.

Pre-Approval Policies and Procedures

The Audit Committee has adopted procedures pursuant to which all audit, audit-related, and tax services and all permissible non-audit services provided by our independent registered public accounting firm must be ~~set forth~~pre-approved by the Audit Committee. All services rendered by KPMG during 2021 and 2020 were permissible under applicable laws and regulations and were approved in advance by the ~~Proxy Statement and is incorporated herein~~Audit Committee in accordance with the rules adopted by ~~reference.~~the SEC in order to implement requirements of SOX.

6389

PART IV

ITEM 15.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

1. Our financial statements are included in Part II, –Item ~~8. Financial Statements and Supplementary Data~~8 of this Annual Report.

2. All financial statement schedules have been omitted from this Item 15 as the required information is not applicable, is not present in amounts sufficient to require submission of such schedules, or because the information required is included in our financial statements or the related notes included in Part II, –Item ~~8. Financial Statements and Supplementary Data~~8 of this Annual Report.

3. The exhibits set forth in the following "Index to Exhibits" are filed with, furnished with, and/or incorporated ~~herein~~ by reference into this Annual Report, as ~~described thereon.~~set forth therein. A copy of any of such exhibit will be furnished at a reasonable cost, upon receipt from any person of a written request for any such exhibit. Such request should be sent to Diffusion Pharmaceuticals Inc., ~~1317 Carlton Avenue,~~300 East Main Street, Suite ~~200,~~201, Charlottesville, Virginia 22902, Attention: General Counsel.

6490

INDEX TO EXHIBITS

Exhibit No.	Description	Method of Filing
3.1	Certificate of Incorporation of Diffusion Pharmaceuticals Inc., as amended	Incorporated by reference to Exhibit 3.1 to the registrant’s annual report on Form 10-K for the year ended December 31, 2019

3.2	Bylaws of Diffusion Pharmaceuticals Inc., as amended	Incorporated by reference to Exhibit 3.4 to the registrant’s annual report on Form 10-K for the year ended December 31, 2015

4.1	Form of 2017 Private Placement Warrant	Incorporated by reference to Exhibit 4.1 to the registrant’s current report on Form 8-K filed on March 15, 2017

4.2	Form of 2018 Common Stock Warrant	Incorporated by reference to Exhibit 4.1 to the registrant’s current report on Form 8-K filed on January 19, 2018

4.3	Form of 2018 Underwriter's Warrant	Incorporated by reference to Exhibit 4.2 to the registrant’s current report on Form 8-K filed on January 22, 2018

4.4	Form of May 2019 Common Stock Warrant	Incorporated by reference to Exhibit 4.1 to the registrant’s current report on Form 8-K filed on May 28, 2019

4.5	Form of May 2019 Placement Agent’s Warrant	Incorporated by reference to Exhibit 4.2 to the registrant’s current report on Form 8-K filed on May 28, 2019

4.6	Form of November 2019 Series I Common Stock Warrant	Incorporated by reference to Exhibit 4.1 to the registrant’s current report on Form 8-K filed on November 13, 2019

4.7	Form of November 2019 Series II Common Stock Warrant	Incorporated by reference to Exhibit 4.2 to the registrant’s current report on Form 8-K filed on November 13, 2019

4.8	Form of November 2019 Pre-Funded Common Stock Warrant	Incorporated by reference to Exhibit 4.3 to the registrant’s current report on Form 8-K filed on November 13, 2019

4.9	Form of November 2019 Placement Agent’s Warrant	Incorporated by reference to Exhibit 4.4 to the registrant’s current report on Form 8-K filed on November 13, 2019

4.10	Form of December 2019 Common Stock Warrant	Incorporated by reference to Exhibit 4.1 to the registrant’s current report on Form 8-K filed on December 13, 2019

4.11	Form of December 2019 Placement Agent’s Warrant	Incorporated by reference to Exhibit 4.2 to the registrant’s current report on Form 8-K filed on December 13, 2019

4.12	Form of May 2020 Common Stock Warrant	Incorporated by reference to Exhibit 4.1 to the registrant’s current report on Form 8-K filed on May 8, 2020

4.13	Form of May 2020 Placement Agent's Warrant (In Respect of Exercise Transaction)	Incorporated by reference to Exhibit 4.2 to the registrant’s current report on Form 8-K filed on May 8, 2020

4.14	Form of May 2020 Placement Agent's Warrant (In Respect of Offering Transaction)	Incorporated by reference to Exhibit 4.3 to the registrant’s current report on Form 8-K filed on May 20, 2020

4.15	Form of February 2021 Underwriter's Warrant	Incorporated by reference to Exhibit 4.1 to the registrant’s current report on Form 8-K filed on February 18, 2021

4.16	Description of Securities	Incorporated by reference to Exhibit 4.12 to the registrant's annual report on 10-K for the year ended December 31, 2019

10.1

Employment Agreement dated as of September 8, 2020 by and between Robert J. Cobuzzi, Jr., Ph.D. and Diffusion Pharmaceuticals Inc.*

Incorporated by reference to Exhibit 10.2 to the registrant’s current report on Form 8-K filed on September 9, 2020

10.2	Amended and Restated Employment Agreement, dated as of September 21, 2018, by and between William Karl Hornung and Diffusion Pharmaceuticals Inc. *		Incorporated by reference to Exhibit 10.2 to the registrant's Current Report on Form 8-K filed September 27, 2018

10.3	Employment Agreement, dated as of October 19, 2020, by and between Christopher D. Galloway, M.D. and Diffusion Pharmaceuticals Inc. *		Incorporated by reference to Exhibit 10.1 to the registrant's Current Report on Form 8-K filed October 20, 2020

10.4	Employment Agreement, dated as of September 23, 2020, by and between William Elder and Diffusion Pharmaceuticals Inc. *		Incorporated by reference to Exhibit 10.1 to the registrant's Current Report on Form 8-K filed September 25, 2020

10.5	Employment Agreement, dated as of September 6, 2016, by and between David G. Kalergis and Diffusion Pharmaceuticals Inc.*		~~Incorporated by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K filed on September 8, 2016~~

~~10.6~~	Separation Agreement dated as of September 8, 2020 by and between David G. Kalergis and Diffusion Pharmaceuticals Inc.*		~~Incorporated by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K filed on September 9, 2020~~

~~10.7~~	Employment Agreement, dated as of October 18, 2016, by and between John L. Gainer and Diffusion Pharmaceuticals Inc.*		~~Incorporated by reference to Exhibit 10.18 to the registrant’s annual report on Form 10-K/A filed on April 28, 2017~~

~~10.8~~	Separation Agreement, dated as of March 12, 2020, by and between John L. Gainer and Diffusion Pharmaceuticals Inc.*		~~Incorporated by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K filed on March 18, 2020~~

~~10.9~~	Consulting Agreement, dated as of March 12, 2020, by and between John L. Gainer and Diffusion Pharmaceuticals Inc.*		~~Incorporated by reference to Exhibit 10.2 to the registrant’s current report on Form 8-K filed on March 18, 2020~~

~~10.1~~	Diffusion Pharmaceuticals Inc. 2015 Equity Incentive Plan**		Incorporated by reference to Appendix C to the registrants definitive proxy statement on Schedule 14A filed on June 10, 2016

~~10.11~~10.6	Amendment No. 1 to Diffusion Pharmaceuticals Inc. 2015 Equity Incentive ~~Plan~~Plan*		Incorporated by reference to Appendix B to the registrants definitive proxy statement on Schedule 14A filed on June 10, 2016

~~10.12~~10.7	Form of Stock Option Award AgreementAgreement under 2015 Equity Incentive Plan		~~Incorporated by reference to Exhibit 10.5 to the registrant’s annual report on Form 10-K for the year ended December 31, 2017~~
			Filed herewith
~~10.13~~10.8	Form of Director RSU Agreement under 2015 Equity Incentive Plan*	Filed herewith
10.9	Form of Diffusion Pharmaceuticals LLC Stock Option Award Agreement*		Incorporated by reference to Exhibit 10.24 to the registrant’s annual report on Form 10-K for the year ended December 31, 2015

~~10.14~~10.10	Form of Indemnification Agreement between Diffusion Pharmaceuticals Inc. and each of its Directors and Officers*		Incorporated by reference to Exhibit 10.3 to the registrant’s annual report on Form 10-K for the year ended December 31, 2015

~~10.15~~	~~Form of Securities Purchase Agreement, dated as of May 18, 2020, by and among Diffusion Pharmaceuticals Inc. and the purchasers party thereto~~		~~Incorporated by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K filed on May 20, 2020~~

~~10.16~~	~~Lease Agreement, dated March 31, 2017, by and between Diffusion Pharmaceuticals Inc. and One Carlton LLC~~		~~Incorporated by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K filed on March 15, 2017~~

21.1	Subsidiaries of Diffusion Pharmaceuticals Inc.		Filed herewith

23.1	Consent of KPMG LLP, independent registered public accounting firm		Filed herewith

31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and SEC Rule 13a-14(a)		Filed herewith

31.2	Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and SEC Rule 13a-14(a)		Filed herewith

32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed herewith

101	The following materials from the registrant’s annual report on Form 10-K for the year ended December 31, ~~2020,~~2021, formatted in ~~XBRL (Extensible~~iXBRL (Inline Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Cash Flows, and (iv) Notes to Consolidated Financial Statements	Filed herewith
104	Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101)
*	Indicates a management contract or compensatory plan or arrangement.

*ITEM 16.

~~Indicates a management contract or compensatory plan or arrangement.~~

~~ITEM 16.~~

FORM 10-K SUMMARY

None.

6792

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: March ~~16, 2021~~18, 2022	DIFFUSION PHARMACEUTICALS INC.

	By:	/s/ Robert J. Cobuzzi, Jr., Ph.D.
		Robert J. Cobuzzi, Jr., Ph.D.
		President, Chief Executive Officer, and Director
		(Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Name and Signature	Title	Date

/s/ Robert J. Cobuzzi, Jr., Ph.D.	President, Chief Executive Officer, and Director	March ~~16, 2021~~18, 2022
Robert J. Cobuzzi, Jr., Ph.D.	(Principal Executive Officer)

/s/ William K. Hornung	Chief Financial Officer	March ~~16, 2021~~18, 2022
William K. Hornung	(Principal Financial and Accounting Officer)

/s/ ~~David G. Kalergis~~Jane H. Hollingsworth	~~Chairman~~Chair of the Board	March ~~16, 2021~~18, 2022
~~David G. Kalergis~~Jane H. Hollingsworth

/s/ Robert Adams	Director	March ~~16, 2021~~18, 2022
Robert Adams

/s/ ~~Jane Hollingsworth~~Eric Francois	Director	March ~~16, 2021~~18, 2022
~~Jane Hollingsworth~~

~~/s/ John L. Gainer, Ph.D.~~	~~Director~~	~~March 16, 2021~~
~~John L. Gainer, Ph.D.~~Eric Francois

/s/ Mark T. Giles	Director	March ~~16, 2021~~18, 2022
Mark T. Giles

/s/ Diana Lanchoney	Director	March 18, 2022
Diana Lanchoney

/s/ Alan Levin	Director	March ~~16, 2021~~18, 2022
Alan Levin

6893

For the fiscal year ended December31, 2021
OR
☐	~~ANNUAL~~TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the ~~fiscal year ended December~~~~31, 2020~~
OR
☐		~~TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~
~~For the~~ transition period from to

Delaware	~~30-0645032~~
(State or Other Jurisdiction of Incorporation or Organization)	30-0645032 (I.R.S. Employer Identification No)
~~1317 Carlton Avenue,~~ 300 East Main Street, Suite ~~200~~
201 Charlottesville, VA	~~22902~~
(Address of Principal Executive Offices)	22902 (Zip Code)

Title of Each Class	Trading Symbol	Name of Each Exchange on Which Registered
Common Stock, par value $0.001 per share	DFFN	The Nasdaq Capital Market

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒	Smaller reporting company ☒
Emerging growth company ☐

PART I		1

ITEM 1.	BUSINESS	1

ITEM 1A.	RISK FACTORS	2125

ITEM 1B.	UNRESOLVED STAFF COMMENTS	3643

ITEM 2.	PROPERTIES	3643

ITEM 3.	LEGAL PROCEEDINGS	3643

ITEM 4.	MINE SAFETY DISCLOSURES	3643

PART II		3744

ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	3744

ITEM 6.	SELECTED FINANCIAL DATA	3744

ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	3845

ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	4552

ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	4652

ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	6269

ITEM 9A.	CONTROLS AND PROCEDURES	6269

ITEM 9B.	OTHER INFORMATION	6270

PART III		6371

ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	6371

ITEM 11.	EXECUTIVE COMPENSATION	6383

ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	6387

ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	6389

ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES	6389

PART IV		6490

ITEM 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES	6490

ITEM 16.	FORM 10-K SUMMARY	6792

Term	Definition
2015 Equity Plan	Diffusion Pharmaceuticals Inc. 2015 Equity Incentive Plan, as amended
2017 Tax Act	Tax Cuts and Jobs Act of 2017
401(k) Plan	Diffusion Pharmaceuticals Inc. 401(k) Defined Contribution Plan
Affordable Care Act	U.S. Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act
Altitude Trial	our ongoing Phase 1b clinical trial evaluating TSC in normal healthy volunteers subjected to incremental levels of physical exertion while exposed to hypoxic and hypobaric conditions, or “simulated altitude”
ANDA	abbreviated new drug application
Annual Report	this Annual Report on Form 10-K
API	active pharmaceutical ingredient
~~ARDS~~	~~acute respiratory distress syndrome~~
ASC	Accounting Standard Codification of the FASB
~~ASC 740-10~~	~~ASC Subtopic 740-10,~~ ~~Accounting for Uncertainty of Income Taxes~~
ASC 815-40	ASC 815-40, Derivatives and Hedging, Contracts in an Entity's Own Equity
ASUs	Accounting Standards Updates of the FASB
~~ASU 2018-07~~Bid Price Rule	~~ASU 2018-07,~~ ~~Compensation--Stock Compensation (Topic 718): Improvements to Non-employee Share Based Payment Accounting~~the minimum bid price requirement contained in Nasdaq Listing Rule 5550(a)(2)
Black-Scholes Model	Black-Scholes-Merton derivative investment instrument pricing model
Board	our board of directors
Bylaws	the Company's bylaws, as amended
Carlton Lease	the Lease Agreement, dated March 31, 2017, related to our prior corporate headquarters located at 1317 Carlton Avenue in Charlottesville, Virginia
COVID-19	Corona Virus Disease 2019, the novel coronavirus disease known as COVID-19, caused by ~~SARS-CoV-2~~severe acute respiratory syndrome coronavirus 2 viral infection
COVID Trial	our Phase 1b clinical trial evaluating TSC in hospitalized COVID-19 patients, completed in February 2021
cGMP	current good manufacturing practices
CMO	contract manufacturing organization
CMS	Centers for Medicare & Medicaid Services
CRO	contract research organization
CTA	clinical trial application
December 2019 Offering	our registered direct public offering and sale of 6,266,787 shares of common stock and concurrent private placement of warrants to purchase up to 6,266,787 shares of common stock completed in December 2019
Diffusion LLC	Diffusion Pharmaceuticals LLC, a Virginia limited liability company and our wholly owned subsidiary
DLCO	diffusion capacity of lung for carbon monoxide
Dodd-Frank Act	Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
E.U.	European Union
~~ETASU~~	~~elements to assure safe use~~
Exchange Act	Securities Exchange Act of 1934, as amended
FASB	Financial Accounting Standards Board
FDA	U.S. Food and Drug Administration
FDC Act	Federal Food, Drug, and Cosmetic Act

February 2021 Offering	our public offering and sale of 33,658,538 shares of common stock completed in February 2021
G&A	general and administrative
GAAP	U.S. generally accepted accounting principles
GBM	glioblastoma multiforme brain cancer
GBM Trial	our Phase 3 clinical trial evaluating TSC in a newly diagnosed inoperable GBM patient population, initiated in December 2017
GCP	good clinical practice
GLP	good laboratory practice

HIPAA	Health Insurance Portability and Accountability Act of 1996
HITECH	Health Information Technology for Economic and Clinical Health Act of 2009
Hypoxic Solid Tumor Program	our ongoing clinical development program to evaluate TSC as an adjunct to standard of care therapy for hypoxic solid tumors, first announced in November 2021
ILD	interstitial lung disease
ILD-DLCO Trial	our ongoing Phase 2a clinical trial evaluating TSC in patients with previously diagnosed ILD who have a baseline DLCO test result that is abnormal using DLCO as a surrogate measure of oxygen transfer efficiency
IMM	irreversible morbidity and mortality
IND	investigational new drug application
IPR&D	in-process research and development
IRB	institutional review board
~~January 2018 Offering~~	~~our public offering and sale of 1,131,375 shares of common stock and warrants to purchase up to 1,131,375 shares of common stock completed in January 2018~~
May 2019 Offering	our registered direct public offering and sale of 1,317,060 shares of common stock and concurrent private placement of warrants to purchase up to 1,317,060 shares of common stock completed in May 2019
May 2020 Investor Warrant Exercise	the exercise of the Prior Warrant in May 2020 pursuant to a warrant exercise agreement
May 2020 Offering	our registered direct public offering and sale of 11,428,572 shares of common stock completed in May 2020
Nasdaq or NASDAQ	Nasdaq Stock Market, LLC
Nasdaq Staff	the staff of the listing qualifications department of Nasdaq
NDA	new drug application
~~NIID~~	~~National Institute of Infectious Diseases in Bucharest, Romania~~
NOL	net operating loss
November 2019 Offering	our public offering and sale of 5,104,429 shares of common stock, pre-funded warrants to purchase up to 6,324,143 shares of common stock, and warrants to purchase up to 22,857,144 shares of common stock completed in November 2019
~~PaO2~~Oxygenation Trials	~~partial pressure of blood oxygen~~collectively, the TCOM Trial, the Altitude Trial, and the ILD-DLCO Trial
Planned Phase 2 ~~Hypoxia-related Indication~~Hypoxic Tumor Trial	the first clinical trial in our Hypoxic Solid Tumor Program, which we currently expect to be a Phase 2 ~~controlled,~~ clinical ~~outcome study evaluating TSC~~trial commencing in ~~one or more appropriate hypoxiarelated indications that we intend~~the second half of 2022, subject to ~~initiate assuming success in one or more~~FDA feedback and the availability of ~~the TSC Oxygenation Trials~~clinical drug supply
Prior Warrant	a previously outstanding warrant to purchase up to 5,000,000 shares of common stock at an exercise price of $0.35 per share
~~Proxy Statement~~	our definitive proxy statement on Schedule 14A for our 2021 Annual Meeting of Stockholders, to be filed with the SEC within 120 days after December 31, 2020, the end of the fiscal year to which this Annual Report relates
R&D	research and development
Regulation S-K	Regulation S-K promulgated under the Securities Act
REMS	risk evaluation and mitigation strategy
~~SARS-CoV-2~~Reverse Stock Split	~~severe acute respiratory syndrome coronavirus 2,~~ the ~~virus responsible for COVID-19~~proposed reclassification and combination of all shares of our common stock outstanding at a ratio of not less than one-for-two and not greater than one-for-50, the approval of which will be voted on by our stockholders at the Special Meeting
SEC	U.S. Securities and Exchange Commission
Securities Act	Securities Act of 1933, as amended
SOX	Sarbanes-Oxley Act of 2002, as amended
Special Meeting	the special meeting of our stockholders to be held on April 14, 2022
Sunshine Act	Physician Payments Sunshine Act

Tax Code	U.S. Internal Revenue Code of 1986, as amended
TCOM	transcutaneous oxygen measurement

~~tPA~~	~~tissue plasminogen activator~~
~~TSC~~	~~trans sodium crocetinate~~
~~TSC COVID Trial~~	~~our Phase 1b clinical trial evaluating TSC in hospitalized COVID-19 patients, completed in February 2021~~
~~TSC DLCO Trial~~	our planned Phase 2a clinical trial evaluating the effects of TSC through the measure of DLCO through the lungs as a surrogate measure of oxygen transfer efficiency in patients with previously diagnosed interstitial lung disease who have a baseline DLCO test that is abnormal
~~TSC GBM Trial~~	~~our Phase 3 clinical trial evaluating TSC in a newly diagnosed inoperable GBM patient population initiated in December 2017~~
~~TSC Induced Hypoxia Trial~~	~~our planned Phase 1b clinical trial evaluating the effects of TSC on VO2 and PaO2 in normal healthy volunteers exposed to conditions that induce hypoxia~~
~~TSC Oxygenation Trials~~	~~collectively, the TSC TCOM Trial, the TSC Induced Hypoxia Trial, and the TSC DLCO Trial~~
~~TSC Stroke Trial~~	~~our Phase 2 clinical trial evaluating TSC in the treatment of acute ischemic or hemorrhagic stroke, initiated in October 2019~~
~~TSC~~ TCOM Trial	our ~~planned~~ Phase 1b clinical trial evaluating the effects of TSC on peripheral tissue oxygenation in healthy normal volunteers using a TCOM device, ~~which we expect to commence before the end of~~completed in March 2021
TSC	trans sodium crocetinate, our lead product candidate
U.S.	United States
USPTO	U.S. Patent and Trademark Office
~~VO2~~	~~maximal oxygen consumption~~

	Year ended December 31,									Year ended December 31,
	2020			2019			Change			2021			2020			Change
Operating expenses:
Research and development	$	9,427,667		$	6,619,597		$	2,808,070		$	8,499,414		$	9,427,667		$	(928,253	)
Intangible asset impairment charge											8,639,000			—		$	8,639,000
General and administrative		6,444,109			4,834,284			1,609,825			7,445,277			6,444,109			1,001,168
Depreciation		103,168			97,915			5,253			93,416			103,168			(9,752	)
Loss from operations		(15,974,944	)		(11,551,796	)		4,423,148			(24,677,107	)		(15,974,944	)		8,702,163
Interest income		114,257			85,302			28,955			137,487			114,257			23,230
Loss from operations before income taxes		(15,860,687	)		(11,466,494	)		(4,394,193	)		(24,539,620	)		(15,860,687	)		(8,678,933	)
Income tax benefit (expense)		1,675,381			(332,885	)		2,008,266			443,893			1,675,381			(1,231,488	)
Net loss	$	(14,185,306	)	$	(11,799,379	)	$	(2,385,927	)	$	(24,095,727	)	$	(14,185,306	)	$	(7,447,445	)

	December 31,						December 31,
Net cash (used in) provided by:	2020			2019			2021			2020
Operating activities	$	(13,552,628	)	$	(9,858,375	)	$	(14,501,789	)	$	(13,552,629	)
Investing activities								4,000			—
Financing activities		17,890,875			16,044,552			33,295,752			17,890,875
Net increase in cash and cash equivalents	$	4,338,247		$	6,186,177		$	18,797,963		$	4,338,246

Description	Page

Report of Independent Registered Public Accounting Firm (KPMG LLP, McLean, Virginia Auditor Firm ID: 185)	4753

Consolidated Balance Sheets as of December 31, ~~2020~~2021 and ~~2019~~2020	4854

Consolidated Statements of Operations for the years ended December 31, ~~2020~~2021 and ~~2019~~2020	4955

Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, ~~2020~~2021 and ~~2019~~2020	5056

Consolidated Statements of Cash Flows for the years ended December 31, ~~2020~~2021 and ~~2019~~2020	5157

Notes to the Consolidated Financial Statements for the years ended December 31, ~~2020~~2021 and ~~2019~~2020	5258

	Stockholders' Equity												Stockholders' Equity
	Common Stock												Common Stock
					Additional Paid-in		Accumulated			Total Stockholders'			Shares		Amount		Additional Paid-in Capital			Accumulated Deficit			Total Stockholders' Equity
	Shares		Amount		Capital		Deficit			Equity
Balance at December 31, 2018		3,376,230	$	3,377	$	95,532,881	$	(79,924,699	)	$	15,611,559
Balance at December 31, 2019														33,480,365	$	33,481	$	111,824,859		$	(91,724,078	)	$	20,134,262
Issuance of common stock, pre-funded warrants and warrants, net of issuance costs		12,688,276		12,688		11,905,207		—			11,917,895			11,428,572		11,429		10,330,202			0			10,341,631
Issuance of common stock upon exercise of warrants		17,415,859		17,416		3,871,009		—			3,888,425			19,106,504		19,106		7,768,370			0			7,787,476
Stock-based compensation expense		—		—		515,762		—			515,762			—		0		736,119			0			736,119
Net loss		—		—		—		(11,799,379	)		(11,799,379	)		—		0		0			(14,185,306	)		(14,185,306	)
Balance at December 31, 2019		33,480,365		33,481		111,824,859		(91,724,078	)		20,134,262
Balance at December 31, 2020														64,015,441		64,016		130,659,550			(105,909,384	)		24,814,182
Issuance of common stock and warrants, net of issuance costs		11,428,572		11,429		10,330,202		—			10,341,631			33,658,538		33,658		31,060,644			0			31,094,302
Issuance of common stock upon exercise of warrants		19,106,504		19,106		7,768,370		—			7,787,476			4,230,000		4,230		2,197,220			0			2,201,450
Vesting of restricted stock units														10,301		10		(10	)		0			0
Stock-based compensation expense		—		—		736,119		—			736,119			—		0		897,260			0			897,260
Net loss		—		—		—		(14,185,306	)		(14,185,306	)		—		0		0			(24,095,727	)		(24,095,727	)
Balance at December 31, 2020		64,015,441	$	64,016	$	130,659,550	$	(105,909,384	)	$	24,814,182
Balance at December 31, 2021														101,914,280	$	101,914	$	164,814,664		$	(130,005,111	)	$	34,911,467

	Rental Commitments
2021	$	118,519
2022		39,735
Total		158,254
Less: imputed interest		(9,092	)
	$	149,162