UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

☒

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

For the quarterly period ended June 30, ~~2019~~

2020

☐

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

For the transition period from ___________ to ______________.

Commission file number: 000-24477

DIFFUSION PHARMACEUTICALS INC.

(Exact name of registrant as specified in its charter)

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

1317 Carlton Avenue, Suite 200
Charlottesville, VA 22902
(Address of principal executive offices, including zip code)

(434) 220-0718

(Registrant’s telephone number including area code)

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

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

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

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒	Smaller reporting company ☒
	Emerging growth company ☐

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

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

The number of shares of common stock outstanding at August ~~8, 2019~~5, 2020 was ~~4,693,290~~63,998,298 shares.

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001 per share	DFFN	NASDAQ Capital Market

DIFFUSION PHARMACEUTICALS INC.

FORM 10-Q

JUNE 30, ~~2019~~2020

INDEX

		Page
–PART I – FINANCIAL INFORMATION	1

ITEM 1.	FINANCIAL STATEMENTS	1

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	1314

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	2225

ITEM 4.	CONTROLS AND PROCEDURES	2225

–PART II – OTHER INFORMATION	2326

ITEM 1. LEGAL PROCEEDINGS	~~LEGAL PROCEEDINGS~~	2326

ITEM 1A. RISK FACTORS	~~RISK FACTORS~~	2326

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	2328

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	2329

ITEM 4.	MINE SAFETY DISCLOSURES	2329

ITEM 5. OTHER INFORMATION	~~OTHER INFORMATION~~	2329

ITEM 6. EXHIBITS	~~EXHIBITS~~	2329

Unless the context otherwise requires, in this report, references to the “Company,” “we,” “our” or “us” refer to Diffusion Pharmaceuticals Inc. and its subsidiaries, and references to “common stock” refer to the common stock, par value $0.001 per share, of the Company.

This report contains the following trademarks, trade names and service marks of ours: Diffusion. All other trade names, trademarks and service marks appearing in this quarterly report on Form 10-Q are the property of their respective owners. We have assumed that the reader understands that all such terms are source-indicating. Accordingly, such terms appear without the trade name, trademark or service mark notice for convenience only and should not be construed as being used in a descriptive or generic sense.

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

	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018			2020			2019			2020			2019
Operating expenses:
Research and development	$	1,518,381		$	1,391,113		$	3,218,226		$	3,216,681		$	2,173,183		$	1,518,381		$	3,707,650		$	3,218,226
General and administrative		1,068,452			1,660,630			2,269,180			3,158,469			1,458,257			1,068,452			2,852,065			2,269,180
Depreciation		34,390			26,709			52,662			54,727			27,021			34,390			54,041			52,662
Loss from operations		2,621,223			3,078,452			5,540,068			6,429,877			3,658,461			2,621,223			6,613,756			5,540,068
Other income:
Interest income		(16,921	)		(45,339	)		(37,605	)		(82,803	)		(25,913	)		(16,921	)		(60,013	)		(37,605	)
Loss from operations before income tax benefit		(2,604,302	)		(3,033,113	)		(5,502,463	)		(6,347,074	)		(3,632,548	)		(2,604,302	)		(6,553,743	)		(5,502,463	)
Income tax benefit		(108,904	)		(267,932	)		(259,256	)		(267,932	)		(507,325	)		(108,904	)		(869,705	)		(259,256	)
Net loss	$	(2,495,398	)	$	(2,765,181	)	$	(5,243,207	)	$	(6,079,142	)	$	(3,125,223	)	$	(2,495,398	)	$	(5,684,038	)	$	(5,243,207	)
Series A cumulative preferred dividends		—			—						(85,993	)
Deemed dividend related to the make-whole provision for the conversion of Series A convertible preferred stock into common stock		—			—			—			(8,167,895	)
Deemed dividend arising from warrant exchange														(1,950,378	)		—			(1,950,378	)		—
Net loss attributable to common stockholders	$	(2,495,398	)	$	(2,765,181	)	$	(5,243,207	)	$	(14,333,030	)	$	(5,075,601	)	$	(2,495,398	)	$	(7,634,416	)	$	(5,243,207	)
Per share information:
Net loss per share of common stock, basic and diluted	$	(0.63	)	$	(0.82	)	$	(1.43	)	$	(4.64	)	$	(0.10	)	$	(0.63	)	$	(0.18	)	$	(1.43	)
Weighted average shares outstanding, basic and diluted		3,940,684			3,369,770			3,658,457			3,092,043			51,978,286			3,940,684			43,242,891			3,658,457

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

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

Convertible Preferred Stock

Stockholders' Equity

Series A

Common Stock

Additional
Paid-in

Accumulated

Total
Stockholders'

Shares

Amount

Shares

Amount
Capital Deficit Equity
Balance at January 1, 2018
8,306,278 $ — 967,976 $ 968 $ 82,783,865 $ (61,554,889
)
$ 21,229,944
Conversion of Series A convertible preferred stock to common stock
(8,306,278
)
— 553,752 554 (554
)
— —
Issuance of common stock to Series A convertible preferred stockholders under make-whole adjustment feature
— — 777,895 778 (778
)
— —
Issuance of common stock related to accrued dividends
— — 68,815 69 1,148,238 — 1,148,307
Series A cumulative preferred dividend
— — — — (85,993
)
— (85,993
)
Issuance of common stock and warrants, net of issuance costs
— — 1,000,000 1,000 10,416,520 — 10,417,520
Stock-based compensation expense — — — — 324,667 — 324,667
Net loss — — — — — (3,313,961 ) (3,313,961 )
Balance at March 31, 2018 — $ — 3,368,438 $ 3,369 $ 94,585,965 $ (64,868,850 ) $ 29,720,484
Common stock issued for advisory services
— — 3,031 3 24,997 25,000
Stock-based compensation expense
— — — — 319,769 — 319,769
Net loss
— — — — — (2,765,181
)
(2,765,181
)
Balance at June 30, 2018
— $ — 3,371,469 $ 3,372 $ 94,930,731 $ (67,634,031
)
$ 27,300,072

	Stockholders' Equity
	Common Stock				Additional Paid-in		Accumulated			Total Stockholders'
	Shares		Amount		Capital		Deficit			Equity
Balance at April 1, 2019		3,376,230	$	3,377	$	95,624,085	$	(82,672,508	)	$	12,954,954
Issuance of common stock and warrants, net of issuance costs		1,317,060		1,317		5,567,633		—			5,568,950
Stock-based compensation expense		—		—		149,080		—			149,080
Net loss		—		—		—		(2,495,398	)		(2,495,398	)
Balance at June 30, 2019		4,693,290	$	4,694	$	101,340,798	$	(85,167,906	)	$	16,177,586

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

1.	Organization and Description of Business

Diffusion Pharmaceuticals Inc. (“Diffusion” or the “Company”), a Delaware corporation, is a clinical stage biotechnology company developing new treatments for ~~life threatening~~life-threatening conditions by improving the body’s ability to bring oxygen to the areas where it is needed most. The Company is developing its lead product candidate, transcrocetinate sodium, also known as trans sodium crocetinate (“TSC”), for use in those ~~life threatening~~life-threatening conditions in which cellular oxygen deprivation (“hypoxia”) is the basis for significant unmet medical needs. TSC is designed to safely and selectively target and re-oxygenate the micro-environment of hypoxic cells, ~~and can potentially be used~~with potential uses in many indications, including COVID-19, stroke, oncology, and ~~cardiovascular/stroke.~~cardiovascular disease.

The Company intends to begin first enrollment in Q3 2020 in its planned international TSC/COVID-19 program, designed to test TSC in a total of approximately 424 COVID-19 patients with symptoms of impaired respiratory function and low oxygen levels. Low oxygen levels are a frequent result of damage to the lungs, often leading to organ failure, the leading cause of death in COVID-19 patients. Diffusion believes TSC’s oxygen-enhancing mechanism could provide an important new treatment option.

In stroke, TSC helps promote the diffusion of oxygen into those brain cells in which oxygen-deprivation causes neuronal death resulting in patient mortality or morbidity. In cancer, TSC re-oxygenates treatment-resistant cancerous tissue, making the cancer cells up to three times more susceptible to the therapeutic effects of standard-of-care radiation therapy and chemotherapy. ~~In stroke, TSC helps promote the diffusion of oxygen into those brain cells in which oxygen-deprivation causes neuronal death resulting in patient mortality or morbidity.~~

In addition to the TSC programs, the Company is exploring alternatives regarding how best to capitalize upon our product candidate RES-529, which may include possible out-licensing and other options. RES-529 is a novel PI3K/Akt/mTOR pathway inhibitor which has completed two Phase 1 clinical trials for age-related macular degeneration and ~~was~~is in preclinical development in oncology, specifically GBM. RES-529 has shown activity in both in vitro and in vivo glioblastoma animal models and has been demonstrated to be orally bioavailable and capable of crossing the blood brain barrier.

On December 13, 2018, the Company effected a 1-for-15 reverse split of its common stock. As a result of the reverse stock split, every fifteen shares of common stock outstanding immediately prior to the reverse stock split were reclassified and combined into one share of Common Stock. No fractional shares were issued in connection with the reverse stock split. Stockholders who otherwise would have been entitled to receive fractional shares of common stock had their holdings rounded up to the next whole share. Proportional adjustments were made to the Company’s outstanding warrants, stock options and other equity securities and to the Company’s 2015 Equity Incentive Plan, as amended, to reflect the reverse stock split, in each case, in accordance with the terms thereof. The accompanying unaudited interim condensed consolidated financial statements and these notes give retroactive effect to this reverse stock split.

2.	Liquidity

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

The Company regularly explores alternative means of financing its operations and seeks funding through various sources, including public and private securities offerings, collaborative arrangements with third parties and other strategic alliances and business transactions. In May 2019, the Company completed a public offering of 1,317,060 shares of its common stock, par value $0.001 per share (the “Common Stock”) and a private placement of warrants to purchase 1,317,060 shares of Common Stock. The shares of Common Stock and warrants were sold for a combined purchase price of $4.895 per unit for total net proceeds of $5.6 million. The warrants are exercisable beginning on the date of their issuance until November 29, 2024 at an initial exercise price equal to $5.00.

~~DIFFUSION PHARMACEUTICALS INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

The Company has prepared its financial statements assuming that it will continue as a going concern, which contemplates realization of assets 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. The Company currently has no sources of revenue and its ability to continue as a going concern is dependent on its ability to raise capital to fund its future business plans. Additionally, volatility in the capital markets and general economic conditions in the United States may be a significant obstacle to raising the required funds. These factors raise substantial doubt about its ability to continue as a going concern. The financial statements included herein do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. If the going concern basis were not appropriate for these financial statements, adjustments would be necessary in the carrying value of assets and liabilities, the reported expenses and the balance sheet classifications used. The Company believes its cash and cash equivalents as of June 30, 2019 are sufficient to fund operations into the first quarter of 2020.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Operations of the Company are subject to certain risks and uncertainties including various internal and external factors that will affect whether and when the Company’s product candidates become approved drugs and how significant their market share will be, some of which are outside of the Company’s control. The length of time and cost of developing and commercializing these product candidates and/or failure of them at any stage of the drug approval process will materially affect the Company’s financial condition and future operations. The Company believes its cash and cash equivalents as of June 30, 2020 are sufficient to fund operations into the fourth quarter of 2021.

3.	Basis of Presentation and Summary of Significant Accounting Policies

The Summary of Significant Accounting Policies included in the Company's Form 10-K for the year ended December 31, ~~2018,~~2019, filed with the Securities and Exchange Commission on March ~~19, 2019~~17, 2020 have not materially changed, except as set forth below.

~~DIFFUSION PHARMACEUTICALS INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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”) for interim financial information as found in the Accounting Standard Codification (“ASC”) and Accounting Standards Updates (“ASUs”) of the Financial Accounting Standards Board (“FASB”), and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (the “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 ~~condensed~~ consolidated financial statements) considered necessary to present fairly the Company’s financial position as of June 30, ~~2019,~~2020, its results of operations for the three and six months ended June 30, ~~2019~~2020 and ~~2018~~2019 and cash flows for the six months ended June 30, ~~2019~~2020 and ~~2018.~~2019. Operating results for the six months ended June 30, ~~2019~~2020 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2019.~~2020. 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, ~~2018~~2019 filed with the SEC on Form 10-K on March ~~19, 2019.~~17, 2020.

Use of Estimates

The preparation of the unaudited interim ~~condensed~~ consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of assets and liabilities at the date the financial statements and reported amounts of expense during the reporting period. ~~Actual~~The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results ~~could differ from those estimates. Due~~of operations and financial condition, including sales, expenses, reserves and allowances, clinical trials, research and development costs and employee-related amounts, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19, governmental and business responses to the ~~uncertainty~~ongoing pandemic, further actions taken to contain or treat COVID-19 and the speed of ~~factors surrounding~~ the anticipated recovery, as well as the ongoing economic impact on local, regional, national and international markets. The COVID-19 pandemic had no material impact on our estimates ~~or judgments~~and assumptions used in the preparation of the unaudited interim ~~condensed~~ consolidated financial statements for the quarterly period ended June 30, 2020. Due to the uncertainty of factors surrounding these estimates or judgments, actual results may materially vary from ~~these~~our estimates. Estimates and assumptions are periodically reviewed, and the effects of revisions are reflected in the unaudited interim ~~condensed~~ consolidated financial statements in the period they are ~~deemed necessary.~~determined. Our future assessment of the magnitude and duration of COVID-19, as well as other factors, could result in material impacts to our consolidated financial statements in future reporting periods.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Fair Value of Financial Instruments

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

•

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

•

Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liabilities.

•

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity.

The following fair value hierarchy table presents information about the Company’s cash equivalents measured at fair value on a recurring basis:

	March 31, 2020
	(Level 1)		(Level 2)		(Level 3)
Assets
Cash equivalents	$	25,383,744	$	—	$	—

	December 31, 2019
	(Level 1)		(Level 2)		(Level 3)
Assets
Cash equivalents	$	14,006,193	$	—	$	—

Intangible Asset

The Company's RES-529 intangible asset is assessed for impairment annually on October 1 of the Company’s fiscal year or more frequently if impairment indicators exist. There was no impairment to the Company’s RES-529 intangible asset recognized during the three or six months ended June 30, ~~2019 or 2018.~~2020 and 2019.

~~Research and Development~~

Major components of research 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.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS

At the end of the reporting period, the Company compares payments made to third-party service providers to the estimated progress toward completion of the research or development objectives. Such estimates are subject to change as additional information becomes available. Depending on the timing of payments to the service providers and the progress that the Company estimates has been made as a result of the services provided, the Company may record net prepaid or accrued expenses relating to these costs. Upfront payments made to third parties who perform research and development services on the Company’s behalf are expensed as services are rendered.

~~Leases~~

In February 2016, the FASB issued a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of operating lease right-of-use (“ROU”) assets and lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. See note 7 for further details.

Net Loss Per Common Share

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

The following potentially dilutive securities outstanding as of June 30, ~~2019~~2020 and ~~2018~~2019 have been excluded from the computation of diluted weighted average shares outstanding, as they would be anti-dilutive:

	Six Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2020		2019
Common stock warrants		3,469,925		2,087,501		9,117,209		3,469,925
Stock options		309,276		214,353		1,427,829		309,276
Unvested restricted stock awards						98,100		—
		3,779,201		2,301,854		10,643,138		3,779,201

~~Amounts in the table reflect the Common Stock equivalents of the noted instruments.~~

In August 2018, the FASB issued ASU ~~2018-03,~~2018-13, Disclosure ~~Framework- Changes~~Framework-Changes to the Disclosure Requirements for Fair Value Measurements, which changes the fair value measurement disclosure requirements of ASC 820. The goal of the ASU is to improve the effectiveness of ASC 820's disclosure requirements. The guidance is applicable to public business entities for fiscal years beginning after December 15, 2019 and interim periods within those years. The Company is currently evaluating the potential impactrequirements by providing users of the ~~adoption of this standard on its related disclosures.~~

~~In February 2016, the FASB issued ASU 2016-02,~~ ~~Leases (Topic 842)~~ ~~to increase transparency and comparability among organizations by requiring the recognition of operating lease right-of-use~~financial statements with better information about assets and ~~lease~~ liabilities ~~on the balance sheet. Most prominent among the changes~~measured at fair value in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases. Under ASC 842, disclosures are required to meet the objective of enabling users of financial statements ~~to assess the amount, timing,~~ and ~~uncertainty of cash flows arising from leases.~~

notes thereto. The Company adopted ~~ASC 842, effective January 1, 2019 using~~ASU No. 2018-13 in the first quarter of 2020 and the adoption did not have a ~~modified retrospective approach and elected to apply the available practical expedients. The standard had an~~material impact on the Company’s unaudited interim condensed consolidated balance sheet but did not have an impact on the Company’s unaudited interim condensed consolidated statements of operations or consolidated statements of cash flows upon adoption. The most significant impact of ASC 842 was the recognition of a $0.3 million ROU asset and corresponding lease liability for the Company's ~~single operating lease.~~

~~On January 1, 2019, the Company adopted ASU 2018-07,~~ ~~Compensation—Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting~~ ~~(“ASU No. 2018-07”) which simplifies the accounting for share-based payments granted to non-employees for goods and services. The ASU supersedes ASC 505-50~~~~Equity-based Payments to Non-employees~~ ~~and expands the scope of ASC 718 to include all~~share-based payment arrangements related to the acquisition of goods and services from both non-employees and employees. The adoption of ASU No. 2018-17 did not have an impact on the unaudited interim condensed consolidated financial ~~statements of the Company.~~statements.

5.	Stockholders' Equity and Common Stock Warrants

~~2019~~2020 Common Stock Offering

In May ~~2019,~~2020, the Company completed a public offering (the “May 2020 Offering”) of ~~1,317,060~~11,428,572 shares of ~~the Common Stock and a private placement of warrants to purchase 1,317,060 shares of Common Stock. The shares of Common Stock and warrants were sold~~its common stock for a ~~combined~~ purchase price of ~~$4.895~~$1.05 per share for ~~total~~ net proceeds of ~~$5.6 million. The warrants are exercisable beginning on the date of their issuance until November 29, 2024 at an initial exercise price equal to $5.00.~~

$10.3 million after deducting commissions, discounts and other offering costs. In addition, at the closing of ~~such offering described in~~ the ~~foregoing paragraph,~~May 2020 Offering, the Company issued warrants to purchase up to 571,429 shares of common stock to designees of the placement agent ~~warrants to purchase up to 65,853 shares of Common Stock and were recorded as non-cash offering costs.~~for the May 2020 Offering. The placement agent's warrants have an exercise price of ~~$6.25~~$1.3125 per share and a term of five years from the date of ~~issuance~~issuance.

Additionally, in May 2020, the Company entered into a warrant exercise agreement with an investor (the “May 2020 investor warrant exercise”) who held existing warrants to purchase up to an aggregate of 5,000,000 shares of our common stock at an exercise price of $0.35 per share (the “Prior Warrant”). In consideration for the exercise of the the Prior Warrants for cash and an additional $0.125 per each share of common stock in the Prior Warrant being exercised, the exercising investor received new unregistered warrants to purchase up to an aggregate of 5,000,000 shares of common stock in a private placement. The warrants are exercisable immediately at an exercise price of $0.5263 per share and exercisable until November 8, 2025. The Company recognized a deemed dividend of $2.0 million to reflect the value as determined by a Black-Scholes option-pricing model of the consideration given above the additional cash received as an inducement for the investor to exercise the warrants. This deemed dividend is recorded in the Company's statement of operations during the three months ended June 30, 2020 as an increase to the net loss attributable to common stockholders for purposes of computing net loss per share, basic and diluted.

In connection with the May 2020 investor warrant exercise, the Company issued warrants to purchase up to 250,000 shares of common stock to the placement agent with an exercise price of $0.5938 per share and otherwise ~~substantially similar~~have identical terms to the ~~form of~~warrants issued to the ~~investor warrant.~~investor.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED ~~CONDENSED~~ CONSOLIDATED FINANCIAL STATEMENTS

~~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. The warrants do not fall under the liability criteria within ASC 480~~ ~~Distinguishing Liabilities from Equity~~ as they are not puttable and do not represent an instrument that has a redeemable underlying security. The warrants do meet the definition of a derivative instrument under ASC 815, but are eligible for the scope exception as they are indexed to the Company’s own stock and would be classified in permanent equity if freestanding.

Common Stock Warrants

As of June 30, ~~2019,~~2020, the Company had the following warrants outstanding to acquire shares of its common stock:

Outstanding

Range of exercise
price per share

Expiration dates

Common stock warrants issued prior to 2016
1,767 $562.50 -
$735.00
2019
Common stock warrants issued related to Series A convertible preferred stock offering
903,870 $33.30
March 2022

Common stock warrants issued in 2018
1,181,375 $12.00 -
$15.00

January 2023

Common stock warrants issued in 2019
1,382,913 $5.00 -
$6.25
2024
3,469,925

	Outstanding		Range of exercise price per shar			Expiration dates
Common stock warrants issued in 2017 related to Series A convertible preferred stock offering		903,870		$33.30		March 2022
Common stock warrants issued in 2018 related to the common stock offering		1,181,375	$12.00	-	$15.00	January 2023
Common stock warrants issued related to the May 2019 offering		1,382,913	$5.00	-	$6.11875	November 2024
Common stock warrants issued related to the November 2019 offering		514,283	$0.35	-	$0.4375	May 2024
Common stock warrants issued related to the December 2019 offering		313,339		$0.6981		December 2024
Common stock warrants issued related to the May 2020 offering		571,429		$1.3125		May 2025
Common stock warrants issued related to May 2020 investor warrant exercise		4,250,000	$0.5263	-	$0.5938	November 2025
		9,117,209

During the six months ended June 30, ~~2019,~~2020, no warrants expired, and no19,089,361 warrants were ~~exercised.~~exercised for 19,089,361 shares of common stock resulting in net proceeds of $7.8 million.

6.	Stock-Based Compensation

2015 Equity Plan

The Diffusion Pharmaceuticals Inc. 2015 Equity Incentive 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’s ~~Common Stock~~common stock outstanding as of the immediately preceding December 31, unless a lesser amount is stipulated by the Compensation Committee of the Company's board of directors. Accordingly, ~~135,049~~1,339,215 shares were added to the reserve as of January 1, ~~2019,~~2020, 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 June 30, ~~2019,~~2020, there were ~~19,740~~142,302 shares of ~~Common Stock~~common stock available for future issuance under the 2015 Equity Plan.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018		2020		2019		2020		2019
Research and development	$	13,577	$	16,274	$	27,173	$	32,646	$	91,896	$	13,577	$	188,426	$	27,173
General and administrative		135,503		303,495		213,111		611,790		21,548		135,503		116,398		213,111
Total stock-based compensation expense	$	149,080	$	319,769	$	240,284	$	644,436	$	113,444	$	149,080	$	304,824	$	240,284

The following table summarizes the activity related to all stock options for the six months ended June 30, ~~2019:~~2020:

The weighted average grant date fair value of stock option awards granted was ~~$2.16~~$0.46 per share during the six months ended June 30, 2019. The total fair value of options vested during the three months ended June 30, 2019 and 2018 was $0.1 million and $0.3 million, respectively. The total fair value of options vested during the six months ended June 30, 2019 and 2018 was $0.3 million and $0.6 million, respectively.2020. No options were exercised during any of the periods presented. At June 30, ~~2019,~~2020, there was ~~$0.6~~$0.5 million of unrecognized compensation expense that will be recognized over a weighted-average period of ~~1.3~~1.5 years.

Options granted were valued using the Black-Scholes option-pricing model and the weighted average assumptions used to value the options granted during the six months ended June 30, ~~2019 and 2018~~2020 were as follows:

During the six months ended June 30, 2020, the Company granted 98,100 restricted stock awards to a member of the board of directors of the Company. The grant date fair value of each restricted stock award granted during the six months ended June 30, 2020 was $0.51. The shares begin to vest 18 months after the grant date. The Company recognized approximately $4,000 and $8,000 in expense related to this award during the three and six months ended June 30, 2020, respectively. At June 30, 2020, there was approximately $42,000 of unrecognized compensation cost that will be recognized over a weighted average period of 2.58 years.

7.	Commitments and Contingencies

Office Space Rental

The Company has a non-cancelable operating lease for office and laboratory space in Charlottesville, Virginia, which began in April of 2017 and as of June 30, ~~2019,~~2020, has a remaining lease term of approximately ~~2.8~~1.8 years. ~~As disclosed in Note 3, the~~The Company adopted ASC 842 in the first quarter of 2019 and as a result of the adoption, the Company recognized a current operating lease liability of $0.1 million and a noncurrent operating lease liability of $0.2 million with a corresponding ~~Right-Of-Use (“ROU”)~~ROU asset of the combined amounts, which is based on the present value of the minimum rental payments of the lease. The discount rate used to account for the Company's operating lease under ASC 842 is the Company’s estimated incremental borrowing rate of 10%. The original term of the lease ends in the second quarter of 2022 and the Company has an option to extend for another 5five (5) years. This option to extend was not recognized as part of the Company's measurement of the ROU asset and operating lease liability as of June 30, ~~2019.~~

~~DIFFUSION PHARMACEUTICALS INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~2020.

Rent expense related to the Company's operating lease for both the three months ended June 30, ~~2019~~2020 and ~~2018~~2019 was approximately ~~$30,000 and $28,000, respectively.~~$30,000. Rent expense for the six months ended June 30, ~~2019~~2020 and ~~2018~~2019 was approximately ~~$50,000~~$60,000 and ~~$56,000,~~$50,000, respectively. Future minimum rental payments under the Company's non-cancelable operating lease at June 30, ~~2019~~2020 was as follows:

Rental
Commitments

2019
$ 57,547
2020
116,464
2021
118,519
2022
39,735
Total
332,265
Less: imputed interest
(40,416
)
$ 291,849

~~Future minimum rental payments under the Company's non-cancelable operating lease was as follows as of December 31, 2018:~~

	Rental Commitments		Rental Commitments
2019	$	114,409
2020		116,464		58,575
2021		118,519		118,519
2022		39,735		39,735
Total				216,829
Less: imputed interest				(21,950	)
	$	389,127	$	194,879

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

The Company has established a 401(k) defined contribution plan (the “401(k) Plan”) that covers all employees who qualify under the terms of the plan. Eligible employees may elect to contribute to the 401(k) Plan up to 90% of their compensation, limited by the IRS-imposed maximum. The Company provides a safe harbor match with a maximum amount of 4% of the participant’s compensation. The Company made matching contributions under the 401(k) Plan of approximately $14,000 and $20,000 for the three months ended June 30, 2020 and 2019, respectively and matched approximately $31,000 and $38,000 during the six months ended June 30, 2020 and 2019, respectively.

On August 7, 2014, a complaint was filed in the Superior Court of Los Angeles County, California by Paul Feller, the Company’s former Chief Executive Officer under the caption Paul Feller v. RestorGenex Corporation, Pro Sports & Entertainment, Inc., ProElite, Inc. and Stratus Media Group, GmbH (Case No. BC553996). The complaint asserts various causes of action, including, among other things, promissory fraud, negligent misrepresentation, breach of contract, breach of employment agreement, breach of the covenant of good faith and fair dealing, violations of the California Labor Code and common counts. The plaintiff is seeking, among other things, compensatory damages in an undetermined amount, punitive damages, accrued interest and an award of attorneys’ fees and costs. On December 30, 2014, the Company filed a petition to compel arbitration and a motion to stay the action. On April 1, 2015, the plaintiff filed a petition in opposition to the Company’s petition to compel arbitration and a motion to stay the action. After a hearing for the petition and motion on April 14, 2015, the Court granted the Company’s petition to compel arbitration and a motion to stay the action. On January 8, 2016, the plaintiff filed an arbitration demand with the American Arbitration Association. On November 19, 2018 at an Order to Show Cause Re Dismissal Hearing, the Court found sufficient grounds not to dismiss the case, and an arbitration hearing has been scheduled for November ~~2019.~~2020. The Company believes this matter is without merit and intends to defend the arbitration vigorously. Because this matter is in an early stage, the Company is unable to predict its outcome and the possible loss or range of loss, if any, associated with its resolution or any potential effect the matter may have on the Company’s financial position. Depending on the outcome or resolution of this matter, it could have a material effect on the Company’s financial position.

You should read the following discussion of our financial condition and results of operations together with the unaudited interim ~~condensed~~ consolidated financial statements and the notes thereto included elsewhere in this report and other financial information included in this report. The following discussion may contain predictions, estimates and other forward looking statements that involve a number of risks and uncertainties, including those discussed under “Part I — Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Special Note Regarding Forward Looking Statements” in this report and under “Part I — Item 1A. Risk Factors” in our annual report on Form 10-K for the fiscal year ended December 31, ~~2018.~~2019. These risks could cause our actual results to differ materially from any future performance suggested below.

We are a clinical stage biotechnology company developing new treatments for ~~life threatening~~life-threatening conditions by improving the body’s ability to bring oxygen to the areas where it is needed most. We are developing our lead product candidate, transcrocetinate sodium, also known as trans sodium crocetinate (“TSC”), for use in those ~~life threatening~~life-threatening conditions in which cellular oxygen deprivation (“hypoxia”) is the basis for significant unmet medical needs. TSC is designed to safely and selectively target and re-oxygenate the micro-environment of hypoxic cells, ~~and potentially be used~~with potential uses in many indications, including COVID-19, stroke, oncology, and ~~cardiovascular/stroke.~~cardiovascular disease.

A range of tissue types, including both normal and cancerous cells, ~~has~~have been shown to be safely re-oxygenated in our preclinical and clinical studies using TSC’s novel mechanism of action.

We believe TSC’s ability to re-oxygenate normal (i.e. non-cancerous) tissue that has become oxygen-deprived provides opportunities for new therapeutic approaches to conditions ranging from stroke and emergency medicine - including COVID-19 where multiple organ failure associated with Acute Respiratory Distress Syndrome (ARDS) is the leading cause of death - to cardiovascular and neurodegenerative diseases. In ~~oncology,~~the treatment of cancerous tissue, we believe TSC’s therapeutic potential to lessen the tumor's treatment resistance to radiation and chemo-therapy is not limited to one specific tumor type, thereby making it potentially useful to improve standard-of-care treatments in many life-threatening cancers. Given TSC's safety profile and animal data, we could, with appropriate funding, move directly into Phase 2 studies for TSC in ~~many such~~other cancers. The successful completion of trials for TSC or any other potential product candidate in these or any other indication is dependent upon our ability to further raise necessary capital.

We believe that TSC has potential applications in stroke and emergency medicine. ~~Approximately 800,000 strokes occur in the United States each year, with an estimated annual cost of $43.0 billion. The damage from~~In stroke, a stroke begins immediately upon onset: brain cell death begins at the beginning of a stroke. A stroke can take a significant toll on its victims. Among long-term stroke survivors, approximately 66% of stroke patients end up needing mental or physical rehabilitation, approximately 40% are classified as moderately to severely disabled after the initial few days of recovery, and approximately 10% of stroke patients require long-term care. A Phase 2 trial in cooperation with ~~UCLA~~the University of California Los Angeles (UCLA) and the University of Virginia (UVA) to test TSC in the treatment of acute ischemic or hemorrhagic stroke ~~has received approval for enrollment by~~is currently enrolling patients. Stroke is the ~~FDA, with the first enrolled patient expected~~5th leading cause of death in the ~~third quarter~~U.S. and the No. 1 cause of ~~2019. This~~adult disability. Our stroke trial, which ~~will feature~~features in-ambulance dosing of TSC, is named the PreH~~ospital~~ A~~cute~~ S~~troke~~ T~~herapy~~“PreHospital Acute Stroke Therapy - ~~TSC~~TSC” (PHAST - TSC) study, and is expected to enroll 160 patients, with 80 in the treatment arm and 80 in the control arm. We believe in-ambulance dosing of TSC ~~could~~will significantly cut the time in which the stroke-related oxygen deprivation to brain cells goes untreated, potentially leading to a better outcome for stroke victims treated in this ~~manner.In the last quarter of 2018, we received FDA permission to begin patient~~manner. Near term enrollment in this trial is expected to be minimal for the ~~PHAST -~~duration of the COVID-19 pandemic.

Patients with COVID-19 infections are at risk for developing ARDS, which can lead to death from systemic hypoxemia (general lack of oxygen to body tissue and vital organs) and we believe that TSC’s oxygen-enhancing mechanism could provide an important new treatment option. Our TSC/Covid-19 clinical development program will begin with an open-label Phase 1b lead-in trial which, if successful, will be followed by one or more randomized double-blinded clinical trials powered for statistical significance. The lead-in will test TSC ~~Phase 2 trial and~~in 24 hospitalized COVID-19 patients at the Romanian National Institute of Infectious Diseases (NIID). We expect to begin ~~enrollment~~dosing in this trial in the ~~third~~3rd quarter ~~2019. Subject~~of 2020 with data read-out in the fourth quarter of 2020. In addition to ~~receipt of adequate funding to support~~safety, the ~~PHAST -~~lead-in trial will collect data on possible increased oxygenation, thereby helping determine TSC dosing for follow-on studies.

Assuming positive results for the lead-in trial and following regulatory approvals, we ~~expect~~plan to begin a clinical trial program in the U.S. and Europe to study the safety and efficacy of TSC compared to placebo in a total of approximately 400 hospitalized COVID-19 patients. This clinical trial program will reflect the guidance received from both the US FDA and European regulatory agencies, with data ~~readout during the first half of 2021.~~availability presently targeted in about 18 months.

Our ~~primary~~ oncology program targets TSC against treatment-resistant brain cancer. A Phase 2 clinical program, completed in the second quarter of 2015, evaluated 59 patients with newly diagnosed glioblastoma multiforme (“GBM”), a particularly deadly form of primary brain cancer. GBM affects approximately 12,000 patients annually in the United States and approximately 35,000 patients annually worldwide. This open label, historically controlled study demonstrated a favorable safety and efficacy profile for TSC when combined with GBM’s standard of care, including a 37% improvement in overall survival over the control group at two years. A particularly strong efficacy signal was seen in the inoperable patients, where survival of TSC-treated patients at two years was increased by almost four-fold over the controls. In December 2017, ~~the Company~~we initiated the INvestigation of TSC Against Cancerous Tumors (INTACT) Phase 3 trial in the newly diagnosed inoperable GBM patient population. The trial is designed to enroll 236 patients in total, with 118 in the treatment arm and 118 in the control arm.

The trial began with an FDA-mandated open label 8 patient safety run-in for which enrollment has completed and is now closed. With the FDA’s permission, a total of 2219 patients were enrolled to ensure that at least 8 complete data ~~sets. We anticipate that data from this open label phase will~~sets meeting the FDA’s specified 4-month exposure period would be available ~~during~~for review. The INTACT Trial Data Safety Monitoring Board (DSMB) met in the third quarter of ~~2019.~~2019 and, based on their analysis, recommended that the study be continued. The DSMB concluded that no adverse safety signal had been observed, and unanimously recommended continuing the study as planned using the highest tested dose of TSC - 1.5 mg/kg - during the adjuvant treatment chemotherapy period with temozolomide. We believe that a preliminary efficacy signal was also received. A total of 10 patients were enrolled into the higher dose cohorts and 9 in the lower dose cohorts. In the higher dose patients, where the best results were expected, 3 discontinued treatment before meeting the FDA exposure period criteria. Of the 7 patients who met the criteria, 4 remain alive as of July 30, 2020. Commencement of enrollment in the randomization portion of the INTACT Phase 3 Trial is contingent upon our entering into a strategic partnership providing the necessary resources to undertake the full trial.

In addition to the TSC programs, we are exploring alternatives regarding how best to capitalize upon our product candidate RES-529, which may include possible out-licensing and other options. RES-529 is a novel PI3K/Akt/mTOR pathway inhibitor which has completed two Phase 1 clinical trials for age-related macular degeneration and was in preclinical development in oncology, specifically GBM. RES-529 has shown activity in both in vitro and in vivo glioblastoma animal models and has been demonstrated to be orally bioavailable and capable of crossing the ~~blood-brain~~blood brain barrier.

The spread of COVID-19 during the first half of 2020 has caused an economic downturn on a global scale, as well as significant volatility in the financial markets. In March 2020 the World Health Organization declared COVID-19 a pandemic. We have experienced some disruptions to clinical operations, including with respect to patient enrollment in our clinical trials, specifically related to our stroke trial. In this time of uncertainty as a result of the COVID-19 pandemic, we have taken precautionary measures and adjusted our operational needs. We are continuing to conduct trials at certain clinical trial sites while taking precautions to provide a safe work environment for our trial participants and employees. However, some in-person visits are currently on hold and other activities are being conducted remotely to the extent possible. We have also made internal resource allocation decisions in order to deliver on key business objectives and to increase our financial flexibility, including, for example, pausing the development of certain preclinical research programs, delaying the start of certain longer-term clinical studies, limiting staff hiring and reducing the number of contract workers, and delaying or limiting information technology and facilities infrastructure projects. We may have to take further actions that we determine are in the best interests of our trial participants and employees or as required by federal, state, or local authorities.

These changes will be reviewed based on future operating conditions and we will continue to take appropriate measures to address our changing needs. As the pandemic continues to unfold, the extent of the pandemic’s effect on our operational and financial performance will depend in large part on future developments, which cannot be predicted with confidence at this time. Future developments include changes in the duration, scope and severity of the pandemic, the actions taken to contain or mitigate its impact, the impact on governmental programs and budgets, the development of treatments or vaccines, and the resumption of widespread economic activity. Any prolonged material disruption on recruiting or retaining patients in our clinical trials, the ability of our suppliers to provide materials for our product candidates, or the regulatory review process could cause additional delays with respect to product development activities and could negatively impact our consolidated financial position, consolidated results of operations and consolidated cash flows.

In May ~~2019,~~2020, we completed ~~a public~~an offering (the “May 2020 Offering”) of ~~1,317,060~~11,428,572 shares of ~~the Common Stock and a private placement of warrants to purchase 1,317,060 shares of Common Stock. The shares of Common Stock and warrants were sold~~our common stock for a ~~combined~~ purchase price of ~~$4.895~~$1.05 per share for ~~total~~ net proceeds of ~~$5.6 million. The warrants are exercisable beginning on the date of their issuance until November 29, 2024 at an initial exercise price equal to $5.00.~~$10.3 million after deducting commissions, discounts and other offering costs. In addition, at the closing of ~~such offering,~~ the ~~Company~~May 2020 Offering, we issued warrants to purchase up to 571,429 shares of common stock to designees of the placement ~~agent warrants to purchase up to 65,853 shares of Common Stock.~~agent. The placement ~~agent’s~~agent's warrants have an exercise price of ~~$6.25~~$1.3125 per share and a term of five years from the date of ~~issuance~~issuance.

Additionally, in May 2020, we entered into a warrant exercise agreement with an investor (the “May 2020 investor warrant exercise”) who held an existing warrant to purchase up to an aggregate of 5,000,000 of our shares of common stock at an exercise price of $0.35 per share (the “Prior Warrant”). In consideration for the exercise of the Prior Warrants for cash and an additional $0.125 per each share of common stock underlying the Prior Warrant being exercised, the exercising investor received a new unregistered warrant to purchase up to an aggregate of 5,000,000 shares of common stock in a private placement. The warrant is exercisable immediately at an exercise price of $0.5263 per share and exercisable until November 8, 2025. In connection with the May 2020 investor warrant exercise, the Company issued 250,000 warrants to purchase shares of common stock to the placement agent with an exercise price of $0.5938 per share and which otherwise ~~substantially similar~~have identical terms to the ~~form of~~warrants issued to the ~~investor warrant.~~investor.

At June 30, ~~2019,~~2020, we had cash and cash equivalents of ~~$8.4~~$25.6 million. We have incurred operating losses since inception, have not generated any product revenue and have not achieved profitable operations. We incurred net losses of ~~$2.5~~$3.1 million and ~~$5.2~~$5.7 million for the three and six months ended June 30, ~~2019,~~2020, respectively. Our accumulated deficit as of June 30, ~~2019~~2020 was ~~$85.2~~$97.4 million, and we expect to continue to incur substantial losses in future periods. We anticipate that our operating expenses will increase substantially as we continue to advance our lead, clinical-stage product candidate, TSC. We anticipate that our expenses will substantially increase as we:

We intend to use our existing cash and cash equivalents for working capital and to fund the research and development of TSC. We believe that our cash and cash equivalents as of June 30, ~~2019~~2020, will enable us to fund our operating expenses and capital expenditure requirements into the ~~first~~fourth quarter of 2020. However, we will need to secure additional funding in the future, from one or more equity or debt financings, collaborations, or other sources, in order to carry out all of our planned research and development activities with respect to TSC and our other product candidates.2021.

We have not yet generated any revenue from product sales. We do not expect to generate revenue from product sales for the foreseeable future.

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

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

Since inception, we had incurred net losses and until 2018, we had not recorded any U.S. federal or state income tax benefits for the losses as they had been offset by valuation allowances. As a result of the change in net operating loss carryforward period associated with the Tax Cuts and Jobs Act (“the 2017 Tax Act”), weWe recognize income tax benefit ~~to reflect the adjustment allowed by the 2017 Tax Act~~ to utilize indefinite deferred tax liabilities as a source of income against ~~indefinite-lived~~indefinite lived portions of our deferred tax assets.

Results of Operations for Three Months Ended June 30, ~~2019~~2020 Compared to Three Months Ended June 30, ~~2018~~2019

The following table sets forth our results of operations for the three months ended June 30, ~~2019~~2020 and ~~2018.~~2019.

We recognized ~~$1.5~~$2.2 million in research and development expenses during the three months ended June 30, ~~2019~~2020 compared to ~~$1.4~~$1.5 million during the three months ended June 30, ~~2018.~~2019. The increase ~~in research and development expense~~ was attributable to a $0.6 million increase in costs associated with follow on work for our 19 patient run-in Phase 3 trial for GBM, a $0.3 million increase in expense related to our open-label Phase 1b lead-in trial for TSC in COVID-19 patients, and a $0.3 million increase in associated manufacturing costs as we ramp up the ~~commencement of~~trial. These increases were offset in part by a $0.5 million decrease in costs associated with the delay in our Phase 2 stroke trial ~~an increase in salary and manufacturing expense of $0.1 million, offset by a decrease of $0.6 million in expense related~~due to ~~our Phase 3 GBM trial.~~the COVID-19 pandemic.

General and administrative expenses were $1.5 million during the three months ended June 30, 2020 compared to $1.1 million during the three months ended June 30, ~~2019 compared~~2019. The increase in general and administrative expense was primarily due to ~~$1.7~~a $0.3 million increase in professional fees and a $0.1 million increase in salaries, wages and other costs.

We recognized income tax benefit of $0.5 million and $0.1 million during the three months ended June 30, ~~2018. Salaries~~2020 and ~~wages decreased by $0.1 million, professional fees decreased by $0.3 million and stock compensation expense decreased by $0.2 million.~~

~~The decrease in interest income for the three months ended June 30,~~ 2019, compared to the three months ended June 30, 2018 is primarily attributable to having a larger cash and cash equivalents balance earning more interest during the three months ended June 30, 2018 compared to the three months ended June 30, 2019.

~~As a result of the change in net operating loss carryforward period associated with the 2017 Tax Act, the Company recognized an income tax benefit of $0.1 million~~respectively, to reflect the utilization of indefinite deferred tax liabilities as a source of income against ~~indefinite-lived~~indefinite lived portions of our deferred tax assets.

Results of Operations for Six Months Ended June 30, ~~2019~~2020 Compared to Six Months Ended June 30, ~~2018~~2019

The following table sets forth our results of operations for the six months ended June 30, ~~2019~~2020 and ~~2018.~~2019.

We recognized ~~$3.2~~$3.7 million in research and development expenses during the six months ended June 30, ~~2019~~2020 compared to $3.2 million during the six months ended June 30, ~~2018. Although overall research and development expenses remained flat, there~~2019. The increase was ~~a $1.0 million increase in expense related~~attributable to ~~the commencement of our Phase 2 stroke trial, an increase in salary and manufacturing expense of $0.1 million, offset by a decrease of $1.1~~$0.3 million in expense related to our open-label Phase 1b lead-in trial for TSC in COVID-19 patients, a $0.4 million increase in associated manufacturing expense as we ramp up the trial, and a $0.2 million increase in costs associated with follow on work for our 19-patient Phase 3 ~~GBM trial.~~trial for GBM. These increases were offset in part by a $0.4 million decrease in costs associated with the delay in our Phase 2 stroke trial due to the COVID-19 pandemic.

General and administrative expenses were $2.9 million during the six months ended June 30, 2020 compared to $2.3 million during the six months ended June 30, ~~2019 compared to $3.2 million during the six months ended June 30, 2018.~~2019. The ~~decrease~~increase in general and administrative expense was primarily due to a ~~$0.3~~$0.5 million ~~decrease~~increase in professional ~~fees, a $0.2 million decrease in salaries and wages, and a $0.4 million decrease in stock-based compensation expense.~~fees.

~~The decrease in interest~~We recognized income ~~for the six months ended June 30, 2019 compared to the six months ended June 30, 2018 is primarily attributable to having a larger cash~~tax benefit of $0.9 million and ~~cash equivalents balance earning more interest~~$0.3 million during the six months ended June 30, ~~2018 compared to the six months ended June 30, 2019.~~

~~As a result of the change in net operating loss carryforward period associated with the 2017 Tax Act, we recognized an income tax benefit of $0.3 million during both the six months ended June 30,~~2020 and 2019, ~~and 2018~~respectively, to reflect the utilization of indefinite deferred tax liabilities as a source of income against ~~indefinite-lived~~indefinite lived portions of our deferred tax assets.

To date, we have funded our operations primarily through the issuance and sale of common stock and warrants, convertible debt and convertible preferred stock. In May ~~2019,~~2020, we completed ~~a public~~an offering of ~~1,317,060~~11,428,572 shares of our common stock for a purchase price of $1.05 per share for net proceeds of $10.3 million after deducting commissions, discounts and other offering costs. Additionally, during the ~~Common Stock and a private placement of~~six months ended June 30, 2020, investors exercised warrants to purchase ~~1,317,060~~17,965,290 shares of ~~Common Stock. The shares of Common Stock and warrants were sold~~our common stock for ~~a combined purchase price of $4.895 for total~~ net proceeds of ~~$5.6~~$7.8 million. The warrants are exercisable beginning on the date of their issuance until November 29, 2024 at an initial exercise price equal to $5.00. In addition, at the closing of such offering, the Company issued to designees of the placement agent warrants to purchase up to 65,853 shares of Common Stock. The placement agent’s warrants have an exercise price of $6.25 per share, a term of five years from the date of issuance and otherwise substantially similar terms to the form of the investor warrant.

As of June 30, ~~2019,~~2020, we had ~~$8.4~~$25.6 million in cash and cash equivalents, working capital of ~~$8.4~~$24.9 million and an accumulated deficit of ~~$85.2~~$97.4 million. We expect to continue to incur net losses for the foreseeable future. We intend to use our existing cash and cash equivalents to fund our working capital and research and development of our product candidates.

The following table sets forth our cash flows for the six months ended June 30, ~~2019~~2020 and ~~2018:~~2019:

Net cash used in operating activities of $6.6 million during the six months ended June 30, 2020 was primarily attributable to our net loss of $5.7 million, our change in deferred income taxes of $0.9 million and our net change in operating assets and liabilities of $0.5 million. These amounts were offset by $0.3 million in stock-based compensation expense, and $0.1 million in depreciation expense. The net change in our operating assets and liabilities is primarily attributable to an increase in our prepaid expenses, deposits and other current assets, which was slightly offset by an increase in accounts payable.

Net cash used in operating activities of $5.3 million during the six months ended June 30, 2019 was primarily attributable to our net loss of $5.2 million and our change in deferred income taxes of $0.3 million and our net change in operating assets and liabilities of $0.1 million. This amount was offset by $0.2 million in stock-based compensation expense and $0.1 million in depreciation expense.

Net cash ~~used in operating~~provided by financing activities ~~of $5.8~~was $18.0 million during the six months ended June 30, ~~2018~~2020, which was primarily attributable to our net loss of $6.1 million and our net change in operating assets and liabilities of $0.2 million. This amount was offset by $0.6 million in stock-based compensation expense and $0.1 million of depreciation expense. The net change in our operating assets and liabilities is primarily attributable to the ~~decrease~~$10.8 million in gross proceeds received upon the sale of our ~~accounts payable due to~~common stock and warrants plus $8.0 million in gross proceeds received from the ~~timing~~exercise of ~~payments to our vendors.~~

~~Financing Activities~~common stock warrants. These cash inflows were offset in part by the payment of $0.8 million in financing costs.

Net cash provided by financing activities was $5.6 million during the six months ended June 30, 2019, which was attributable to the $5.7 million in proceeds received upon the sale of our Common Stock and warrants, offset in part by approximately $0.1 million in payments for related ~~offering~~financing costs.

Net cash provided by financing activities was $9.9 million during the six months ended June 30, 2018, which was attributable to the $10.8 million in proceeds received upon the sale of our Common Stock, offset by approximately $0.4 million in payments for related offering costs. During the six months ended June 30, 2018, we repaid the outstanding balance of our convertible debt in the amount of approximately $0.6 million.

On December 13, 2018, we filed a Certificate of Amendment to our Certificate of Incorporation with the Secretary of State of the State of Delaware to effect a 1-to-15 reverse stock split (the “Reverse Stock Split”) of our common stock. No fractional shares were issued in connection with the Reverse Stock Split. Stockholders who otherwise would have been entitled to receive fractional shares of our common stock had their holdings rounded up to the next whole share. Proportional adjustments were made to our outstanding warrants, stock options, and other equity securities and to our 2015 Equity Incentive Plan, as amended, to reflect the Reverse Stock Split, in each case, in accordance with the terms thereof. Unless the context otherwise requires, all share and per share amounts in this quarterly report on Form 10-Q have been adjusted to reflect the Reverse Stock Split.

We expect to continue to incur substantial expenses and generate significant operating losses as we continue to pursue our business strategy of developing our lead product candidate, TSC, for use in the treatment of ~~GBM, stroke and other~~ hypoxia related indications. Our operations have consumed substantial amounts of cash since inception. We expect to continue to spend substantial amounts of cash to advance the clinical development of our product ~~candidates and to commercialize any product candidates for which we receive regulatory approval.~~candidates. At the current time, the bulk of our cash resources for clinical development is dedicated to the open-label Phase 31b lead-in trial for TSC in ~~inoperable GBM~~COVID-19 patients, and, to a lesser extent, the Phase 2 trial for TSC in acute stroke. While we believe we have adequate cash resources to continue operations into the ~~first~~fourth quarter of ~~2020,~~2021, we will need to raise additional funds in order to complete these trials. We do not expect to commence any clinical trials beyond these trials unless we are able to raise additional capital, enter into a strategic collaborations, or make alternative financing arrangements for any such trials. To date, we have funded our ongoing business operations and short-term liquidity needs, primarily through the sale and issuance of preferred stock, common stock and convertible debt. We expect to continue this practice for the foreseeable future, however, we may enter into strategic partnerships or transactions in order to fund our ongoing capital requirements.

As of June 30, ~~2019,~~2020, we did not have credit facilities under which we could borrow funds or any other sources of committed capital. We may seek to raise additional funds through various sources, such as equity and debt financings, or through strategic collaborations and license agreements. We can give no assurances that we will be able to secure additional sources of funds to support our operations, or if such funds are available to us, that such additional financing will be sufficient to meet our needs or be on terms acceptable to ~~us.~~us or that potential delays in clinical trials due to the impact of COVID-19 could increase the anticipated cost of completing our clinical trials. This risk may increase if economic and market conditions deteriorate. If we are unable to obtain additional financing when needed, we may need to terminate, significantly modify or delay the development of our product candidates and our operations, or we may need to obtain funds through collaborators that may require us to relinquish rights to our technologies or product candidates that we might otherwise seek to develop or commercialize independently. If we are unable to raise any additional capital in the near-term and/or we cannot significantly reduce our expenses and are forced to terminate our operations, investors may experience a complete loss of their investment.

To the extent that we raise additional capital through the sale of our common stock, the interests of our current stockholders may be diluted. Also, the Company’s outstanding warrants to purchase common stock, if exercised, will dilute the interests of our current stockholders. If we issue additional preferred stock or convertible debt securities, it could affect the rights of our common stockholders or reduce the value of our common stock or any outstanding classes of preferred stock. In particular, specific rights granted to future holders of preferred stock or convertible debt securities may include voting rights, preferences as to dividends and liquidation, conversion and redemption rights, sinking fund provisions, and restrictions on our ability to merge with or sell our assets to a third party. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through strategic collaborations in the future, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates or grant licenses.

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

The Critical Accounting Policies included in our Form 10-K for the year ended December 31, ~~2018,~~2019, filed with the SEC pursuant to Section 13 or 15(d) under the Securities Act on March ~~19, 2019~~17, 2020 have not changed.

This report includes forward-looking statements. We may, in some cases, use terms such as “believes,” “estimates,” “anticipates,” “expects,” “plans,” “intends,” “may,” “could,” “might,” “will,” “should,” “approximately” or other words that convey uncertainty of future events or outcomes to identify these forward-looking statements. Forward-looking statements appear in a number of places throughout this Quarterly Report and include statements regarding our intentions, beliefs, projections, outlook, analyses or current expectations concerning, among other things, our ongoing and planned preclinical development and clinical trials, the timing of and our ability to make regulatory filings and obtain and maintain regulatory and other approvals for our product candidates, our intellectual property position, our ability to maintain our Nasdaq listing, the degree of clinical utility of our products, particularly in specific patient populations, general business and market conditions, our ability to develop commercial functions, expectations regarding clinical trial data, our results of operations, the sufficiency of the Company’s cash, ~~needs,~~the Company’s need for and ability to obtain additional financing or partnering arrangements, financial condition, liquidity, prospects, growth and strategies, the industry in which we operate and the trends that may affect the industry or us.

By their nature, forward-looking statements involve risks and uncertainties because they relate to events, competitive dynamics and industry change, and depend on the economic circumstances that may or may not occur in the future or may occur on longer or shorter timelines than anticipated. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report or incorporated by reference, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from the forward-looking statements contained in this Quarterly ~~Report.~~Report or incorporated by reference. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Quarterly Report or incorporated by reference, they may not be predictive of results or developments in future periods.

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

You should also read carefully the factors described in the “Risk Factors” section of our Annual Report on Form 10-K filed with the SEC on March ~~19, 2019,~~17, 2020, as amended, and elsewhere in our public filings to better understand the risks and uncertainties inherent in our business and underlying any forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements contained or incorporated by reference in this Quarterly Report on Form 10-Q will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all.

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

This Item 3 is not applicable to us as a smaller reporting company and has been omitted.

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

There were no changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended) that occurred during the quarter ended June 30, ~~2019~~2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A - “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, which could materially affect our business, financial condition or future results.

AsEvents outside of our control, including public health crises such as the COVID-19 pandemic, could negatively affect our business and our operating results.

The novel coronavirus (“COVID-19”) pandemic has resulted in significant financial market volatility, and its impact on the global economy and our operations remains uncertain. While we have business continuity plans in place to help mitigate the impact of COVID-19[kcannavo1] , a continuation or worsening of the ~~date~~pandemic could have a material adverse impact on our business, results of ~~this Quarterly Report~~operations and financial condition and on ~~Form 10-Q, there~~the market price of our common stock.

On March 12, 2020, the World Health Organization declared COVID-19 to be a pandemic. In an effort to contain and mitigate the spread of COVID-19, many countries worldwide have imposed quarantines, business closures and unprecedented restrictions on travel. The outbreak and government measures taken in response, have had a significant impact, both direct and indirect, on economic activity, as worker shortages have occurred, supply chains have been nodisrupted, facilities and production have been suspended and demand for certain goods and services, such as medical services and supplies, has spiked, while demand for other goods and services has fallen.

As the pandemic continues, and if conditions worsen, [we expect to experience additional adverse effects on our operational activities and our financial condition. It is unclear which adverse effects may be material, ~~changes~~and it remains uncertain the degree to which these adverse effects would impact our future operational activities and financial condition even if conditions begin to improve.] With the recent relaxation of restrictions on business operations and in-person gatherings there has been a resurgence in COVID-19 infections in numerous jurisdictions, resulting in the reinstatement of stricter restrictions and shutdowns. It is expected that there will be an ebb and flow to the pandemic with different jurisdictions having higher levels of infections than others over the course of the pandemic. In addition to existing travel restrictions, jurisdictions may continue or reinstate border closures, impose or reimpose prolonged quarantines and further restrict travel and business activity,

As a result of the ongoing COVID-19 pandemic, we [have experienced and may continue to experience] disruptions that could severely impact our business and clinical trials, including:

Any negative impact that the COVID-19 pandemic has had or will continue to have on recruiting or retaining patients in our clinical trials, the ability of our suppliers to provide materials for our product candidates, or the regulatory review process could cause additional delays with respect to product development activities, which could materially and adversely affect our ability to obtain regulatory approval for and to commercialize our product candidates, increase our operating expenses, affect our ability to raise additional capital, and have a material adverse effect on our financial results. In addition, our clinical trial patients who contract COVID-19 may have adverse health outcomes that could impact the ~~Company’s risk factors previously disclosed~~results of our clinical trials[kcannavo2] .

The COVID-19 pandemic has resulted in significant financial market volatility and uncertainty and continues to rapidly evolve. The extent to which the outbreak impacts our business and clinical trials will depend on ~~Form 10-K~~future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, new information that may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others. A continuation or worsening of the levels of market disruption and volatility seen in the recent past could have an adverse effect on our ability to access capital, on our business, results of operations and financial condition, and on the market price of our common stock.

We face risks related to the planned clinical program to test TSC as a treatment for COVID-19, which has not been approved by the FDA or any other regulatory authority.

In response to the recent global outbreak of COVID-19, on April 24, 2020, we submitted a Pre-IND to the FDA related to a planned clinical program using TSC in COVID-19 patients displaying severe respiratory symptoms and low oxygen levels, which received an accelerated review by the FDA under its Coronavirus Treatment Acceleration Program. We submitted our IND application for the ~~year ended December 31, 2018.~~COVID-19 clinical program on July 7, 2020, which incorporates pre-IND regulatory guidance from the FDA. Clinical trial start-up preparations are continuing as our IND submission is under review. The estimated timing of regulatory approval is based on factors beyond our control, including but not limited to, unforeseen scheduling difficulties and unfavorable results at various stages in the pre-market application process. This FDA approval or clearance process may be time-consuming and costly. Moreover, there is no guarantee that the IND submission will ultimately be acceptable to the FDA. Even if the IND is approved by the FDA, there can be no assurance as to when the FDA might provide such approved or when the program might be able to commence, if at all. We intend to work closely with the FDA to determine the best path forward to obtain approval, but we cannot guarantee that these efforts will be successful. Even if FDA approval for trials evaluating TSC for the treatment of ARDS is ultimately granted and we are able to move forward with clinical trials, such trials may entail significant additional time, effort and expense, particularly in light of the difficulty of doing business during the COVID-19 pandemic. In addition, there is no assurance of favorable results from any clinical trials, or that one or more of such trials will be completed in the currently anticipated timelines or at all. Further, we may make a strategic decision to discontinue clinical testing of TSC in COVID-19 patients, including in the event that other parties are successful in developing a more effective treatment for COVID-19.

We have committed significant capital and resources to begin funding and supplying the clinical trials for the COVID-19 program. If we are unable to obtain regulatory approvals, or if clinical trials fail to demonstrate the clinical safety profile or the efficacy of TSC for the treatment of ARDS in COVID-19 patients, or if we make a strategic decision to discontinue testing TSC as a treatment for COVID-19 patients, we will be unable to recoup our significant expenses incurred to date and in the future related to the clinical program and the FDA approval process.

The Bylaws of the Company include a forum selection clause, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or agents.

Our Bylaws (the “Bylaws”) require that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim for breach of a fiduciary duty owed by any of our directors, officers, employees or agents to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, our Certificate of Incorporation or our Bylaws or (iv) any action asserting a claim governed by the internal affairs doctrine, in each case subject to said Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein.

This exclusive forum provision will not apply to claims under the Exchange Act, but will apply to other state and federal law claims including actions arising under the Securities Act (although our stockholders will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder). Section 22 of the Securities Act, however, creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. Accordingly, there is uncertainty as to whether a court would enforce such a forum selection provision as written in connection with claims arising under the Securities Act. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock is deemed to have notice of and consented to the foregoing provisions. This forum selection provision in our Bylaws may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or agents, which may discourage lawsuits against us and such persons. It is also possible that, notwithstanding the forum selection clause included in our Bylaws, a court could rule that such a provision is inapplicable or unenforceable.

~~None.~~In May 2020, the Company entered into a warrant exercise agreement with an investor (the “May 2020 investor warrant exercise”) who held existing warrants to purchase up to an aggregate of 5,000,000 shares of our common stock at an exercise price of $0.35 per share (the “Prior Warrant”). In consideration for the exercise of the Prior Warrant for cash and an additional $0.125 per each share of common stock underlying the Prior Warrant being exercised, the exercising investor received a new unregistered warrant to purchase up to an aggregate of 5,000,000 shares of common stock in a private placement. The warrants are exercisable immediately at an exercise price of $0.5263 per share and exercisable until November 8, 2025.

In connection with the May 2020 investor warrant exercise, the Company issued warrants to purchase up to 250,000 shares of common stock to the placement agent with an exercise price of $0.5938 per share and which otherwise have identical terms to the warrants issued to the investor.

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	June 30, 2019			December 31, 2018			June 30, 2020			December 31, 2019
Assets
Current assets:
Cash and cash equivalents	$	8,372,741		$	7,991,172		$	25,561,599		$	14,177,349
Prepaid expenses, deposits and other current assets		1,036,753			923,059			1,147,174			472,464
Total current assets		9,409,494			8,914,231			26,708,773			14,649,813
Property and equipment, net		297,619			350,281			198,325			252,366
Intangible asset		8,639,000			8,639,000			8,639,000			8,639,000
Right of use asset		291,849			—			194,879			247,043
Other assets		291,176			298,480			252,149			322,301
Total assets	$	18,929,138		$	18,201,992		$	35,993,126		$	24,110,523
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	489,133		$	198,818		$	1,354,948		$	1,251,412
Accrued expenses and other current liabilities		443,437			605,226			317,075			358,532
Current operating lease liability		110,473			—			109,808			111,477
Total current liabilities		1,043,043			804,044			1,781,831			1,721,421
Deferred income taxes		1,527,133			1,786,389			1,249,569			2,119,274
Noncurrent operating lease liability		181,376			—			85,071			135,566
Total liabilities		2,751,552			2,590,433			3,116,471			3,976,261
Commitments and Contingencies (Note 7)
Stockholders’ Equity:
Common stock, $0.001 par value:
1,000,000,000 shares authorized; 4,693,290 and 3,376,230 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively		4,694			3,377
1,000,000,000 shares authorized; 63,998,298 and 33,480,365 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively								63,999			33,481
Additional paid-in capital		101,340,798			95,532,881			130,220,772			111,824,859
Accumulated deficit		(85,167,906	)		(79,924,699	)		(97,408,116	)		(91,724,078	)
Total stockholders' equity		16,177,586			15,611,559			32,876,655			20,134,262
Total liabilities and stockholders' equity	$	18,929,138		$	18,201,992		$	35,993,126		$	24,110,523

	Six Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2020			2019
Operating activities:
Net loss	$	(5,243,207	)	$	(6,079,142	)	$	(5,684,038	)	$	(5,243,207	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		52,662			54,727			54,041			52,662
Stock-based compensation expense		240,284			644,436			304,824			240,284
Common stock issued for advisory services		—			25,000
Change in deferred income taxes		(259,256	)		(267,932	)		(869,705	)		(259,256	)
Changes in operating assets and liabilities:
Prepaid expenses, deposits and other assets		(106,390	)		185,487			(604,558	)		(106,390	)
Accounts payable, accrued expenses and other liabilities		48,320			(391,861	)		151,411			48,320
Net cash used in operating activities		(5,267,587	)		(5,829,285	)		(6,648,025	)		(5,267,587	)

Cash flows provided by financing activities:
Repayment of convertible debt principal		—			(550,000	)
Proceeds from the sale of common stock		5,731,779			10,846,062			10,827,100			5,731,779
Payment of offering costs		(82,623	)		(428,542	)
Proceeds from the exercise of common stock warrants								8,038,603			—
Payment of financing costs								(833,428	)		(82,623	)
Net cash provided by financing activities		5,649,156			9,867,520			18,032,275			5,649,156

Net increase in cash and cash equivalents		381,569			4,038,235			11,384,250			381,569
Cash and cash equivalents at beginning of period		7,991,172			8,896,468			14,177,349			7,991,172
Cash and cash equivalents at end of period	$	8,372,741		$	12,934,703		$	25,561,599		$	8,372,741

Supplemental disclosure of cash flow information
Cash paid for interest	$	—		$	40,142
Supplemental disclosure of non-cash investing and financing activities:
Reclassification of accrued dividends related to the issuance of common stock to Series A convertible preferred stockholders	$	—		$	1,148,307
Offering costs in accounts payable	$	80,206		$	—		$	148,900		$	80,206
Series A cumulative preferred dividends	$	—		$	85,993
Operating lease right of use asset and current and noncurrent liability	$	334,205		$	—		$	—		$	334,205

	June 30, 2019		December 31, 2018		June 30, 2020		December 31, 2019
Accrued payroll and payroll related expenses		277,439		409,889		252,194		182,708
Accrued professional fees		31,000		69,231		—		48,338
Accrued clinical studies expenses		84,211		34,000		52,705		57,378
Other accrued expenses		50,787		92,106		12,176		70,108
Total	$	443,437	$	605,226	$	317,075	$	358,532

	Number of Options			Weighted average exercise price per share		Weighted average remaining contractual life (in years)
Balance at January 1, 2019		203,736		$	88.14
Granted		117,270			2.62
Forfeited		(11,583	)		83.81
Expired		(147	)		276.00
Outstanding at June 30, 2019		309,276		$	55.78		7.48
Exercisable at June 30, 2019		187,910		$	87.96		6.17

	Number of Options			Weighted average exercise price per share		Weighted average remaining contractual life (in years)
Balance at January 1, 2020		309,276		$	55.78
Granted		1,118,700			0.58
Expired		(147	)		142.50
Outstanding at June 30, 2020		1,427,829		$	12.53		8.9
Exercisable at June 30, 2020		660,504		$	26.17		8.2

	Convertible Preferred Stock					Stockholders' Equity
	Series A					Common Stock				Additional Paid-in			Accumulated			Total Stockholders'
	Shares			Amount		Shares		Amount		Capital			Deficit			Equity
Balance at January 1, 2018		8,306,278		$	—		967,976	$	968	$	82,783,865		$	(61,554,889	)	$	21,229,944
Conversion of Series A convertible preferred stock to common stock		(8,306,278	)		—		553,752		554		(554	)		—			—
Issuance of common stock to Series A convertible preferred stockholders under make-whole adjustment feature		—			—		777,895		778		(778	)		—			—
Issuance of common stock related to accrued dividends		—			—		68,815		69		1,148,238			—			1,148,307
Series A cumulative preferred dividend		—			—		—		—		(85,993	)		—			(85,993	)
Issuance of common stock and warrants, net of issuance costs		—			—		1,000,000		1,000		10,416,520			—			10,417,520
Stock-based compensation expense		—			—		—		—		324,667			—			324,667
Net loss		—			—		—		—		—			(3,313,961	)		(3,313,961	)
Balance at March 31, 2018		—		$	—		3,368,438	$	3,369	$	94,585,965		$	(64,868,850	)	$	29,720,484
Common stock issued for advisory services		—			—		3,031		3		24,997						25,000
Stock-based compensation expense		—			—		—		—		319,769			—			319,769
Net loss		—			—		—		—		—			(2,765,181	)		(2,765,181	)
Balance at June 30, 2018		—		$	—		3,371,469	$	3,372	$	94,930,731		$	(67,634,031	)	$	27,300,072

	Outstanding		Range of exercise price per share			Expiration dates
Common stock warrants issued prior to 2016		1,767	$562.50	-	$735.00	2019
Common stock warrants issued related to Series A convertible preferred stock offering		903,870	$33.30			March 2022
Common stock warrants issued in 2018		1,181,375	$12.00	-	$15.00	January 2023
Common stock warrants issued in 2019		1,382,913	$5.00	-	$6.25	2024
		3,469,925

	2019			2018
Expected term (in years)		5.57			5.57
Risk-free interest rate		2.2	%		2.4	%
Expected volatility		113.4	%		114.7	%
Dividend yield		—	%		—	%

	2020
Expected term (in years)		5.59
Risk-free interest rate		1.3	%
Expected volatility		115.1	%
Dividend yield		—	%

	Rental Commitments
2019	$	57,547
2020		116,464
2021		118,519
2022		39,735
Total		332,265
Less: imputed interest		(40,416	)
	$	291,849

	Three Months Ended June 30, 2019									Three Months Ended June 30
	2019			2018			Change			2020			2019			Change
Operating expenses:
Research and development	$	1,518,381		$	1,391,113		$	127,268		$	2,173,183		$	1,518,381		$	654,802
General and administrative		1,068,452			1,660,630			(592,178	)		1,458,257			1,068,452			389,805
Depreciation		34,390			26,709			7,681			27,021			34,390			(7,369	)
Loss from operations		2,621,223			3,078,452			(457,229	)		3,658,461			2,621,223			1,037,238
Other income:
Interest income		(16,921	)		(45,339	)		28,418			(25,913	)		(16,921	)		(8,992	)
Loss from operations before income tax benefit		(2,604,302	)		(3,033,113	)		428,811			(3,632,548	)		(2,604,302	)		(1,028,246	)
Income tax benefit		(108,904	)		(267,932	)		159,028			(507,325	)		(108,904	)		(398,421	)
Net loss	$	(2,495,398	)	$	(2,765,181	)	$	269,783		$	(3,125,223	)	$	(2,495,398	)	$	(629,825	)

	Six Months Ended June 30,						Six Months Ended June 30,
Net cash (used in) provided by:	2019			2018			2020			2019
Operating activities	$	(5,267,587	)	$	(5,829,285	)	$	(6,648,025	)	$	(5,267,587	)
Financing activities		5,649,156			9,867,520			18,032,275			5,649,156
Net increase in cash and cash equivalents	$	381,569		$	4,038,235		$	11,384,250		$	381,569

	●	our ability to obtain additional financing;

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

	●	our ability to enroll subjects in our clinical trials at anticipated rates;

	●	the success and timing of our preclinical studies and clinical trials;


	●	the difficulties in obtaining and maintaining regulatory approval;

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

	●	our plans and ability to develop and commercialize our product candidates;

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

	●	the accuracy of our estimates of the size and characteristics of the potential markets for our product candidates and our ability to serve those markets;

	●	regulatory developments in the United States and foreign countries;

	●	the rate and degree of market acceptance of any of our product candidates;

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

	●	our ability to operate our business without infringing the intellectual property rights of others;

	●	recently enacted and future legislation regarding the healthcare system;

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

	●	the ability of the Company to continue as a going concern.

	●	the success of competing products that are or may become available; and

	●	the performance of third parties, including contract research organizations and manufacturers.

	•	interruption or delays in the operations of the FDA or other regulatory authorities, which may impact review and approval timelines;

	•	interruption of, or delays in receiving, supplies for productions of our product candidates from our third party suppliers due to staffing shortages, production slowdowns or stoppages and disruptions in delivery systems;

Exhibit No.	Description	Method of Filing
4.1	Form of May 2020 exercise Warrant	Incorporated by reference to Exhibit 4.1 to the registrant’s current report on Form 8-K filed on May 8, 2020
4.2	Form of May 2020 Placement Agent’s Exercise Warrant	Incorporated by reference to Exhibit 4.2 to the registrant’s current report on Form 8-K filed on May 8, 2020
4.3	Form of May 2020 Placement Agent’s Public Offering Warrant	Incorporated by reference to Exhibit 4.1 to the registrant’s current report on Form 8-K filed on May 20, 2020
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and SEC Rule 13a-14(a)	Filed herewith
31.2	Certification of principal financial officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and SEC Rule 13a-14(a)	Filed herewith
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Furnished herewith
32.2	Certification of principal financial officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Furnished herewith
101	The following materials from Diffusion’s quarterly report on Form 10-Q for the quarter ended June 30, ~~2019,~~2020 formatted in XBRL (Extensible Business Reporting Language): (i) the Unaudited ~~Condensed~~ Consolidated Balance Sheets, (ii) the Unaudited ~~Condensed~~ Consolidated Statements of Operations, (iii) the Unaudited ~~Condensed~~ Consolidated Statement of Changes in Stockholders’ Equity (Deficit), (iv) the Unaudited ~~Condensed~~ Consolidated Statements of Cash Flows, and (v) Notes to Unaudited ~~Condensed~~ Consolidated Financial Statements	Filed herewith

		DIFFUSION PHARMACEUTICALS INC.



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


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