CervoMed Inc. - Quarter Report: 2020 September (Form 10-Q)

 

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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

 

For the quarterly period ended September 30, 2020

 

☐

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, Suite 200
Charlottesville, VA 22902
(Address of principal executive offices, including zip code)

 

(434) 220-0718

(Registrant’s telephone number including area code)

 

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

 

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

 

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 11, 2020 was 64,015,441 shares.

 

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Note Regarding Company References and Other Defined Terms

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

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

Any forward-looking 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 Trademarks, Trade Names and Service Marks

This Quarterly Report may contain the following trademarks, trade names and service marks of ours: “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

(unaudited)

See accompanying notes to unaudited interim consolidated financial statements.

Diffusion Pharmaceuticals Inc.

Consolidated Statement of Changes in Stockholders' Equity

Three and Nine Months Ended September 30, 2019

(unaudited)

See accompanying notes to unaudited interim consolidated financial statements.

Diffusion Pharmaceuticals Inc.

Consolidated Statement of Changes in Stockholders' Equity

Three and Nine Months Ended September 30, 2020

(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. 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Please see the “Note Regarding Company References and Other Defined Terms” included elsewhere in this Quarterly Report for the meanings of certain capitalized terms used throughout these notes accompanying our unaudited consolidated financial statements.

You should read the following discussion and analysis of our financial condition and results of operations as of and for the periods ended September 30, 2020 and 2019 together with (i) the unaudited interim consolidated financial statements and accompanying notes included in Part I, Item 1 of this Quarterly Report and (ii) the audited consolidated financial statements and accompanying notes included in the Form 10-K. In addition, our actual results may differ materially from those anticipated in any forward-looking statements included in the following discussion. Please refer to the “Note Regarding Forward-Looking Statements” included elsewhere in this Quarterly Report for a discussion of certain risks and uncertainties associated with forward-looking statements. Please also see the “Note Regarding Company References and Other Defined Terms” included elsewhere in this Quarterly Report for the meanings of certain capitalized terms used throughout this discussion and analysis.

Executive Summary

Third Quarter Developments & Near-Term Strategy

During the quarter ended September 30, 2020 and the early part of October 2020, our leadership team changed significantly.  We appointed a new chief executive officer (Robert Cobuzzi, Ph.D.) and a new general counsel (William Elder, J.D.) in September 2020, followed by a new chief medical officer (Christopher Galloway, M.D.) in October 2020. We also welcomed a new director (Jane Hollingsworth) in August 2020.

As of September 30, 2020, we had cash and cash equivalents of $21.9 million, which we believe will enable us to fund our anticipated operating expenses and capital expenditures into the fourth quarter of 2022.

On September 10, 2020, we announced the dosing of the first two patients in our 100-303 COVID Trial evaluating TSC in hospitalized COVID-19 patients at the NIID in Bucharest, Romania. The primary endpoint of the 100-303 COVID Trial is to evaluate the safety and tolerability of TSC administered every six (6) hours for up to 15 days, a more frequent dosing regimen than has been used in our previous clinical studies.

As of the date of this Quarterly Report, patient enrollment continues and no dose-limiting toxicities have been observed. However, given the complex design of the 100-303 COVID Trial protocol, the sequential nature of patient enrollment thereunder, and the resulting challenges to expediting the trial when ordinary course delays are encountered, we now expect the 100-303 COVID Trial to be completed with topline data available by the end of first quarter of 2021. Additional details regarding certain objectives, endpoints, and other aspects of the protocol and design of the 100-303 COVID Trial are described below under the heading, “—TSC in Conditions Often Complicated by Hypoxia–TSC in COVID-19.”

Following the recent changes and additions to our leadership team, we initiated a thorough review of our existing development program for TSC. Although this review remains ongoing, we have commenced plans to modify the existing development program for TSC intending to accomplish two principal strategic objectives:

We believe that, if we are able to accomplish these two strategic objectives, it will allow us to mitigate a significant number of potential risks related to the subsequent stages of our development of TSC and focus our resources, time, and energy in a more efficient manner, particularly given the broad range of indications in which we believe TSC may have an adjunctive therapeutic benefit.

Accordingly, our plans include the following, which we refer to collectively as our Planned Studies:

We expect to fully fund our Planned Studies with cash-on-hand.

We are registered to participate in two virtual, biopharmaceutical and biotechnology industry conferences in mid-January 2021: Biotech Showcase and the HC Wainwright Bioconnect Conference. We intend to provide our next update regarding our Planned Studies and our overall development program for TSC at that time.

Our Business

We are an innovative 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 was designed to enhance the level of organization among water molecules by increasing the amount of hydrogen bonding. This creates a less dense matrix of water molecules, which facilitates the diffusion of oxygen molecules from areas of high to low oxygen concentrations, such as from oxygenated red blood cells into tissues where the oxygen is used to power the cells. In animal models, this diffusion-enhancing mechanism of action has been observed to affect hypoxic tissue preferentially while avoiding excessive oxygen-related tissue toxicity, also known as hyperoxia.

TSC previously has been demonstrated safe and tolerable in over 160 subjects included in our clinical program across a variety of medical conditions often complicated by hypoxia, including our clinical studies conducted in patients afflicted with GBM, peripheral artery disease with intermittent claudication, and stroke, as well as our ongoing 100-303 COVID Trial.  In each of these conditions and many others, hypoxia is a significant contributor to morbidity and mortality, and a considerable treatment obstacle for medical providers.

About Hypoxia

Under normal conditions, the body’s supply of oxygen meets the demand at the tissue/cellular level to sustain life.  The availability of sufficient oxygen enables efficient and sustainable generation of energy to support the metabolic demands of the cells. Hypoxia is a condition in which the body, or a region of the body, is deprived of sufficient oxygen to produce the energy it needs to survive. This state can only be sustained for very brief periods of time before tissue ischemia, damage and, eventually, cell death occurs.  Hypoxic conditions occur in many of medicine’s most intractable and difficult-to-treat conditions, complicating treatment of the underlying condition by medical providers.

TSC in Conditions Often Complicated by Hypoxia

                TSC in COVID-19

                In March 2020, the COVID-19 pandemic accelerated in the U.S. resulting in numerous delays and other challenges for biopharmaceutical companies conducting clinical studies in indications not related to COVID-19, including our Phase 2 PHAST-TSC Trial evaluating TSC in acute stroke.  This is discussed in more detail below under the heading – TSC in Stroke.  In early April 2020 we announced plans to initiate a clinical research program to evaluate TSC in patients with COVID-19 due to the anticipated persistence of the COVID-19 pandemic coupled with our belief in the potential of TSC to improve low tissue oxygen levels. We believe this decision was both opportunistic and a natural extension of the previous development work conducted with TSC, as COVID-19 often affects patients’ respiratory systems, with some patients rapidly progressing to acute respiratory distress and multiple organ failure.

 On September 10, 2020 we announced the dosing of the first two patients in the 100-303 COVID Trial, our ongoing Phase 1b clinical trial evaluating TSC in hospitalized COVID-19 patients at the NIID in Bucharest, Romania.  The 100-303 COVID Trial is a single-center, open-label, pharmacokinetic, pharmacodynamic, multiple ascending dose study in hospitalized patients with confirmed SARS-CoV-2 infection and hypoxemia, defined for purposes of the trial as (i) low blood oxygen levels as measured by pulse oximetry (SpO2 < 94%) when breathing room air or (ii) if such patient requires supplemental oxygen. Patients requiring mechanical ventilation or extracorporeal membrane oxygenation, however, are excluded from the 100-303 COVID Trial. As of the date of this Quarterly Report, patient enrollment continues in accordance with the trial protocol and no dose-limiting toxicities have been observed.

The primary objective of the 100-303 COVID Trial is to evaluate the safety and tolerability of TSC administered every six (6) hours for up to 15 days.  Secondary endpoints include pharmacokinetic measurement of TSC levels after dosing, relative improvements in blood oxygen levels, and certain other clinical parameters related to COVID-19. The trial’s ascending dose design provides for groups of six (6) patients to receive the protocol-specified dose of TSC via intravenous administration every six (6) hours for up to 15 days.  Once a group of six (6) patients successfully completes treatment at a specified dose with no dose-limiting toxicities observed, the following group of six (6) patients can then be enrolled and receive the next, higher dose specified by the protocol, with four different doses provided for by the protocol as of the date of this Quarterly Report.  However, as described in more detail above under the heading “—Third Quarter Developments & Near Term Strategy – Anticipated Next Steps in TSC Development Program – Expanding the Ongoing 100-303 COVID Trial,” we are evaluating the possibility of expanding the 100-303 COVID Trial to include two additional doses, each in a group of six (6) patients, for a total of 36 patients across all doses. In addition, although the trial is not powered to evaluate efficacy, patients’ blood oxygen levels and other COVID-19-specific clinical data will be collected throughout the trial and analyzed at the end of the trial.

The adjudication of dose-limiting toxicities, if any, is being performed by an external safety monitoring committee put in place to oversee the safety of the patients in the trial.  Pursuant to the trial protocol, this committee meets after every three (3) patients complete a specified minimum number of days of dosing, at which time the safety data for these patients are collected and summarized for analysis by the committee. For the first group of three (3) patients, the protocol specified the safety monitoring committee was to meet only after the first three (3) patients completed the full treatment period of up to 15 days.  Following the committee’s review of the data for this first group of three (3) patients, with respect to all subsequent groups of three (3) patients, the protocol allows for the safety monitoring committee meeting to occur after the last of the three (3) patients in the group completes five (5) days of dosing and all relevant safety data have been collected and provided to the committee. In the interest of patient safety, enrollment of a subsequent group of three (3) patients into the trial cannot proceed until approval is granted by the safety monitoring committee based upon review of the data from the immediately preceding three (3) patient group.

As described above, the design of the 100-303 COVID Trail protocol is complex, patient enrollment thereunder is sequential in nature, and this results in certain challenges to expediting the trial when ordinary course delays are encountered. Accordingly, we now expect the 100-303 COVID Trial to be completed with topline data available by the end of first quarter of 2021, including with respect to any additional groups we may add to the trial as described above.

TSC in GBM

               GBM is a particularly deadly form of brain cancer that each year affects approximately 12,000 patients in the U.S. and approximately 35,000 patients worldwide, and for which TSC has received an Orphan Drug Designation from the FDA. We believe TSC may be able to re-oxygenate hypoxic cancer tissue, making the cells more susceptible to the therapeutic effects of standard-of-care radiation therapy and chemotherapy.

               We previously completed a Phase 2 clinical trial that evaluated 59 patients with newly diagnosed GBM. This open-label, historically controlled trial demonstrated a favorable safety and tolerability profile for TSC when combined with standard of care treatment for GBM. Although not prospectively defined, a subgroup analysis of inoperable patients suggested a higher proportion of TSC-treated patients survived at two years compared to those in the historical control group.

               Based upon data from the inoperable patient subgroup in the Phase 2 trial, we initiated the Phase 3 INTACT Trial in the newly diagnosed inoperable GBM patient population in December 2017.  The INTACT Trial was designed to enroll 236 patients in total, with 118 in the treatment arm and 118 in the control arm. The trial began with an FDA-mandated, open-label, dose-escalation safety run-in for which enrollment was completed and has closed. A total of 19 patients were enrolled in an attempt to ensure that at least 8 completed the FDA-specified 42-month exposure period. At a meeting in the third quarter of 2019, the data safety monitoring board for the INTACT Trial concluded that no adverse safety signal was present and unanimously recommended the trial continue as planned, with TSC to be used adjunctively with temozolomide, an anti-cancer chemotherapy drug, during the adjuvant treatment chemotherapy period. However, we determined we did not have the resources to support the randomized portion of the INTACT Trial. Further development of TSC in GBM is contingent upon our ability to raise additional capital or enter into a strategic partnership.

TSC in Stroke

                A stroke occurs when blood flow to the brain is blocked (an “ischemic stroke”) or a blood vessel in the brain ruptures (a “hemorrhagic stroke”), causing part of the brain to become damaged or to die. According to the U.S. Centers for Disease Control and Prevention, stroke is the fifth leading cause of death and a leading cause of adult disability in the U.S.

                Based upon preclinical safety and efficacy data, as well as certain clinical safety data, we believe TSC has potential applications in both ischemic and hemorrhagic stroke. The hypoxic conditions in the brain of stroke patients may be a significant factor contributing to morbidity and mortality, and we believe TSC could enhance the diffusion of oxygen into brain tissue to reduce stroke-induced hypoxia and neuronal death.

                In October 2019, we began enrolling patients in our randomized Phase 2 PHAST-TSC Trial to evaluate TSC in the treatment of acute ischemic or hemorrhagic stroke. The PHAST Trial was planned to enroll 160 total patients, evenly split between the TSC treatment arm and the control arm. All patients were to receive either TSC or placebo treatment while in the ambulance to ensure treatment as soon as possible after the onset of clinical symptoms. However, due to, among other factors, the delays and other challenges related to COVID-19 discussed above under the heading –TSC in COVID-19, and the substantial capital needs to complete the trial, we determined to begin winding down the PHAST-TSC Trial. Further development of TSC in stroke is contingent upon our ability raise additional capital or enter into a strategic partnership.

DFN-529 (formerly RES-529)

                In addition to TSC, our product candidate DFN-529, a novel PI3K/Akt/mTOR pathway inhibitor, is in early-stage development. We previously completed two Phase 1 clinical trials evaluating DFN-529 in age-related macular degeneration, and DFN-529 was also previously in preclinical development in oncology, specifically GBM. In oncology, DFN-529 has shown activity in both in vitro and in vivo glioblastoma animal models and has been demonstrated to be orally bioavailable and capable of crossing the blood brain barrier. We continue to explore alternatives regarding how best to capitalize upon the value of DFN-529 and our associated intellectual property.

The COVID-19 Pandemic and its Impacts on Our Business

                In March 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic. The spread of COVID-19 during 2020 has caused a worldwide economic downturn as well as significant volatility in the financial markets. We have experienced certain disruptions to our clinical operations, including with respect to patient enrollment in our clinical studies, specifically the PHAST Trial prior to our decision to begin winding down the trial.

                As a result of the uncertainty caused by the COVID-19 pandemic, we have taken certain measures and responded to changes in our operational needs, including actions designed to provide a safe work environment for the patients and other third-parties involved in the conduct of our clinical studies. We have also made certain internal resource allocation decisions designed to streamline our clinical operations and increase our overall financial flexibility, including prioritizing our resources to the 100-303 COVID Trial and our other Planned Studies, beginning to wind-down the PHAST Trial and INTACT Trial, investing in technology solutions to support increased work-from-home capabilities for our employees and consultants, and suspending or eliminating certain other R&D activities and their related costs.

                These changes are being and will be reviewed on an ongoing basis throughout the duration of the pandemic based on operating conditions and other factors. We will continue to take measures intended to address our changing needs and the evolving nature of the pandemic, and we may have to take further actions that we determine are in the best interests of the patients in our clinical studies, our employees, or other constituencies that we serve, or as required by federal, state or local authorities. As the pandemic continues to unfold, the extent of its effect on our operational and financial performance will depend in large part on future developments, which cannot be predicted with confidence at this time. Any such future developments or actions we may take in response thereto, including any prolonged material disruption to our ongoing or planned clinical studies, our other business operations, the industry in which we operate, or general economic, business or market conditions, could cause additional delays with respect to our product development activities and could negatively impact our consolidated financial position, consolidated results of operations, and consolidated cash flows.

Financial Operations Overview & Critical Accounting Policies

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 Expenses

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.

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 consists of interest earned from our cash and cash equivalents.

Income Tax Benefit

We recognize income tax benefit to utilize indefinite deferred tax liabilities as a source of income against indefinite lived portions of our deferred tax assets. Our NOLs and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. NOL and tax credit carryforwards may become subject to an annual limitation in the event of a greater than 50% cumulative change in the ownership interest of significant stockholders over a three year period, as defined under Sections 382 and 383 of the Internal Revenue Code as well as similar state provisions. These limitations may, in certain cases, limit the amount of income tax benefit that can be utilized annually to offset taxable income or tax liabilities in future periods. The amount of the annual limitation is determined based on the Company’s value immediately prior to the ownership change, and subsequent ownership changes may further affect the limitation in future years. In 2019, due to the significant changes to our stockholder base as a result of the equity financing we completed during that year, we performed an analysis under Section 382 of the Internal Revenue Code and, as a result, reduced the magnitude of our NOL carryforwards to account for the ownership changes. In addition, the cumulative benefit of our NOLs was remeasured, resulting in tax expense recognized during the year ended December 31, 2019. We have not yet performed an analysis to determine whether or not ownership changes that have occurred in year ending December 31, 2020 give rise to any further limitations.

Critical Accounting Policies

As of September 30, 2020, our Critical Accounting Policies included in the Form 10-K have not changed, except as otherwise set forth in Note 3 – Basis of Presentation and Summary of Significant Accounting Policies – Recently Adopted Accounting Pronouncements in the notes accompanying the financial statements included in Part I, Item 1 of this Quarterly Report.

Results of Operations

Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019

The following table sets forth our results of operations for the three months ended September 30, 2020 and 2019.

We recognized $3.1 million in R&D expenses during the three months ended September 30, 2020 compared to $1.7 million during the three months ended September 30, 2019. A significant portion of this increase was attributable to R&D expenses related to the 100-303 COVID Trial initiated in September 2020 and our related ramp-up, including a $0.4 million increase in manufacturing costs and a $1.0 million increase in clinical trial and other R&D expenses. The overall increase in R&D expense also includes a $0.1 million increase in costs associated with the PHAST Trial, primarily costs related to winding down the trial. These increases in R&D expenses were offset in part by a $0.1 million decrease in R&D related salaries, wages and stock-based compensation expense.

G&A expenses were $2.1 million during the three months ended September 30, 2020 compared to $1.3 million during the three months ended September 30, 2019. The increase in G&A expenses was primarily due to a $0.2 million increase in professional fees and a $0.6 million increase in salaries, wages and stock-based compensation expenses, including non-recurring expenses related to the retirement, resignation and separation of our former Chief Executive Officer in September 2020.

We recognized income tax benefits of $0.8 million and $0.2 million during the three months ended September 30, 2020 and 2019, respectively. In both periods, the recognized benefit reflects the utilization of indefinite deferred tax liabilities as a source of income against indefinite lived portions of our deferred tax assets.

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

The following table sets forth our results of operations for the nine months ended September 30, 2020 and 2019.

We recognized $6.8 million in R&D expenses during the nine months ended September 30, 2020 compared to $5.0 million during the nine months ended September 30, 2019. A significant portion of this increase was attributable to R&D expenses related to the 100-303 COVID Trial initiated in September 2020 and our related ramp-up, including a $0.8 million increase in manufacturing costs and a $1.3 million increase in clinical trial and other related R&D expenses. The overall increase in R&D expense also includes a $0.1 million increase in costs associated with the INTACT Trial, primarily related to winding down that trial. These increases in R&D expenses were offset in part by a $0.2 million decrease in R&D related salaries, wages and stock-based compensation expense and a $0.3 million decrease in costs associated with our PHAST Trial as we wind down that trial as well.

G&A expenses were $5.0 million during the nine months ended September 30, 2020 compared to $3.6 million during the nine months ended September 30, 2019. The increase in G&A expense was primarily due to a $0.7 million increase in professional fees and a $0.6 million increase in salaries, wages and stock-based compensation expense, including non-recurring expenses related to the retirement, resignation and separation of our former Chief Executive Officer in September 2020.

We recognized income tax benefits of $1.7 million and $0.5 million during the nine months ended September 30, 2020 and 2019, respectively. In both periods, the recognized benefit reflects the utilization of indefinite deferred tax liabilities as a source of income against indefinite lived portions of our deferred tax assets.

Financial Condition, Liquidity and Capital Resources

Summary

As of September 30, 2020, we had cash and cash equivalents of $21.9 million. We have incurred operating losses since inception, have not generated any product revenue and have not achieved profitable operations. We incurred net losses of $4.4 million and $10.1 million for the three and nine months ended September 30, 2020, respectively. Our accumulated deficit as of September 30, 2020 was $101.8 million, and we expect to continue to incur substantial losses in future periods. We anticipate that our operating expenses will increase substantially as we continue to advance the development of TSC, including any costs related to:

We intend to use our existing cash and cash equivalents for working capital and to fund the research and development of TSC, including our Planned Studies. We believe that our cash and cash equivalents as of September 30, 2020, will enable us to fund our operating expenses and capital expenditure requirements into the fourth quarter of 2022.

To date, we have funded our operations and short-term liquidity needs primarily through the issuance and sale of common stock, warrants, convertible debt, and convertible preferred stock. For example, in May 2020, we completed an offering of 11,428,572 shares of our common stock for a purchase price of $1.05 per share for net proceeds of $10.3 million after deducting commissions, discounts and other offering costs. Additionally, during the nine months ended September 30, 2020, warrants to purchase 19,106,504 shares of our common stock were exercised for proceeds of $8.0 million. We expect to continue funding our operations through similar means for the foreseeable future, assuming the availability of additional capital, though we may enter into strategic partnerships or other alternative transactions in order to fund our ongoing capital requirements.

 Cash Flows

The following table sets forth our cash flows for the nine months ended September 30, 2020 and 2019:

Operating Activities

Cash flows from operating activities represent our sources and uses of cash related to all of our activities other than financing activities and investing activities. For the nine months ended September 30, 2020, our net cash used in operating activities increased by $2.8 million from the corresponding prior year period, from $7.4 million to $10.2 million.

Net cash used in operating activities of $10.2 million during the nine months ended September 30, 2020 was primarily attributable to our net loss of $10.1 million and our change in deferred income taxes of $1.7 million. These amounts were partially offset by a net change in operating assets and liabilities of $1.4 million, $0.6 million in stock-based compensation expense, and $0.1 million in depreciation expense. The net change in our operating assets and liabilities was primarily attributable to an increase in accounts payable and accrued expenses and was slightly offset by an increase in our prepaid expenses, deposits and other current assets.

Net cash used in operating activities of $7.4 million during the nine months ended September 30, 2019 was primarily attributable to our net loss of $8.0 million and our change in deferred income taxes of $0.5 million. These amounts were partially offset by our net change in operating assets and liabilities of $0.7 million, $0.4 million in stock-based compensation expense, and $0.1 million in depreciation expense. The net change in our operating assets and liabilities was primarily attributable to a decrease in our prepaid expenses, deposits and other current assets and an increase in accounts payable.

Investing Activities

Cash flows from investing activities represent our sources and uses of cash from our investments, including purchases and sales of equipment and other assets. During each of the nine months ended September 30, 2020 and 2019, we had no cash flows from investing activities.

Financing Activities

Cash flows from financing activities represent our sources and uses of cash from investors and banks. For the nine months ended September 30, 2020, our net cash provided by financing activities increased by $12.3 million from the corresponding prior year period, from $5.6 million to $17.9 million.

Net cash provided by financing activities of $17.9 million during the nine months ended September 30, 2020, was primarily attributable to $10.8 million in gross proceeds received in connection with the May 2020 Offering and $8.0 million in gross proceeds received in connection with the exercise of previously outstanding warrants to purchase common stock. These cash inflows were offset in part by the payment of $1.0 million in financing costs.

Net cash provided by financing activities of $5.6 million during the nine months ended September 30, 2019, was primarily attributable to $5.7 million in proceeds received in connection with the May 2019 Offering, offset in part by payments of approximately $0.2 million for related financing costs.

Capital Requirements

Our operations have consumed substantial amounts of cash since inception and 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. As of September 30, 2020, most of our cash resources for clinical development were dedicated to the 100-303 COVID Trial and, except as set forth above under Executive Summary - Developments and Strategy with respect to our Planned Studies, we have not committed to any other clinical studies as of the date of this Quarterly Report. 

While we believe we have adequate cash resources to continue operations into the fourth quarter of 2022, we will need to raise additional funds in order to complete our development of TSC and, as of September 30, 2020, we did not have any credit facilities under which we could borrow funds or any other sources of committed capital. We may seek to raise additional funds through various sources, including equity and debt financings or through strategic collaborations and license agreements. 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 any such additional financing will be sufficient to meet our needs or will be on terms acceptable to us. We also can give no assurances that potential delays in our clinical study timelines, due to the impact of the ongoing COVID-19 pandemic or otherwise, will not increase the anticipated cost of completing our planned clinical studies or any of other clinical studies we may commence in the future, and this risk may increase if general economic and market conditions deteriorate in the future. If we are unable to obtain additional financing when needed, we may need to terminate, significantly modify, or delay the development of our product candidates and our operations more generally, or we may need to obtain funds through collaborators or other sources that require us to relinquish rights to our product candidates or technologies that we might otherwise prefer to retain or seek to develop or commercialize independently. If we are unable to raise sufficient additional capital to meet our needs and are forced to terminate our operations, investors may experience a complete loss of their investment.

To the extent that we raise additional capital through the issuance and sale of our common stock, the interests of our current stockholders may be diluted. In addition, we have in the past issued warrants to purchase shares of common stock which, if exercised by the holders thereof, will dilute the interests of our current stockholders. If we issue preferred stock or convertible debt securities, it could affect the rights of our common stockholders which could reduce the value of our common stock. 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. If we enter into a debt financing arrangement, if available, such arrangement 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. If we raise additional funds through strategic collaborations in the future, we may have to provide a license or otherwise relinquish valuable rights to our product candidates or other technologies, future revenue streams, or intellectual property.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, as defined by the rules and regulations of the SEC that have or are reasonably likely to have an effect on our financial condition, or any changes thereto, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. As a result, we are not materially exposed to any financing, liquidity, market, or credit risk that could arise if we had engaged in any such arrangements.

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

Evaluation of Disclosure Controls and Procedures

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’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.

Change in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f) that occurred during the period ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

Please refer to Note 7, Commitments and Contingencies in the notes accompanying the unaudited interim consolidated financial statements included in Part I, Item 1 of this Quarterly Report, 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 (i) Part I, Item 1A - “Risk Factors,” in the Form 10-K and (ii) Part II, Item 1A - “Risk Factors,” in the June 30 Form 10-Q, which could materially affect our business, financial condition or future results.

As of the date of this Quarterly Report, there have been no material changes to our risk factors previously disclosed in the Form 10-K other than as set forth in the June 30 Form 10-Q.

Unregistered Sales of Equity Securities

None. 

 Issuer Purchases of Equity Securities

None. 

None.

Not applicable.

None.

See attached Exhibit Index.

DIFFUSION PHARMACEUTICALS INC.

QUARTERLY REPORT ON FORM 10-Q

EXHIBIT INDEX

SIGNATURES

Pursuant 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.

Date: November 12, 2020