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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 THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended SeptemberJune 30, 2017

2023

 

☐

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

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

 

For the transition period from ___________ to ______________.

 

Commission file number: 000-24477001-37942

 

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 101

1317 Carlton Avenue, Suite 400
Charlottesville, VA 22902

(Address of principal executive offices, including zip code)

 

(434) 220-0718

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

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

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

None

 

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

 

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

 

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

 

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

 

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

 

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

 

The number of shares of common stock outstanding at November 10, 2017August 7, 2023 was 14,521,7302,040,287 shares.

 

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DIFFUSION PHARMACEUTICALS INC.

FORM 10-Q

SEPTEMBERJUNE30, 20172023

INDEX

Note Regarding Company References and Other Defined Terms

Unless the context otherwise requires, in this report,Quarterly Report, (i) references to the “Company,"Diffusion," "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 and references to "Series A convertible preferred stock" refer to the Series A convertible preferredCompany. We have also used several other defined terms in this Quarterly Report, many of 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 or incorporated by reference in this Quarterly Report will prove to be accurate or that any such inaccuracy will not be material. You should also understand that it is not possible to predict or identify all such factors, and you should not consider any such list to be a complete set of all potential risks or uncertainties. In light of the Company. On August 17, 2016,foregoing and the Company effectedsignificant uncertainties in these forward-looking statements, you should not regard these statements as a 1-for-10 reverse splitrepresentation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. For all forward-looking statements, we claim the protection of its common stock. Unless noted otherwise, any share or per share amountsthe safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

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

Note Regarding Trademarks, Trade Names and Service Marks

This reportQuarterly Report contains the followingcertain trademarks, trade names, and service marks of ours: Diffusion.ours, including “DIFFUSIO₂N.” All other trade names, trademarks, and service marks appearing in this quarterly report on Form 10-QQuarterly Report are, to the knowledge of Diffusion, the property of their respective owners. We have assumed thatTo the reader understands that all such terms are source-indicating. Accordingly,extent any such terms appear without the trade name, trademark, or service mark notice, such presentation is for convenience only and should not be construed as being used in a descriptive or generic sense.

PART I – FINANCIAL INFORMATION

Diffusion Pharmaceuticals Inc.

Condensed Consolidated Balance Sheets

(unaudited)

 See accompanying notes to unaudited condensed consolidated financial statements.

Diffusion Pharmaceuticals Inc.

Condensed Consolidated Statements of Operations

(unaudited)

See accompanying notes to unaudited condensedinterim consolidated financial statements.

Diffusion Pharmaceuticals Inc.

Condensed Consolidated StatementStatements of Changes in Convertible Preferred StockOperations and Stockholders' Equity

Nine Months Ended September 30, 2017Comprehensive Loss

(unaudited)

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

See accompanying notes to unaudited condensedinterim consolidated financial statements.

Diffusion Pharmaceuticals Inc.

Condensed Consolidated Statements of Cash FlowsStockholders' Equity

Three and Six Months Ended June 30, 2022 and 2023

(unaudited)

See accompanying notes to unaudited condensedinterim consolidated financial statements.

Diffusion Pharmaceuticals Inc.

Consolidated Statements of Cash Flows

(unaudited)

See accompanying notes to unaudited interim consolidated financial statements.

Diffusion Pharmaceuticals Inc. (“Diffusion” or the “Company”), a Delaware corporation, is a clinical stage biotechnologybiopharmaceutical company that has historically focused on extendingdeveloping novel therapies that may enhance the life expectancy of cancer patients by improving the effectiveness of current standard-of-care treatments, including radiation therapy and chemotherapy.body’s ability to deliver oxygen to areas where it is needed most. The Company is developing its leadCompany’s most advanced product candidate, trans sodium crocetinate (“TSC”)TSC, has been investigated and developed to enhance the diffusion of oxygen to tissues with low oxygen levels, also known as hypoxia, most recently as an adjuvant treatment to standard of care therapy for use in many cancer types inGBM and other hypoxic solid tumors. On March 30, 2023, Diffusion, Merger Sub and EIP entered into the Merger Agreement, pursuant to which, tumor oxygen deprivation ("hypoxia") is known to diminish the effectiveness of current treatments. TSC is designed to target the cancer’s hypoxic micro-environment, re-oxygenating treatment-resistant tissue and making the cancer cells more susceptibleamong other things, subject to the therapeutic effectssatisfaction or waiver of standard-of-care radiation therapythe conditions set forth in the Merger Agreement, Merger Sub will merge with and chemotherapy. The U.S. Foodinto EIP, with EIP surviving the merger as the wholly-owned subsidiary of the combined company. Diffusion has called a special meeting of stockholders currently scheduled for August 15, 2023 in order to obtain the stockholder approvals necessary to complete the Merger and Drug Administration (“FDA”) provided Diffusion with final protocol guidance for a Phase 3 trial of TSCcertain related transactions, as more fully described in newly diagnosed inoperable GBM patients and the Company plans to begin the trial by the end of 2017.Merger Proxy Statement.

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

The Company has not generated any revenues from product sales and has historically funded operations primarily from the proceeds of public and private placementsofferings of its membership units (prior to the Merger),equity, convertible notesdebt, and convertible preferred stock.

On March 30, 2023, the Company entered into the Merger Agreement with EIP and Merger Sub, pursuant to which, and subject to the satisfaction or waiver of the conditions set forth therein, Merger Sub will be merged with and into EIP at the effective time of the Merger, with EIP continuing after the Merger as the surviving corporation and a wholly-owned subsidiary of the Company. Diffusion has called a special meeting of stockholders currently scheduled for August 15, 2023 in order to obtain the stockholder approvals necessary to complete the Merger and certain related transactions, as more fully described in the Merger Proxy Statement. The Merger is intended to qualify as a tax-free reorganization for U.S. federal income tax purposes. In connection with the Merger Agreement with EIP and efforts to utilize and preserve assets in a manner that maximizes value for its stockholders, the Company committed to a reduction in force in the first quarter of 2023 that impacted seven of the Company’s thirteen employees. The reduction was a cash preservation measure and impacted employees primarily in the Company’s clinical operations function. The Company has paused significant portions of its TSC development activities in the first quarter of 2023, including initiation of the Company’s previously announced Phase 2 study of TSC in newly diagnosed GBM patients.

Substantial additional financing will be required by the Company to continue to fund itsany research and development activities. No assurance can be given that any such financing will be available when neededactivities related to the Company's existing or thatfuture product candidates, including EIP's product candidates if the Company’s research and development efforts will be successful.

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

The Company currently does not have any commitments to obtain additional funds and mayno assurance can be unable to obtain sufficient fundinggiven that any such financing will be available in the future — when needed, in sufficient amounts, on acceptable terms, ifor at all. If the Company cannot obtain the necessary funding, it willmay need to, among other things, delay, continue to scale back or eliminate some or all of its research and development programs, enter into collaborations with third parties to commercialize potential productsmodify its overall development strategy for one or technologies thatmore product candidates (or the Company as a whole) in a manner it might otherwise seek to developwould not if sufficient cash resources were available, or commercialize independently, consider other various strategic alternatives, including a merger or salecease operations altogether.

Operations of the Company are subject to certain additional risks and uncertainties as well, and any one or cease operations. Ifmore of these factors could materially affect the Company engages in collaborations, it may receive lower consideration upon commercializationCompany’s financial condition, future operations and liquidity needs. Many of such products than if it had not entered into such arrangements or if it entered into such arrangements at later stages in the product development process.

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

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company has prepared its financial statements assuming that it will continue as a going concern, which contemplates realization of assetspending merger with EIP and the satisfaction of liabilities in the normal course of business. The Company has incurred net losses since inception and it expects to generate losses from operations for the foreseeable future primarily due to research and development costs for its potential product candidates, which raises substantial doubt about the Company’s ability to continue as a going concern. Variousvarious internal and external factors willthat may affect whether and when the Company’s product candidates become approved drugs and the extent of their market share. The regulatory approval and market acceptancesuccess or failure of the Company’s proposed future products (if any),Company's research and development efforts, the length of time and cost of developing and commercializing thesethe Company's current or future product candidates, and/or failure of them atwhether and when any stagesuch product candidates become approved drugs, and how significant a drug's market share will be, if approved, among others.

Without giving effect to the consummation of the drug approval process will materially affectproposed Merger with EIP, the Company’s financial condition and future operations. The Company believescurrently expect that its existing cash and cash equivalents and certificateas of deposit at SeptemberJune 30, 20172023 are sufficient to fund current operations through June 2018. for at least 12 months following the date of this Quarterly Report.

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

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”)GAAP for interim financial information as found in the Accounting Standard Codification (“ASC”)ASC and Accounting Standards Updates (“ASUs”)ASUs of the Financial Accounting Standards Board (“FASB”),FASB, and with the instructions to Form 10-Q and Article 10 of Regulation S-X ofpromulgated by the Securities and Exchange Commission (the “SEC”).SEC. In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements of the Company include all normal and recurring adjustments (which consist primarily of accruals, estimates and assumptions that impact the unaudited interim consolidated financial statements) considered necessary to present fairly the Company’s financial position as of SeptemberJune 30, 2017,2023, and its results of operations for the three and ninesix months ended SeptemberJune 30, 20172023 and 20162022 and cash flows for the ninesix months ended SeptemberJune 30, 20172023 and 2016.2022. Operating results for the ninesix months ended SeptemberJune 30, 20172023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.2023. The unaudited interim condensed consolidated financial statements presented herein do not contain the required disclosures under GAAP for annual financial statements. The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the annual audited financial statements and related notes as of and for the year ended December 31, 20162022 filed with the SEC as part of the Annual Report on Form 10-K on March 31, 2017.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS10-K.

Use of Estimates

The preparation of the unaudited interim condensed 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.

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

Fair Value of Financial Instruments

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

Concentration of Credit Risk

Financial instruments that potentially subject the estimates or judgments usedCompany to significant concentrations of credit risk consist primarily of cash, cash equivalents, and marketable securities. The Company maintains deposits in the preparationfederally insured financial institutions in excess of the unaudited condensed consolidated financial statements, actual results may materially vary from these estimates. Estimatesfederally insured limits. The Company has not experienced any losses in such accounts and assumptions are periodically reviewedbelieves it is not exposed to significant risk on its cash, cash equivalents, and the effects of revisions are reflected in the unaudited interim condensed consolidated financial statements in the period they are deemed necessary.marketable securities.

Cash and Cash Equivalents and Certificate of Deposit

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

Marketable securities

The Company classifies its marketable securities as available-for-sale, which include commercial paper and cash equivalents. The Company's certificateU.S. government debt securities with original maturities of deposit has a maturity greater than three months but within one year of thefrom date of purchase. This certificate of deposit is classifiedThe Company considers its marketable securities as held-to-maturity,available for use in current operations, and therefore classifies these securities as current assets on the consolidated balance sheet. These securities are carried at fair 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 are based on the specific identification method.

The Company routinely monitors the difference between cost and the estimated fair value of its investments. Each reporting period, securities with unrealized losses are reviewed to determine whether the decline in fair value requires the recognition of an allowance for credit losses. Factors considered in the review include (i) current market interest rates, (ii) general financial condition of the issuer, (iii) issuers industry and future business prospects, (iv) issuers past defaults in principal and interest payments, and (v) the payment structure of the investment approximates its amortized cost.and the issuers ability to make contractual payments on the investment. All of the Company's marketable securities were fully matured at June 30, 2023.

Research and Development

Fair Value

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

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

Patent Costs

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

Stock-based Compensation

The carrying amountsCompany measures stock-based awards at grant-date fair value and records compensation expense on a straight-line basis over the vesting period of the award. The Company’s financial instruments, including cash equivalents, certificate of deposit, accounts payable, and accrued expenses approximate fair uses the Black-Scholes model to value due to the short-term nature of those instruments. As of September 30, 2017,its stock option awards. Estimating the fair value of stock option awards requires management to apply judgment and make estimates, including the Company's outstanding Series B convertible note was approximately $0.5 million. Asvolatility of December 31, 2016,the Company’s common stock, the expected term of the Company’s stock options, the expected dividend yield and the fair value of the Company’s outstanding 2016 convertible notecommon stock on the measurement date. As a result, if factors change and Series B convertible notemanagement uses different assumptions, stock-based compensation expense could be materially different for future awards.

For stock option grants, the expected term was approximately $2.0 millionestimated using the “simplified method” for employee options as the Company has limited historical information to develop reasonable expectations about future exercise patterns and $0.6 million, respectively.post vesting employment termination behavior for its stock option grants. The 2016 convertible note was paid in full duringsimplified method is based on the three month period ended September 30, 2017.average of the vesting tranches and the contractual life of each grant. The Company uses the simplified method to estimate the expected term.

For stock price volatility, the Company uses a combination of its own historical stock price and comparable public companies as a basis for its expected volatility to calculate the fair value of option grants. The Company assumes no dividend yield because dividends are not expected to be paid in the convertiblenear future, which is consistent with the Company’s history of not paying dividends. The risk-free interest rate is based on U.S. Treasury notes is determined usingwith a binomial lattice model that utilizes certain unobservable inputs that fall within Level 3term approximating the expected term of the fair value hierarchy.

Offering Costs

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

Intangible Assets and Goodwill

In connection with the Merger, the Company acquired indefinite-lived In-Process Research and Development Assets (“IPR&D”) RES-529 and RES-440, with estimated fair values of $8.6 million and $1.0 million, respectively, and recognized $6.9 millionperiods in goodwill. In the third quarter of 2016, the IPR&D asset associated with RES-440 was abandoned and written down to $0. RES-529 and goodwill are assessed for impairment on each of October 1 of the Company’s fiscal year or more frequently if impairment indicators exist. The Company has a single reporting unit and all goodwill relates to that reporting unit. There were no impairment indicators or impairments to RES-529 or goodwill during the three and nine months ended September 30, 2017.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSwhich they occur.

Net Income (Loss)Loss Per Common Share

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

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

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

In MarchJune 2016, the FASB issued ASU 2016-09,2016-13, Compensation – ImprovementsFinancial Instruments—Credit Losses, Measurement of Credit Losses on Financial Instruments (Topic 326). The standard amends the impairment model by requiring entities to Employee Share-Based Payment Accounting, which simplifies several aspectsuse a forward-looking approach based on expected losses to estimate credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. For available-for-sale debt securities, entities will be required to recognize an allowance for credit losses rather than a reduction in carrying value of the accounting for employee share-based payment transactions includingasset. Entities will no longer be permitted to consider the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statementlength of cash flows. The guidance is applicable to public business entities for fiscal years beginning after December 15, 2016 and interim periods within those years.time that fair value has been less than amortized cost when evaluating when credit losses should be recognized. The Company adopted this standard in 2017 by electing to account for forfeitures in the period that they occur. Under ASU 2016-09, accounting changes adoptedguidance using thea modified retrospective method must be calculatedapproach as of January 1, 2023 which resulted in no cumulative-effect adjustment to retained earnings.

The updated guidance in ASU 2016-13 also amended the previous other-than-temporary impairment (“OTTI”) model for available-for-sale fixed income securities by requiring the recognition of impairments relating to credit losses through an allowance account and limits the amount of credit loss to the difference between a security’s amortized cost basis and its fair value. In addition, the length of time a security has been in an unrealized loss position will no longer impact the determination of whether a credit loss exists. The Company adopted the guidance related to available-for-sale fixed income securities on January 1, 2023 using a prospective transition approach for available-for-sale fixed income securities that were purchased with credit deterioration or had recognized an OTTI write-down prior to the effective date. The effect of the prospective transition approach was to maintain the same amortized cost basis before and after the effective date.

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

The following is a summary of the period adopted and reportedCompany's marketable securities as a cumulative-effect adjustment. As a result,of as of the Company recognized cumulative-effect adjustment of approximately $1,000 on January 1, 2017.date indicated:

In February 2016,

The Company had no marketable securities as of June 30, 2023.

Fair value is the FASB issued ASU 2016-02, Leases (Topic 842). The FASB issuedprice 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 update to requirenature of the recognition of lease assets and liabilities, onvarious valuation techniques and assumptions are used when estimating fair value. The carrying amounts of certain of the balance sheetCompany’s financial instruments, including prepaid expense and accounts payable, are shown at cost, which approximates fair value due to the short-term nature of lessees. The standard will be effective for fiscal years beginning after December 15, 2018, including interim periods within such fiscal years. The ASU requires a modified retrospective transition method with the option to elect a package of practical expedients. Early adoption is permitted.these instruments. The Company is currently evaluatingfollows the potential impactprovisions 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 adoption of this standard on its consolidated results of operations, financial position and cash flows and related disclosures.following three categories:

Reverse Merger with RestorGenex

On January 8, 2016, the Company completed a reverse merger transaction with RestorGenex. The Company entered into the Merger transaction in an effort to provide improved access to the capital markets in order to obtain the resources necessary to accelerate development of TSC in multiple clinical programs and continue to build an oncology-focused company.

The purchase price was calculated as follows:

The following table summarizespresents the allocation of the purchase price to theCompany’s assets acquired and liabilities assumed as of the acquisition date:that are measured at fair value on a recurring basis (amounts in thousands):

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

Pro Forma Financial Information (Unaudited)

The following pro forma financial information reflects the condensed consolidated results of operationsfair values of the Company asCompany’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 the acquisition of RestorGenex had taken place on January 1, 2016. The pro forma financial informationthere is not necessarily indicative of the results of operations as they would have been had the transactions been effectedreadily available and relevant market activity for an individual security. This valuation technique may change from period to period, based on the assumed date.

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

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Other accrued expenses and liabilities consisted of the following:

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

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

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

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Series A Convertible Preferred Stock Transaction

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

The Company sold 12,376,329 units in the private placement and received approximately $22.1 million in aggregate net cash proceeds, after deducting commissions and other expenses of approximately $2.9 million. In addition, as compensation for its services, the Company granted to its placement agent in the offering warrants to purchase an aggregate of 1,179,558 shares of common stock at an initial exercise price of $2.22 per share, which expire on the fifth anniversary of their original issuance date.

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

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

Dividends

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

Voting

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

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Liquidation Preference

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

Conversion

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

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

Make-Whole Provision

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

Common Stock Warrants

As of SeptemberJune 30, 2017,2023, the Company had the following warrants outstanding to acquire shares of its common stock:

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

During the ninesix months ended SeptemberJune 30, 2017, 13,0002023, 23,639 warrants issued prior to the Merger, expired. These common stock warrants will expire periodically through 2019. The common stock warrants issued in connection with the March 2017 Series A private placement expire in March 2022. During the three and nine months ended September 30, 2017, the Company recognized a net gain of $8.4 million and $5.8 million in warrant related charges associated with the Series A private placement, which consisted primarily of the change in fair value of the common stock warrants from issuance and the excess fair value of the common stock warrants over the gross cash proceeds of the Series A offering. 

2015 Equity Plan

The Diffusion Pharmaceuticals Inc. 2015 Equity Plan as amended (the "2015 Equity Plan"), provides for increases to the number of shares reserved for issuance thereunder each January 1 equal to 4.0% of the total shares of the Company’sCompany’s common stock outstanding as of the immediately preceding December 31, unless a lesser amount is stipulated by the Compensation Committee of the Company's Boardboard of Directors.directors. Accordingly, 413,82581,582 shares were added to the reserve as of January 1, 2017,2023, 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 SeptemberJune 30, 2017,2023, there were 114,291160,254 shares of common stock available for future issuance under the 2015 Equity Plan.

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

The following table summarizes the activity related to all stock option grants to employees and non-employees for the ninesix months ended SeptemberJune 30, 2017:2023: