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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

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

 

For the quarterly period ended SeptemberJune 30, 20222023

 

☐

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

 

For the transition period from ___________ to ______________.

 

Commission file number: 000-24477001-37942

 

 

DIFFUSION PHARMACEUTICALS INC.

(Exact name of registrant as specified in its charter)

 

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

 

300 East Main Street, Suite 201
101

Charlottesville, VA 22902

(Address of principal executive offices, including zip code)

 

(434) 220-0718

(Registrant’s telephone number including area code)

 

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

 

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

None

 

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

 

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

 

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

 

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

 

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

 

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

 

The number of shares of common stock outstanding at November 14, 2022August 7, 2023 was 2,039,4422,040,287 shares.

Note Regarding Forward-Looking Statements

This Quarterly Report (including, for purposes of this Note Regarding Forward-Looking Statements, any information or documents incorporated herein by reference) includes express and implied forward-looking statements. By their nature, forward-looking statements involve risks and uncertainties because they relate to events, competitive dynamics and industry change, and depend on the economic circumstances that may or may not occur in the future or may occur on longer or shorter timelines than anticipated. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition, liquidity, and prospects may differ materially from the forward-looking statements contained in this Quarterly Report. In addition, even if our results of operations, financial condition, liquidity, and prospects are consistent with the forward-looking statements contained in this Quarterly Report, they may not be predictive of actual results or reflect unanticipated developments in future periods.

Forward-looking statements appear in a number of places throughout this Quarterly Report .Report. We may, in some cases, use terms such as “believes,” “estimates,” “anticipates,” “expects,” “plans,” “intends,” “may,” “could,” “might,” “will,” “should,” “approximately,” or other words that convey uncertainty of future events or outcomes to identify these forward-looking statements. Forward-looking statements also include statements regarding our intentions, beliefs, projections, outlook, analyses or expectations concerning, among other things:

As a result of these and other factors, known and unknown, actual results could differ materially from our intentions, beliefs, projections, outlook, analyses, or expectations expressed in any forward-looking statements in this Quarterly Report. Accordingly, we cannot assure you that the forward-looking statements contained or incorporated by reference in this Quarterly Report will prove to be accurate or that any such inaccuracy will not be material. You should also understand that it is not possible to predict or identify all such factors, and you should not consider any such list to be a complete set of all potential risks or uncertainties. In light of the foregoing and the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. For all forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

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

Note Regarding Trademarks, Trade Names and Service Marks

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

PART I – FINANCIAL INFORMATION

Diffusion Pharmaceuticals Inc.

Consolidated Balance Sheets

(unaudited)

See accompanying notes to unaudited interim consolidated financial statements.

Diffusion Pharmaceuticals Inc.

Consolidated Statements of Operations and Comprehensive Loss

(unaudited)

See accompanying notes to unaudited interim consolidated financial statements.

Diffusion Pharmaceuticals Inc.

Consolidated StatementStatements of Changes in Stockholders' Equity

Three and NineSix Months Ended SeptemberJune 30, 20212022 and 20222023

(unaudited)

See accompanying notes to unaudited interim consolidated financial statements.

Diffusion Pharmaceuticals Inc.

Consolidated Statements of Cash Flows

(unaudited)

See accompanying notes to unaudited interim consolidated financial statements.

DIFFUSION PHARMACEUTICALS INC.

Diffusion Pharmaceuticals Inc., a Delaware corporation, is a biopharmaceutical company that has historically focused on developing novel therapies that may enhance the body’s ability to deliver oxygen to areas where it is needed most. The Company’s leadmost advanced product candidate, TSC, is beinghas been investigated and developed to enhance the diffusion of oxygen to tissues with low oxygen levels, also known as hypoxia, a serious complicationmost recently as an adjuvant treatment to standard of many of medicine’s most intractablecare therapy for GBM and difficult-to-treat conditions, includingother hypoxic solid tumors like GBM. In October 2022, tumors. On March 30, 2023, Diffusion, Merger Sub and EIP entered into the Company announced that its Board has authorized a thorough review and evaluationMerger Agreement, pursuant to which, among other things, subject to the satisfaction or waiver of a range of potential strategic opportunitiesthe conditions set forth in the interestMerger Agreement, Merger Sub will merge with and into EIP, with EIP surviving the merger as the wholly-owned subsidiary of enhancingthe combined company. Diffusion has called a special meeting of stockholders currently scheduled for August 15, 2023 in order to obtain the stockholder value including transactional opportunitiesapprovals necessary to better leveragecomplete the potential of TSCMerger and the Company’s other assets.

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

Merger Proxy Statement.

The Company has not generated any revenues from product sales and has historically funded operations primarily from the proceeds of public and private offerings of equity, convertible debt, and convertible preferred stock.

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

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

Merger is closed. The Company regularly explores alternative means of financing its operations and seeks funding through various sources, including public and private securities offerings, collaborative arrangements with third parties, and other strategic alliances and business transactions. TheHowever, as of the date of this Quarterly Report, the Company does not have any commitments to obtain additional funds and may no assurance can be unable to obtain sufficient fundinggiven that any such financing will be available in the future — when needed, in sufficient amounts, on acceptable terms, ifor at all. If the Company cannot obtain the necessary funding, it willmay need to, among other things, delay, continue to scale back or eliminate some or all of its research and development programs, modify its overall development strategy for one or enter into collaborations with third parties to commercialize potential products or technologies thatmore product candidates (or the Company as a whole) in a manner it might otherwise seek to develop or commercialize independently; consider other various strategic alternatives, including a merger or sale of the Company;would not if sufficient cash resources were available, or cease operations. If the Company engages in collaborations, it may receive lower consideration upon commercialization of such products than if it had not entered such arrangements or if it entered into such arrangements at later stages in the product development process.

In July 2022, the Company entered into an at-the-market sales agreement (the "2022 Sales Agreement") with BTIG, LLC, ("BTIG") as agent, pursuant to which the Company may sell up to an aggregate of $20.0 million in shares of the Company’s common stock, from time to time through BTIG, by any method permitted that is deemed an “at the market offering” as defined in Rule 415(a)(4) under the Securities Act of 1933, as amended. To date, the Company has not sold any shares pursuant to the 2022 Sales Agreement.operations altogether.

Operations of the Company are subject to certain additional risks and uncertainties as well, and any one or more of these factors could materially affect the Company’s financial condition, future operations and liquidity needs. Many of these risks and uncertainties are outside of the Company’s control, including the outcome of its pending merger with EIP and various internal and external factors that willmay affect whether and when the Company’s product candidates become approved drugs and how significant their market share will be, some of which are outsidesuccess or failure of the Company’s control. TheCompany's research and development efforts, the length of time and cost of developing and commercializing thesethe Company's current or future product candidates, and/or failure of them atwhether and when any stage of the drug approval processsuch product candidates become approved drugs, and how significant a drug's market share will materially affect the Company’s financial condition and future operations. The Company currently expects that its existing cash, cash equivalents and marketable securities as of September 30,2022 will enable it to fund its operating expenses and capital expenditure requirements into the first quarter of 2024, subject to the outcome and timing of the Company's ongoing strategic review process.be, if approved, among others.

DIFFUSION PHARMACEUTICALS INC.

Without giving effect to the consummation of the proposed Merger with EIP, the Company currently expect that its existing cash and cash equivalents as of June 30, 2023 are sufficient to fund current operations for at least 12 months following the date of this Quarterly Report.

TheAs of the date of this Quarterly Report, the Summary of Significant Accounting Policies included in the Company's Annual Report for the year ended December 31, 2021 have not materially changed.

Basis of Presentation

The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with GAAP for interim financial information as found in the ASC and ASUs of the FASB, and with the instructions to Form 10-Q10-Q and Article 10 of Regulation S-XS-X promulgated by the SEC. In the opinion of management, the accompanying unaudited interim consolidated financial statements of the Company include all normal and recurring adjustments (which consist primarily of accruals, estimates and assumptions that impact the unaudited interim consolidated financial statements) considered necessary to present fairly the Company’s financial position as of September June 30,2022, 2023, and its results of operations for the three and ninesix months ended September June 30,2022 2023 and 20212022 and cash flows for the ninesix months ended September June 30,2022 2023 and 2021.2022. Operating results for the ninesix months ended September June 30,2022 2023 are not necessarily indicative of the results that may be expected for the year ending December 31,2022. 2023. The unaudited interim consolidated financial statements presented herein do not contain the required disclosures under GAAP for annual financial statements. The accompanying unaudited interim consolidated interim financial statements should be read in conjunction with the annual audited financial statements and related notes as of and for the year ended December 31,2021 2022 filed with the SEC as part of the Company's Annual Report.Report on Form 10-K.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period.

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

Fair Value of Financial Instruments

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

Concentration of Credit Risk

Financial instruments that potentially exposesubject the Company to significant concentrations of credit risk consist principallyprimarily of cash, on deposit with multiplecash equivalents, and marketable securities. The Company maintains deposits in federally insured financial institutions the balancesin excess of which frequently exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to significant risk on its cash, cash equivalents, and marketable securities.

Cash and Cash Equivalents

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

Marketable Securitiessecurities

The Company classifies its marketable securities as available-for-sale, which include commercial paper and U.S. government debt securities with original maturities of greater than three months from date of purchase. The Company considers its marketable securities as available for use in current operations, and therefore classifyclassifies these securities as current assets on the consolidated balance sheet. These securities are carried at fair value, with unrealized gains and losses reported in comprehensive loss and accumulated other comprehensive loss within stockholders’ equity. Gains or losses on marketable securities sold will beare based on the specific identification method.

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

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Reverse Stock SplitResearch and Development

On April 18, 2022, 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.

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

Patent Costs

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

Stock-based Compensation

The Company filedmeasures stock-based awards at grant-date fair value and records compensation expense on a Certificate of Amendment to its Certificate of Incorporation, as amended, withstraight-line basis over the Secretary of Statevesting period of the Stateaward. The Company uses the Black-Scholes model to value its stock option awards. Estimating the fair value of Delawarestock option awards requires management to implementapply judgment and make estimates, including the Reverse Stock Split at a ratiovolatility of 1-to-50. No fractional shares were issued in connection with the Reverse Stock Split. Stockholders who otherwise would have been entitled to receive fractional shares ofCompany’s common stock, became entitled to receive an amount in cash (without interest or deduction) equal to the fractionexpected term of one share to which such stockholder would otherwise be entitled multiplied by $12.93, representing the split-adjusted average closing priceCompany’s stock options, the expected dividend yield and the fair value of the Company’s common stock on the Nasdaq Capital Marketmeasurement date. As a result, if factors change and management uses different assumptions, stock-based compensation expense could be materially different for future awards.

For stock option grants, the five consecutive trading days immediately precedingexpected term was estimated using the effective date“simplified method” for employee options as the Company has limited historical information to develop reasonable expectations about future exercise patterns and post vesting employment termination behavior for its stock option grants. The simplified method is based on the average of the Reverse Stock Split. Proportional adjustments were madevesting tranches and the contractual life of each grant. The Company uses the simplified method to estimate the expected term.

For stock price volatility, the Company uses a combination of its own historical stock price and comparable public companies as a basis for its expected volatility to calculate the fair value of option grants. The Company assumes no dividend yield because dividends are not expected to be paid in the near future, which is consistent with the Company’s outstanding warrants, stock options, and other equity securities, as well as tohistory of not paying dividends. The risk-free interest rate is based on U.S. Treasury notes with a term approximating the reserveexpected term of shares availablethe option. The Company accounts for future issuance underforfeitures in the 2015 Equity Plan, to reflect the Reverse Stock Split,periods in each case, in accordance with the respective terms thereof.which they occur.

Net Loss Per Common Share

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

The following potentially dilutive securities outstanding as of September 30,2022 and 2021 have been excluded from the computation of diluted weighted average shares outstanding, as they would be anti-dilutive:

Recently Adopted Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13,2016-13, Financial Instruments—Credit Losses, Measurement of Credit Losses on Financial Instruments (Topic 326)326). The standard amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. For available-for-sale debt securities, entities will be required to recognize an allowance for credit losses rather than a reduction in carrying value of the asset. Entities will no longer be permitted to consider the length of time that fair value has been less than amortized cost when evaluating when credit losses should be recognized. This newThe Company adopted the guidance is effective for the Companyusing a modified retrospective approach as of January 1, 2023. 2023 which resulted in no cumulative-effect adjustment to retained earnings.

The updated guidance in ASU 2016-13 also amended the previous other-than-temporary impairment (“OTTI”) model for available-for-sale fixed income securities by requiring the recognition of impairments relating to credit losses through an allowance account and limits the amount of credit loss to the difference between a security’s amortized cost basis and its fair value. In addition, the length of time a security has been in an unrealized loss position will no longer impact the determination of whether a credit loss exists. The Company is currently evaluatingadopted the impactguidance related to available-for-sale fixed income securities on January 1, 2023 using a prospective transition approach for available-for-sale fixed income securities that were purchased with credit deterioration or had recognized an OTTI write-down prior to the effective date. The effect of this ASU but does not expect that adoption of this standard will have a material impact on the consolidated financial statementsprospective transition approach was to maintain the same amortized cost basis before and related disclosures.

after the effective date.

DIFFUSION PHARMACEUTICALS INC.

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

The following is a summary of the Company's marketable securities as of September 30,2022:as of the date indicated:

The Company did not have anyhad no marketable securities as of December 31, 2021. The Company's marketable securities generally have contractual maturity dates between 3 and 12 months. All of the Company’s marketable securities are in an unrealized loss position at September June 30,2022. Unrealized losses on marketable securities as of September 30,2022 were not significant and were primarily due to changes in interest rates, and not due to increased credit risks associated with specific securities. Accordingly, no other-than-temporary impairment was recorded for the nine months ended September 30,2022 and there were no realized gains or losses recorded during the nine months ended September 30,2021.

2023.

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

DIFFUSION PHARMACEUTICALS INC.

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

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

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

DIFFUSION PHARMACEUTICALS INC.

Common Stock Warrants

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

As of September June 30,2022, 2023, the Company had the following warrants outstanding to acquire shares of its common stock:

During the ninesix months ended SeptemberJune 30, 2022, 18,0772023, 23,639 warrants expired.

2015 Equity Plan

The 2015 Equity Plan provides for increases to the number of shares reserved for issuance thereunder each January 1 equal to 4.0% of the total shares of the Company’s common stock outstanding as of the immediately preceding December 31, unless a lesser amount is stipulated by the Compensation Committee of the Company's board of directors. Accordingly, 81,53181,582 shares were added to the reserve as of January 1, 2022, 2023, which shares may be issued in connection with the grant of stock-based awards, including stock options, restricted stock, restricted stock units, stock appreciation rights and other types of awards as deemed appropriate, in each case, in accordance with the terms of the 2015 Equity Plan. As of September June 30,2022, 2023, there were 23,664160,254 shares 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 consolidated statements of operations and comprehensive loss for the periods indicated:

The following table summarizes the activity related to all stock option grants for the ninesix months ended September June 30,2022: 2023:

The weighted average grant date fair value of stock option awardsThere were no options granted during the ninesix months ended September June 30,2022 was $9.87. 2023. The total fair value of options vested during the three months ended September June 30,2022 2023 and 20212022 was $0.4$0.1 million and $0.3 million, respectively. The total fair value of options vested during the ninesix months September ended June 30,2022 2023 and 20212022 was $0.7$0.2 million and $0.6$0.5 million, respectively. No options were exercised during any of the periods presented. At September June 30,2022, 2023, there was $1.0$0.2 million of unrecognized compensation expense that will be recognized over a weighted-average period of 1.671.12 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 nine months ended September 30,2022 and 2021 were as follows:

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Restricted Stock Unit Awards

The Company previously issued restricted stock units (each, an "RSU") to newly elected, non-executive members of the board of directors that vest in six, tri-monthly installments beginning 18 months after the respective grant date. The fair value of an RSU is equal to the fair market value price of the Company’s common stock on the date of grant. RSU expense is recorded on a straight-line basis over the service period.

(1)The following table summarizes activity related to RSU awards during the period indicated:

(1) The RSUs vested during the ninesix months ended September June 30,2022 2023 were settled on a hybrid basis. The Company withheld 496512 shares of common stock and, in lieu of delivering such shares, paid the RSU holder an amount in cash equal to the fair market value of such shares on the vesting date, representing the holder's approximate tax liability associated with the vesting.

The Company recognized approximately $17,000an insignificant amount in expense related to these awards and $16,000 in expense related to these awards during the three months ended September June 30,2022 2023 and 2021,June 30, 2022, respectively. The Company recognized approximately $49,000an insignificant amount and $27,000$32,000 in expense related to these awards during the ninesix months ended September June 30,2022 2023 and 2021,2022, respectively. At September June 30,2022, 2023, there was approximately $79,000 of$19,000 in unrecognized compensation cost that will be recognized over a weighted average period of 1.490.88 years.

Office Space Lease Commitment

As of September 30, 2022, theThe Company had short term agreementshas a short-term agreement to utilize membership-based co-working space in both Charlottesville, Virginia and was previously party to a second, similar agreement for co-working space in Philadelphia, Pennsylvania.Pennsylvania, which was terminated during the year ended December 31, 2022. Rent expense related to the Company's short-term agreements was approximately $1,000 and $2,000 for the three months ended SeptemberJune 30, 2022 2023 and 2021 was approximately $5,000 and $48,000,2022, respectively. Rent expense related to the Company's short-term agreements was approximately $16,000$2,000 and $0.1 million$11,000 for the ninesix months ended September June 30,2022 2023 and 2021,2022, respectively.

Research and Development Arrangements

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

Defined Contribution Retirement Plan

The Company has established its 401(k)401(k) Plan, which covers all employees who qualify under the terms of the plan. Eligible employees may elect to contribute to the 401(k)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)401(k) Plan of approximately $26,000$10,000 and $11,000$26,000 for the three months ended June 30, 2023 and matched2022, respectively. The Company made matching contributions under the 401(k)401(k) Plan of approximately $79,000$35,000 and $60,000$53,000 for the ninesix months ended September June 30,2022 2023 and 2021,2022, respectively.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Legal Proceedings

On August 7, 2014, a complaint was filed in the Superior Court of Los Angeles County, California by Paul Feller, the former Chief Executive Officer of the Company’s legal predecessor under the caption Paul Feller v. RestorGenex Corporation, Pro Sports & Entertainment, Inc., ProElite, Inc. and Stratus Media Group, GmbH (Case No.BC553996) BC553996). The complaint asserts various causes of action, including, among other things, promissory fraud, negligent misrepresentation, breach of contract, breach of employment agreement, breach of the covenant of good faith and fair dealing, violations of the California Labor Code and common counts. The plaintiff is seeking, among other things, compensatory damages in an undetermined amount, punitive damages, accrued interest and an award of attorneys’ fees and costs. On December 30, 2014, the Company filed a petition to compel arbitration and a motion to stay the action. On April 1, 2015, the plaintiff filed a petition in opposition to the Company’s petition to compel arbitration and a motion to stay the action. After a related hearing on April 14, 2015, the court granted the Company’s petition to compel arbitration and a motion to stay the action. On January 8, 2016, the plaintiff filed an arbitration demand with the American Arbitration Association. On November 19, 2018 at an Order to Show Cause Re Dismissal Hearing, the court found sufficient grounds not to dismiss the case and an arbitration hearing was scheduled, originally for November 2020 but later postponed due to the COVID-19COVID-19 pandemic and related restrictions on gatherings in the State of California. In addition, following the November 2018 hearing, an automatic stay was placed on the arbitration in connection with the plaintiff filing for personal bankruptcy protection. On October 22, 2021, following a determination by the bankruptcy trustee not to pursue the claims and release them back to the plaintiff, the parties entered into a stipulation to abandon arbitration and return the matter to state court. A case management conference was held on February 23, 2022 at which an initial trial date of May 24, 2023 was set, and the parties have agreed to stipulate to mediation in advance of the trial. On October 20, 2022, the parties filed a joint stipulation to continue the trial and certain deadlines related to the mediation in order to allow plaintiff's counsel to continue to seek treatment for an ongoing medical issue. On November 1, 2022, based on the parties joint stipulation, the court entered an order continuing the trial date to October 25, 2023.

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

Following announcement of the Merger Agreement with EIP and the initial filing on May 11, 2023 of the Company’s Registration Statement on Form S-4 (File No. 333-271823) (the “Registration Statement”), two lawsuits were filed in the United States District Court for the Southern District of New York on May 15, 2023 and May 17, 2023, respectively, by purported stockholders of the Company in connection with the Merger. The lawsuits are captioned Dunlea v. Diffusion Pharmaceuticals, Inc., et al., No. 1:23-cv-04043 (S.D.N.Y.) and Pikazin v. Diffusion Pharmaceuticals, Inc., et al., No. 1:23-cv-04096 (S.D.N.Y.).  Additional stockholder litigations were subsequently filed in the United States District Courts for the Southern District of New York and the District of Delaware and in the Delaware Court of Chancery (collectively with the first two cases, the “Actions”). The complaints in each of the Actions named as defendants the Company and the members of the Company’s board of directors as of such dates. Each of the federal court complaints alleges claims for violations of Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder against all defendants, and violations of Section 20(a) of the Exchange Act against such members of the Company’s board of directors. The Chancery Court complaint, filed after the stockholder had received copies of certain documents in response to a books and records demand under Section 220 of the Delaware General Corporation Law, alleges a claim for breach of fiduciary duty.  The plaintiff in the Chancery Court action also sought expedited treatment and a preliminary injunction barring the scheduled stockholder vote, but those motions were subsequently withdrawn.  The plaintiffs in each of the Actions contend that Registration Statement omitted or misrepresented material information regarding the proposed Merger, rendering the Registration Statement materially misleading. The Actions seek injunctive and declaratory relief, as well as damages.  The Company has also received correspondence from law firms claiming to represent other purported stockholders making similar demands for additional disclosures relating to the Merger. 

The Company believes that the claims asserted in the Actions and the demand letters are without merit.

Stockholders may serve additional demands and/or file additional lawsuits challenging the Merger, which may name the Company, EIP, members of the Company’s board of directors, members of the EIP board of directors and/or others as defendants. No assurance can be made as to the outcome of such additional demands, lawsuits, demand letters or the Actions, including the amount of costs associated with defending, settling, or any other liabilities that may be incurred in connection with the litigation or settlement of, such claims. If any additional demands are served and/or any additional lawsuits filed, absent new or different allegations that are material, the Company will not necessarily announce such additional demands and/or complaints, except as required by applicable law including the rules and regulations of the SEC.

You should read the following discussion of our financial condition and results of operations together with the unaudited interim consolidated financial statements and the notes thereto included elsewhere in this report and other financial information included in this report. The following discussion may contain predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed under “Part I — Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Special Note Regarding Forward-Looking Statements” in this report and under “Part I — Item 1A. Risk Factors” in our Annual Report.Report, as well as the risk factors discussed under the heading "Risk Factors" in the Merger Proxy Statement. These risks could cause our actual results to differ materially from any future performance suggested below.

Overview

Diffusion Pharmaceuticals: Enhancing Oxygen, Fueling Life

We areis a biopharmaceutical company that has historically focused on developing novel therapies that may enhance the body’s ability to deliver oxygen to the areas where it is needed most. Our leadDiffusion’s most advanced product candidate, TSC, is beinghas been investigated and developed to enhance the diffusion of oxygen to tissues with low oxygen levels, also known as hypoxia, a serious complication of many of medicine’s most intractable and difficult-to-treat conditions, including hypoxic solid tumors like GBM.

Business Update

Ongoing Evaluation of Strategic Opportunities

On October 25, 2022, we announced that our Board authorized a thorough review and evaluation of a range of potential strategic opportunities in the interest of enhancing stockholder value including transactional opportunities to better leverage the potential TSC and the Company’s other assets.

We are undertaking this expanded review as part of our previously disclosed, ongoing efforts to identify acquisition and partnership transactions that complement, supplement, or de-risk our current development programs and support the Board’s commitment to enhancing stockholder value. Our Board has determined to expand its evaluation to a broader range of options which could include a joint venture, licensing, sale or divestiture of some of the Company’s proprietary technologies or a sale of the Company, in addition to the previously announced opportunities under consideration.

Over the past two years, we have obtained encouraging data on the potential effects of TSC on oxygenation, including the results of our Altitude, TCOM, and COVID-19 Trials. We believe these data further support TSC's potential benefits for patients, particularlyrecently as an adjuvant treatment to standard of care therapy for GBM and other hypoxic solid tumors, like glioblastoma multiforme. However, despitetumors.

Pending Merger with EIP Pharma, Inc

Following an extensive process of evaluating strategic alternatives, on March 30, 2023, we entered into the accelerated, tumor oxygenationMerger Agreement with EIP and Merger Sub pursuant to which, among other things, and subject to the satisfaction or waiver of the conditions set forth therein, Merger Sub will merge with and into EIP, with EIP continuing as our wholly-owned subsidiary. In connection with the Merger and as more fully described in the Merger Proxy Statement, at a special meeting of stockholders currently scheduled for August 15, 2023, we are seeking approval of our stockholders to, among other things, (a) issue the shares of our common stock issuable to former EIP equity holders in connection with the Merger in accordance with the rules of Nasdaq and (b) amend our certificate of incorporation to effect a reverse stock split of the outstanding shares of our common stock at a ratio of not less than 1-for-1.5 and not more than 1-for-8, if necessary to satisfy applicable Nasdaq listing requirements (clauses (a) and (b), collectively, the “Diffusion Special Meeting Proposals”). Our board of directors unanimously approved the Merger Agreement and unanimously recommended that our stockholders approve the Diffusion Special Meeting Proposals.

If our stockholders approve the Diffusion Special Meeting Proposals and the Merger is completed, at or following the effective time of the Merger, (i) Diffusion will be renamed “CervoMed Inc.," (ii) subject to satisfying Nasdaq’s initial listing standards, our common stock's ticker symbol on the Nasdaq Capital Market will change from "DFFN" to “CRVO,” and (iii) the combined company will focus on developing EIP’s product candidates for acute and chronic neurodegenerative diseases and other neurologic indications. EIP’s lead drug candidate, neflamapimod, is currently being developed for the treatment of dementia with Lewy bodies ("DLB"). In the second quarter of 2023, EIP initiated its ongoing, 160-subject Phase 2b clinical trial evaluating neflamapimod in patients with DLB, the clinical trial costs of which are expected to be fully funded by $21.0 million in non-dilutive grant funding from the National Institutes of Health’s National Institute on Aging awarded to EIP in January 2023. An initial data readoutsreadout from the study is anticipated in the second half of 2024.

If consummated, immediately following the effective time of the Merger, Diffusion stockholders as of immediately before the Merger are expected fromto own approximately 24.68% of the outstanding shares of our Study 200-208 trial designcommon stock and former EIP equity holders as of immediately before the Merger are expected to own approximately 75.32% of the outstanding shares of our common stock, subject to certain assumptions more fully described below, we increasingly believein the likelihoodMerger Proxy Statement, including (i) that "Parent Net Cash" (as calculated in accordance with the Merger Agreement) at the closing of realizing TSC's valuethe Merger is between $13.5 million and benefits$14.5 million and (ii) the exclusion of an estimated 705,571 shares underlying pre-funded warrants that may be more likely achieved in an organization with larger infrastructure and greater resources givenissued to former EIP equity holders at the recent downturn in the public financing environment and associated increase in our expected cost of capital as a standalone, single asset company which is oneeffective time of the rationales underlying the strategic review authorized byMerger in lieu of an equivalent number of shares of our Board.common stock.

As more fully described in the Merger Proxy Statement, consummation of September 30, 2022 we had cash, cash equivalents and marketable securitiesthe Merger is subject to certain closing conditions, including, among other things, (a) approval of $12.68 per sharethe Diffusion Special Meeting Proposals by our stockholders, (b) Nasdaq’s approval of the listing of the shares of our common stock outstanding. We believeto be issued in connection with the Merger, and (c) our strong balance sheethaving Parent Net Cash (as defined in the Merger Agreement) as of closing of the Merger greater than or equal to $12.0 million. The Merger Agreement also contains certain termination rights of each of us and talented team of employees provide us the opportunity to leverage what we have learned from the development of TSC to evaluate a range of potential strategic opportunities to further enhance stockholder value. We believe supplementing, diversifying and expanding our asset portfolio through an acquisition, in-license, merger or other opportunistic transaction has the potential to increase our Company's attractiveness as an investment opportunity and reduce its overall risk profile.

There is no timeline for this review and there is no assurance the Board’s review willEIP which, in certain circumstances, may result in any transactionour being consummated. Diffusion does not intendrequired to comment on this process or make further disclosures until it determines an update is appropriate.

Phase 2 Trial in Patients with GBM Incorporating Innovative Imaging Methodology (Study 200-208)

While our processpay EIP a termination fee of up to evaluate strategic opportunities is ongoing, the entire Diffusion organization remains focused on executing our strategy to enhance value for our stockholders. We continue to prioritize and advance what we continue to believe to be value-creating initiatives within our standalone business, including continued progress towards the initiation of Study 200-208, further exploration of potential accelerated pathways for regulatory approval of TSC, and taking steps to preserve capital without sacrificing meaningful growth opportunities.

On July 26, 2022, we announced we had aligned with the FDA on the design of an open-label, dose-escalation, Phase 2 safety and efficacy study of TSC administered with standard of care to newly diagnosed GBM patients, which has been designated Study "200-208."GBM is an aggressive, deadly, and treatment-resistant type of malignant brain tumor, affecting approximately 13,000 newly diagnosed patients each year in the United States. Few treatment options are available for patients with GBM, and none have extended life expectancy beyond a few months. In fact, according to the National Brain Tumor Society, the five-year survival rate for GBM is only 6.8 percent with an average survival time of eight months.

The tissue microenvironment of tumors such as GBM is well known to be hypoxic, and therefore less sensitive to radiation therapy, an important part of standard of care therapy. As such, Study 200-208 has been designed to evaluate TSC as an adjuvant treatment to standard of care therapy for hypoxic solid tumors. The study will include a dose-escalation phase, enrolling patients in a 3+3+3 design, to evaluate the safety, tolerability, pharmacokinetics, and pharmacodynamics of TSC at doses of 1.5 mg/kg, 2.0 mg/kg and 2.5 mg/kg administered in combination with concomitant standard of care radiotherapy plus temozolomide. An additional 17 subjects will be treated at the highest tolerable dose identified in the dose escalation phase. The primary objective of the study is to evaluate the overall survival of patients with newly diagnosed GBM when treated with TSC administered with standard of care. Secondary objectives of the study are to evaluate progression-free survival at six months and seven months by magnetic resonance imaging, assessment using Response Assessment in Neuro-Oncology criteria.

Study 200-208 will vary in a variety of ways from the GBM trials we have conducted in the past, including three particularly notable differentiators:

We currently intend to use the PET scan data from the dose escalation phase of Study 200-208 to support a discussion with the FDA on a planned pathway to approval of TSC as a treatment for newly diagnosed patients with GBM when administered as an adjunct to radiotherapy as part of standard of care therapy. We intend to initiate these discussions with the FDA concurrently with our planned enrollment of an additional 17 subjects to be treated at the highest tolerable dose identified in the dose escalation phase.

Our internal clinical development efforts continue to be focused on engaging study sites and related activities that will enable us to dose the first patient in Study 200-208 in the first quarter of 2023. However, the actual timing of the study's initiation, the dosing of the first patient and subsequent downstream milestones are subject to the outcome and timing of our ongoing strategic review process described above and the pace of enrollment in the study.

ILD-DLCO Trial

In August 2022, satisfied that the positive results observed in our TCOM and Altitude Trials had accomplished our original goals for the Oxygenation Trials, we announced our decision to terminate recruitment and enrollment in our ILD-DLCO Trial and dedicate additional time and resources to standing up our Hypoxic Solid Tumor Program and the 200-208 Study, as well as our business development activities.$765,000.

AtAs of June 30, 2023, we had cash and cash equivalents of approximately $15.0 million. However, as set forth in the timeMerger Agreement and more fully described in the ILD-DLCO study was terminated, 18Merger Proxy Statement, the calculation of "Parent Net Cash" involves numerous adjustments to the amount of cash, cash equivalents and marketable securities as reported on our balance sheet and the actual amount of Parent Net Cash delivered at Closing will depend on many factors, including among others, the date of the planned 27 patients had been enrolledclosing and treated in accordance with the planned 2:1 randomization withmagnitude of such adjustments. No assurance can be given as to the 12 patients inactual amount of Parent Net Cash that will be delivered, that our stockholders will approve the TSC cohort receiving a single, intravenous dose of 2.5mg/kg. AnalysesDiffusion Special Meeting Proposals, that any other condition to closing will not fail to be satisfied or waived, or that the Merger will be consummated at all. The Company expects to continue to incur losses following the period of this partial dataset indicate TSC was safe and well tolerated among all 12 TSC-treated patients atQuarterly Report through the 2.5 mg/kg dose, which as noted above isclosing of the highest dose currently planned to be administered in the 200-208 Study. Although there was no significant change observed in the study’s primary endpoint, diffusion of carbon monoxide into the lungs measured at 30 min post-TSC vs baseline DLCO, the TSC-treated patient cohort did statistically separate from placebo at 60 min post-dose in the 6-minute walk test when comparedMerger (if any) primarily related to the pre-dose baseline, thoughproposed Merger and, as a result, available cash, cash equivalents and marketable securities will continue to decrease.

As previously announced, in connection with our strategic review process, the change was lesspending Merger with EIP, and our expectation that the combined company will not continue to develop Diffusion's existing assets (other than the clinically meaningful change typically foundpotential continuation of efforts to identify third parties that may be interested in a license or other similar transaction involving our TSC assets), we have paused development activity related to TSC including the scientific literature (30m distance gained or 20% improvement vs baseline (pre-TSC) 6-minute walk test). Further, there was no significant changeinitiation of our previously announced Phase 2 study in newly diagnosed GBM patients. Accordingly, our future operations are highly dependent on the pre-TSC vs. post-TSC Borg Dyspnea Scale measurement or heart rate recovery at completionsuccess of the 6-minute walk test.

WeMerger. In the event that we do not complete the Merger with EIP, we will reconsider our strategic alternatives and may (i) pursue another strategic transaction similar to the Merger or (ii) dissolve and liquidate our assets, which we currently believe are the data frommost likely alternatives if the ILD-DLCO trial supportingMerger is not completed. Subject to the safety and tolerabilityavailability of additional funding on acceptable terms, we may also consider resuming development of TSC administered at 2.5 mg/kg iv in patients with ILD-DLCO reinforce our plans to target this dose inif the 200-208 Study as a treatment for newly diagnosed patients with GBM when administered as an adjunct to radiotherapy as part of standard of care therapy.Merger is not completed.