UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.20549

FORM 10-Q

(Mark one)

☒

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

~~QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

For the quarterly period ended September30, ~~2017~~2021

☐

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

~~TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

For the transition period from ___________ to ______________.

Commission file number: 000-24477

DIFFUSION PHARMACEUTICALS INC.

(Exact name of registrant as specified in its charter)

Delaware	30-0645032
(State of other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

~~1317 Carlton Avenue,~~300 East Main Street, Suite ~~400~~
201
Charlottesville, VA 22902

(Address of principal executive offices, including zip code)

(434) 220-0718

(~~Registrant~~’sRegistrant’s telephone number including area code)

Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
Common Stock, par value $0.001 per share	DFFN	NASDAQ Capital Market

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ~~☐ (Do not check if a smaller reporting company)~~☒	Smaller reporting company ☒
	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes ☐ No ☒

The number of shares of common stock outstanding at November ~~10, 2017~~8, 2021 was ~~14,521,730~~101,920,329 shares.

DIFFUSION PHARMACEUTICALS INC.

FORM 10-Q

SEPTEMBER30, ~~2017~~2021

INDEX

	Page
PART I – FINANCIAL INFORMATION	1

ITEM 1. FINANCIAL STATEMENTS	1

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	21 14

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	3122

ITEM 4. CONTROLS AND PROCEDURES	3122

PART II – OTHER INFORMATION	3223

ITEM 1. LEGAL PROCEEDINGS	3223

ITEM 1A. RISK FACTORS	3223

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	3224

ITEM 3. DEFAULTS UPON SENIOR SECURITIES	3224

ITEM 4. MINE SAFETY DISCLOSURES	3224

ITEM 5. OTHER INFORMATION	3224

ITEM 6. EXHIBITS	3224

Note Regarding Company References and Other Defined Terms

Unless the context otherwise requires, in this ~~report,~~Quarterly 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~~Company. We have also used several other defined terms in this Quarterly Report, many of which are explained or defined below:

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
Altitude Trial	our planned Phase 1b clinical trial evaluating the effects of TSC on V02 and PaO2 in normal healthy volunteers exposed to conditions that induce hypoxia
Annual Report	our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 16, 2021
ASC	Accounting Standard Codification of the FASB
ASUs	Accounting Standards Updates of the FASB
Carlton Landlord	One Carlton, LLC
Carlton Lease	the Lease Agreement, dated March 31, 2017, related to our prior corporate headquarters located at 1317 Carlton Avenue in Charlotteville, Virginia
COVID Trial	our Phase 1b clinical trial evaluating TSC in hospitalized COVID-19 patients, completed in February 2021
COVID-19	Corona Virus Disease 2019, the novel coronavirus disease known as COVID-19, caused by SARS-CoV-2 infection
CMO	contract manufacturing organization
CRO	contract research organization
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
DLCO	diffusion capacity of lung for carbon monoxide
Exchange Act	Securities Exchange Act of 1934, as amended
FASB	Financial Accounting Standards Board
FDA	U.S. Food and Drug Administration
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
Hypoxic Solid Tumor Program	our program of studies designed to evaluate the efficacy of TSC as a treatment for patients with hypoxic solid tumors
ILD-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
IND	investigational new drug application
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 a previously outstanding warrant to purchase up to 5,000,000 shares of common stock at an exercise price of $0.35 per share 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	Nasdaq Stock Market, LLC
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
Oxygenation Trials	collectively, the TCOM Trial, the Altitude Trial, and the ILD-DLCO Trial
PaO2	partial pressure of blood oxygen
Quarterly Report	this Quarterly Report on Form 10-Q

R&D	research and development
Regulation S-K	Regulation S-K promulgated under the Securities Act
SEC	U.S. Securities and Exchange Commission
Securities Act	Securities Act of 1933, as amended
TCOM Trial	our Phase 1b clinical trial evaluating the effects of TSC on peripheral tissue oxygenation in healthy normal volunteers using a TCOM device, completed in March 2021
TCOM	transcutaneous oxygen measurement
TSC	trans sodium crocetinate
U.S.	United States
VO2	maximal oxygen consumption

iii

Note Regarding Forward-Looking Statements

This Quarterly Report (including, for purposes of this Note Regarding Forward-Looking Statements, any information or documents incorporated herein by reference) includes express and ~~references~~implied forward-looking statements. By their nature, forward-looking statements involve risks and uncertainties because they relate to ~~"Series A convertible preferred stock" refer~~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 Quarterly 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 Quarterly Report. In addition, even if our results of operations, financial condition, liquidity, and prospects are consistent with the forward-looking statements contained in this Quarterly 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 Quarterly 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 concerning, among other things:

•

the success and timing of our clinical and preclinical studies, including our ability to enroll subjects in our ongoing and planned clinical studies at anticipated rates;

•

our ability to obtain and maintain regulatory approval of our product candidates and, if approved, our products, including the labeling under any approval we may obtain;

•

our plans and ability to develop and commercialize our product candidates and the outcomes of our research and development activities;

•

the accuracy of our estimates of the size and characteristics of the potential markets for our product candidates, the rate and degree of market acceptance of any of our product candidates that may be approved in the future, and our ability to serve those markets;

•

the success of products that are or may become available which also target the potential markets for our product candidates;

•

obtaining and maintaining intellectual property protection for our product candidates and our proprietary technology;

•

our ability to operate our business without infringing the intellectual property rights of others and the potential for others to infringe upon our intellectual property rights;

•

our failure to recruit or retain key scientific or management personnel or to retain our executive officers;

•

the performance of third parties, including contract research organizations, manufacturers, suppliers, and outside consultants, to whom we outsource certain operational, staff and other functions;

•

our ability to obtain additional financing in the future and continue as a going concern;

•

our estimates regarding expenses, future revenues, capital requirements, and needs for additional financing;

•

regulatory developments in the U.S., E.U., and other foreign jurisdictions;

•

recently enacted and future legislation related to the healthcare system, including trends towards managed care and healthcare cost containment, the impact of any significant spending reductions or cost controls affecting publicly funded or subsidized healthcare programs, or any replacement, repeal, modification, or invalidation of some or all of the provisions of the Affordable Care Act;

•

any significant breakdown, infiltration, or interruption of our information technology systems and infrastructure;

•

our ability to satisfy the continued listing requirements of the NASDAQ Capital Market or any other exchange on which our securities may trade in the future;

•

uncertainties related to general economic, political, business, industry, and market conditions, including the ongoing COVID-19 pandemic; and

•

other risks and uncertainties, including those discussed under the heading "Risk Factors" in this Annual Report and elsewhere in our other public filings.

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 Quarterly Report. Accordingly, we cannot assure you that the ~~Series A convertible preferred stock, par value $0.001 per share,~~forward-looking statements contained or incorporated by reference in this Quarterly 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 risks or uncertainties. In light of the ~~Company. On August 17, 2016,~~foregoing and the ~~Company effected~~significant uncertainties in these forward-looking statements, you should not regard these statements as a ~~1-for-10 reverse split~~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 ~~its common stock. Unless noted otherwise, any share or per share amounts~~the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Any forward-looking statements that we make in this ~~report,~~Quarterly Report speak only as of the ~~accompanying unaudited condensed consolidated financial~~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 Quarterly Report or to reflect the occurrence of unanticipated events. Comparisons of current and ~~related notes give retroactive effect~~any prior period results are not intended to ~~this reverse stock split.~~express any ongoing or future trends or indications of future performance, unless explicitly expressed as such, and should only be viewed as historical data.

Note Regarding Trademarks, Trade Names and Service Marks

This ~~report~~Quarterly Report contains ~~the following~~certain trademarks, trade names, and service marks of ~~ours: Diffusion.~~ours, including “DIFFUSIO₂N.” All other trade names, trademarks, and service marks appearing in this ~~quarterly report on Form 10-Q~~Quarterly Report are, to the knowledge of Diffusion, the property of their respective owners. ~~We have assumed that~~To the ~~reader understands that all such terms are source-indicating. Accordingly,~~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.

See accompanying notes to unaudited ~~condensed~~interim consolidated financial statements.

~~Condensed~~ Consolidated Statement of Changes in ~~Convertible Preferred Stock and~~ Stockholders' Equity

~~(a) In 2017, the Company adopted provisions of ASU 2016-09~~~~, Improvements to Employee Share Based Payment Accounting~~, resulting in a cumulative effect adjustment to Accumulated Deficit and Additional Paid-in Capital for previously unrecognized stock-based compensation expense. See Note 3 for further discussion of the impacts of this standard.

See accompanying notes to unaudited ~~condensed~~interim consolidated financial statements.

~~Condensed~~ Consolidated ~~Statements~~Statement of ~~Cash Flows~~Changes in Stockholders' Equity

See accompanying notes to unaudited ~~condensed~~interim consolidated financial statements.

Diffusion Pharmaceuticals Inc. ~~(“Diffusion” or the “Company”)~~, a Delaware corporation, is a ~~clinical stage biotechnology~~biopharmaceutical company ~~focused on extending~~developing novel therapies that enhance the ~~life expectancy of cancer patients by improving~~body’s ability to deliver oxygen to the ~~effectiveness of current standard-of-care treatments, including radiation therapy and chemotherapy.~~areas where it is needed most. The ~~Company is developing its~~Company’s lead product candidate, ~~trans sodium crocetinate (“TSC”) for use in many cancer types in which tumor oxygen deprivation ("hypoxia") is known to diminish the effectiveness of current treatments.~~ TSC, is ~~designed~~being developed to ~~target~~enhance the ~~cancer’s hypoxic micro-environment, re-oxygenating treatment-resistant tissue~~diffusion of oxygen to tissues with low oxygen levels, also known as hypoxia, a serious complication of many of medicine’s most intractable and making the cancer cells more susceptible to the therapeutic effects of standard-of-care radiation therapy and chemotherapy. The U.S. Food and Drug Administration (“FDA”) provided Diffusion with final protocol guidance for a Phase 3 trial of TSC in newly diagnosed inoperable GBM patients and the Company plans to begin the trial by the end of 2017.difficult-to-treat conditions.

On January 8, 2016, the Company completed a reverse merger (the “Merger”) with RestorGenex Corporation (“RestorGenex”) whereby the Company was considered the acquirer for accounting purposes. The operational activity of RestorGenex is included in the Company’s consolidated financial statements from the date of acquisition. Accordingly, all comparative period information presented in these unaudited condensed consolidated financial statements from January 1, 2016 through January 7, 2016 exclude any activity related to RestorGenex.

The Company has not generated any revenues from product sales and has funded operations primarily from the proceeds of public and private ~~placements~~offerings of ~~its membership units (prior to the Merger),~~equity, convertible ~~notes~~debt and convertible preferred stock. Substantial additional financing will be required by the Company to continue to fund its research and development activities. No assurance can be given that any such financing will be available when needed, or at all, or that the ~~Company~~’sCompany’s research and development efforts will be successful.

The Company regularly explores alternative means of financing its operations and seeks funding through various sources, including public and private securities offerings, collaborative arrangements with third parties and other strategic alliances and business transactions. In March 2017, the Company completed a $25.0 million private placement of its securities by offering units consisting of one share of the Company's Series A convertible preferred stock and a warrant to purchase one share of common stock for each share of Series A convertible preferred stock purchased in the offering. The Company sold 12,376,329 units and received approximately $22.1 million in aggregate net cash proceeds from the private placement, after deducting commissions and other expenses of approximately $2.9 million. In addition, the Company granted to its placement agent in the offering warrants to purchase an aggregate 1,179,558 shares of common stock as compensation for its services.

~~The Company currently~~ does not have any commitments to obtain additional funds and may be unable to obtain sufficient funding in the future on acceptable terms, if at all. If the Company cannot obtain the necessary funding, it will need to delay, scale back or eliminate some or all of its research and development programs or enter into collaborations with third parties to commercialize potential products or technologies that it might otherwise seek to develop or commercialize ~~independently,~~independently; consider other various strategic alternatives, including a merger or sale of the ~~Company,~~Company; or cease operations. If the Company engages in collaborations, it may receive lower consideration upon commercialization of such products than if it had not entered ~~into~~ such arrangements or if it entered into such arrangements at later stages in the product development process.

~~On May 26, 2017,~~Operations of the Company ~~received a written notice from NASDAQ~~ ~~indicating the Company was not in compliance with Nasdaq Listing Rule 5550(b)(2) because the market value of the Company’s listed securities had been below $35.0 million for the previous 30 consecutive business days. NASDAQ~~ ~~also noted that as of such date the Company also did not meet the alternative requirements under Nasdaq Listing Rule 5550(b)(1), due~~are subject to the Company's failure to maintain stockholders' equity of at least $2.5 million, or Nasdaq Listing Rule 5550(b)(3), due to the Company's failure to generate net income from continuing operations during its last fiscal year or during two of its last three fiscal years. See Note 12 for further details.

~~The Company has prepared its financial statements assuming that it will continue as a going concern, which contemplates realization of assets~~certain risks and the satisfaction of liabilities in the normal course of business. The Company has incurred net losses since inception and it expects to generate losses from operations for the foreseeable future primarily due to research and development costs for its potential product candidates, which raises substantial doubt about the Company’s ability to continue as a going concern. Variousuncertainties including various internal and external factors that will affect whether and when the Company’s product candidates become approved drugs and ~~the extent of~~how significant their market ~~share. The regulatory approval and market acceptance~~share will be, some of which are outside of the Company’s ~~proposed future products (if any),~~control. The length of time and cost of developing and commercializing these product candidates and/or failure of them at any stage of the drug approval process will materially affect the Company’s financial condition and future operations. The Company ~~believes~~expects that its existing cash and cash equivalents ~~and certificate~~as of ~~deposit at~~ September 30, ~~2017 are sufficient~~2021 will enable it to fund ~~operations~~its operating expenses and capital expenditure requirements through ~~June 2018.~~ 2023.

The Summary of Significant Accounting Policies included in the Company's ~~Form 10-K~~Annual Report for the year ended December 31, ~~2016, filed with the Securities and Exchange Commission on March 31, 2017~~ 2020 have not materially ~~changed, except as set forth below.~~changed.

The accompanying unaudited interim ~~condensed~~ consolidated financial statements of the Company have been prepared in accordance with ~~U.S. generally accepted accounting principles (“GAAP”)~~GAAP for interim financial information as found in the ~~Accounting Standard Codification (“ASC”)~~ASC and ~~Accounting Standards Updates (“ASUs”)~~ASUs of the ~~Financial Accounting Standards Board (“FASB”),~~FASB, and with the instructions to Form ~~10-Q~~10-Q and Article 10 of Regulation ~~S-X of~~S-X promulgated by the ~~Securities and Exchange Commission (the “SEC”).~~SEC. In the opinion of management, the accompanying unaudited interim ~~condensed~~ consolidated financial statements of the Company include all normal and recurring adjustments (which consist primarily of accruals, estimates and assumptions that impact the unaudited interim consolidated financial statements) considered necessary to present fairly the Company’s financial position as of September 30, ~~2017, its~~2021, results of operations for the three and nine months ended September 30, ~~2017~~2021 and ~~2016~~2020 and cash flows for the nine months ended September 30, ~~2017~~2021 and ~~2016.~~2020. Operating results for the nine months ended September 30, ~~2017~~2021 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2017.~~2021. The unaudited interim ~~condensed~~ consolidated financial statements presented herein do not contain the required disclosures under GAAP for annual financial statements. The accompanying unaudited consolidated interim ~~condensed consolidated~~ financial statements should be read in conjunction with the annual audited financial statements and related notes as of and for the year ended December 31, ~~2016~~2020 filed with the SEC as part of the Company's Annual Report on Form ~~10-K~~10-K on March ~~31, 2017.~~

The preparation of ~~the~~ unaudited interim ~~condensed~~ consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of assets and liabilities at the date the financial statements and reported amounts of expense during the reporting period. ~~Actual~~The COVID-19 pandemic had no material impact on the Company's estimates and assumptions used in the preparation of the unaudited interim consolidated financial statements for the three and nine months ended September 30,2021. However, the full extent to which the ongoing COVID-19 pandemic will directly or indirectly impact the Company's business, results ~~could differ from those estimates.~~of operations and financial condition, including sales, expenses, reserves and allowances, clinical trials, research and development costs and employee-related amounts, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19, governmental and business responses to the pandemic, further actions taken to contain or treat COVID-19, the ongoing economic impact on local, regional, national and international markets, and the speed of the anticipated economic recovery. Due to the uncertainty of factors surrounding ~~the~~these estimates or judgments, ~~used in the preparation of the unaudited condensed consolidated financial statements,~~ actual results may materially vary from ~~these~~the Company’s estimates. Estimates and assumptions are periodically reviewed, and the effects of revisions are reflected in the unaudited interim ~~condensed~~ consolidated financial statements in the period they are ~~deemed necessary.~~

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

The Company considers any highly liquid investments, such as money market funds, with an original maturity of three months or less to be cash and cash equivalents. The Company's certificate of deposit has a maturity greater than three months but within one year of the date of purchase. This certificate of deposit is classified as held-to-maturity, and the estimated fair value of the investment approximates its amortized cost.

The carrying amounts of the ~~Company~~’sCompany’s financial instruments, including cash equivalents ~~certificate of deposit,~~and accounts payable ~~and accrued expenses~~ approximate fair value due to the short-term nature of those instruments. As of September 30, 2017, the fair value of the Company's outstanding Series B convertible note was approximately $0.5 million. As of December 31, 2016, the fair value of the Company’s outstanding 2016 convertible note and Series B convertible note was approximately $2.0 million and $0.6 million, respectively. The 2016 convertible note was paid in full during the three month period ended September 30, 2017. The fair value of the convertible notes is determined using a binomial lattice model that utilizes certain unobservable inputs that fall within Level 3 of the fair value hierarchy.

Offering costs are either expensed upon completion or abandonment of the related financing or offset against the proceeds of the offering, depending upon the accounting treatment of the offering. Offering costs consist principally of legal costs incurred through the balance sheet date related to the Company’s private placement financings and are recognized in other assets on the consolidated balance sheet. During the three months ended September 30, 2017, management decided to not move forward with the Series B financing, which was originally contemplated and disclosed in the Company's definitive proxy statement filed with the Securities and Exchange Commission on May 1, 2017, and expensed $98,000 of previously capitalized offering costs related to the financing.

In the third quarter of 2021, the Board of Directors decided to no longer dedicate financial resources to the Company's DFN-529 (formerly RES-529) intangible asset and any future internal development efforts were abandoned. In connection with ~~the Merger,~~this decision, the Company ~~acquired indefinite-lived In-Process Research~~concluded that DFN-529 was impaired in its entirety and ~~Development Assets (“IPR&D”) RES-529 and RES-440, with estimated fair values~~as such, the Company recognized a non-cash impairment charge of $8.6 million ~~and $1.0 million, respectively, and recognized $6.9 million in goodwill. In~~during the third quarter of ~~2016,~~2021. The abandonment also resulted in an income tax benefit of $0.4 million due to the ~~IPR&D asset~~tax effect of the reduction in the deferred tax liability associated with ~~RES-440 was abandoned and written down to $0. RES-529 and goodwill are assessed for impairment on each of October 1 of~~ the ~~Company~~’s fiscal year or more frequently if impairment indicators exist. The Company has a single reporting unit and all goodwill relates to that reporting unit. There were no impairment indicators or impairments to RES-529 or goodwill during the three and nine months ended September 30, 2017.asset.

~~For the three and nine months ended September 30, 2017, the Company used the two-class method to compute basic~~Basic net ~~income~~loss per ~~common~~ share ~~because the Company has issued securities ("Series A convertible preferred stock") that entitle the holder to participate in dividends and earnings of the Company. Under this method,~~is computed by dividing net ~~income is reduced by any dividends earned during the period. The remaining earnings ("undistributed earnings") are allocated~~loss attributable to common stock and the Series A convertible preferred stock to the extent that the Series A convertible preferred stock may share in earnings. In periods of net loss, losses are not allocated to participating securities as the holders of such securities have no obligation to fund losses. The total earnings allocated to common stock is then dividedstockholders 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 ~~outstanding to determine~~of common stock. In computing the basic ~~earnings per share.~~

~~For purposes of calculating~~and diluted net loss per share applicable to common ~~share, the denominator includes both~~stockholders, the weighted average ~~common shares outstanding and the~~ number of ~~common stock equivalents if~~shares remains the ~~inclusion of such common stock equivalents would be dilutive. Dilutive common stock equivalents potentially include stock options, unvested restricted stock awards and warrants using~~same for both calculations due to the ~~treasury stock method. The Company considers~~fact that when a net loss exists, dilutive shares are not included in the ~~potential dilutive~~calculation as the impact of its convertible debt instruments using the "if-converted" method. In addition, the Company considers the potential dilutive impact of its convertible preferred shares using the “if-converted” method if more dilutive than the two-class method. For convertible preferred shares, the two-class method was more dilutive than the “if-converted” method for the three months ended September 30, 2017.is anti-dilutive.

~~The following table sets forth the computation of basic and diluted earnings per share:~~

The following potentially dilutive securities outstanding ~~as of September 30, 2017 and 2016~~ have been excluded from the computation of diluted weighted average shares outstanding, as they would be ~~anti-dilutive:~~anti-dilutive as of the dates indicated below:

~~Amounts in the table reflect the common stock equivalents of the noted instruments.~~

In ~~July~~ ~~2017,~~ December 2019, the FASB issued ASU ~~2017-11,~~No.2019-12, Income Taxes (Topic 740): ~~Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I)~~Simplifying the Accounting for ~~Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities~~Income Taxes. This guidance applies to all entities and ~~Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception.~~ ~~The first part of this update addresses~~aims to reduce the complexity of tax accounting ~~for certain financial instruments with down round features and the second part addresses the complexity of distinguishing liabilities from equity. The~~standards while enhancing reporting disclosures. This guidance is applicable to public business entities for fiscal years beginning after December 15, 2018 and interim periods within those years. The Company is currently evaluating the potential impact of the adoption of this standard on its consolidated results of operations, financial position and cash flows and related disclosures.

~~In May 2017, the FASB issued ASU No. 2017-09,~~ ~~Modification Accounting for Share-Based Payment Arrangements~~, which amends the scope of modification accounting for share-based payment arrangements. The ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The guidance is applicable to public business entities for fiscal years beginning after December 15, 2017 and interim periods within those years. Early adoption is permitted, including adoption in any interim period. The Company does not expect this new guidance to have a material impact on its condensed consolidated financial statements.

~~In March~~ ~~2016, the FASB issued ASU 2016-09,~~ ~~Compensation – Improvements to Employee Share-Based Payment Accounting~~, which simplifies several aspects of the accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The guidance is applicable to public business entities for fiscal years beginning after December 15, 2016 and interim periods within those years. The Company adopted this standard in 2017 by electing to account for forfeitures in the period that they occur. Under ASU 2016-09, accounting changes adopted using the modified retrospective method must be calculated as of the beginning of the period adopted and reported as a cumulative-effect adjustment. As a result, the Company recognized cumulative-effect adjustment of approximately $1,000 on January 1, 2017.

~~In February 2016, the FASB issued ASU 2016-02,~~ ~~Leases (Topic 842)~~~~. The FASB issued the update to require the recognition of lease assets and liabilities on the balance sheet of lessees. The standard will be~~was effective for fiscal years beginning after December 15, ~~2018, including~~2020 and interim periods ~~within such fiscal years. The ASU requires a modified retrospective transition method with the option to elect a package of practical expedients. Early adoption is permitted.~~therein. The Company ~~is currently evaluating~~adopted ASU No.2019-12 in the ~~potential impact~~first quarter of2021 and the adoption ~~of this standard on its consolidated results of operations, financial position and cash flows and related disclosures.~~

~~On January 8, 2016, the Company completed~~did not have a reverse merger transaction with RestorGenex. The Company entered into the Merger transaction in an effort to provide improved access to the capital markets in order to obtain the resources necessary to accelerate development of TSC in multiple clinical programs and continue to build an oncology-focused company.

The Merger transaction has been accounted for using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The valuation technique utilized to value the IPR&D was the cost approach.

~~The following table summarizes the allocation of the purchase price to the assets acquired and liabilities assumed as of the acquisition date:~~

Qualitative factors supporting the recognition of goodwill due to the Merger transaction include the Company’s anticipated enhanced ability to secure additional capital and gain access to capital market opportunities as a public company and the potential value created by having a more well-rounded clinical development portfolio by adding the earlier stage products acquired in the reverse merger transaction to the Company’s later stage product portfolio. The goodwill is not deductible for income tax purposes.

The following pro forma financial information reflects the condensed consolidated results of operations of the Company as if the acquisition of RestorGenex had taken place on January 1, 2016. The pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transactions been effectedmaterial impact on the ~~assumed date.~~Company's consolidated financial statements.

Non-recurring pro forma transaction costs directly attributable to the Merger were $1.6 million for the nine months ended September 30, 2016 and have been deducted from the net loss presented above. The costs deducted from the nine months ended September 30, 2016 period includes a success fee of $1.1 million and approximately 46,000 shares of common stock with a fair market value of $0.5 million paid to a financial adviser upon the closing of the Merger on January 8, 2016. Additionally, RestorGenex incurred approximately $3.0 million in severance costs as a result of resignations of executive officers immediately prior to the Merger and approximately $2.7 million in share based compensation expense as a result of the acceleration of vesting of stock options at the time of the Merger. These costs are excluded from the pro forma financial information for the nine months ended September 30, 2016. No such costs were recorded in the three and nine months ended September 30, 2017 or in the three months ended September 30, 2016.

~~Prepaid expenses, deposits and other current assets consisted of the following:~~

~~The components of debt outstanding at September~~ ~~30, 2017 and December 31, 2016 are as follows:~~

Upon maturity of the 2016 Convertible Notes during the third quarter of 2017, the Company repaid the outstanding principal and interest of $1.9 million and $0.1 million, respectively. The accrued interest related to the Company’s Series B Convertible Note is included within accruedAccrued expenses and other current liabilities ~~within~~consisted of the ~~unaudited condensed consolidated balance sheets. As~~following as of ~~September 30, 2017,~~ the ~~Company had accrued interest of approximately $36,000.~~dates indicated below:

In contemplation of completing the private placement described below, the Company amended and restated its articles of incorporation and authorized 13,750,000 shares of Series A convertible preferred stock. The Company has classified its Series A convertible preferred stock outside of stockholders~~’ equity because the shares contain deemed liquidation rights that are contingent redemption features not solely within the control of the Company.~~

~~Series~~ ~~A Convertible Preferred~~February 2021 Common Stock ~~Transaction~~Offering

In ~~March 2017,~~ February 2021, the Company completed ~~a $25.0 million private placement of its securities~~the February 2021 Offering in which ~~the Company~~it offered and sold ~~units consisting~~33,658,538 shares of ~~one~~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 ~~Company’s Series A convertible preferred stock and a warrant~~exercise-in-full by the underwriter of its 30-day option to purchase one share of common stock for each share of Series A convertible preferred stock purchased in the offering. Each share of Series A convertible preferred stock entitles the holder to an 8.0% cumulative dividend payable in shares of our common stock on a semi-annual basis.additional shares. The holders may, at their option, convert each share of Series A convertible preferred stock into one share of the Company’s common stock based on the initial conversion price of $2.02 per share, subject to adjustment. Each warrant entitles the holder to purchase one share of common stock at an initial exercise price of $2.22, subject to adjustment and expires on the fifth anniversary of their original issuance date.

~~The Company sold 12,376,329 units in the private placement and received approximately $22.1 million~~February 2021 Offering resulted in aggregate net ~~cash~~ proceeds to the Company of $31.1 million, after deducting underwriting commissions, discounts, and expenses but prior to deducting other ~~expenses of approximately $2.9 million.~~offering costs. In addition, ~~as compensation for its services,~~at the closings of the February 2021 Offering, the Company ~~granted~~issued to ~~its placement agent in~~designees of the ~~offering~~underwriter of the transaction warrants to purchase up to an aggregate of ~~1,179,558~~1,682,927 shares of common stock atto designees. The underwriter warrants have an ~~initial~~ exercise price of ~~$2.22~~$1.28125 per share ~~which expire on the fifth anniversary~~and a term of ~~their original issuance date.~~

~~During its evaluation of equity classification for the common stock warrants, the Company considered the conditions as prescribed within ASC 815-40,~~ ~~Derivatives and Hedging, Contracts in an Entity’s own Equity~~ (“ASC 815-40”). The conditions within ASC 815-40 are not subject to a probability assessment. As the Company is obligated to issue a variable number of shares to settle the cumulative dividends on the Series A convertible preferred stock, the Company cannot assert there will be sufficient authorized shares available to settle the warrants issued in connection with the Series A offering. Accordingly, these warrants are classified as liabilities. The Company will continue to classify such warrants as liabilities until they are exercised, expire, or are no longer required to be classified as liabilities.

As the fair value of the warrants upon issuance was in excess of the proceeds of the Series A offering, there are no proceeds allocated to the Series A convertible preferred stock. The excess fair value of the warrants over the gross proceeds of the Series A offering and the fair value of the warrants granted to its placement agent was $10.2 million in the aggregate and was recorded as warrant related expenses in the statement of operations for the nine months ended September ~~30, 2017.~~

The Company shall pay a cumulative preferential dividend on each share of the Series A convertible preferred stock outstanding at a rate of 8.0% per annum, payable only in shares of common stock, semi-annually in arrears on April 1 and October 1 of each year commencing on October 1, 2017. This cumulative preferential dividend is not subject to declaration. The Company recognized approximately $0.4 million and $0.9 million in dividends, respectively, for the three and nine months ended September ~~30, 2017.~~

Subject to certain preferred stock class votes specified in the Certificate of Designation of Preferences, Rights and Limitations of the Series A Convertible Preferred Stock (the “Certificate of Designation”) or as required by law, the holders of the Series A convertible preferred stock votes together with the holders of common stock as a single class on an adjusted as-converted basis. In accordance with N~~ASDAQ~~ listing rules, in any matter voted on by the holders of our common stock, each share of Series A convertible preferred stock entitles the holder thereof to a number of votes based upon the closing price of our common stock on the N~~ASDAQ~~ ~~Capital Market on~~five years from the date of issuance of such shares of Series A convertible preferred stock. Accordingly, shares of Series A convertible preferred stock issued in the initial closing of the private placement on March 14, 2017 are entitled to 0.84874 votes per share and shares of Series A Preferred Stock issued in the final closing of the private placement on March 31, 2017 are entitled to 0.50627 votes per share, in each case, subject to adjustment as described in the Certificate of Designation.issuance.

The Series A convertible preferred stock is senior to the common stock. In the event of a liquidation, dissolution or winding up of the Company, either voluntary or involuntary, or in the event of a deemed liquidation event, which includes a sale of the Company as defined in the Certificate of Designation, the holders of the Series A convertible preferred stock shall be entitled to receive their original investment amount. If upon the occurrence of such event, the assets and funds available for distribution are insufficient to pay such holders the full amount to which they are entitled, then the entire remaining assets and funds legally available for distribution shall be distributed ratably among the holders of the Series A convertible preferred stock in proportion to the full amounts to which they would otherwise be entitled.

~~The Series A convertible preferred stock is convertible, at the holder~~’s option, into common stock. At the Company’s option, the Series A convertible preferred stock can be converted into common stock upon (a) the thirty-day moving average of the closing price of the Company’s common stock exceeding $8.00 per share, (b) a financing of at least $10.0 million or (c) upon the majority vote of the voting power of the then outstanding shares of Series A convertible preferred stock. The conversion price of the Series A convertible preferred stock is subject to adjustment as described in the Certificate of Designation.

Upon any conversion, any unpaid dividends shall be payable to the holders of Series A convertible preferred stock. During the three and nine months ended September 30, 2017, 2,125,306 and 4,052,297 shares of Series A convertible preferred stock, respectively, were converted into common stock. During the three and nine months ended September 30, 2017, approximately $0.1 million and $0.2 million in accrued dividends, respectively, were converted into 62,701 and 88,436 shares of common stock, respectively.

Until March 2020 and subject to certain exceptions, if the Company issues at least $10.0 million of its common stock or securities convertible into or exercisable for common stock at a per share price less than $2.02 (such lower price, the “Make-Whole Price”) while any shares of Series A convertible preferred stock remain outstanding, the Company will be required to issue to these holders of Series A convertible preferred stock a number of shares of common stock equal to the additional number of shares of common stock that such shares of Series A convertible preferred stock would be convertible into if the conversion price of such shares was equal to 105% of the Make-Whole Price (the “Make-Whole Adjustment”). The Make-Whole Adjustment was evaluated and was not required to be bifurcated from the Series A convertible preferred stock.

As of September30, ~~2017,~~2021, the Company had the following warrants outstanding to acquire shares of its common stock:

During the nine months ended September30, ~~2017, 13,000~~2021, 53,570 warrants ~~issued prior to the Merger, expired. These common stock~~expired and 4,230,000 warrants will expire periodically through 2019. The common stock warrants issued in connection with the March 2017 Series A private placement expire in March 2022. During the three and nine months ended September 30, 2017, the Company recognized a net gain of $8.4 million and $5.8 million in warrant related charges associated with the Series A private placement, which consisted primarily of the change in fair value of the common stock warrants from issuance and the excess fair value of the common stock warrants over the gross cashwere exercised for aggregate proceeds of ~~the Series A offering.~~ approximately $2.2 million.

The ~~Diffusion Pharmaceuticals Inc.~~ 2015 Equity Plan ~~as amended (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~~’sCompany’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~~board of ~~Directors.~~directors. Accordingly, ~~413,825~~2,560,618 shares were added to the reserve as of January 1, ~~2017,~~ 2021, which shares may be issued in connection with the grant of stock-based awards, including stock options, restricted stock, restricted stock units, stock appreciation rights and other types of awards as deemed appropriate, in each case, in accordance with the terms of the 2015 Equity Plan. As of September 30, ~~2017,~~2021, there were ~~114,291~~407,333 shares ~~of common stock~~ available for future issuance under the 2015 Equity Plan.

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

The following table summarizes the activity related to all stock option grants ~~to employees and non-employees~~ for the nine months ended September30, ~~2017:~~2021:

Non-employee options are remeasured to fair value each period using a Black-Scholes option-pricing model until the options vest. During the nine months ended September 30, 2017, the Company granted 9,394 stock options to non-employees. The total fair value of non-employee stock options vested during the three months ended September 30, 2017 and 2016 was approximately $7,000 and $0.2 million, respectively. The total fair value of non-employee stock options vested during the nine months ended September 30, 2017 and 2016 was approximately $83,000 and $0.7 million, respectively. At September 30, 2017, there were 18,572 unvested options subject to remeasurement and approximately $26,000 of unrecognized compensation expense that will be recognized over a weighted-average period of 1.64 years.

~~During the nine months ended September 30, 2017, the Company granted 330,647 stock options to employees.~~ The weighted average grant date fair value of stock option awards granted ~~to employees was $2.12~~ during the nine months ended September 30, ~~2017. During~~2021 was $0.87. The total fair value of options vested during the three months ended September 30, ~~2017~~2021 and ~~2016 the Company recognized stock-based compensation expense of~~2020 was $0.3 million and ~~$0.1~~$0.3 million, respectively. ~~During~~The total fair value of options vested during the nine months ended September 30, ~~2017~~2021 and ~~2016, the Company recognized stock-based compensation expense $0.9~~2020 was $0.6 million and ~~$0.4~~$0.6 million, respectively. No options were exercised during any of the periods presented. At September 30, ~~2017,~~2021, there was ~~$2.8~~$1.2 million of unrecognized compensation expense that will be recognized over a weighted-average period of ~~5.33~~1.80 years. During the nine months ended September 30, 2021, the Company granted 385,267 performance-based stock options with an exercise price of $1.11 per share, subject to vesting based on the satisfaction of specified performance criteria. Compensation expense for the performance-based awards is recorded over the estimated service period for each milestone when the performance conditions are deemed probable of achievement. The Company recorded stock-based compensation expense of approximately $0.1 million nine months ended September 30,2021, for service-based awards and performance conditions deemed probable of achievement and/or achieved. For performance-based awards containing performance conditions which were not deemed probable of achievement at September 30,2021,no stock compensation expense was recognized and any previously recognized expense related to those awards originally deemed probable was reversed.

Options granted were valued using the Black-Scholes option-pricing model and the weighted average assumptions used to value the options granted during the ~~first~~ nine months ~~of 2017~~ended September 30,2021 and 2020 were as follows:

AsThe Company issues restricted stocks ("RSU") to newly elected, non-executive members of ~~September~~ ~~30, 2017, there were 4,599 unvested shares~~the board of ~~restricted stock. During~~directors that vest in six, tri-monthly installments beginning 18 months after the respective grant date. The fair value of an RSU is equal to the fair market value price of the Company’s common stock on the date of grant. 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:

The Company recognized approximately $16,000 and $4,000 in expense related to these awards during the three months ended September 30, ~~2017~~ 2021 and ~~2016, there were 1,533 and 1,534 shares that vested, respectively and the~~2020, respectively. The Company recognized ~~stock-based compensation~~approximately $27,000 and $12,000 in expense ~~of approximately $3,000 and $3,000, respectively. During~~related to these awards during the nine months ended September 30, ~~2017~~2021 and ~~2016, there were 4,599 and 4,603 shares that vested, respectively and the Company recognized stock-based compensation expense of approximately $9,000 and $9,000,~~2020, respectively. At September 30, ~~2017,~~2021, there was approximately ~~$9,000~~$0.1 million of unrecognized compensation ~~expense~~cost that will be recognized over a ~~weighted-average~~weighted average period of ~~less than 1.0 year.~~2.35 years.

The Company ~~leases~~has a non-cancelable operating lease for office and laboratory ~~facilities~~space in Charlottesville, ~~Virginia. On March 31,~~Virginia, which began in April 2017,and as of September 30,2021, has a remaining lease term of approximately 0.6 years. The discount rate used to account for the Company's operating lease under ASC 842 is the Company’s estimated incremental borrowing rate of 10%. The original term of the lease ends in the second quarter of 2022 and the Company ~~entered into a lease~~has an option to extend for its office and laboratory facilities at a new location in Charlottesville, Virginia. During the nine months ended September 30, 2017, the Company capitalized approximately $0.4 million in leasehold improvementsanother five (5) years. This option to extend was not recognized as part of the ~~build out~~Company's measurement of the ~~new~~right-of-use asset and operating lease liability as of September 30,2021. The Company also entered into two month-to-month leases for office space during the nine months ended September 30, 2021. The Company adopted the short-term lease election as afforded by ASC 842and ~~laboratory location.~~ did not recognize a right-of-use asset and operating lease liability related to these short-term leases.

Rent expense related to the Company's operating leases for the three months ended September 30, ~~2017~~2021 and ~~2016~~2020 was ~~$28,000~~approximately $48,000 and ~~$34,000,~~$30,000, respectively. Rent expense for the nine months ended September 30, ~~2017~~2021 and ~~2016~~2020 was ~~$80,000~~approximately $0.1 million and ~~$115,000,~~$91,000, respectively. For the new operating lease, lease payments commenced on May 1, 2017 and expire on April 30, 2022. The Company will continue to recognize rent expense on a straight-line basis over the lease period and will accrue for rent expense incurred but not yet paid. Future minimum rental payments under the Company's ~~new~~ non-cancelable operating lease at September30, ~~2017 was~~2021 were as follows:

~~Arrangement with Clinical~~ Research ~~Organization~~and Development Arrangements

~~On July 5, 2017,~~In the course of normal business operations, the Company ~~entered~~enters into ~~a Master Services Agreement ("MSA")~~agreements with ~~a contract research organization ("CRO")~~universities and CROs to ~~provide clinical trial services for individual studies and projects by executing individual work orders. The MSA and associated work orders are designed such that quarterly payments are to be made~~assist in ~~advance~~the performance of ~~the work to be performed. The Company recognized~~ research and development ~~expenses~~activities and contract manufacturers to assist with chemistry, manufacturing, and controls related expenses. Expenditures to ~~this MSA of $0.6 million~~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.

The Company has established a 401(k) defined contribution plan that covers all employees who qualify under the terms of the plan. Eligible employees may elect to contribute to the 401(k) Plan up to 90% of their compensation, limited by the IRS-imposed maximum. The Company provides a safe harbor match with a maximum amount of 4% of the participant’s compensation. The Company made matching contributions under the 401(k) Plan of approximately $29,000 and $11,000 for the three months ended September 30, ~~2017. As of~~ 2021 and 2020, respectively and matched approximately $60,000 and $42,000 during the nine months ended September 30, ~~2017, there was $1.0 million of prepaid research~~2021 and ~~development costs that are estimated to be recognized during the fourth quarter of fiscal 2017.~~2020, respectively.

On August 7, 2014, a complaint was filed in the Superior Court of Los Angeles County, California by Paul Feller, the ~~Company~~’s former Chief Executive Officer of the Company’s legal predecessor under the caption Paul Feller v. RestorGenex Corporation, Pro Sports & Entertainment, Inc., ProElite, Inc. and Stratus Media Group, GmbH ~~(Case~~ (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. NoOn November 19, 2018 at an Order to Show Cause Re Dismissal Hearing, the court found sufficient grounds not to dismiss the case and an arbitration hearing was scheduled, originally for November 2020 but later postponed due to the COVID-19 pandemic and related restrictions on gatherings in the State of California. In addition, following the November 2018 hearing, an automatic stay was placed on the arbitration in connection with the plaintiff filing for personal bankruptcy protection. On October 22, 2021, following a determination by the bankruptcy trustee not to pursue the claims and release them back to the plaintiff, the parties entered into a stipulation to abandon arbitration and return the matter to state court. A case management conference has ~~yet~~ been ~~scheduled.~~ scheduled by the court for February 23, 2022 to set a trial date.

The Company believes the claims in this matter isare without merit and intends to defend ~~the arbitration~~itself vigorously. ~~Because~~However, at this ~~matter is in an early~~ 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.

On November 8, 2021, we entered into a Deed of Lease Termination Agreement with the Carlton Landlord providing for the early termination of the Carlton Lease related to our prior corporate headquarters. The Carlton Lease was previously scheduled to expire on April 30, 2022 and, ~~liabilities are carried at fair value~~as of September 30, 2021, our aggregate amount of future minimum rental payments thereunder was approximately $69,536. In connection with the termination, we will make a one-time payment to the Carlton Landlord of approximately $14,000, after deducting anticipated returns of deposits in accordance with the Carlton Lease.

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

As previously disclosed, on May 6, 2021, the Company received a written notice from the staff of the Listing Qualifications Department of Nasdaq relating to the minimum bid price requirement contained in Nasdaq Listing Rule 5550(a)(2). This notice indicated that the Company was not in compliance with such rule because the bid price for the Company’s common stock had closed below $1.00 per share for the previous 30 consecutive business days. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company was provided 180 calendar days, or until November 2, 2021, to regain compliance with the Rule.

On November 3, 2021, the Company received an additional notice from the staff providing that, although the Company had not regained compliance with the bid price rule by November 2, 2021, in accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Staff has determined that the Company is ~~defined as the exchange price that would be received~~eligible for an ~~asset~~additional 180 calendar days from the date of such notice, or ~~paid~~ until May 2, 2022, to ~~transfer a liability (an exit price) in~~regain compliance. To regain compliance, the ~~principal or most advantageous market~~bid price for the ~~asset~~Company’s common stock must close at $1.00 per share or ~~liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use~~more for a minimum of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:

• ~~Level 1—Quoted prices in active markets for identical assets or liabilities.~~

• Level 2—Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.

• Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.10 consecutive business days.

The ~~asset’s or liability’s fair value measurement level within the fair value hierarchy is based~~Notice has no effect on the ~~lowest level~~listing or trading of ~~any input that~~the Company’s common stock at this time, and the Company is ~~significant~~currently evaluating its alternatives to resolve this listing deficiency, including, if necessary and subject to the fair value measurement. Accordingly, transfers between levels within the valuation hierarchy occur when there are significant changes to the inputs, such as increases or decreases in market activity, changes to the availabilityapproval of ~~current prices, changes to the transparency to underlying inputs,~~its board of directors and ~~whether there are significant variances in quoted prices. Transfers in and/or out of any level are assumed to occur at the end of the period.~~

~~The following table presents the Company’s assets and liabilities that are measured at fair value on~~stockholders, implementing a ~~recurring basis:~~

~~The reconciliation of the common~~reverse stock ~~warrant liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) is as follows:~~

The common stock warrants issued in connection with the Series A convertible preferred stock are classified as liabilities on the accompanying balance sheet at September 30, 2017. The liability is marked-to-market each reporting period with the change in fair value recorded as either income or expense in the accompanying statements of operations until the warrants are exercised, expire or other facts and circumstances lead the liability to be reclassified to stockholders’ equity. The fair value of the warrant liability is estimated using the Black-Scholes model and assumptions used to value the warrant liability as of September 30, 2017 were as follows:

On November 1, 2017 the Company held a Special Shareholders meeting, requesting shareholders, both common and Series A, to approve a proposed amendment to the Company’s Certificate of Incorporation to permit the Company to pay dividends on the Company’s Series A Convertible Preferred Stock in either cash or shares of the Company’s Common Stock, which was approved by the shareholders. As a result of this amendment, the Company is able to assert there will be sufficient authorized shares available to settle the Series A warrants. Upon this assertion, the Series A warrants were reclassified from liabilities to stockholders’ equity. Prior to the amendment, for accounting purposes, the warrants were recorded as a liability under U.S. generally accepted accounting principles. The warrant liability resulted in a reduction of our stockholders’ equity, as of March 31, 2017 and June 30, 2017, below the required level under the Nasdaq Capital Market’s continued listing standards. The Charter Amendment, by permitting the Company to assert share settlement of the warrants, resulted in a reclassification of the warrant liability to stockholders’ equity as of the date of the amendment.

~~It is therefore the belief of the Company that this fundamental change will allow the Company to regain its NASDAQ~~ compliant status. The following pro-forma information shows adjustments to the September 30, 2017 balances to (i) remove the Series A warrant liability of $16.3 million as of September 30, 2017 from total liabilities, (ii) show the reclassification of the fair value of the Series A warrants of $13.2 million as of November 1, 2017 to APIC, and (iii) to adjust the accumulated deficit balance for the change in fair value of the Series A warrants from September 30, 2017 to November 1, 2017 of $3.2 million.

You should read the following discussion of our financial condition and results of operations together with the unaudited interim ~~condensed~~ consolidated financial statements and the notes thereto included elsewhere in this report and other financial information included in this report. The following discussion may contain predictions, estimates and other ~~forward looking~~forward-looking statements that involve a number of risks and uncertainties, including those discussed under “Part I — Item 2. ~~Management’s~~Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations—~~Operations—Special Note Regarding ~~Forward Looking~~Forward-Looking Statements” in this report and under “Part I — Item 1A. Risk Factors” in our ~~annual report~~ Annual Report and under “Part II—Other Information – Item 1A. Risk Factors” in our Quarterly Reports on Form ~~10-K~~10-Q for the ~~fiscal year~~quarterly periods ended ~~December~~March 31, ~~2016.~~2021 and June 30, 2021. These risks could cause our actual results to differ materially from any future performance suggested below.

We are a ~~clinical stage biotechnology~~biopharmaceutical company ~~focused on extending~~developing novel therapies that enhance the ~~life expectancy of cancer patients by improving~~body’s ability to deliver oxygen to the ~~effectiveness of current standard-of-care treatments, including radiation therapy and chemotherapy. We are developing our~~areas where it is needed most. Our lead product candidate, ~~transcrocetinate sodium~~,TSC, is being developed to enhance the diffusion of oxygen to tissues with low oxygen levels, also known as ~~trans sodium crocetinate, or~~ hypoxia, a serious complication of many of medicine’s most intractable and difficult-to-treat conditions.

Solid tumors comprise approximately 90% of all adult cancers and, according to the American Cancer Society, roughly 1.9 million new cancer cases will be diagnosed in the ~~many cancer~~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 ~~in which tumor oxygen deprivation (“hypoxia”) is known~~directly contributes to ~~diminish~~treatment resistance whether it be radiotherapy, chemotherapy, and immunotherapy, increasing the ~~effectiveness~~metastatic potential of ~~current treatments.~~these tumors and the probability of unsuccessful treatment. We believe TSC’s novel mechanism of action lends itself to treating this unmet medical need, so we are designing our Hypoxic Solid Tumor Program to support the use of TSC ~~is designed to target the cancer’s~~as a treatment of hypoxic ~~micro-environment, re-oxygenating treatment-resistant tissue and making the cancer cells more susceptible to the therapeutic effects of standard-of-care radiation therapy and chemotherapy.~~solid tumors.

~~Our lead development programs target~~This program is being designed based on previously obtained data that we believe support the potential benefits of TSC ~~against cancers known to be inherently treatment-resistant,~~as a treatment for hypoxic solid tumors, including ~~brain cancers~~preclinical evidence supporting TSC’s enhancement of radiotherapy and ~~pancreatic cancer. A~~clinical evidence of TSC's effects in unresectable glioblastoma multiforme tumors from our previous Phase 2 ~~clinical program, completed~~study evaluating TSC in ~~the second quarter of 2015, evaluated 59~~ patients with ~~newly diagnosed glioblastoma multiforme (“GBM”). This open label, historically controlled study demonstrated a favorable safety and efficacy profile for TSC combined~~GBM treated with standard of care radiation and chemotherapy. Additionally, with the outcome of the TCOM Trial, originally reported in June 2021, we believe we now have direct evidence of TSC's ability to enhance oxygenation in humans, including additional dosing information that will be integral to designing a clinical study to treat hypoxic solid tumors.

Our plan is to use the information obtained to date on TSC to submit a briefing document related to our development plan for discussion with the FDA during the first quarter of 2022. In addition to questions about clinical trial design and chemistry, manufacturing, and controls, we anticipate the submission will include the information required to obtain FDA feedback on potential accelerated pathways to approval for TSC. In addition, the results of the Altitude Trial and ILD-DLCO Trial, which we anticipate reporting during the first half of 2022 as further described below under the heading, “Our Oxygenation Trials,” will also be used to further guide the design of the program. We believe receiving FDA feedback on the proposed regulatory pathway underlying our Hypoxic Solid Tumor Program will enhance the probability of successfully developing and, if approved, commercializing TSC for use as a treatment for hypoxic solid tumors.

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

In June 2021, we reported a positive trend in oxygenation from our TCOM Trial, which evaluated the effect of TSC versus placebo on peripheral tissue oxygenation in healthy normal volunteers using transcutaneous oxygen monitoring. Analysis of the primary endpoint data indicated a positive dose-response trend in TCOM readings with TSC as compared to placebo that persisted through the measurement period, and the trends observed in the primary endpoint data indicated an improvement in peripheral oxygenation with TSC with no evidence of hyperoxygenation.

In September 2021, we issued a letter to our stockholders including a ~~37% improvement~~further discussion of the results of the TCOM Trial, as well as certain additional facts and figures from our supplemental analysis of the study data.

Figure 1. Effects of TSC on transcutaneous oxygen pressure (tcpO2). The graph was created by subtracting the median placebo response from the dose and time matched median TSC response.

For example, the chart above was created by subtracting the median response observed in ~~overall survival over~~ the ~~control~~TCOM Trial's placebo group from the median response observed in each TSC dosage group at ~~two years. A particularly strong efficacy signal was seen~~each of the measurement times during the one-hour period following dosing. As you can see in the ~~inoperable patients, where survival~~chart, these data indicate peripheral tissue oxygenation increased relative to the placebo group following TSC administration and persisted through the one-hour measurement period, particularly at the two highest doses tested (2.0 mg/kg and 2.5 mg/kg).

We believe the results of ~~TSC-treated patients~~the TCOM Trial provide clinical evidence that TSC facilitates the passive diffusion of oxygen from areas of high concentration to areas of low concentration without causing hyperoxygenation and, accordingly, represent a positive and meaningful step towards the accomplishment of the overall strategic objectives of our Oxygenation Trials set forth in November 2020. Moreover, the doses at ~~two years was increased by almost four-fold over~~which the ~~controls. The U.S. Food and Drug Administration, or FDA, provided Diffusion with final protocol guidance for a Phase 3 trial~~largest effects of TSC were observed in ~~newly diagnosed inoperable GBM patients. The Company has responded~~the TCOM study are higher than the doses tested in any of the recent clinical trials of TSC, and these data obtained from the TCOM Trial is being used to ~~all outstanding points raised~~guide the design of our remaining Oxygenation Trials – the Altitude Trial and the ILD-DLCO Trial.

We believe the two remaining Oxygenation Trials, the Altitude Trial and the ILD-DLCO Trial, remain integral to our overall development plan for TSC, as they are intended to provide further information regarding TSC’s mechanism of action and dose response characteristics, as well as support for what we view as the broad therapeutic potential of TSC to treat a variety of conditions complicated by hypoxia. As described below, the ~~FDA~~Altitude Trial is designed to provide specific information on TSC’s effects on oxygen consumption and ~~plans~~the ILD-DLCO Trial is designed to ~~begin~~evaluate the effects of TSC on the uptake of oxygen through the lungs. Accordingly, we intend to continue to execute the Altitude Trial and the ILD-DLCO Trial to develop this additional data in parallel with designing our Hypoxic Solid Tumor Program.

This trial ~~under~~will be a double-blind, randomized, placebo-controlled study which will evaluate the ~~protocol agreed~~effects of TSC on maximal oxygen consumption, or VO2, and partial pressure of blood oxygen, or PaO2, in normal healthy volunteers subjected to ~~by the FDA by the end~~incremental levels of ~~2017.~~physical exertion while exposed to hypoxic and hypobaric conditions (i.e., simulated altitude). The trial will ~~enroll 236~~evaluate the difference in effect of TSC on oxygen availability and consumption compared to placebo. We expect to dose the first patient in the Altitude Trial in the coming days, to complete dosing of patients in ~~total, 118~~the study in ~~each arm. Due~~late December 2021 or early January 2022, and anticipate reporting topline results from the study within two months of completion.

This trial will be a double-blind, randomized, placebo-controlled study which will evaluate the effects of TSC on the diffusion of carbon monoxide through the lungs, or DLCO, in patients with previously diagnosed interstitial lung disease who have an abnormal baseline DLCO test result. DLCO will act as a surrogate measure of oxygen transfer efficiency, or uptake, from the alveoli of the lungs, through the plasma, and onto hemoglobin within red blood cells. The study will evaluate the difference in effect of TSC on improvement in DLCO, as well as distance covered in a standard six-minute walk test. We anticipate initiating the ILD-DLCO Trial in the late fourth quarter of 2021 and completing the study in the first quarter of 2022, with topline results reported within two months of study completion.

Further, during the third quarter of 2021, we received clearance of our IND for TSC from the Pulmonary, Allergy, and Critical Care division of the FDA, an important step as we prepare to ~~its novel~~initiate the ILD-DLCO Trial. This also represents the fourth division with which we have an open IND for TSC – joining the Cardiology and Nephrology, Neurology, and Oncology divisions – which we believe underscores TSC’s broad therapeutic potential to treat a variety of conditions complicated by hypoxia.

The information we expect to obtain from the Altitude Trial and ILD-DLCO Trial during the first half of 2022 — particularly when combined with the information we have acquired over the last year from the TCOM Trial and our COVID-19 Trial — will continue to refine and enhance our understanding of TSC’s mechanism of action, dose-response effects, and, more specifically, effects on oxygen consumption and uptake of oxygen through the lungs. In addition to providing insights regarding additional, non-oncology indications in which the TSC ~~has safely re-oxygenated a range~~platform may have potential, the results of ~~tumor types~~the Altitude Trial and ILD-DLCO Trial will also inform our design of our Hypoxic Solid Tumor Program studies.

As broadly reported by companies across industrial sectors, supply chain disruptions, shortages, and other issues have been widespread during 2021, and we have also recently been subject to delays and interruptions in our ~~preclinical~~TSC drug supply. As previously reported in our Annual Report , TSC is currently manufactured by our primary CMO partner at a facility that now manufactures COVID-19 vaccines under the Defense Production Act. In response these delays and interruptions, we are in the process of evaluating opportunities to increase the robustness of our drug supply and overall supply chain to be more responsive to our needs.

We are actively managing this process and believe we are taking the necessary steps to ensure the availability of high-quality drug supply to support the next steps in TSC’s development. However, TSC is a freeze-dried, injectable product requiring a sophisticated manufacturing process. As a result, any change to all or a portion of our manufacturing process, together with uncertainty regarding the general availability of manufacturing materials as a result of more general global supply chain shortages and disruptions, could affect the cost and timing of the available clinical ~~studies. Diffusion believes its therapeutic potential is not limited~~study drug supply of TSC.

During the third quarter, we continued to ~~specific tumors, thereby making it potentially useful~~enhance our operating team with the addition of new employees in a variety of functions across our organization, including clinical operations, CMC, finance, and, more recently, medical writing. As part of our growth strategy, we have embraced the remote work culture that became prevalent at many organizations during the COVID-19 pandemic. We believe our people are critical to ~~improve standard-of-care treatments~~our ability to efficiently and successfully execute our stated strategy, and this remote operating paradigm allows us to enhance our available pool of ~~other life-threatening cancers. Given TSC's safety profile~~talented human resources while also conserving financial resources. For example, in November 2021, we negotiated and ~~animal data, we can move~~entered into ~~Phase 2 studies~~an agreement providing for the early termination of our lease of the Carlton Avenue facility in ~~metastatic brain cancer or pancreatic cancer.~~Charlottesville, Virginia. We also believe in the power of collaboration. In turn, and in lieu of the fixed office and laboratory space previously available to us under that TSC has potential application in other indications involving hypoxia, such as neurodegenerative diseases and emergency medicine. For example, our stroke program is now in advanced discussions with doctors from UCLA and the University of Virginia, with whomagreement, we have ~~established a joint team dedicated~~recently entered into short term agreements to ~~developing a program to test TSC in the treatment of stroke, with an in-ambulance trial of TSC in stroke under consideration. Planning for such a trial is on-going.~~

In addition to the TSC programs, we are exploring alternatives regarding how best to capitalize upon our product candidate, RES-529, which may include possible out-licensing and other options. RES-529 is a novel PI3K/Akt/mTOR pathway inhibitor which has completed two Phase 1 clinical trials for age-related macular degeneration and was in preclinical development in oncology, specifically GBM. RES-529 has shown activityutilize membership-based co-working space in both Charlottesville, Virginia and Philadelphia, Pennsylvania. We believe these arrangements will permit our team combine the advantages of remote and in-person work in ~~vitro~~environments intended to foster creativity and ~~in vivo glioblastoma animal models and has been demonstrated to be orally bioavailable and can cross the blood brain barrier.~~innovation.

~~In March 2017, we completed a $25.0 million private placement~~As of our securities by offering units consisting of one share of our Series A convertible preferred stock and a warrant to purchase one share of our common stock for each share of Series A convertible preferred stock purchased in the offering. We sold 12,376,329 units and received approximately $22.1 million in aggregate net cash proceeds from the private placement, after deducting commissions and other expenses of approximately $2.9 million. In addition, we granted our placement agent in the offering warrants to purchase an aggregate of 1,179,558 shares of our common stock as compensation for its services.

At September 30, ~~2017,~~2021, we had cash and cash equivalents of ~~$1.2 million and a certificate of deposit of $10.0~~$40.3 million. We have incurred operating losses since inception, have not generated any product ~~sales~~ revenue and have not achieved profitable operations. We ~~had~~incurred net ~~income~~losses of ~~$5.1~~$12.2 million and ~~incurred a net loss of $3.2~~$20.6 million for the three and nine months ended September 30, ~~2017,~~2021, respectively. Our net income for the three months ended September 30, 2017 was primarily related to the remeasurement of our common stock warrant liability at September 30, 2017 which resulted in a $8.4 million gain (see Notes 8 and 11 to the accompanying unaudited condensed consolidated financial statements). Our accumulated deficit as of September 30, ~~2017~~2021 was ~~$63.3~~$126.5 million, and we expect to continue to incur substantial losses in future periods. We anticipate that our operating expenses will increase substantially as we continue to advance ~~our lead, clinical-stage product candidate, TSC. We anticipate that our expenses will substantially increase as we:~~the development of TSC, including any costs related to:

We intend to use our existing cash and cash equivalents ~~and certificate of deposit~~ for working capital and to fund the research and development of ~~TSC for use in the treatment of GBM, pancreatic cancer, stroke and brain metastases.~~TSC. We ~~believe~~expect that our cash and cash equivalents ~~and our certificate of deposit~~ as of September 30, ~~2017~~2021 will enable us to fund our operating expenses and capital expenditure requirements through June 2018. However, we will need to secure additional funding in the future, from one or more equity or debt financings, collaborations, or other sources, in order to carry out our planned research and development activities with respect to TSC and our other product candidates.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.

~~Research and development costs are charged to expense as incurred. These costs~~R&D expenses include, but are not limited to, ~~expenses related to~~ third-party ~~contract research~~CRO arrangements and employee-related expenses, including salaries, benefits, stock-based compensation and travel expense ~~reimbursement, as well as impairment of our in-process research and development, or IPR~~reimbursement. R&D ~~assets. Research and development~~ 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 ~~trials.~~studies. As we advance our product candidates, we expect the amount of ~~research and development~~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.

~~General and administrative~~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 ~~general and administrative~~G&A expenses include, ~~costs associated with the Merger, professional fees that were incurred in connection with preparing to operate and operating as a public company,~~ facility-related costs, communication expenses and professional fees for legal, patent prosecution and maintenance, consulting, accounting, and ~~consulting and accounting~~other professional services.

Interest ~~expense, net consists principally of the interest expense recorded in connection with our convertible debt instruments offset by the~~income is interest earned from our cash and cash ~~equivalents and certificate of deposit.~~equivalents.

~~Change in Fair Value of Warrant Liabilities, Warrant Related Expenses, and Other Financing Expenses~~Income Tax Benefit

~~In connection with our private placement~~The Company recorded an income tax benefit of $0.4 million during the three and nine months ended September 30, 2021, respectively. The income tax benefit was due to the tax effect of the reduction in ~~March 2017, we recorded warrant expense~~the deferred tax liability associated with the ~~change in fair value of the common stock warrants from issuance, the excess fair value of the common stock warrants over the gross cash proceeds~~basis difference from the ~~Series A convertible preferred stock offering, and placement agent commissions and other offering costs.~~IPR&D indefinite lived intangible asset. The Company maintains a full valuation allowance against its deferred tax assets due to the Company’s history of losses as of September 30, 2021.

~~Results~~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 ~~Operations~~a greater than 50.0% cumulative change in the ownership interest of significant stockholders over a three year period, as defined under Sections 382 and 383 of the Internal Revenue Code as well as similar state provisions. The amount of the annual limitation is determined based on the Company’s value immediately prior to the ownership change, and subsequent ownership changes may further affect the limitation in future years. In 2019, due to the significant changes to our stockholder base as a result of the equity financing we completed during that year, we performed an analysis under Section 382 of the Internal Revenue Code and, as a result, reduced the magnitude of our NOL carryforwards to account for the ownership changes. In addition, the cumulative benefit of our NOLs was remeasured, resulting in tax expense recognized during the year ended December 31, 2019. We have not yet performed an analysis to determine whether or not ownership changes that have occurred in the year ended December 31, 2020 or during the three or nine months ended September 30, 2021 give rise to any further limitations.

~~Comparison~~Results of Operations for Three Months Ended September30, 2021 Compared to Three Months Ended September 30, ~~2017 and 2016~~2020

The following table sets forth our results of operations for the three months ended September 30, ~~2017~~2021 and ~~2016.~~2020.

We recognized ~~$1.8~~$2.1 million in ~~research and development~~R&D expenses during the three months ended September 30, ~~2017~~2021 compared to $3.1 million during the three months ended September 30, 2020. This decrease was due to lower project spending due to the completion and/or wind-down of our clinical studies evaluating TSC in Covid-19, GBM, and stroke.

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

G&A expenses were $1.9 million during the three months ended September 30, ~~2016. The decrease in research and development expense was attributable~~2021 compared to a $1.0 million impairment charge recognized in the third quarter of 2016, a $0.2 million decrease in expense associated with animal toxicology studies and a $0.1 million decrease in stock-based compensation expense. These amounts were partially offset by a $0.9 million increase in costs associated with our GBM trials, a $0.1 million increase in API and drug manufacturing costs and a $0.1 million increase in salary related expenses.

~~General and administrative expenses were $1.6~~$2.1 million during the three months ended September 30, ~~2017 compared~~2020. The decrease in G&A expenses was primarily due to ~~$3.9~~a $0.5 million decrease in salaries related to executive separation payments recorded in the prior year period as well as a $0.2 million decrease in outside legal and professional fees. This decrease was partially offset by an increase in salaries and other costs associated with the hiring of new employees to support our R&D efforts as well as an increase in insurance costs.

We recognized an income tax benefit of $0.4 million due to the tax effect of the reduction in the deferred tax liability associated with the basis differences from the DFN-529 IPR&D intangible asset that was written down in the third quarter of 2021. We recognized an income tax benefit of $0.8 million during the three months ended September 30, ~~2016. The decrease in general and administrative expense was primarily due~~2020 to reflect the utilization of indefinite deferred tax liabilities as a ~~$2.5 million decrease in litigation settlement fees, partially offset by an increase in salary and stock-based compensation expense~~source of ~~$0.1 million and an increase in professional fees of $0.1 million.~~

The decrease in interest expense, net for the three months ended September 30, 2017 compared to the three months ended September 30, 2016 is primarily attributable to the interest earned on our certificate of deposit, partially offset by interest expense on our convertible notes that were issued in September 2016.

~~In connection with the private placement~~income against indefinite lived portions of our ~~Series A convertible preferred stock and common stock warrants,~~deferred tax assets. Prior to 2021, we ~~determined~~recognized the ~~warrants~~full income tax benefit allowed by the 2017 Tax Act to ~~be classified~~utilize indefinite deferred tax liabilities as ~~liabilities and subject to remeasurement at each reporting period. As~~ a ~~result~~source of ~~the liability classification, during the three months ended September 30, 2017, we recorded a $8.4 million non-cash gain for the change in fair value~~income against indefinite lived portions of our ~~common stock warrant liabilities which was primarily attributable to the decrease in the market price for our common stock.~~deferred tax assets.

~~Comparison~~Results of Operations for Nine Months Ended September30, 2021 Compared to Nine Months Ended September 30, ~~2017 and 2016~~2020

The following table sets forth our results of operations for the ~~Nine Months Ended~~nine months ended September 30, ~~2017~~2021 and ~~2016.~~2020.

We recognized ~~$3.9~~$7.0 million in ~~research and development~~R&D expenses during the nine months ended September 30, ~~2017~~2021 compared to ~~$5.7~~$6.8 million during the nine months ended September 30, ~~2016. The decrease in research and development expense~~2020. This increase was primarily attributable to a ~~$1.0 million impairment charge recognized in the third quarter of 2016, a~~ $1.2 million ~~decrease in animal toxicology expenses, a $0.9 million decrease~~increase in expense related to ~~our pancreatic cancer program,~~drug manufacturing as described in part above under the heading “TSC Supply Chain Update.” and a $0.5 million decrease in stock-based compensation expense. This decrease was partially offset by a $0.9 million increase in costs related to our GBM trials, $0.5 million increase in API manufacturing costs and a $0.2$0.6 million increase in salary and related ~~expenses.~~expenses due to increases in headcount. These increases were offset by lower project spending due to the completion and/or wind-down of our clinical studies evaluating TSC in Covid-19, GBM, and stroke.

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

~~General and administrative~~G&A expenses were ~~$4.9~~$5.5 million during the nine months ended September 30, ~~2017~~2021 compared to ~~$10.1~~$5.0 million during the nine months ended September 30, ~~2016.~~2020. The ~~decrease~~increase in ~~general and administrative~~G&A expense was primarily due to a ~~$2.7~~$1.0 million ~~decrease~~increase in salaries and other costs ~~attributable~~associated with the hiring of new employees. These amounts were slightly offset by $0.5 million in salaries related to executive separation payments recorded in the prior year period.

We recognized an income tax benefit of $0.4 million due to the ~~reverse merger transaction~~tax effect of the reduction in ~~January 2016, a $2.5~~the deferred tax liability associated with the basis differences from the DFN 529 IPR&D intangible asset that was written down in the third quarter of 2021. We recognized an income tax benefit of $1.7 million decrease in legal settlement costs, and a decrease in insurance related expenses of $0.4 million. This decrease was offset by an increase in salary and stock-based compensation expense of $0.5 million.

~~The increase in interest expense for~~during the nine months ended ~~September 30, 2017 compared~~2020 to reflect the ~~nine months ended September 30, 2016 is primarily attributable to the issuance~~utilization of indefinite deferred tax liabilities as a source of income against indefinite lived portions of our ~~convertible promissory note with~~deferred tax assets. Prior to 2021, we recognized the full income tax benefit allowed by the 2017 Tax Act to utilize indefinite deferred tax liabilities as a ~~notional value~~source of ~~$1.9 million in September 2016.~~

~~As a result of the liability classification, for the nine months ended September 30, 2017, we recorded a $18.9 million non-cash gain for the change in fair value~~income against indefinite lived portions of our common stock warrant liabilities which was primarily attributable to the decrease in the market price for our common stock. We also recognized $10.2 million in excess fair value of the common stock warrants over the gross proceeds from our private placement and $2.9 million in placement agent commissions and other offering costs.deferred tax assets.

To date, we have funded our operations primarily through the sale and issuance of preferred stock, common stock and convertible promissory notes. In March 2017, we sold 12,376,329 units, consisting of shares of Series A convertible preferred stock and warrants to purchase shares of common stock in a private placement and received approximately $22.1 million in aggregate net cash proceeds, after deducting commissions and other expenses of approximately $2.9 million. As of September 30, ~~2017,~~2021, we had ~~$1.2~~$40.3 million in cash and cash equivalents, ~~$10.0 million in a certificate of deposit,~~ working capital ~~deficit~~ of ~~$6.5~~$38.0 million and an accumulated deficit of ~~$63.3~~$126.5 million. We expect to continue to incur net losses for the foreseeable future. We intend to use our existing cash and cash equivalents to fund our working capital and research and development of our product candidates.

The following table sets forth our cash flows for the nine months ended September 30, ~~2017~~2021 and ~~2016:~~2020:

Net cash used in operating activities of ~~$10.1~~$11.5 million during the nine months ended September 30, ~~2017~~2021 was primarily attributable to our net loss of ~~$3.2~~$20.6 million ~~$5.8~~and a change in our deferred income taxes of $0.4 million. These amounts were partially offset by a $8.6 million non cash impairment charge in connection with the write down of our DFN-529 IPR&D asset, $0.6 million in ~~non-cash warrant related~~stock-based compensation expense, and ~~other financing expenses~~a net change in our operating assets and liabilities of $0.2 million.

Net cash used in operating activities of $10.2 million during the nine months ended September 30, 2020 was primarily attributable to our net loss of $10.1 million and our change in deferred income taxes of $1.7 million. These amounts were partially offset by a net change in operating assets and liabilities of ~~$2.2 million. This amount was offset by $1.0~~$1.4 million, $0.6 million in stock-based compensation expense, and $0.1 million in depreciation expense. The net change in our operating assets and liabilities iswas primarily attributable to ~~the decrease~~an increase in ~~our~~ accounts payable ~~due to the timing of payments to our vendors,~~and accrued expenses and was slightly offset by an increase in ~~accrued expenses due to additional accrued interest and dividends as well as an increase in~~our prepaid expenses, ~~mainly related to prepaid research~~deposits and ~~development and insurance costs.~~other current assets.

~~Net cash used in operating activities of $9.4 million during the nine months ended September~~ 30, 2016 was primarily attributable to our net loss of $15.5 million the $0.4 reduction in our deferred tax liability that was offset by $6.0 million of non-cash charges and $0.5 million for the net change in our operating assets and liabilities. Noncash charges primarily consisted of stock-based compensation expense of $1.1 million, $1.0 million impairment charge in connection abandoning our future development efforts of RES-440, $2.5 million litigation settlement charge, and the issuance of 148,073 shares of our common stock for advisory services at an estimated fair value of $1.4 million. The net change in our operating assets and liabilities is primarily attributable to the increase in our accounts payable and accrued expenses due to the timing in processing our payroll and payment to our vendors for professional services and costs associated with our clinical and preclinical activities.

~~During the nine months ended September~~ 30, 2017, we purchased a certificate of deposit in the amount of $10.0 million and had approximately $0.4 million in fixed asset purchases. During the nine months ended September 30, 2016, net cash provided by investing activities was $8.5 million and was attributable to the cash acquired in connection with the reverse merger transaction with RestorGenex.

Net cash provided by financing activities was ~~$20.2~~$33.3 million during the nine months ended September 30, ~~2017,~~2021, which was attributable to net proceeds of $31.1 million received from the ~~$22.1~~sale of our common stock in connection with the February 2021 Offering and $2.2 million in proceeds received ~~upon~~from the ~~closing~~exercise of ~~our Series A private placement offset~~previously issued common stock warrants.

Net cash provided by ~~approximately $98,000 in payments for Series B offering costs. This amount was further offset by the repayment~~financing activities of ~~our convertible note in the amount of $1.9 million. During~~$17.9 million during the nine months ended September 30, ~~2016, net cash provided by financing activities~~2020, was primarily attributable to ~~the $1.9~~$10.8 million in gross proceeds received ~~from our convertible note borrowings.~~in connection with the May 2020 Offering and $8.0 million in gross proceeds received in connection with the exercise of previously outstanding warrants to purchase common stock. These cash inflows were offset in part by the payment of $1.0 million in financing costs.

We expect to continue to incur substantial expenses and generate significant operating losses as we continue to pursue our business strategy of developing ~~our lead product candidate, TSC, for use in the treatment~~TSC. Our operations have consumed substantial amounts of ~~GBM, pancreatic cancer, stroke~~cash since inception and ~~brain metastases.~~

~~To date,~~ we ~~have funded our ongoing business operations and short-term liquidity needs, primarily through the sale and issuance of preferred stock, common stock and convertible promissory notes. We~~ expect to continue to spend substantial amounts of cash to advance the clinical development of the TSC platform, as well as associated investments into our manufacturing, regulatory, and other related capabilities. As of the date of this ~~practice for the foreseeable future. We believe~~Quarterly Report, most our cash ~~and cash equivalents~~resources for clinical development are dedicated to our remaining Oxygenation Trials and our ~~certificate~~Hypoxic Solid Tumor Program, near-term investments intended to improve the quality and robustness of ~~deposit as of September~~ ~~30, 2017 will be sufficient~~our supplier relationships and overall supply chain, and general operating expenses. While we believe we have adequate cash resources to ~~fund our planned~~continue operations through ~~June 2018.~~2023, we anticipate that we will need additional funding in order to complete development of TSC which, if available, could be obtained through additional capital raising transactions, entry into strategic partnerships or collaborations, or alternative financing arrangements.

As of September 30, ~~2017,~~2021, we did not have any credit facilities in place under which we could borrow funds or any other sources of committed capital. WeIn the future, we may seek to raise additional funds through various ~~sources, such as equity and debt financings, or through strategic collaborations and license agreements. We~~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.~~deteriorate, including as a result of unanticipated market shocks, such as the COVID-19 pandemic and ongoing global supply chain disruptions, or inflationary pressure. 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, ~~and our operations,~~ or we may need to obtain funds through ~~collaborators~~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 ~~any~~adequate additional capital as and when required in the ~~near-term and/or~~future, we ~~cannot significantly reduce our expenses and are~~could be forced to cease development activities and terminate our operations, ~~investors may~~and you could experience a complete loss of ~~their~~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. If we issue additional preferred stock~~diluted or ~~convertible debt securities, it could affect the rights of our common stockholders or reduce the value of our common stock or any outstanding classes of preferred stock.~~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.

~~On May 26, 2017, we received a written notice from NASDAQ~~ indicating we were not in compliance with Nasdaq Listing Rule 5550(b)(2) because the market value of our listed securities had been below $35.0 million for the previous 30 consecutive business days. N~~ASDAQ~~ also noted that as of such date the Company also did not meet the alternative requirements under Nasdaq Listing Rule 5550(b)(1), due to the Company's failure to maintain stockholders' equity of at least $2.5 million, or Nasdaq Listing Rule 5550(b)(3), due to the Company's failure to generate net income from continuing operations during its last fiscal year or during two of its last three fiscal years. See Note 12 of our unaudited condensed consolidated statements for further details.

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 Critical Accounting Policies included in our Form 10-K for the year ended December 31, ~~2016,~~2020, filed with the SEC pursuant to Section 13 or 15(d) under the Securities Act on March ~~31, 2017, as amended to this date,~~16, 2021 have not ~~changed, except as follows:~~changed.

Common stock warrants issued in conjunction with our Series A convertible preferred stock offering are accounted for as freestanding financial instruments. These warrants are classified as liabilities on our condensed consolidated balance sheet and are recorded at their estimated fair value. At the end of each reporting period, changes in the estimated fair value during the period are recorded in our condensed consolidated statement of operations. On November 1, 2017, we held a Special Shareholders meeting, requesting shareholders, both common and Series A, to approve a proposed amendment to our Certificate of Incorporation to permit us to pay dividends on our Series A Convertible Preferred Stock in either cash or shares of our Common Stock, which was approved by the shareholders. As a result of this amendment, we have asserted there will be sufficient authorized shares available to settle the Series A warrants. Upon this assertion, the Series A warrants were remeasured on November 1, 2017 and reclassified from liabilities to stockholders’ equity. The warrants will no longer be adjusted to fair value after November 1, 2017. The estimated fair value of common stock warrants is determined by using the Black-Scholes option-pricing model.

This report includes forward-looking statements. 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 appear in a number of places throughout this Quarterly Report and include statements regarding our intentions, beliefs, projections, outlook, analyses or current expectations concerning, among other things, our ongoing and planned preclinical development and clinical trials, the timing of and our ability to make regulatory filings and obtain and maintain regulatory approvals for our product candidates, our intellectual property position, the degree of clinical utility of our products, particularly in specific patient populations, our ability to develop commercial functions, expectations regarding clinical trial data, our results of operations, cash needs, financial condition, liquidity, prospects, growth and strategies, the industry in which we operate and the trends that may affect the industry or us.

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 Quarterly Report, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from the forward-looking statements contained in this Quarterly Report. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Quarterly Report, they may not be predictive of results or developments in future periods.

~~Actual results could differ materially from our forward-looking statements due to a number of factors, including risks related to:~~

You should also read carefully the factors described in the “Risk Factors” section of our Annual Report on Form 10-K filed with the SEC on March 31, 2017, as amended, and elsewhere in our public filings to better understand the risks and uncertainties inherent in our business and underlying any forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Quarterly Report on Form 10-Q will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of 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.

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

~~This~~As a “smaller reporting company” as defined by Item ~~3 is~~10 of Regulation S-K, promulgated by the SEC under the U.S. Securities Act of 1933, as amended, we are not ~~applicable~~required to ~~us as a smaller reporting company and has been omitted.~~provide the information required by this Item 3.

We maintain disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) that are designed to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the ~~SEC~~’sSEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and we are required to apply our judgment in evaluating the cost-benefit relationship of possible internal controls. Our management evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered in this report. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of such period to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding disclosure.

There were no changes in our internal control over financial reporting (as such term is defined in ~~Rule 13a-15(f) under the Securities~~ Exchange Act ~~of 1934, as amended)~~Rule 13a-15(f) that occurred during the quarter ended September 30, ~~2017~~2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

~~For this item, please~~Please refer to Note ~~10,~~7, Commitments and Contingencies to in the ~~Notes to~~notes accompanying the ~~Unaudited Condensed Consolidated Financial Statements~~unaudited interim consolidated financial statements included in Part I, Item 1 of this Quarterly Report, ~~on Form 10-Q,~~ which is incorporated herein by reference.

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A - “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2016 and our Quarterly Report on Form 10-Q for the period ended March 31, 2017, which could materially affect our business, financial condition or future results.

As of the date of this Quarterly Report, ~~on Form 10-Q,~~ there have been no material changes ~~with respect~~ to ~~the Company~~’sour risk factors previously disclosed in our Annual Report and our subsequent quarterly reports on Form ~~10-K~~10-Q, other than as set forth below.

If we cannot regain compliance with the Nasdaq Capital Market continued listing standards , 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 closing 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 closing 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 continue to meet the minimum closing price requirement and other listing requirements.

For example, on November 3, 2021, we received a written notice from the staff of the Listing Qualifications Department of Nasdaq relating to the minimum bid price requirement contained in Nasdaq Listing Rule 5550(a)(2). As previously disclosed, on May 6, 2021 the Company received a written notice from the staff indicating that the Company was not in compliance with the minimum bid price rule because the bid price for the ~~year ended December 31, 2016 and Form 10-Q~~Company’s common stock had closed below $1.00 per share for the ~~period ended March 31, 2017.~~previous 30 consecutive business days. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company was provided 180 calendar days, or until November 2, 2021, to regain compliance. The November 3 notice stated that, although the Company had not regained compliance prior to November 2, 2021, in accordance with Nasdaq Listing Rule 5810(c)(3)(F), the staff has determined that the Company is eligible for an additional 180 calendar days from the date of the second notice, or until May 2, 2022, to regain compliance.

To regain compliance, 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. If necessary to regain compliance with Nasdaq listing standards, we intend, subject to approval of our board of directors and stockholders, to implement a reverse stock split. However, there can be no assurance that the reverse stock split will be approved or will result in a sustained higher stock price that will allow us to 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.

~~None.~~On November 8, 2021, we entered into a Deed of Lease Termination Agreement with the Carlton Landlord providing for the early termination of the Carlton Lease related to our prior corporate headquarters. The Carlton Lease was previously scheduled to expire on April 30, 2022 and, as of September 30, 2021, our aggregate amount of future minimum rental payments thereunder was approximately $69,536. In connection with the termination, we will make a one-time payment to the Carlton Landlord of approximately $14,000, after deducting anticipated returns of deposits in accordance with the Carlton Lease.

In addition to the economic savings, our decision to terminate the Carlton Lease early was also driven by our more general embrace of the remote work culture that became prevalent at many organizations during the COVID-19 pandemic. We believe our people are critical to our ability to efficiently and successfully execute our stated strategy, and that a remote operating paradigm allows us to enhance our available pool of talented human resources while also conserving financial resources.

We also believe in the value of collaboration. In lieu of the fixed office and laboratory space previously available to us under the Carlton Lease, we have recently entered into short term agreements to utilize membership-based co-working space in both Charlottesville, Virginia and Philadelphia, Pennsylvania. We believe these arrangements will permit our team to combine the advantages of remote and in-person work in environments intended to foster creativity and innovation.

34Pursuant to the requirements 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.

	September 30, 2017			December 31, 2016			September 30, 2021			December 31, 2020
Assets
Current assets:
Cash and cash equivalents	$	1,216,000		$	1,552,852		$	40,335,045		$	18,515,595
Certificate of deposit		10,020,164			—
Prepaid expenses, deposits and other current assets		1,004,361			50,844			380,097			260,825
Total current assets		12,240,525			1,603,696			40,715,142			18,776,420
Property and equipment, net		479,647			79,755			81,896			149,198
Intangible asset		8,639,000			8,639,000			0			8,639,000
Goodwill		6,929,258			6,929,258
Right of use asset								67,886			149,162
Other assets		38,813			232,675			15,579			15,771
Total assets	$	28,327,243		$	17,484,384		$	40,880,503		$	27,729,551
Liabilities, Convertible Preferred Stock and Stockholders’ Equity
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of convertible debt	$	550,000		$	1,880,000
Accounts payable		409,423			1,684,158		$	678,036		$	545,844
Accrued expenses and other current liabilities		1,415,707			874,264			2,002,981			1,776,470
Common stock warrant liability		16,316,054			—
Current operating lease liability								67,886			113,469
Total current liabilities		18,691,184			4,438,422			2,748,903			2,435,783
Convertible debt, net of current portion		—			550,000
Deferred income taxes		3,279,363			3,279,363			0			443,893
Other liabilities		—			31,915
Noncurrent operating lease liability								0			35,693
Total liabilities		21,970,547			8,299,700			2,748,903			2,915,369
Commitments and Contingencies
Convertible preferred stock, $0.001 par value:
Series A - 13,750,000 shares authorized, 12,376,329 and 8,324,032 shares issued and outstanding, respectively at September 30, 2017; No shares authorized, issued or outstanding at December 31, 2016 (liquidation value of $16,814,360 at September 30, 2017)		—			—
Total convertible preferred stock		—			—
Stockholders’ Equity:
Commitments and Contingencies (Note 7)
Stockholders’ Equity:
Common stock, $0.001 par value:
1,000,000,000 shares authorized; 14,503,976 and 10,345,637 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively		14,504			10,346
Common stock, $0.001 par value: 1,000,000,000 shares authorized; 101,903,979 and 64,015,441 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively								101,904			64,016
Additional paid-in capital		69,686,744			69,363,575			164,560,366			130,659,550
Accumulated deficit		(63,344,552	)		(60,189,237	)		(126,530,670	)		(105,909,384	)
Total stockholders' equity		6,356,696			9,184,684			38,131,600			24,814,182
Total liabilities, convertible preferred stock and stockholders' equity	$	28,327,243		$	17,484,384
Total liabilities and stockholders' equity							$	40,880,503		$	27,729,551

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Operating expenses:
Research and development	$	1,759,305		$	1,941,743		$	3,946,420		$	5,739,456
General and administrative		1,559,399			3,852,406			4,908,424			10,070,878
Depreciation		27,374			5,822			39,767			19,520
Loss from operations		3,346,078			5,799,971			8,894,611			15,829,854
Other expense (income):
Interest (income) expense, net		(1,318	)		1,378			73,290			854
Change in fair value of warrant liability (Note 11)		(8,441,616	)		—			(18,909,792	)		—
Warrant related expenses (Note 8)		—			—			10,225,846			—
Other financing expenses		—			—			2,870,226			—
Income (loss) from operations before income tax benefit		5,096,856			(5,801,349	)		(3,154,181	)		(15,830,708	)
Income tax benefit		—			(364,796	)		—			(364,796	)
Net income (loss)	$	5,096,856		$	(5,436,553	)	$	(3,154,181	)	$	(15,465,912	)
Per share information:
Net income (loss) per share of common stock, basic	$	0.21		$	(0.53	)	$	(0.35	)	$	(1.52	)
Net income (loss) per share of common stock, diluted	$	0.20		$	(0.53	)	$	(1.83	)	$	(1.52	)
Weighted average shares outstanding, basic		13,937,869			10,333,898			11,709,128			10,198,491
Weighted average shares outstanding, diluted		14,714,853			10,333,898			12,525,707			10,198,491

	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Operating expenses:
Research and development	$	2,105,815		$	3,137,553		$	6,994,866		$	6,845,203
Intangible asset impairment charge		8,639,000			0			8,639,000			0
General and administrative		1,930,082			2,112,375			5,510,365			4,964,440
Depreciation		19,100			24,192			67,302			78,233
Loss from operations		12,693,997			5,274,120			21,211,533			11,887,876
Other income:
Interest income		(50,710	)		(29,233	)		(146,354	)		(89,246	)
Loss from operations before income tax benefit		(12,643,287	)		(5,244,887	)		(21,065,179	)		(11,798,630	)
Income tax benefit		(443,893	)		(805,676	)		(443,893	)		(1,675,381	)
Net loss	$	(12,199,394	)	$	(4,439,211	)	$	(20,621,286	)	$	(10,123,249	)
Deemed dividend arising from warrant exchange		0			0			0			(1,950,378	)
Net loss attributable to common stockholders	$	(12,199,394	)	$	(4,439,211	)	$	(20,621,286	)	$	(12,073,627	)
Per share information:
Net loss per share of common stock, basic and diluted	$	(0.12	)	$	(0.07	)	$	(0.22	)	$	(0.24	)
Weighted average shares outstanding, basic and diluted		101,903,979			64,011,342			98,810,420			50,216,239

	Convertible Preferred Stock					Stockholders' Equity
	Series A					Common Stock				Additional Paid-in			Accumulated			Total Stockholders'
	Shares			Amount		Shares		Amount		Capital			Deficit			Equity
Balance at January 1, 2017		—		$	—		10,345,637	$	10,346	$	69,363,575		$	(60,189,237	)	$	9,184,684
Cumulative effect of change in accounting principle^(a)		—			—		—		—		1,134			(1,134	)		—
Sale of Series A convertible preferred stock and common stock warrants		12,376,329			—		—		—		—			—			—
Common stock issued for advisory services		—			—		17,606		18		49,982			—			50,000
Series A cumulative preferred dividend		—			—		—		—		(912,946	)		—			(912,946	)
Reclassification of accrued dividends upon conversion of Series A		—			—		88,436		88		187,084			—			187,172
Conversion of Series A convertible preferred stock to common stock		(4,052,297	)		—		4,052,297		4,052		(4,052	)		—			—
Beneficial conversion feature for accrued interest of convertible debt		—			—		—		—		28,017			—			28,017
Stock-based compensation expense		—			—		—		—		973,950			—			973,950
Net loss		—			—		—		—		—			(3,154,181	)		(3,154,181	)
Balance at September 30, 2017		8,324,032		$	—		14,503,976	$	14,504	$	69,686,744		$	(63,344,552	)	$	6,356,696

	Stockholders' Equity
	Common Stock				Additional					Total
	Shares		Amount		Paid-in Capital		Accumulated Deficit			Stockholders' Equity
Balance at July 1, 2020		63,998,298	$	63,999	$	130,220,772	$	(97,408,116	)	$	32,876,655
Issuance of common stock upon exercise of warrants		17,143		17		7,483		0			7,500
Stock-based compensation expense		—		0		279,473		0			279,473
Net loss		—		0		0		(4,439,211	)		(4,439,211	)
Balance at September 30, 2020		64,015,441	$	64,016	$	130,507,728	$	(101,847,327	)	$	28,724,417

	Nine Months Ended September 30,
	2017			2016
Operating activities:
Net loss	$	(3,154,181	)	$	(15,465,912	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		39,767			19,520
Loss on sale or disposal of assets		—			6,761
Stock-based compensation expense		973,950			1,121,990
Common stock issued for advisory services		50,000			1,409,363
Warrant related expense, change in fair value, and other financing expenses		(5,813,720	)		—
Abandonment of in-process research and development intangible asset		—			951,000
Change in deferred income taxes		—			(364,796	)
Settlement of litigation matter		—			2,500,000
Non-cash interest expense, net		11,967			7,067
Changes in operating assets and liabilities:
Prepaid expenses, deposits and other assets		(661,675	)		50,918
Accounts payable, accrued expenses and other liabilities		(1,496,150	)		410,014
Net cash used in operating activities		(10,050,042	)		(9,354,075	)

Cash flows (used in) provided by investing activities:
Purchases of property and equipment		(438,604	)		(2,331	)
Purchase of certificate of deposit		(10,000,000	)		—
Cash received in reverse merger transaction		—			8,500,602
Net cash (used in) provided by investing activities		(10,438,604	)		8,498,271
Cash flows provided by financing activities:
Proceeds from the sale of Series A convertible preferred stock and warrants, net		22,129,774			—
Payment of offering costs for Series B		(97,980	)		—
Repayment of convertible debt		(1,880,000	)
Proceeds from the issuance of convertible debt		—			1,880,000
Net cash provided by financing activities		20,151,794			1,880,000
Net (decrease) increase in cash and cash equivalents		(336,852	)		1,024,196
Cash and cash equivalents at beginning of period		1,552,852			1,997,192
Cash and cash equivalents at end of period	$	1,216,000		$	3,021,388
Supplemental disclosure of cash flow information:
Cash paid for interest	$	112,800		$	—
Supplemental disclosure of non-cash investing and financing activities:
Series A cumulative preferred dividends	$	(912,946	)	$	—
Conversion of accrued dividends related to convertible preferred stock	$	187,172		$	—
Conversion of convertible notes and related accrued interest into common stock	$	—		$	711,495
Consideration in connection with RestorGenex Corporation merger transaction	$	—		$	21,261,000

	Three Months Ended September 30,				Nine Months Ended September 30,				As of September 30,
	2017		2016		2017		2016		2021		2020
Convertible debt		—		749,280		213,879		749,280
Common stock warrants		14,003,608		460,721		447,721		460,721		6,499,469		9,100,112
Stock options		2,521,605		2,010,409		2,545,989		2,010,409		3,799,815		2,040,204
Unvested restricted stock awards		4,599		10,738		4,599		10,738		291,800		153,000
		16,529,812		3,231,148		3,212,188		3,231,148		10,591,084		11,293,316

Fair value of RestorGenex shares outstanding	$	19,546,000
Estimated fair value of RestorGenex stock options outstanding		1,321,000
Estimated fair value of RestorGenex warrants outstanding		384,000
CVRs – RES-440 product candidate		10,000
Total purchase price	$	21,261,000

Cash and cash equivalents	$	8,500,602
Prepaid expenses and other assets		195,200
Property and equipment		57,531
Intangible assets		9,600,000
Goodwill		6,929,258
Accrued liabilities		(377,432	)
Deferred tax liability		(3,644,159	)
Net assets acquired	$	21,261,000

	Nine Months Ended September 30, 2016

Net revenues	$	—
Net loss		(13,900,691	)
Basic and diluted loss per share	$	(1.36	)

	September 30, 2017		December 31, 2016
Prepaid research and development expense	$	844,521	$	12,725
Prepaid insurance expense		126,733		9,731
Prepaid other		33,107		28,388
Total	$	1,004,361	$	50,844

	September 30, 2017		December 31, 2016
Accrued interest payable	$	36,029	$	29,359
Accrued Series A dividends		725,774		—
Accrued payroll and payroll related expenses		398,859		399,740
Accrued professional fees		114,268		72,855
Accrued clinical studies expenses		88,175		220,978
Other accrued expenses		52,602		151,332
Total	$	1,415,707	$	874,264

	September 30, 2017			December 31, 2016
2016 Convertible notes	$	—		$	1,880,000
Series B convertible notes		550,000			550,000
		550,000			2,430,000
Less current portion		(550,000	)		(1,880,000	)
Long-term debt, net of current portion	$	—		$	550,000

	September 30, 2021		December 31, 2020
Accrued payroll and payroll related expenses		773,917		653,899
Accrued professional fees		59,126		31,809
Accrued clinical studies expenses		1,081,453		1,055,398
Other accrued expenses		88,485		35,364
Total	$	2,002,981	$	1,776,470

	Outstanding		Range of exercise price per share
Common stock warrants issued prior to Merger		447,721	$20.00	-	$750.00
Common stock warrants issued in Series A		13,555,887		$2.22
		14,003,608

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

	Number of Options			Weighted average exercise price per share		Weighted average remaining contractual life (in years)
Balance at January 1, 2017		2,207,409		$	8.09
Granted		340,041			2.49
Expired		(1,461	)		15.00
Outstanding at September 30, 2017		2,545,989		$	7.34		7.37
Exercisable at September 30, 2017		1,746,809		$	8.51		6.62

	Number of Options			Weighted average exercise price per share		Weighted average remaining contractual life (in years)		Aggregate intrinsic value
Balance at January 1, 2021		2,240,204		$	8.28
Granted		1,732,515			0.91
Forfeited		(172,904	)		1.76
Outstanding at September 30, 2021		3,799,815		$	5.22		8.79	$	33,791
Exercisable at September 30, 2021		1,839,079		$	9.85		8.17	$	30,113
Vested and expected to vest at September 30, 2021		3,542,971		$	5.51		8.74	$	33,791

~~Expected term (in years)~~	~~6.03~~
~~Risk-free interest rate~~	~~2.0~~	%
~~Expected volatility~~	~~114.9~~	%
~~Dividend yield~~	—	%

	2021			2020
Expected term (in years)		10			7.75
Risk-free interest rate		1.5	%		0.9	%
Expected volatility		123.8	%		119.7	%
Dividend yield		0	%		0	%

	Number of shares		Weighted-average grant date fair value
Unvested balance at January 1, 2021		153,000	$	0.65
Granted		138,800	$	0.72
Unvested balance at September 30, 2021		291,800	$	0.69

	Rental Commitments
2017	$	27,746
2018		112,354
2019		114,409
2020		116,464
2021		118,519
Thereafter		58,232
Total	$	547,724

	Rental Commitments
2021	$	29,801
2022		39,735
Total		69,536
Less: imputed interest		(1,650	)
	$	67,886

	September 30, 2017
	(Level 1)		(Level 2)		(Level 3)
Assets
Cash and cash equivalents	$	1,216,000	$	—	$	—
Certificate of deposit	$	10,020,164

Liabilities
Common stock warrant liability	$	—	$	—	$	16,316,054

	December 31, 2016
	(Level 1)		(Level 2)		(Level 3)
Assets
Cash and cash equivalents	$	1,552,852	$	—	$	—

	Common Stock Warrant Liability
Balance at December 31, 2016	$	—
Issued in connection with the Series A convertible preferred stock		35,225,846
Change in fair value		(18,909,792	)
Balance at September 30, 2017	$	16,316,054

Stock price	$	1.66
Exercise price	$	2.22
Expected term (in years)		4.5
Risk-free interest rate		1.8	%
Expected volatility		109.3	%
Dividend yield		—

	As of September 30, 2017
	Actual			Adjustments				Pro-forma
Total assets	$	28,327,243		$	—			$	28,327,243
Total liabilities		21,970,547			(16,316,054	)	(i)		5,654,493
Convertible preferred stock		—			—				—
Stockholders' equity
Common stock		14,504			—				14,504
Additional paid-in-capital		69,686,744			13,153,524		(ii)		82,840,268
Accumulated deficit		(63,344,552	)		3,162,530		(iii)		(60,182,022	)
Total stockholders' equity		6,356,696			16,316,054				22,672,750
Total liabilities, convertible preferred stock and stockholders' equity	$	28,327,243		$	—			$	28,327,243

	Three Months Ended September 30, 2017									Three Months Ended September 30,
	2017			2016			Change			2021			2020			Change
Operating expenses:
Research and development	$	1,759,305		$	1,941,743		$	(182,438	)	$	2,105,815		$	3,137,553		$	(1,031,738	)
Intangible asset impairment charge											8,639,000			—			8,639,000
General and administrative		1,559,399			3,852,406			(2,293,007	)		1,930,082			2,112,375			(182,293	)
Depreciation		27,374			5,822			21,552			19,100			24,192			(5,092	)
Loss from operations		3,346,078			5,799,971			(2,453,893	)		12,693,997			5,274,120			7,419,877
Other expense (income):
Interest (income) expense, net		(1,318	)		1,378			(2,696	)
Change in fair value of warrant liabilities		(8,441,616	)		—			(8,441,616	)
Other income:
Interest income											(50,710	)		(29,233	)		(21,477	)
Loss from operations before income tax benefit											(12,643,287	)		(5,244,887	)		(7,398,400	)
Income tax benefit		—			(364,796	)		364,796			(443,893	)		(805,676	)		361,783
Net income (loss)	$	5,096,856		$	(5,436,553	)	$	10,533,409
Net loss										$	(12,199,394	)	$	(4,439,211	)	$	(7,760,183	)

		~~DIFFUSION PHARMACEUTICALS INC.~~



	~~By:~~	~~/s/ David G. Kalergis~~
		~~David G. Kalergis~~
		~~Chairman and Chief Executive Officer~~
		~~(Principal Executive Officer)~~


	~~By:~~	~~/s/ Ben L. Shealy~~
		~~Ben L. Shealy~~
		~~Senior Vice President, Finance, Treasurer and Secretary~~
		~~(Principal Financial Officer)~~

Exhibit No.	Description	Method of Filing
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	Furnished herewith
32.2	Certification of principal financial officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Furnished herewith
101	The following materials from ~~Diffusion~~’sDiffusion’s quarterly report on Form 10-Q for the quarter ended September 30, ~~2017,~~2021 formatted in Inline XBRL (Extensible Business Reporting Language): (i) the Unaudited ~~Condensed~~Interim Consolidated Balance Sheets, (ii) the Unaudited ~~Condensed~~Interim Consolidated Statements of Operations, (iii) the Unaudited ~~Condensed~~Interim Consolidated Statement of Changes in Stockholders’ Equity, ~~(Deficit),~~ (iv) the Unaudited ~~Condensed~~Interim Consolidated Statements of Cash Flows, and (v) Notes to Unaudited ~~Condensed~~Interim Consolidated Financial Statements	Filed herewith
104	Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101)

		DIFFUSION PHARMACEUTICALS INC.



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


	By:	/s/ William Hornung
		William Hornung
		Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)