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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

(Mark one)

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

 

For the quarterly period ended SeptemberMarch 30, 202131, 2022

 

☐

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)

 

300 East Main Street, Suite 201

Charlottesville, VA 22902

(Address of principal executive offices, including zip code)

 

(434) 220-0718

(Registrant’s telephone number including area code)

 

Title of Each Class	Trading Symbol(s)Symbol	Name of Each Exchange on Which Registered
Common Stock, par value $0.001 per share	DFFN	NASDAQThe 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 every Interactive Data File required to be submitted 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 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 ☒	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 8, 2021May 11, 2022 was 101,920,3292,038,592 shares.

 

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Note Regarding Company References and Other Defined Terms¹

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

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

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 implied forward-looking statements. By their nature, forward-looking statements involve risks and uncertainties because they relate to events, competitive dynamics and industry change, and depend on the economic circumstances that may or may not occur in the future or may occur on longer or shorter timelines than anticipated. Although we believe that we have a reasonable basis for each forward-looking statement contained in this 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:

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 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 foregoing and the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. For all forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

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

Note Regarding Stock Splits

Unless the context otherwise requires, in this Quarterly Report, all share and per share amounts related to our common stock give effect to our 1-for-50 reverse stock split effective April 18, 2022.

Note Regarding Trademarks, Trade Names and Service Marks

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

PART I – FINANCIAL INFORMATION

Diffusion Pharmaceuticals Inc.

Consolidated Balance Sheets

(unaudited)

See accompanying notes to unaudited interim consolidated financial statements.

Diffusion Pharmaceuticals Inc.

Consolidated Statements of Operations and Comprehensive Loss

(unaudited)

See accompanying notes to unaudited interim consolidated financial statements.

Diffusion Pharmaceuticals Inc.

Consolidated StatementStatements of Changes in Stockholders' Equity

Three and Nine Months Ended September 30, 2020March 31, 2021 and 2022

(unaudited)

See accompanying notes to unaudited interim consolidated financial statements.

Diffusion Pharmaceuticals Inc.

Consolidated StatementStatements of Changes in Stockholders' Equity

Three and Nine Months Ended September 30, 2021Cash Flows

(unaudited)

See accompanying notes to unaudited interim consolidated financial statements.

Diffusion Pharmaceuticals Inc.

Consolidated Statements of Cash Flows

(unaudited)

See accompanying notes to unaudited interim consolidated financial statements.

Diffusion Pharmaceuticals Inc., a Delaware corporation, is a biopharmaceutical company developing novel therapies that enhance the body’s ability to deliver oxygen to the areas where it is needed most. The Company’s lead product candidate, TSC, is being developed to enhance the diffusion of oxygen to tissues with low oxygen levels, also known as hypoxia, a serious complication of many of medicine’s most intractable and difficult-to-treat conditions.conditions, including hypoxic tumors.

On April 18, 2022, the Company effected a 1-for-50 reverse split of its common stock. Any references in the unaudited condensed consolidated financial statements and related notes to share or per share amounts give retroactive effect to this reverse stock split.

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

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

Operations of the Company are subject to certain risks and uncertainties including various internal and external factors that will affect whether and when the Company’s product candidates become approved drugs and how significant their market share will be, some of which are outside of the Company’s control. The length of time and cost of developing and commercializing these product candidates and/or failure of them at any stage of the drug approval process will materially affect the Company’s financial condition and future operations. The Company expects that its existing cash, and cash equivalents and marketable securities as of SeptemberMarch 30,31, 20212022 will enable it to fund its operating expenses and capital expenditure requirements through 2023.

TheAs of the date of this Quarterly Report, the Summary of Significant Accounting Policies included in the Company's Annual Report for the year ended December 31, 2020 have not materially changed.changed, except as set forth below.

Basis of Presentation

The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with GAAP for interim financial information as found in the ASC and ASUs of the FASB, and with the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the SEC. In the opinion of management, the accompanying unaudited interim consolidated financial statements of the Company include all normal and recurring adjustments (which consist primarily of accruals, estimates and assumptions that impact the unaudited interim consolidated financial statements) considered necessary to present fairly the Company’s financial position as of SeptemberMarch 30,31, 2021,2022, and its results of operations for the three and nine months ended September 30,2021 and 2020 and cash flows for the ninethree months ended SeptemberMarch 30,31, 20212022 and 2020.2021. Operating results for the ninethree months ended SeptemberMarch 30,31, 20212022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.2022. The unaudited interim consolidated financial statements presented herein do not contain the required disclosures under GAAP for annual financial statements. The accompanying unaudited interim consolidated interim financial statements should be read in conjunction with the annual audited financial statements and related notes as of and for the year ended December 31, 20202021 filed with the SEC as part of the Company's Annual Report on Form 10-K on March 16, 2021.Report.

Use of Estimates

The preparation of unaudited interim consolidated financial statements in conformity with GAAP requires managementthe Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenseexpenses during the reporting period. The COVID-19 pandemic had no material impact on

On an ongoing basis, the Company'sCompany evaluates its estimates using historical experience and other factors, including the current economic environment. Significant items subject to such estimates are assumptions used in the preparationfor purposes of the unaudited interim consolidated financial statementsdetermining stock-based compensation and accounting 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 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 responsesactivities. Management believes its estimates to be reasonable under the pandemic, further actions taken to contain or treat COVID-19, the ongoing economic impact on local, regional, national and international markets, and the speed of the anticipated economic recovery. Due to the uncertainty of factors surrounding these estimates or judgments, actualcircumstances. Actual results may materially varycould differ significantly from the Company’sthose estimates. Estimates and assumptions are periodically reviewed, and the effects of revisions are reflected in the unaudited interim consolidated financial statements in the period they are determined. The Company’s future assessment of the magnitude and duration of COVID-19, as well as other factors, could result in material impacts to the Company’s consolidated financial statements in future reporting periods.

Fair Value of Financial Instruments

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

Intangible AssetConcentration of Credit Risk

In the third quarter of 2021, the Board of Directors decided to no longer dedicate financial resources to the Company's DFN-529 (formerly RES-529) intangible asset and any future internal development efforts were abandoned. In connection with this decision,Financial instruments that potentially expose the Company concluded that DFN-529 was impaired in its entiretyto concentrations of credit risk consist principally of cash on deposit with multiple financial institutions, the balances of which frequently exceed federally insured limits.

Cash and Cash Equivalents

The Company considers any highly-liquid investments, such as such, the Company recognized a non-cash impairment charge of $8.6 million during the third quartermoney market funds and commercial paper with an original maturity of 2021.three months or less to be cash and cash equivalents.

Marketable securities

The abandonment also resultedCompany classifies its marketable securities as available-for-sale, which include commercial paper and U.S. government debt securities with original maturities of greater than three months from date of purchase. The Company considers its marketable securities as available for use in an income tax benefit of $0.4 million due tocurrent operations, and therefore classify these securities as current assets on the tax effect ofconsolidated balance sheet. These securities are carried at fair market value, with unrealized gains and losses reported in comprehensive loss and accumulated other comprehensive loss within stockholders’ equity. Gains or losses on marketable securities sold will be based on the reduction in the deferred tax liability associated with the asset.specific identification method.

Reverse Stock Split

On April 18, 2022, the Company filed a Certificate of Amendment to its Certificate of Incorporation, as amended, with the Secretary of State of the State of Delaware to effect the Reverse Stock Split at a ratio of 1-to-50. NaN fractional shares were issued in connection with the Reverse Stock Split. Stockholders who otherwise would have been entitled to receive fractional shares of common stock are entitled to receive an amount in cash (without interest or deduction) equal to the fraction of one share to which such stockholder would otherwise be entitled multiplied by $12.93, representing the split-adjusted average closing price of the Company’s common stock on the Nasdaq Capital Market for the five consecutive trading days immediately preceding the effective date of the Reverse Stock Split. Proportional adjustments were made to the Company’s outstanding warrants, stock options and other equity securities and to the 2015 Equity Plan to reflect the Reverse Stock Split, in each case, in accordance with the terms thereof. Unless the context otherwise requires, all share and per share amounts in this Quarterly Report have been adjusted to reflect the Reverse Stock Split.

Net Loss Per Common Share

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

The following potentially dilutive securities outstanding as of March 31,2022 and 2021have been excluded from the computation of diluted weighted average shares outstanding, as they would be anti-dilutive as of the dates indicated below:anti-dilutive:

Recently Adopted Accounting Pronouncements

In December 2019,June 2016, the FASB issued ASU No.20192016-12,13, Income TaxesFinancial Instruments—Credit Losses, Measurement of Credit Losses on Financial Instruments (Topic 740326): Simplifying. The standard amends the Accountingimpairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses for Income Taxes.most financial assets and certain other instruments that aren’t measured at fair value through net income. For available-for-sale debt securities, entities will be required to recognize an allowance for credit losses rather than a reduction in carrying value of the asset. Entities will no longer be permitted to consider the length of time that fair value has been less than amortized cost when evaluating when credit losses should be recognized. This new guidance applies to all entities and aims to reduce the complexity of tax accounting standards while enhancing reporting disclosures. This guidance wasis effective for fiscal years beginning afterthe Company as of December 15, 2020January 1, 2023. and interim periods therein. The Company adoptedis currently evaluating the impact of this ASU No.2019-12 in the first quarter of 2021 and the adoption didbut does not expect that adoption of this standard will have a material impact on the Company's consolidated financial statements.statements and related disclosures.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

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

The Company did not have marketable securities as of December 31, 2021. The Company's marketable securities generally have contractual maturity dates between 3 and 12 months. Most of the Company’s marketable securities are in an unrealized loss position at March 31, 2022. Unrealized losses on marketable securities as of March 31, 2022 were not significant and were primarily due to changes in interest rates, and not due to increased credit risks associated with specific securities. Accordingly, 0 other-than-temporary impairment was recorded for the three months ended March 31, 2022 and there were 0 realized gains or losses recorded during the three months ended March 31, 2022.

Fair value is the price that could be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value determination in accordance with applicable accounting guidance requires that a number of significant judgments be made. Additionally, fair value is used on a nonrecurring basis to evaluate assets for impairment or as required for disclosure purposes by applicable accounting guidance on disclosures about fair value of financial instruments. Depending on the nature of the assets and liabilities, various valuation techniques and assumptions are used when estimating fair value. The carrying amounts of certain of the Company’s financial instruments, including prepaid expense and accounts payable are shown at cost, which approximates fair value due to the short-term nature of these instruments. The Company follows the provisions of FASB ASC Topic 820,Fair Value Measurement, for financial assets and liabilities measured on a recurring basis. The guidance requires fair value measurements be classified and disclosed in one of the following three categories:

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

The fair value of the Company’s Level 2 marketable securities are estimated primarily based on benchmark yields, reported trades, market-based quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications, which represent a market approach. In general, a market approach is utilized if there is readily available and relevant market activity for an individual security. This valuation technique may change from period to period, based on the relevance and availability of market data.

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

February 2021 CommonPrivate Placement of Series C Preferred Stock Offering

InOn February 2021,March 18, 2022, the Company completed the February 2021 Offering in which it offeredissued and sold 33,658,538 shares ofto Robert J. Cobuzzi, Jr., Ph.D., its common stock in an underwritten, public offering for a purchase price to the public of $1.025 per share, inclusive of shares offeredPresident & Chief Executive Officer, and sold pursuant to the exercise-in-full by the underwriter ofWilliam R. Elder, its 30-day option to purchase additional shares. The February 2021 Offering resulted in aggregate net proceeds to the Company of $31.1 million, after deducting underwriting commissions, discounts, and expenses but prior to deducting other offering costs. In addition, at the closings of the February 2021 Offering, the Company issued to designees of the underwriter of the transaction warrants to purchase up toGeneral Counsel & Corporate Secretary, an aggregate of 1,682,92710,000 shares of Series C Preferred Stock at an offering price of $0.50 per share, representing 100% of the stated value per share of the Series C Preferred Stock, for aggregate gross proceeds of $5,000.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The Series C Certificate provides that, among other things, (i) each share of Series C Preferred Stock is convertible into 0.02 shares of the Company's common stock, representing a conversion price of $25.00 per share, subject to certain conditions, (ii) each share of Series C Preferred Stock outstanding is counted on an as converted basis, together with the Company’s common stock as a single class, for purposes of determining the presence of a quorum at any meeting at which holders are asked to vote on matters related to the Reverse Stock Split (subject to any applicable exchange listing rules), (iii) each share of Series C Preferred Stock outstanding has the right to cast 1,600 votes per share of Series C Preferred Stock on the Reverse Stock Split on a “mirrored” basis — this means that the holders of the Series C Preferred Stock are required to vote their shares in a manner that “mirrors” the proportions of “For” and “Against” votes cast by the holders of the Company’s common stock are voted on the Amendment (excluding, for the avoidance of doubt, any shares of common stock that are not voted), and (iv) the holders of outstanding shares of Series C Preferred Stock are entitled to designees. The underwriter warrants havedividends, on an exercise priceas converted basis, equal to dividends actually paid, if any, on shares of $1.28125 per sharecommon stock and a termparticipate in any liquidation of five years from the date of issuance.Company on an as converted basis.

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

Common Stock Warrants

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

As of SeptemberMarch 30,31, 2021,2022, the Company had the following warrants outstanding to acquire shares of its common stock:

During the ninethree months ended SeptemberMarch 30,31, 2021,2022, 53,57018,077 warrants expired and 4,230,000 warrants were exercised for aggregate proceeds of approximately $2.2 million.expired.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

2015 Equity Plan

The 2015 Equity Plan provides for increases to the number of shares reserved for issuance thereunder each January 1 equal to 4.0% of the total shares of the Company’s common stock outstanding as of the immediately preceding December 31, unless a lesser amount is stipulated by the Compensation Committee of the Company's board of directors. Accordingly, 2,560,61881,531 shares were added to the reserve as of January 1, 2021,2022, which shares may be issued in connection with the grant of stock-based awards, including stock options, restricted stock, restricted stock units, stock appreciation rights and other types of awards as deemed appropriate, in each case, in accordance with the terms of the 2015 Equity Plan. As of SeptemberMarch 31, 2022, 30,2021,there were 407,33349,039 shares available for future issuance under the 2015 Equity Plan.

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

The following table summarizes the activity related to all stock option grants for the ninethree months ended SeptemberMarch 30,31, 2021:2022:

The weighted average grant date fair value of stock option awards granted was $10.90 during the ninethree months ended SeptemberMarch 31, 2022. 30,2021 was $0.87. The total fair value of options vested during the three months ended SeptemberMarch 31, 2022 30,2021and 20202021 was $0.3 million and $0.3$0.2 million, respectively. The total fair value of options vested during the nine months ended September 30,2021 and 2020 was $0.6 million and $0.6 million, respectively. NoNaN options were exercised during any of the periods presented. At SeptemberMarch 30,31, 2021,2022, there was $1.2$1.3 million of unrecognized compensation expense that will be recognized over a weighted-average period of 1.801.97 years. During the nine months ended September 30, 2021, the Company granted 385,267 performance-based stock options with an exercise price of $1.11 per share, subject to vesting based on the satisfaction of specified performance criteria. Compensation expense for the performance-based awards is recorded over the estimated service period for each milestone when the performance conditions are deemed probable of achievement. The Company recorded stock-based compensation expense of approximately $0.1 million nine months ended September 30,2021, for service-based awards and performance conditions deemed probable of achievement and/or achieved. For performance-based awards containing performance conditions which were not deemed probable of achievement at September 30,2021,no stock compensation expense was recognized and any previously recognized expense related to those awards originally deemed probable was reversed.

Options granted were valued using the Black-Scholes option-pricingBlack-Scholes-Merton derivative instrument pricing model and the weighted average assumptions used to value the options granted during the ninethree months ended SeptemberMarch 31, 2022 30,2021 and 2020were as follows:

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Restricted Stock Unit Awards

The Company issues restricted stocksstock units ("RSU") to newly elected, non-executive members of the board of directors that vest in six, tri-monthly installments beginning 18 months after the respective grant date. The fair value of ana 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:awards during the period indicated:

(1) The RSUs vested during the three months ended March 31, 2022 were settled on a hybrid basis. The Company withheld 120 shares of common stock and, in lieu of delivering such shares, paid the RSU holder an amount in cash equal to the fair market value of such shares on vesting date, representing the holder's approximate tax liability associated with such vesting amount in cash equal to the fair market value of such shares on vesting date, representing the holder's approximate tax liability associated with such vesting.

The Company recognized approximately $16,000 and $4,000$5,000 in expense related to these awards during the three months ended September 30, 2021March and 2020, respectively. The Company recognized approximately $27,000 and $12,000 in expense related to these awards during the nine months ended September 30,31, 20212022 and 2020,March 31, 2021, respectively. At SeptemberMarch 30,31, 2021,2022, there was approximately $0.1 million of unrecognized compensation cost that will be recognized over a weighted average period of 2.351.90 years.

Office Space RentalLease Commitment

The Company has a non-cancelable operating lease for office and laboratoryshort term agreements to utilize membership-based co-working space in both Charlottesville, Virginia which began in April 2017, and as of September 30,2021, has a remaining lease term of approximately 0.6 years. The discount rate used to account for the Company's operating lease under ASC 842 is the Company’s estimated incremental borrowing rate of 10%. The original term of the lease ends in the second quarter of 2022 and the Company has an option to extend for another five (5) years. This option to extend was not recognized as part of the Company's measurement of the right-of-use asset and operating lease liability as of September 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 842 and did not recognize a right-of-use asset and operating lease liability related to these short-term leases.

Philadelphia, Pennsylvania. Rent expense related to the Company's operating leasesshort-term agreements was approximately $9,000 and $31,000 for the three months ended SeptemberMarch 30,31,2022 and 2021, and 2020 was approximately $48,000 and $30,000, respectively. Rent expense for the nine months ended September 30,2021 and 2020 was approximately $0.1 million and $91,000, respectively. Future minimum rental payments under the Company's non-cancelable operating lease at September 30,2021 were as follows:

Research and Development Arrangements

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

Defined Contribution Retirement Plan

The Company has established aits 401(k) defined contribution plan thatPlan, which covers all employees who qualify under the terms of the plan. Eligible employees may elect to contribute to the 401(k) Plan up to 90% of their compensation, limited by the IRS-imposed maximum. The Company provides a safe harbor match with a maximum amount of 4% of the participant’s compensation. The Company made matching contributions under the 401(k) Plan of approximately $29,000$27,000 and $11,000$16,000 for the three months ended September 30,March 31, 2022 2021and 2020, respectively and matched approximately $60,000 and $42,000 during the nine months ended September 30, 2021, and 2020, respectively.

Legal Proceedings

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

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

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

On November 8, 2021,April 18, 2022, we entered intoat the Special Meeting, the Company's stockholders approved an amendment to the Company’s certificate of incorporation, as amended, to effect a Deed of Lease Termination Agreement with the Carlton Landlord providing for the early terminationreverse stock split of the Carlton Lease relatedCompany’s outstanding shares of common stock by a ratio of any whole number between 1-for-2 and 1-for-50, at any time prior to our prior corporate headquarters. The Carlton Lease was previously scheduled to expire on April 30,December 31, 2022, the implementation 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 paymenttiming thereof subject to the Carlton Landlorddiscretion of approximately $14,000, after deducting anticipated returnsthe Company’s board of depositsdirectors.

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

In lieuAs described in further detail above under, Note 3. Basis of Presentation and Summary of Significant Accounting Policies, on April 18, 2022, following the completion of the fixed officeSpecial Meeting and laboratory space previouslythe Series C Preferred Stock conversion,  the Company implemented the Reverse Stock Split at a ratio of 1-for-50 and beginning with the opening of trading on April 19, 2022, the Company’s common stock was available to us underfor trading on the Carlton Lease, we have recently entered into short term agreements to utilize membership-based co-working space in both Charlottesville, Virginia and Philadelphia, Pennsylvania.Nasdaq Capital Market on a Reverse Stock Split adjusted basis.

Nasdaq Bid Price Deficiency NoticeRequirement Compliance

On May 3, 2022, the Company received a written notice from the Nasdaq Staff confirming that the Company has regained compliance with Nasdaq Listing Rule 5550(a)(2) because the bid price for the Company’s common stock had closed above $1.00 per share for the previous ten (10) consecutive business days ending May 2, 2022. As previously disclosed,reported, 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 indicatedStaff indicating that the Company was not in compliance with such ruleNasdaq Listing Rule 5550(a)(2) because the bid price for the Company’s common stock had closed below $1.00 per share for the previous 30 consecutive business days. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company was provided 180 calendar days, or until November 2, 2021, to regain compliance with the Rule.

On November 3, 2021, the Company received an additional notice from the staff providing that, although the Company had not regained compliance with the bid price rule by November 2, 2021, in accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Staff has determined that the Company is eligible for an additional 180 calendar days from the date of such notice, or untilday. The May 2,3, 2022 to regain compliance. To regain compliance, the bid price for the Company’s common stock must close at $1.00 per share or more for a minimum of 10 consecutive business days.

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

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

Diffusion Pharmaceuticals: Enhancing Oxygen, Fueling Life

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

TSC DevelopmentHighlights from the First Quarter of 2022

Business Update

Our Lead Indication: Using TSCIn the first quarter of 2022, we continued to Treat Hypoxic Solid Tumors

Solid tumors comprise approximately 90% of all adult cancers and, according toadvance the American Cancer Society, roughly 1.9 million new cancer cases will be diagnosed in the U.S. during 2021.  It is also well-documented in the scientific literature that the prevalence of hypoxic regions across numerous primary solid tumor types directly contributes to treatment resistance whether it be radiotherapy, chemotherapy, and immunotherapy, increasing the metastatic potential of these tumors and the probability of unsuccessful treatment. We believe TSC’s novel mechanism of action lends itself to treating this unmet medical need, so we are designing our Hypoxic Solid Tumor Program to support the usedevelopment of TSC for the treatment of hypoxia and as a platform to enhance standard-of-care treatment offor conditions complicated by hypoxia with a particular near-term focus on hypoxic solid tumors.

This program is being designed based on previously obtained data that we believe support the potential benefits of TSC as a treatment for hypoxic solid tumors, including preclinical evidence supporting TSC’s enhancement of radiotherapy and clinical evidence of TSC's effects in unresectable glioblastoma multiforme tumors from our previous Phase 2 study evaluating TSC in patients with GBM treated with standard of care radiation and chemotherapy. Additionally, with the outcomeAs 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 usedQuarterly Report, TSC has been administered to further guide the designmore than 220 subjects across 11 clinical trials. Data from these clinical trials support our understanding of the program.  We believe receiving FDA feedback on the proposed regulatory pathway underlying our Hypoxic Solid Tumor Program will enhance the probabilitysafety, tolerability, pharmacokinetics and pharmacodynamic effects of successfully developing and, if approved, commercializingTSC. Evidence of clinical effect with 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 bewas reported from a Phase 2 clinical trial, will be subjectstudy conducted in patients with PAD with claudication. In addition, post hoc analyses of two prior studies involving patients with COVID-19 and unresected GBM tumors have provided preliminary evidence of TSC’s potential. Although the results small Phase 2 studies were not statistically significant, we believe the results were compelling and subsequent analyses helped identify certain data gaps that have been focus of recent development, including the relationship between TSC  dose and oxygenation.

During 2021, to address these identified gaps in our TSC knowledge base, and guide the timingfuture of FDA feedbackour TSC development program, we designed and executed on our Oxygenation Trials. The Oxygenation Trials are a series of three short-term, clinical studies designed to provide clinical evidence of the relationship between TSC dose and the availabilityeffects on oxygenation, each specifically tailored to evaluate the effects of clinical drug supply. TSC on a different component of the oxygen delivery pathway. We completed the first of these studies, the TCOM Trial, in March 2021. The first participants in the second Oxygenation Trial, the Altitude Trial, were dosed in November 2021 and on April 11, 2022, we announced the completion of dosing for the final participant in the study. Topline data from the Altitude Trial are expected to be available in June 2022. In December 2021 we announced the dosing of the first patients in the final Oxygenation Trial, the ILD-DLCO Trial. We currently expect to complete dosing in this study in the second half of 2022 and to report top line results within two months of study completion.

OurThe extensive preclinical and clinical data regarding TSC obtained to date, including data recently obtained from our Oxygenation Trials

TCOM Trial: TSC's Effects and our COVID-19 Trial completed in February 2021, provide significant information related to TSC’s effects on Peripheral Tissue Oxygenation

oxygenation, dose response characteristics, pharmacokinetics, and pharmacodynamics. In JuneNovember 2021, based on the available data and the significant unmet medical need, we reported a positive trendannounced our intention to focus the next steps 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 withefforts to develop TSC as comparedan adjunct 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 evidencestandard of hyperoxygenation.

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

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 the TCOM Trial's placebo group from the median response observed in each TSC dosage group at each of the measurement times during the one-hour period following dosing. As you can see in the chart, these data indicate peripheral tissue oxygenation increased relative to the placebo group following TSC administration and persisted through the one-hour measurement period, particularly at the two highest doses tested (2.0 mg/kg and 2.5 mg/kg).

care therapy for hypoxic solid tumors. We believe the resultsaforementioned collection of information will allow us to be more efficient and increase our likelihood of success, compared to the TCOM Trial provide clinical evidence thatCompany’s past efforts to develop TSC facilitates the passive diffusion of oxygen from areas of high concentrationas a cancer treatment, which were terminated in 2019 due to areas of low concentration without causing hyperoxygenation and, accordingly, represent a positive and meaningful step towards the accomplishment of the overall strategic objectives of our Oxygenation Trials set forth in November 2020. Moreover, the doses at which the largest effects of TSC were observed in the TCOM study are higher than the doses tested in any of the recent clinical trials of TSC, and these data obtained from the TCOM Trial is being used to guide the design of our remaining Oxygenation Trials – the Altitude Trial and the ILD-DLCO Trial.financial constraints.

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

Altitude Trial: TSC’s Effects Under Induced Hypoxic Conditions

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

ILD-DLCO Trial: TSC's Effects on Oxygen Transfer Efficiency

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

Further, duringour advisors including our new Scientific Advisory Board members announced in February 2022, on the third quarter of 2021, we received clearance of our IND for TSC from the Pulmonary, Allergy, and Critical Care divisiondesign of the FDA, an important step as we prepare to initiate the ILD-DLCO Trial. This also represents the fourth division with which we have an open IND for TSC – joining the Cardiology and Nephrology, Neurology, and Oncology divisions – which we believe underscores TSC’s broad therapeutic potential to treat a variety of conditions complicated by hypoxia.

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

TSC Supply Chain Update

As broadly reported by companies across industrial sectors, supply chain disruptions, shortages, and other issues have been widespread during 2021, and we have also recently been subject to delays and interruptions in our TSC drug supply. As previously reported in our Annual Report , TSC is currently manufactured by our primary CMO partner at a facility that now manufactures COVID-19 vaccines underincluding the Defense Production Act. In response these delays and interruptions, we are in the process of evaluating opportunities to increase the robustnesspreliminary design of our drug supplyPlanned Phase 2 Hypoxic Tumor Trial protocol and overall supply chain to be more responsive toupdating our needs.oncology-related IND previously filed with the FDA.

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

In parallel, we continue to undertake preclinical studies and other opportunities to obtain additional data designed to demonstrate TSC’s potential uses in a broad spectrum of non-cancer indications, as well as our work to further improve the TSC manufacturing process and believe we are takingsupport the necessary steps to ensurecontinued  and support the continued availability of high-quality drug supply to supportproduct.

Finally, we believe we can leverage what we have learned from the next steps in TSC’s development. However,development of TSC is a freeze-dried, injectable product requiring a sophisticated manufacturing process. As a result, any change to all or a portionand the significant skills and experience of our manufacturing process, together with uncertainty regarding the general availability of manufacturing materials as a result of more general global supply chain shortagesteam to opportunistically identify and disruptions, could affect the costacquire or in-license novel product candidates that complement TSC and timing of the available clinical study drug supply of TSC.

Organizational Update

Enhancing Our Organization, Embracing Remote Work

During the third quarter, we continued to enhance our operating team with the addition of new employees in a variety of functions across our organization, including clinical operations, CMC, finance, and, more recently, medical writing. As part of our growth strategy, we have embraced the remote work culture that became prevalent at many organizations during the COVID-19 pandemic. We believe our people are critical to our ability to efficiently and successfully execute our stated strategy, and this remote operating paradigm allows us to enhance our available pool of talented human resources while also conserving financial resources. For example, in November 2021, we negotiated and entered into an agreement providing for the early termination of our lease of the Carlton Avenue facility in Charlottesville, Virginia.overall strategy.  We also believe in the power of collaboration. In turn,diversifying our asset portfolio through and in lieu of the fixed office and laboratory space previously available to us under that agreement, we have recently entered into short term agreements to utilize membership-based co-working space in both Charlottesville, Virginia and Philadelphia, Pennsylvania. We believe these arrangements will permitacquisition or in-license would reduce our team combine the advantages of remote and in-person work in environments intended to foster creativity and innovation.Company’s overall risk profile as an investment.

Financial Summary

As of September 30, 2021,March 31, 2022, we had cash, and cash equivalents and marketable securities of $40.3 million.$32.6 million, in the aggregate. We have incurred operating losses since inception, have not generated any product sales revenue and have not achieved profitable operations. We incurred a net lossesloss of $12.2 million and $20.6$4.5 million for the three and nine months ended September 30, 2021, respectively.March 31, 2022. Our accumulated deficit as of September 30, 2021March 31, 2022 was $126.5$134.5 million, and we expect to continue to incur substantial losses in future periods. We also anticipate that our operating expenses will increase substantially as we continue to advance the development of TSC, including any costs related to:

We currently intend to use our existing cash, and cash equivalents and marketable securities for working capital and to fund the research and development of TSC. We expect that our cash, and cash equivalents and marketable securities as of September 30, 2021March 31, 2022 will enable us to fund our operating expenses and capital expenditure requirements through 2023.

Financial Operations Overview

Revenues

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 Expense

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

Intangible Asset Impairment Charge

In the third quarter of 2021, the Company made a determination to no longer dedicate resources to the Company’s DFN-529 intangible asset and any future development efforts were abandoned.  In connection with this decision, the Company concluded that DFN-529 was impaired in its entirety.

General and Administrative Expense

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

Interest Income

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

Income Tax Benefit

The Company recorded an income tax benefit of $0.4 million during the three and nine months ended September 30, 2021, respectively. The income tax benefit was due to the tax effect of the reduction in the deferred tax liability associated with the basis difference from the IPR&D indefinite lived intangible asset. The Company maintains a full valuation allowance against its deferred tax assets due to the Company’s history of losses as of September 30, 2021.

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

Results of Operations for Three Months Ended SeptemberMarch 30, 202131, 2022 Compared to Three Months Ended September 30, 2020March31, 2021

The following table sets forth our results of operations for the three months ended September 30, 2021March 31, 2022, and 2020.2021.