介绍说明

关于公司参考和其他定义术语的说明

根据我们于2023年8月17日向美国证券交易委员会提交的8-k表格中披露的信息，在2023年8月16日，前身为“扩散制药公司”的特拉华州公司根据于2023年3月30日签订的《合并协议书》的条款和条件完成了一项合并交易，参与方包括扩散制药公司（“扩散”）、扎恩合并子公司（扩散的全资子公司）和EIP制药公司（“EIP”），根据合并协议书，合并子公司与EIP合并，EIP成为扩散的全资子公司（“合并”）。在生效时间（如下所定义）时，每股EIP股票被转换为有权收到公司普通股0.1151股，并在生效时间之后，扩散将其名称从“Diffusion Pharmaceuticals Inc.”更改为“CervoMed Inc。”

出于会计目的，合并按照美国通用会计准则被视为一种反向资本重组，而EIP被视为会计并购方。因此，EIP的历史经营业绩被视为公司在合并前所有时期的历史经营业绩，并且，在合并后的所有时期，合并公司的经营业绩将被纳入公司的合并财务报表中。合并完成后，公司进行的业务主要是合并前由EIP进行的业务。

相应地，除非上下文另有要求，在本季度报告中对于CervoMed的所有提及，即“公司”，“我们”，“我们的”，或“我们”，均指截至2023年8月16日之前所有日期和期间的EIP业务，并指2023年8月16日（含）之后所有日期和期间的CervoMed业务；“普通股”指公司每股面值为0.001美元的普通股。 EIP的历史股票和每股数字已根据0.1151的交换比率进行了追溯调整。

我们在本季度报告中还使用了其他几个预先定义的术语，其中许多在下面进行了解释或定义：

关于前瞻性声明的说明

本季度报告（其中根据本关于前瞻性陈述注释的目的，包括任何通过参考加入的信息或文件）包含明示和隐含的前瞻性陈述。由于前瞻性陈述涉及事件、竞争动态和行业变化，并依赖可能会或可能不会在未来发生的经济情况，或可能会在比预期更长或更短的时间线上发生风险与不确定性，因此它们的性质，进而。虽然我们相信我们对本季度报告中包含的每一项前瞻性声明都有合理的基础，但我们提醒您前瞻性声明并非对未来绩效的保证，我们的经营业绩、财务状况、流动性和前景可能会与本季度报告中包含的前瞻性声明大不相同。此外，即使我们的经营业绩、财务状况、流动性和前景与本季度报告中包含的前瞻性声明一致，它们也可能不具有预示实际结果或反映未来期间出现的意外发展能力。

前瞻性陈述在本季度报告中的多个地方出现。我们在某些情况下可能会使用术语，如“相信”、“估计”、“预期”、“期待”、“计划”、“目标”、“寻求”、“打算”、“可能”、“或许”、“可以”、“将”、“应该”、“大约”、“潜在”、“目标”、“项目”、“思考”、“预测”、“预报”、“继续”或其他传达对未来事件或结果的不确定性词汇来识别这些前瞻性陈述。前瞻性陈述还包括关于我们的意图、信念、预测、前景、分析或期望的陈述，内容涵盖但不限于：

由于这些以及其他已知和未知的因素，实际结果可能与我们在此季度报告中的任何前瞻性声明中表达的意图、信念、预测、前景、分析或期望存在重大差异。因此，我们无法保证此季度报告中包含的前瞻性声明将被证明是准确的，或者任何此类不准确不会是重要的。您还应该理解，不可能预测或识别所有这些因素，并且您不应将任何此类列表视为所有潜在风险或不确定性的完整集合。鉴于上述因素以及这些前瞻性声明中的重大不确定性，您不应将这些声明视为我们或任何其他人会在任何特定时间框架内或完全实现我们的目标和计划的陈述或保证。对于所有前瞻性声明，我们主张根据1995年《私人证券诉讼改革法》中的前瞻性声明安全港条款获得保护。

我们在本季度报告中所做的任何前瞻性陈述仅在该陈述日期时有效，除非适用法律或美国证券交易委员会的规则和条例要求，否则我们没有义务更新这些陈述，以反映本季度报告日期之后的事件或情况，或反映意想不到事件的发生。当前与任何先前时期结果的比较并不旨在表达任何持续或未来的趋势或未来表现的指示，除非明确表示如此，且应仅被视为历史数据。

关于商标、交易名称和服务标记的说明

本季度报告包含我们或其他公司拥有的商标、商业名和服务标志。本季度报告中包含的所有商标、服务标志和商业名称均为其各自所有者的财产。在不带商标、商业名或服务标记通知的情况下，若出现这些术语，则仅为方便起见，不应被解释为用于描述性或泛指意义。

第一部分 – 财务信息

CervoMed股份有限公司

汇编的综合资产负债表

(未经审计)

See accompanying notes to unaudited condensed consolidated interim financial statements

CervoMed Inc.

Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income

(unaudited)

See accompanying notes to unaudited condensed consolidated interim financial statements

CervoMed Inc.

Condensed Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(unaudited)

See accompanying notes to unaudited condensed consolidated interim financial statements

CervoMed Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

See accompanying notes to unaudited condensed consolidated interim financial statements

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

This discussion and analysis contains information related to historical and prospective events intended to enable you to assess our financial condition and results of operations. The information contained in this discussion and analysis should be read in conjunction with our unaudited condensed consolidated interim financial statements and the related notes contained elsewhere in this Quarterly Report, as well as the risks and uncertainties discussed under the headings, "Part II — Item 1A — Risk Factors" and “Note Regarding Forward-Looking Statements.”

Introduction to CervoMed

We are a clinical-stage company developing treatments for age-related neurologic disorders. We are currently focused on developing our lead drug candidate, neflamapimod, an investigational, orally administered, small molecule brain penetrant that inhibits p38α. Neflamapimod has the potential to treat and improve synaptic dysfunction, the reversible aspect of the underlying neurodegenerative processes that cause disease in DLB and certain other major neurological disorders, and is currently being evaluated in our ongoing RewinD-LB Trial, a Phase 2b study in patients with Early-Stage DLB, funded by a $21.3 million grant from the NIA.

Overview of Our Business, Our Approach and Our Lead Drug Candidate

Our novel approach focuses on reducing the impact of inflammation in the brain, or neuroinflammation, which we believe is a key factor in the manifestation of degenerative diseases of the brain, including DLB. Chronic activation of the enzyme p38α in the neurons (also known as nerve cells) within the brains of people with neurodegenerative diseases is believed to impair how neurons communicate through synapses (i.e., the connections between neurons). This impairment, termed synaptic dysfunction, leads to deterioration of cognitive and motor abilities. Left untreated, synaptic dysfunction can result in neuronal loss that leads to devastating disabilities, significant reliance on a caretaker, long term care living, and, ultimately, death. However, before neuronal loss commences, disease progression in major neurodegenerative disorders, including DLB, initially involves a protracted period of functional loss, particularly with respect to the synapses. We believe that inhibiting p38α activity in the brain, by interfering with key pathogenic drivers of disease, has the potential to reverse the clinical progression observed in early-stage neurodegenerative diseases, and that it is possible to slow further progression by delaying permanent synaptic dysfunction and neuron death.

We believe we are a leader in the industry in developing a treatment for DLB, as we are the only company of which we are aware with an asset that has shown statistically significant improvements compared to placebo in a Phase 2a clinical trial (our AscenD-LB Trial) and that has initiated a Phase 2b clinical evaluation (our ongoing RewinD-LB Trial), from which we expect topline results in December 2024. The clinical symptoms in DLB are most directly linked to synaptic dysfunction in cholinergic neurons (i.e., neurons producing the neurotransmitter acetylcholine) in a part of the brain named the basal forebrain. Based on available preclinical and clinical data, we believe if neflamapimod is given in the early stages of certain degenerative diseases of the brain, it may reverse synaptic dysfunction and improve neuron health and function. In preclinical studies, neflamapimod has been shown to reverse the neurodegenerative process in the BFC system and correct the behavioral deficits that result from synaptic dysfunction in the BFC system. Following earlier clinical studies demonstrating blood-brain-barrier penetration, target engagement, and identification of dose-response, we obtained positive Phase 2a clinical data in patients with DLB in our AscenD-LB Trial. Specifically, statistically significant improvement was observed in patients treated with neflamapimod compared to patients treated with placebo on measures of dementia severity (as measured by CDR-SB) and functional mobility (i.e., walking ability, as measured by the TUG test) in the primary (intention-to-treat) analysis, which includes all patients randomized into the study that had at least one measurement of the endpoint analyzed. In addition, in a secondary analysis evaluating the higher of two doses in the study (40 mg TID), neflamapimod demonstrated statistically significant improvement compared to placebo in a battery of cognitive tests, particularly with respect to tests that measured attention. These preclinical results and the primary results of the AscenD-LB Trial were published in the journal Nature Communications in September 2022.

In October 2023, the major clinical neurology journal, Neurology, published additional analyses of the AscenD-LB Trial data that further strengthened these conclusions regarding neflamapimod’s potential and identified the DLB patient population most responsive to neflamapimod treatment. In these analyses, the study results were stratified by pre-treatment levels of plasma ptau181, which recent scientific literature has identified as a blood-based biomarker to differentiate advanced DLB patients – in whom there is significant, irreversible neuronal loss in the hippocampus and associated Alzheimer's disease co-pathology – from Early-Stage DLB patients — in whom the disease is limited to synaptic dysfunction in the basal forebrain, a reversible component of the disease, and there is no associated, irreversible Alzheimer's disease-related pathology (i.e., tau pathology and neuronal loss in the region of the brain that includes the hippocampus, the medial temporal lobe). It is estimated that Early-Stage DLB patients comprise approximately 50% of the total diagnosed DLB patient population at any given time and that the remaining 50% is comprised of patients with advanced DLB, which is sometimes referred to in the scientific literature as "DLB-AD" or a form of "mixed dementia." In patients with a plasma ptau181 level of less than 2.2 pg/mL, the treatment response to neflamapimod in the AscenD-LB Trial was substantially greater than the overall patient population, with a Cohen’s d effect size ≥ 0.7 and statistically significant vs. placebo on the CDR-SB, TUG, cognitive tests of attention and working memory. In a February 2024 publication in the Journal of Prevention of Alzheimer’s Disease, results from our prior clinical trials of neflamapimod in Alzheimer's disease and DLB were integrated to show not only the demonstrated effects of neflamapimod on cognition and function, but on other biomarkers such as Electroencephalogram ("EEG") and basal forebrain volume and functional connectivity by Magnetic Resonance Imaging ("MRI").

Our ongoing RewinD-LB Trial is a double-blind, placebo-controlled, 16-week Phase 2b study that enrolled 159 patients with Early-Stage DLB, and is funded by a $21.3 million grant from the NIA. The trial is intended to confirm the efficacy findings from the AscenD-LB Trial and definitively demonstrate proof-of-concept. We have utilized our subsequent analyses of the AscenD-LB Trial data and the other information described above to optimize the RewinD-LB Trial’s design and bolster the trial’s statistical power. Critically, the RewinD-LB Trial excluded patients with advanced DLB as evaluated by plasma ptau181 levels (i.e., the study only enrolled patients with Early-Stage DLB). To enrich for such patients during screening, the global Clinical Dementia Rating score at entry was limited to 0.5 or 1.0; based on the enrollment data in our AscenD-LB and RewinD-LB Trials, in these patients with mild or very mild dementia, we estimate that the percentage of patients with Early-Stage DLB is substantially higher (approximately 66% among patients screened in RewinD-LB) as compared to the overall DLB population as a whole (approximately 50%). Together with additional modifications to the AscenD-LB Trial design related to dosing regimen (40 mg TID) and primary endpoint (CDR-SB), sample size calculations indicate that the RewinD-LB Phase Trial has greater than 95% statistical power (approaching 100%) to meet its primary objective of demonstrating improvement relative to placebo on change in CDR-SB, a global measure of dementia severity, over the course of the study.

We completed enrollment in the RewinD-LB Trial in June 2024, completed the last patient, last visit for the 16-week placebo-controlled phase of the study in October 2024, and expect to report topline results from the placebo-controlled phase of the study in December 2024. The results of the RewinD-LB Trial are intended to provide the data necessary to finalize our design of a Phase 3 clinical trial, the general framework of which, including a 24-week treatment duration, is based on prior discussions with and feedback from the FDA. Assuming positive data in the RewinD-LB Trial, we are targeting an initiation of the Phase 3 trial in mid-2025.

In August 2024, we initiated a Phase 2a study in Strasbourg, France, to evaluate neflamapimod in up to 20 patients with mild cognitive impairment (MoCA score >= 18 during screening). The primary objective of the study is to obtain additional pharmacokinetic data on a dosing regimen not previously used in any of our clinical trials (80 mg BID) that may provide additional dosing flexibility for certain patient populations or indications we may target in the future. On an exploratory basis, we will also collect data on basal forebrain atrophy, as measured by MRI, and a broad range of clinical endpoints.

In addition to neflamapimod’s potential to treat DLB, we believe the benefit of targeting neuroinflammation-induced synaptic dysfunction in the BFC system can be applied to other neurologic indications in which treatment of BFC dysfunction and degeneration would be expected to be clinically beneficial, including as treatment promoting recovery in the three months after ischemic stroke, as a disease-modifying treatment for early-stage Alzheimer’s disease, and as a treatment for certain forms of frontotemporal dementia. In particular, we have generated preclinical evidence suggesting that neflamapimod could improve recovery after ischemic stroke in an animal model and we have received ethics committee approval to conduct a double-blind, placebo-controlled, 16-week, Phase 2a study in Australia to evaluate the effects of neflamapimod on motor recovery after ischemic stroke in approximately 90 patients, which we expect to initiate in the first quarter of 2025.

Financial Summary

As of September 30, 2024, we had cash and cash equivalents and marketable securities of approximately $46.7 million. To date, we have not had any products approved for sale and have not generated any revenue from product sales, and our ability to do so in the future will depend on the successful development and eventual commercialization of neflamapimod (or another product candidate that we could acquire or develop in the future). We do not expect to generate revenue from product sales until such time, if ever.

Our accumulated deficit as of September 30, 2024, was $64.0 million. We have never been profitable and we will continue to require additional capital to develop neflamapimod and fund operations for the foreseeable future. We have historically incurred net losses in each year ended since inception, except for the three and nine months ended September 30, 2023. Out net loss was $4.8 million and $9.6 million for the three and nine months ended September 30, 2024, respectively. Our net income was $2.2 million and $0.2 million for the three and nine months ended September 30, 2023, respectively. We expect our expenses will increase in connection with our ongoing activities, as we:

Based on our current operating plan, we believe our existing cash and cash equivalents and marketable securities on hand as of September 30, 2024, along with the remaining funds to be received from the NIA Grant, will enable us to fund our operating expenses and capital expenditure requirements for at least twelve months from the issuance of the unaudited condensed consolidated interim financial statements included in this Quarterly Report.

Financial Operations Overview

Revenue

To date, we have not generated any revenue from product sales and we do not expect to do so in the near future. In January 2023, we were awarded our $21.0 million under our NIA Grant. In August 2024, we were awarded an additional $0.3 million under our NIA Grant. Funding from the NIA Grant is recognized as grant revenue as the qualifying expenses related thereto are incurred. For the nine months ended September 30, 2024 and 2023, $7.6 million and $4.7 million of grant funding was recognized, respectively. For the three months ended September 30, 2024 and 2023, $1.9 million and $1.5 million of grant funding was recognized, respectively.

Research and Development Expenses

Research and development expenses account for a significant portion of our operating expenses and primarily consist of costs incurred for the discovery and development of our product candidates, including:

We recognize research and development expenses as incurred. Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors, collaborators, and third-party service providers. Non-refundable advance payments made by us for future research and development activities are capitalized and expensed as the related goods are delivered and as services are performed.

Specific program expenses include expenses associated with the development of our lead product candidate, neflamapimod, including our ongoing Phase 2b RewinD-LB Trial in patients with Early-Stage DLB. Personnel and other operating expenses incurred for our research and development programs primarily relate to salaries and benefits, stock-based compensation, and facility expenses.

At this time, we cannot reasonably estimate or know the nature, timing, and estimated costs of the efforts that will be necessary to complete the development of, and obtain regulatory approval for, neflamapimod, or for any other product candidates that we may develop or acquire. We expect our research and development expenses to increase substantially for the foreseeable future as we continue to invest in R&D activities related to developing neflamapimod such as conducting larger clinical trials, seeking regulatory approval and incurring expenses associated with hiring personnel to support these and other R&D efforts. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and the successful development of product candidates, including neflamapimod, is highly uncertain.

General and Administrative Expenses

General and administrative expenses consist primarily of personnel-related costs, including stock-based compensation for our personnel in executive, finance and accounting, and other administrative functions. General and administrative expenses also include legal fees relating to intellectual property and corporate matters, professional fees paid for accounting, auditing, consulting, and tax services, insurance costs, and facility costs.

We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our continued research and development activities and as we continue development activities. We also anticipate that we will incur increased expenses as a result of continuing to operate as a public company, including expenses related to compliance with the rules and regulations of the SEC and those of any national securities exchange on which our securities are traded, legal, auditing, insurance expenses, investor relations activities, and other administrative and professional services.

Other Income (Expense)

Other income (expense) consists of the change in fair value of the previously outstanding Convertible Notes.

Interest Income

Interest income consists of interest earned on our marketable securities and on our cash and cash equivalent balances held with financial institutions.

Results of Operations

Comparison of the Three Months Ended September 30, 2024 and 2023

The following table summarizes our results of operations  

*(a) Not meaningful

Grant Revenue

Grant revenue was $1.9 million and $1.5 million for the three months ended September 30, 2024 and 2023, respectively. This increase in grant revenue — all of which, for each period presented, was received pursuant to our NIA Grant, $21.0 million of which was awarded in January 2023 and the additional $0.3 million of which was received in August 2024, to support the RewinD-LB Trial — was related to an increase in services performed during the three months ended September 30, 2024, as a result of, among other things, a larger number of trial sites being active during the current year period. We initiated the RewinD-LB Trial in the second quarter of 2023 and completed enrollment in June 2024, with trial sites being activated on a rolling basis throughout the enrollment period.

Research and Development Expenses

Research and development expenses were $5.1 million for the three months ended September 30, 2024, compared to $1.8 million for the three months ended September 30, 2023. The increase of $3.3 million was primarily due to the increase in outsourced CRO site expenses related to our RewinD-LB Trial services which ramped up progressively between initiation and the completion of enrollment as described above. In addition, the increase was due to the manufacturing of drug product batches to support further clinical development of neflamapimod, including a potential Phase 3 clinical trial in DLB, CRO expenses to support our stroke trial, non-clinical studies, and consulting services.

General and Administrative Expenses

General and administrative expenses were $2.2 million for the three months ended September 30, 2024, compared to $2.4 million for the three months ended September 30, 2023. The slight decrease of $0.2 million was primarily due to fewer one-time professional fee costs that we incurred related to the Merger in the prior year. The one-time costs included D&O insurance, public relations, and accounting services.

Other Income (Expense)

There was a de minimis amount of other income (expense) for the three months ended September 30, 2024, compared to $4.8 million for the three months ended September 30, 2023. The amount in the prior year period was due to adjustments to the fair value of the Convertible Notes for the three months ended September 30, 2023. The Convertible Notes converted into the right to receive common stock in connection with the closing of the Merger in August 2023 and were not outstanding during the current year period.

Interest income

Interest income was $0.6 million for the three months ended September 30, 2024, compared to $48,000 for the three months ended September 30, 2023. The increase was primarily due to interest earned on our increased cash equivalents and marketable securities balances in the current year period following the completion of the 2024 Private Placement in April 2024.

Comparison of the Nine Months Ended September 30, 2024 and 2023

The following table summarizes our results of operations  

*(a) Not meaningful

Grant Revenue

Grant revenue was $7.6 million and $4.7 million for the nine months ended September 30, 2024 and 2023, respectively. This increase in grant revenue — all of which, for each period presented, was received pursuant to our NIA Grant, $21.0 million of which was awarded in January 2023 and an additional $0.3 million of which was received in August 2024, to support the RewinD-LB Trial — was related to an increase in services performed during the nine months ended September 30, 2024, as a result of, among other things, a larger number of trial sites being active during the current year period. We initiated the RewinD-LB Trial in the second quarter of 2023 and completed enrollment in June 2024, with trial sites being activated on a rolling basis throughout the enrollment period.

Research and Development Expenses

Research and development expenses were $11.7 million for the nine months ended September 30, 2024, compared to $5.6 million for the nine months ended September 30, 2023. The increase of $6.1 million was primarily due to an increase in outsourced CRO site expenses related to our RewinD-LB Trial services, which ramped up progressively between initiation and the completion of enrollment as described above. In addition, the increase was driven by the manufacturing of drug product batches to support further clinical development of neflamapimod, including a potential Phase 3 clinical trial, CRO expenses to support our stroke trial, non-clinical studies, and consulting services.

General and Administrative Expenses

General and administrative expenses were $6.9 million for the nine months ended September 30, 2024, compared to $4.4 million for the nine months ended September 30, 2023. The increase of $2.4 million was primarily due to public company related costs following the completion of the Merger, which closed in the third quarter of 2023. The drivers of the increase were primarily outsourced legal costs, insurance costs, headcount costs, investor/public relations costs, and stock-based compensation expense due to additional stock options granted and an amendment to our former chief financial officer's previously granted option awards in connection with his termination as an employee in May 2024 to extend the vesting and exercise periods thereunder to September 30, 2025.

Other Income (Expense)

There was a de minimis amount of other income (expense) for the nine months ended September 30, 2024, compared to $5.4 million for the nine months ended September 30, 2023. The amount in the prior year period was due to adjustments to the fair value of the Convertible Notes for the nine months ended September 30, 2023. The Convertible Notes converted into the right to receive common stock in connection with the closing of the Merger in August 2023 and were not outstanding during the current year period.

Interest income

Interest income was $1.4 million for the nine months ended September 30, 2024, as compared to $0.1 million for the nine months ended September 30, 2023. The increase was primarily due to interest earned on our increased cash equivalents and marketable securities balances in the current year period following the completion of the 2024 Private Placement in April 2024.

Liquidity and Capital Resources

Capital Requirements

From the date of our inception through September 30, 2024, our operations have primarily been financed through the issuance of common stock, convertible preferred stock and convertible debt financings. As of September 30, 2024, we had approximately $46.7 million of cash and cash equivalents and marketable securities. We have not generated positive cash flows from operations and as of September 30, 2024, we had an accumulated deficit of approximately $64.0 million. In January 2023, we were awarded a $21.0 million grant from the NIA to support the RewinD-LB Trial, which is expected to be received over a three-year period. In August 2024, we received an additional $0.3 million from the NIA. As of September 30, 2024, total cash funding of $14.5 million had been received from the NIA Grant.

On April 1, 2024, pursuant to and in accordance with the terms of a securities purchase agreement with certain purchasers named therein, we completed the private placement of an aggregate of 2,532,285 units, each comprised of (i) (A) one share of common stock or (B) one Pre-Funded Warrant and (ii) one Series A Warrant. The aggregate upfront gross proceeds from the 2024 Private Placement were approximately $50.0 million, before deducting offering fees and expenses, and additional gross proceeds of up to approximately $99.4 million may be received if the Series A Warrants are exercised in full for cash.

In addition, we were previously party to our 2022 Sales Agreement with BTIG. The 2022 Sales Agreement was an "at-the-market" sales agreement pursuant to which we were able to, from time to time and through BTIG as our agent, sell up to an aggregate of $20.0 million in shares of common stock by any permissible method deemed an “at-the-market offering” as defined in Rule 415(a)(4) under the Securities Act. On October 1, 2024, pursuant to and in accordance with Section 12(b) thereof, we notified BTIG that we were terminating the 2022 Sales Agreement effective October 11, 2024. We were not subject to any termination penalties or other expenses related to the termination of the 2022 Sales Agreement and, prior to termination, no shares were sold pursuant to the 2022 Sales Agreement.

Our primary uses of cash are to fund our operations, which consist primarily of research and development expenditures related to our programs and general and administrative expenditures. These primary uses of capital include, and we expect will continue to include, costs related to clinical research, manufacturing and development services; compensation and related expenses; costs relating to the build-out of our headquarters, other offices and laboratories; license payments or milestone obligations that may arise; laboratory expenses and costs for related supplies; manufacturing costs; legal and other regulatory expenses and general overhead costs. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable and accrued expenses.

Any product candidates we may develop may never achieve commercialization, and we anticipate that we will continue to incur losses for the foreseeable future. We expect that our research and development expenses, general and administrative expenses, and capital expenditures will continue to increase. In addition, we expect to incur costs associated with operating as a public company. As a result, until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity offerings, debt financings or other capital sources, including potential collaborations, licenses and other similar arrangements.

Based on our current operating plan, we believe our existing cash and cash equivalents and marketable securities on hand as of September 30, 2024, along with the remaining funds to be received from the NIA Grant, will enable us to fund our operating expenses and capital expenditure requirements for at least twelve months from the issuance of the unaudited condensed consolidated interim financial statements included in this Quarterly Report. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. We will continue to require additional financing to advance our current product candidates through clinical development, to develop, acquire or in-license other potential product candidates and to fund operations for the foreseeable future. We will continue to seek funds through equity offerings, debt financings or other capital sources, including potential collaborations, licenses and other similar arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. If we do raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights. If we raise additional capital through a debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Any failure to raise capital as and when needed could have a negative impact on our financial condition and on our ability to pursue our business plans and strategies. If we are unable to raise capital, we may need to delay, reduce or terminate planned activities to reduce costs, including our development or commercialization activities for neflamapimod. We might also be required to seek funds through arrangements with third parties that require us to relinquish certain of our rights to neflamapimod or otherwise agree to terms unfavorable to us.

Because of the numerous risks and uncertainties associated with research, development and commercialization of product candidates, we are unable to estimate the exact amount of our operating capital requirements. Our future capital requirements will depend on, and could increase significantly as a result of, many factors, including:

A change in the outcome of any of these or other variables could significantly alter the costs and timing associated with the development of neflamapimod. Furthermore, our operating plans may change in the future, and we may need additional funds to meet operational needs and capital requirements associated with such operating plans.

Cash Flows 

Operating Activities

For the nine months ended September 30, 2024, cash used in operating activities was $8.5 million. The net cash outflow from operations primarily resulted from net loss of $9.6 million and accretion of discount on marketable securities of $0.8 million, partially offset by changes in operating assets and liabilities of $0.9 million and by a non-cash expense of $1.1 million for stock-based compensation.

For the nine months ended September 30, 2023, cash used in operating activities was $4.9 million. The net cash outflow from operations primarily resulted from net income of $0.2 million and change in fair value of convertible debt of $5.4 million, offset by a non-cash charge of $0.2 million for stock-based compensation and changes in operating assets and liabilities of $0.1 million.

Investing Activities

For the nine months ended September 30, 2024, cash used in investing activities was $38.0 million due to the purchase of marketable securities offset by the maturities of marketable securities.

We did not have any cash provided by or used in investing activities for the nine months ended September 30, 2023.

Financing Activities

For the nine months ended September 30, 2024, cash provided by financing activities was $46.4 million due to proceeds from the sale of common stock and the Pre-Funded Warrants for approximately $46.4 million, partially offset by the payment of issuance costs related to the sale of common stock and the Pre-Funded Warrants, in each case, in connection with the 2024 Private Placement.

For the nine months ended September 30, 2023, net cash provided by financing activities was $11.2 million. The net cash provided by financing activities primarily resulted from the net assets assumed in connection with the Merger, which was accounted for as a reverse capitalization, offset by the payment of offering costs.

Contractual Obligations and Other Commitments

We enter into contracts in the normal course of business with third-party contract organizations for clinical trials, nonclinical studies and manufacturing, and other services for operating purposes. The amount and timing of contractual obligations may vary based on the timing of services. We can generally elect to discontinue the work under these agreements at any time. In the future, we could also enter into additional collaborative research, contract research, manufacturing and supplier agreements which may require upfront payments or long-term commitments of cash.

Off-Balance Sheet Arrangements

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

Critical Accounting Policies and Estimates

During the nine months ended September 30, 2024, there were no material changes to our critical accounting policies and estimates from those described under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report.

Recently Adopted Accounting Pronouncements

A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 3, Summary of Significant Accounting Policies, in the notes accompanying the unaudited condensed consolidated interim financial statements included in Part I, Item 1 of this Quarterly Report.

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 Rules 13a-15I and 15d-15(e) promulgated under the Exchange Act) 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 are ineffective due to the material weaknesses noted below in the subsequent paragraph.

Material Weaknesses in Internal Control over Financial Reporting

In connection with the audit of the Company’s consolidated financial statements for the years ended December 31, 2023 and 2022, material weaknesses in the Company’s internal control over financial reporting were identified in relation to: (i) the recording of significant complex transactions and (ii) the absence of effective controls regarding the accurate identification, evaluation and proper recording of various expense accounts.

A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our condensed consolidated interim financial statements would not be prevented or detected on a timely basis. The identified material weaknesses, if not remediated, could result in a material misstatement to the Company’s consolidated financial statements that may not be prevented or detected. A material weakness will not be considered remediated until a remediation plan has been fully implemented, the applicable controls operate for a sufficient period of time, and it has been concluded, through testing, that the newly implemented and enhanced controls are operating effectively.

On August 16, 2023, we completed the Merger. For financial reporting purposes, EIP was determined to be the accounting acquirer and, accordingly, for all periods prior to the Merger, EIP’s historical financial statements and results of operations replace and are deemed to be the Company’s financial statement and results of operations for such periods. While Diffusion was previously subject to the provisions of SOX, EIP, as a private, non-reporting operating company prior to the Merger, was not. Accordingly, upon consummation of the Merger, we began the process of integrating the pre-Merger business of EIP into Diffusion’s pre-established public company, internal control framework, including internal controls and information systems and we continue to implement measures designed to improve our internal control over financial reporting to remediate the material weaknesses. As of the date of this Quarterly Report, we continue to be actively engaged in these efforts through, among other things, adding additional review procedures by qualified personnel over complex accounting matters, and we currently expect to complete the remediation plan during the year ending December 31, 2024. However, the Company cannot predict the success of such efforts or the outcome of its assessment of the remediation efforts and the Company’s efforts may not remediate this material weakness in its internal control over financial reporting, or additional material weaknesses may be identified in the future.

Notwithstanding the material weaknesses in internal control over financial reporting described above, our management has concluded that our consolidated financial statements included in this Quarterly Report are fairly stated in all material respects in accordance with US GAAP.

Change in Internal Control Over Financial Reporting

Except as set forth above, 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 quarter ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION