UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark one)

For the quarterly period ended September 30, 2017

March 31, 2019

For the transition period from ___________ to ______________.

Commission file number: 000-24477

DIFFUSION PHARMACEUTICALS INC.

(Exact name of registrant as specified in its charter)

1317 Carlton Avenue, Suite 400200
Charlottesville, VA 22902
(Address of principal executive offices, including zip code)

(434) 220-0718

(Registrant’sRegistrant’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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ☒  No  ☐

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

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

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

The number of shares of common stock outstanding at November 10, 2017May 8, 2019 was 14,521,7303,379,345 shares.

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

DIFFUSION PHARMACEUTICALS INC.

FORM 10-Q

SEPTEMBER 30, 2017MARCH 31, 2019

INDEX

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 and references to "Series A convertible preferred stock" refer to the Series A convertible preferred stock, par value $0.001 per share, of the Company. On August 17, 2016, the Company effected a 1-for-10 reverse split of its common stock. Unless noted otherwise, any share or per share amounts in this report, the accompanying unaudited condensed consolidated financial statements and related notes give retroactive effect to this reverse stock split.

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.

Diffusion Pharmaceuticals Inc. (“Diffusion” or the “Company”), a Delaware corporation, is a clinical stage biotechnology company focused on extending thedeveloping new treatments for life expectancy of cancer patientsthreatening conditions by improving the effectiveness of current standard-of-care treatments, including radiation therapy and chemotherapy.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 many cancer typesthose life threatening conditions in which tumorcellular oxygen deprivation ("hypoxia"(“hypoxia”) is known to diminish the effectiveness of current treatments.basis for significant unmet medical needs. TSC is designed to safely and selectively target and re-oxygenate the cancer’smicro-environment of hypoxic micro-environment, re-oxygenatingcells, and can potentially be used in many indications, including oncology and cardiovascular/stroke.  In cancer, TSC re-oxygenates treatment-resistant cancerous tissue, and making the cancer cells up to three times more susceptible to the therapeutic effects of standard-of-care radiation therapy and chemotherapy. The U.S. Food and Drug Administration (“FDA”) provided Diffusion with final protocol guidance for a Phase 3 trialIn 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 in newly diagnosed inoperable GBM patients andprograms, the Company plansis exploring alternatives regarding how best to begincapitalize 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 trial by the end of 2017.blood brain barrier.

On January 8, 2016,December 13, 2018, the Company completedeffected a 1-for-15 reverse merger (the “Merger”)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 RestorGenex Corporation (“RestorGenex”) whereby the Company was consideredreverse stock split. Stockholders who otherwise would have been entitled to receive fractional shares of common stock had their holdings rounded up to the acquirer for accounting purposes.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 operational activity of RestorGenex is included in the Company’s consolidated financial statements from the date of acquisition. Accordingly, all comparative period information presented in theseaccompanying unaudited interim condensed consolidated financial statements from January 1, 2016 through January 7, 2016 exclude any activity relatedand these notes give retroactive effect to RestorGenex.this reverse stock split.

The Company has not generated any revenues from product sales and has funded operations primarily from the proceeds of public offerings of common stock and warrants, and private placements of its membership units (prior to the Merger), convertible notesdebt 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’sCompany’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 March 2017, the Company completed a $25.0 million private placement of its securities by offering units consisting of one share of the Company's Series A convertible preferred stock and a warrant to purchase one share of common stock for each share of Series A convertible preferred stock purchased in the offering. The Company sold 12,376,329 units and received approximately $22.1 million in aggregate net cash proceeds from the private placement, after deducting commissions and other expenses of approximately $2.9 million. In addition, the Company granted to its placement agent in the offering warrants to purchase an aggregate 1,179,558 shares of common stock as compensation for its services.

The Company currently does not have any credit facilities or other commitments to obtain additional fundswhich it could utilize for future funding 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,independently; consider other various strategic alternatives, including a merger or sale of the Company,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.

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

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company has prepared its financial statements assuming that it will continue as a going concern, which contemplates realization of 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. VariousThe 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 March 31, 2019 are sufficient to fund operations into July 2019.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONDENSED 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 the extent ofhow significant their market share. The regulatory approval and market acceptanceshare will be, some of which are outside of the Company’s proposed future products (if any),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 and certificate of deposit at September 30, 2017 are sufficient to fund operations through June 2018. 

The Summary of Significant Accounting Policies included in the Company's Form 10-K for the year ended December 31, 2016,2018, filed with the Securities and Exchange Commission on March 31, 201719, 2019, have not materially changed, except as set forth below.

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 September 30, 2017,March 31, 2019, and its results of operations for the three and nine months ended September 30, 2017 and 2016 and cash flows for the ninethree months ended September 30, 2017March 31, 2019 and 2016.2018. Operating results for the ninethree months ended September 30, 2017March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.2019. 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, 20162018 filed with the SEC on Form 10-K on March 31, 2017.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS19, 2019.

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 results could differ from those estimates. Due to the uncertainty of factors surrounding the estimates or judgments used in the preparation of the unaudited interim condensed consolidated financial statements, actual results may materially vary from these 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 deemeddetermined necessary.

Cash and Cash Equivalents and Certificate of Deposit

The Company considers any highly liquid investments, such as money market funds, with an original maturity of three months or less to be cash and cash equivalents. The Company's certificate of deposit has a maturity greater than three months but within one year of the date of purchase. This certificate of deposit is classified as held-to-maturity, and the estimated fair value of the investment approximates its amortized cost.

Fair Value of Financial Instruments

The carrying amounts of the Company’sCompany’s financial instruments, including cash equivalents, certificate of deposit, accounts payable, and accrued expenses approximate fair value due to the short-term nature of those instruments. As of September 30, 2017, the fair value of the Company's outstanding Series B convertible note was approximately $0.5 million. As of December 31, 2016, the fair value of the Company’s outstanding 2016 convertible note and Series B convertible note was approximately $2.0 million and $0.6 million, respectively. The 2016 convertible note was paid in full during the three month period ended September 30, 2017. The fair value of the convertible notes is determined using a binomial lattice model that utilizes certain unobservable inputs that fall within Level 3 of the fair value hierarchy.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Offering CostsIntangible Asset

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

Intangible Assets and Goodwill

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

DIFFUSION PHARMACEUTICALS INC.March 31, 2019 and 2018.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSResearch 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.

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 Income (Loss)Loss Per Common Share

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

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

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

The following potentially dilutive securities outstanding as of September 30, 2017March 31, 2019 and 20162018 have been excluded from the computation of diluted weighted average shares outstanding, as they would be anti-dilutive:

Amounts in the table reflect the common stockCommon Stock equivalents of the noted instruments.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

RecentRecently Issued But Not Yet Adopted Accounting Pronouncements

In July 2017,August 2018, the FASB issued ASU 2017-11,2018-13, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) AccountingDisclosure Framework-Changes to the Disclosure Requirements for Certain Financial Instruments with Down Round Features, (Part II) ReplacementFair Value Measurements, which changes the fair value measurement disclosure requirements of ASC 820. The goal of the Indefinite Deferral for Mandatorily Redeemable Financial InstrumentsASU is to improve the effectiveness of Certain Nonpublic EntitiesASC 820's disclosure requirements by providing users of the financial statements with better information about assets and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. The first part of this update addressesliabilities measured at fair value in the complexity of accounting for certain financial instruments with down round featuresstatements and the second part addresses the complexity of distinguishing liabilities from equity.notes thereto. The guidance is applicable to public business entities for fiscal years beginning after December 15, 20182019 and interim periods within those years. The Company is currently evaluating the potential impact of the adoption of this standard on its consolidated results of operations, financial position and cash flows and related disclosures.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In May 2017, the FASB issued ASU No. 2017-09, ModificationRecently Adopted Accounting for Share-Based Payment ArrangementsPronouncements, which amends the scope of modification accounting for share-based payment arrangements. The ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The guidance is applicable to public business entities for fiscal years beginning after December 15, 2017 and interim periods within those years. Early adoption is permitted, including adoption in any interim period. The Company does not expect this new guidance to have a material impact on its condensed consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation – Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The guidance is applicable to public business entities for fiscal years beginning after December 15, 2016 and interim periods within those years. The Company adopted this standard in 2017 by electing to account for forfeitures in the period that they occur. Under ASU 2016-09, accounting changes adopted using the modified retrospective method must be calculated as of the beginning of the period adopted and reported as a cumulative-effect adjustment. As a result, the Company recognized cumulative-effect adjustment of approximately $1,000 on January 1, 2017.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The FASB issued the update to requireincrease transparency and comparability among organizations by requiring the recognition of operating lease right-of-use (“ROU”) assets and lease liabilities on the balance sheetsheet. Most prominent among the changes in the standard is the recognition of lessees. 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.

The standard will beCompany adopted ASC 842, effective for fiscal years beginning after December 15, 2018, including interim periods within such fiscal years. The ASU requiresJanuary 1, 2019 using a modified retrospective transition method withapproach and elected to apply the option to elect a package ofavailable practical expedients. Early adoption is permitted. The Company is currently evaluatingstandard had an impact on the potentialCompany’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 adoptionrecognition of this standard on its consolidated results of operations, financial positiona $0.3 million ROU asset and cash flows and related disclosures.

Reverse Merger with RestorGenexcorresponding lease liability for the Company's single operating lease.

On January 8, 2016,1, 2019, the Company completed a reverse merger transaction with RestorGenex.adopted ASU 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU No. 2018-07”) which simplifies the accounting for share-based payments granted to nonemployees for goods and services. The Company entered intoASU supersedes ASC 505-50 Equity-based Payments to Non-employees and expands the Merger transaction in an effortscope of ASC 718 to provide improved accessinclude all share-based payment arrangements related to the capital markets in order to obtain the resources necessary to accelerate development of TSC in multiple clinical programs and continue to build an oncology-focused company.

The purchase price was calculated as follows:

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Merger transaction has been accounted for using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The valuation technique utilized to value the IPR&D was the cost approach.

The following table summarizes the allocation of the purchase price to the assets acquired and liabilities assumed as of the acquisition date:

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

Pro Forma Financial Information (Unaudited)

The following pro forma financial information reflects the condensed consolidated results of operations of the Company as if the acquisition of RestorGenex had taken placegoods and services from both nonemployees and employees. The adoption of ASU No. 2018-17 did not have an impact on January 1, 2016. The pro formathe unaudited interim condensed consolidated financial information is not necessarily indicativestatements of the results of operations as they would have been had the transactions been effected on the assumed date.

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

DIFFUSION PHARMACEUTICALS INC.Company.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Other accrued expenses and liabilities consisted of the following:

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

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

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

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Series A Convertible Preferred2018 Common Stock TransactionOffering

In March 2017,January 2018, the Company completed a $25.0 million private placemententered into an Underwriting Agreement (the “Agreement”) pursuant to which it issued 1,000,000 shares of its securities in which the Company offeredCommon Stock and sold units consisting of one share of the Company’s Series A convertible preferred stock and a warrantwarrants to purchase one share of common stock for each share of Series A convertible preferred stock purchased in the offering. Each share of Series A convertible preferred stock entitles the holder to an 8.0% cumulative dividend payable in1,000,000 shares of our common stock on a semi-annual basis. The holders may, at their option, convert each share of Series A convertible preferred stock into one share of the Company’s common stock based on the initial conversion price of $2.02 per share, subject to adjustment. Each warrant entitles the holder to purchase one share of common stock atCommon Stock with an initial exercise price of $2.22, subject to adjustment and expires on the fifth anniversary of their original issuance date.

The Company sold 12,376,329 units in the private placement and received approximately $22.1 million in aggregate net$12.00 per share for cash proceeds after deducting commissions and other expenses of approximately $2.9$10.8 million. In addition, as compensation for its services, the Company granted to its placement agentthe underwriter in the offeringtransaction an option (the “Over-Allotment Option”) to purchase, in the aggregate, 150,000 shares of Common Stock (the “Option Shares”) and warrants to purchase an aggregate of 1,179,558up to 150,000 shares of common stock atCommon Stock (the “Option Warrants”). The underwriter exercised its right to purchase a portion of the Option Warrants and received an additional 131,375 warrants to purchase Common Stock with an initial exercise price $12.00 per share.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In addition, at the closing, the Company issued to designees of $2.22the underwriter warrants to purchase up to 50,000 shares of Common Stock. The underwriter’s warrants have an exercise price of $15.00 per share, which expire ona term of five years from the fifth anniversarydate of their original issuance date.and otherwise substantially similar terms to the form of the investor warrant.

During its evaluation of equity classification for the common stockCommon 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.

As a result of the Company is obligated to issue a variable numberCompany's Common Stock offering in January 2018, all outstanding shares of shares to settle the cumulative dividends on theCompany's Series A convertible preferred stock the Company cannot assert there will be sufficient authorizedconverted into 1,400,462 shares available to settle the warrants(the “Conversion Shares”) of Common Stock of which (i) 553,752 shares were issued in connection with the Series A offering. Accordingly, these warrants are classified as liabilities. The Company will continue to classify such warrants as liabilities until they are exercised, expire, or are no longer required to be classified as liabilities.

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

Dividends

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

Voting

Subject to certain preferred stock class votes specified in the Certificate of Designation of Preferences, Rights and Limitations of the Series A Convertible Preferred Stock (the “Certificate of Designation”) or as required by law, the holders of the Series A convertible preferred stock votes together with the holders of common stock as a single class on an adjusted as-converted basis. In accordance with NASDAQ listing rules, in any matter voted on by the holders of our common stock, each shareautomatic conversion of Series A convertible preferred stock entitles(ii) 68,815 shares were issued upon settlement of accrued dividends and (iii) 777,895 shares were issued for the holder thereof to a number of votes based upon the closing price of our common stock on the NASDAQ Capital Market on the date of issuance of such shares of Series A convertible preferred stock. Accordingly, shares of Series A convertible preferred stock issued in the initial closingsettlement of the private placement on March 14, 2017 are entitled to 0.84874 votes per share and shares“make-whole” adjustment feature. A deemed dividend of Series A Preferred Stock issued in$8.2 million was recorded against additional paid-in-capital for the final closingvalue of the private placement on March 31, 2017 are entitled to 0.50627 votes per share, in each case, subject to adjustment as described incommon shares issued for the Certificate of Designation.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Liquidation Preference

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

Conversion

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

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

Make-Whole Provision

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

Common Stock Warrants

As of September 30, 2017,March 31, 2019, the Company had the following warrants outstanding to acquire shares of its common stock:Common Stock:

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

During the ninethree months ended September 30, 2017, 13,000March 31, 2019, no warrants issued prior to the Merger, expired. These common stockexpired and no warrants will expire periodically through 2019. The common stock warrants issued in connection with the March 2017 Series A private placement expire in March 2022. During the three and nine months ended September 30, 2017, the Company recognized a net gain of $8.4 million and $5.8 million in warrant related charges associated with the Series A private placement, which consisted primarily of the change in fair value of the common stock warrants from issuance and the excess fair value of the common stock warrants over the gross cash proceeds of the Series A offering. were exercised.

2015 Equity Plan

The Diffusion Pharmaceuticals Inc. 2015 Equity Plan, as amended (the "2015 Equity Plan"), provides for increases to the number of shares reserved for issuance thereunder each January 1 equal to 4.0% of the total shares of the Company’s common stockCompany’s Common Stock outstanding as of the immediately preceding December 31, unless a lesser amount is stipulated by the Compensation Committee of the Company's Boardboard of Directors.directors. Accordingly, 413,825135,049 shares were added to the reserve as of January 1, 2017,2019, 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 30, 2017,March 31, 2019, there were 114,29177,340 shares of common stockCommon Stock available for future issuance under the 2015 Equity Plan.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONDENSED 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:

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Non-employee Stock Options

Non-employee options are remeasured to fair value each period using a Black-Scholes option-pricing model until the options vest. During the nine months ended September 30, 2017, the Company granted 9,394 stock options to non-employees. The total fair value of non-employee stock options vested during the three months ended September 30, 2017 and 2016 was approximately $7,000 and $0.2 million, respectively. The total fair value of non-employee stock options vested during the nine months ended September 30, 2017 and 2016 was approximately $83,000 and $0.7 million, respectively. At September 30, 2017, there were 18,572 unvested options subject to remeasurement and approximately $26,000 of unrecognized compensation expense that will be recognized over a weighted-average period of 1.64 years.March 31, 2019:

Employee Stock Options

During the nine months ended September 30, 2017, the Company granted 330,647 stock options to employees. The weighted average grant date fair value of stock option awards granted to employees was $2.12$1.77 during the nine months ended September 30, 2017. During the three months ended September 30, 2017March 31, 2019. The total fair value of options vested during the three months ended March 31, 2019 and 2016 the Company recognized stock-based compensation expense of $0.32018 was $0.2 million and $0.1 million, respectively. During the nine months ended September 30, 2017 and 2016, the Company recognized stock-based compensation expense $0.9 million and $0.4$0.3 million, respectively. No options were exercised during any of the periods presented. At September 30, 2017,March 31, 2019, there was $2.8$0.6 million of unrecognized compensation expense that will be recognized over a weighted-average period of 5.331.51 years.

Options granted were valued using the Black-Scholes model and the weighted average assumptions used to value the options granted during the first ninethree months of 20172019 were as follows:

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On November 1, 2017 the Company held a Special Shareholders meeting, requesting shareholders, both common and Series A, to approve a proposed amendment to the Company’s Certificate of Incorporation to permit the Company to pay dividends on the Company’s Series A Convertible Preferred Stock in either cash or shares of the Company’s Common Stock, which was approved by the shareholders. As a result of this amendment, the Company is able to assert there will be sufficient authorized shares available to settle the Series A warrants. Upon this assertion, the Series A warrants were reclassified from liabilities to stockholders’ equity. Prior to the amendment, for accounting purposes, the warrants were recorded as a liability under U.S. generally accepted accounting principles. The warrant liability resulted in a reduction of our stockholders’ equity, as of March 31, 2017 and June 30, 2017, below the required level under the Nasdaq Capital Market’s continued listing standards. The Charter Amendment, by permitting the Company to assert share settlement of the warrants, resulted in a reclassification of the warrant liability to stockholders’ equity as of the date of the amendment.

It is therefore the belief of the Company that this fundamental change will allow the Company to regain its NASDAQ compliant status. The following pro-forma information shows adjustments to the September 30, 2017 balances to (i) remove the Series A warrant liability of $16.3 million as of September 30, 2017 from total liabilities, (ii) show the reclassification of the fair value of the Series A warrants of $13.2 million as of November 1, 2017 to APIC, and (iii) to adjust the accumulated deficit balance for the change in fair value of the Series A warrants from September 30, 2017 to November 1, 2017 of $3.2 million.

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 lookingforward-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 LookingForward-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, 2016.2018. These risks could cause our actual results to differ materially from any future performance suggested below.

Business Overview

We are a clinical stage biotechnology company focused on extending the life expectancy of cancer patientsdeveloping new treatments for life-threatening conditions by improving the effectiveness of current standard-of-care treatments, including radiation therapy and chemotherapy.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 or TSC,(“TSC”), for use in the many cancer typesthose life-threatening conditions in which tumorcellular oxygen deprivation (“hypoxia”) is known to diminish the effectiveness of current treatments.basis for significant unmet medical needs. TSC is designed to safely and selectively target and re-oxygenate the cancer’smicro-environment of hypoxic micro-environment, re-oxygenatingcells, and potentially be used in many indications, including oncology and cardiovascular/stroke. In cancer, TSC re-oxygenates treatment-resistant cancerous tissue, and 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.

A range of tissue types, including both cancerous and normal cells, has been shown to be safely re-oxygenated in our preclinical and clinical studies using TSC’s novel mechanism of action. In oncology, we believe TSC’s therapeutic potential 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 in many such cancers. Likewise, we believe TSC’s ability to re-oxygenate normal tissue that has become oxygen-deprived provides opportunities for new therapeutic approaches to conditions ranging from stroke and emergency medicine to cardiovascular indications. The successful completion of trials for TSC or any other potential product candidate in these or any other indication are dependent upon our ability to further raise necessary capital.

Our lead development programs targetmost advanced program targets TSC against cancers known to be inherently treatment-resistant including brain cancers and pancreatic 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. This open label,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. The U.S. Food and Drug Administration, or FDA, provided Diffusion with final protocol guidance for aIn December 2017, we initiated the INvestigation of TSC Against Cancerous Tumors (INTACT) Phase 3 trial of TSC in the newly diagnosed inoperable GBM patients. The Company has responded to all outstanding points raised by the FDA and plans to begin the trial under the protocol agreed to by the FDA by the end of 2017.patient population. Patient enrollment began in January 2018. The trial will enroll 236 patients in total, with 118 in eachthe treatment arm and 118 in the control arm. DueThe trial is beginning with an 8 patient safety run-in which the Company expects to its novel mechanismbe finished in the second quarter of action,2019. Commencement of 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 236 patient trial.

Other cancerous tumor targets upon which the Company’s technology is focused include pancreatic cancer and brain metastasis, for which an FDA Orphan Designation has been granted to TSC. We believe that TSC has safely re-oxygenated a range of tumor types in our preclinical and clinical studies. Diffusion believes its therapeutic potential is not limited to specific tumors, thereby making it potentially useful to improve standard-of-care treatments of other life-threatening cancers. Given TSC's safety profile and animal data, we can move intoprograms for such cancers are Phase 2 studiesready, as safety profiles have been demonstrated in metastatic brain cancer or pancreatic cancer. other oncology programs, protocols have been written, FDA interaction has taken place, and key opinion leaders have been engaged. Further research and development of TSC as a potential treatment for these indications is largely dependent on the necessary financial resources becoming available.

We also believe that TSC has potential application in other indications involving hypoxia, such as neurodegenerative diseasesnotably stroke and emergency medicine. For example, our strokemedicine, as well as cardiovascular and neurodegenerative diseases. A Phase 2 trial program is now in advanced discussionscooperation with doctors from UCLA and the University of Virginia with whom we have established a joint team dedicated to developing a program to test TSC in the treatment of acute stroke has received approval for enrollment by the FDA, with anthe first enrolled patient expected in the third quarter of 2019. This trial, which will feature in-ambulance trialdosing of TSC, is named the PreHospital Acute Stroke Therapy -TSC (PHAST - TSC) 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 significantly cut the time in which the stroke-related oxygen deprivation to brain cells goes untreated, potentially leading to a better outcome for stroke under consideration. Planning for such avictims treated in this manner. In the fourth quarter of 2018, we received FDA permission to begin patient enrollment in the PHAST - TSC Phase 2 trial is on-going.and expect to begin enrollment in third quarter of 2019, following completion of the institutional review board and contracting activities.

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 can crosscapable of crossing the blood brainblood-brain barrier.

Summary of Current Product Candidate Pipeline

The following table, as of September 30, 2017, summarizes the targeted clinical indications for Diffusion’s lead molecule, TSC:

Financial Summary

InAs of March 2017, we completed a $25.0 million private placement of our securities by offering units consisting of one share of our Series A convertible preferred stock and a warrant to purchase one share of our common stock for each share of Series A convertible preferred stock purchased in the offering. We sold 12,376,329 units and received approximately $22.1 million in aggregate net cash proceeds from the private placement, after deducting commissions and other expenses of approximately $2.9 million. In addition, we granted our placement agent in the offering warrants to purchase an aggregate of 1,179,558 shares of our common stock as compensation for its services.

At September 30, 2017,31, 2019, we had cash and cash equivalents of $1.2 million and a certificate of deposit of $10.0$5.3 million. We have incurred operating losses since inception, have not generated any product sales revenue and have not achieved profitable operations. We had net income of $5.1 million and incurred a net loss of $3.2$2.7 million for the three and nine months ended September 30, 2017, respectively. Our net income for the three months ended September 30, 2017 was primarily related to the remeasurement of our common stock warrant liability at September 30, 2017 which resulted in a $8.4 million gain (see Notes 8 and 11 to the accompanying unaudited condensed consolidated financial statements).March 31, 2019. Our accumulated deficit as of September 30, 2017March 31, 2019 was $63.3$82.7 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 and certificate of deposit for working capital and to fund the research and development of TSC for use in the treatment of GBM, pancreatic cancer, stroke and brain metastases.TSC. We believe that our cash and cash equivalents and our certificate of deposit as of September 30, 2017March 31, 2019, will enable us to fund our operating expenses and capital expenditure requirements through June 2018.into July 2019. 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.

Financial Operations Overview

Revenues

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

Research and Development Expense

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, as well as impairment of our in-process research and development, or IPR&D assets.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.

General and Administrative Expense

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 costs associated with the Merger, professional fees, that were incurred in connection with preparing to operate and operating as a public company, facility-related costs, communication expenses and professional fees for legal, patent prosecution and maintenance, and consulting and accounting services.

Interest Expense, NetIncome

Interest expense, netincome consists principally of the interest expense recorded in connection with our convertible debt instruments offset by the interest earned from our cash and cash equivalents and certificate of deposit.equivalents.

Change in Fair Value of Warrant Liabilities, Warrant Related Expenses, and Other Financing ExpensesIncome Tax Benefit

In connection with our private placementSince 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 March 2017, we recorded warrant expensenet operating loss carryforward period associated with the change in fair valueTax Cuts and Jobs Act (“the 2017 Tax Act”), we recognize income tax benefit to reflect the adjustment allowed by the 2017 Tax Act to utilize indefinite deferred tax liabilities as a source of the common stock warrants from issuance, the excess fair valueincome against indefinite-lived portions of the common stock warrants over the gross cash proceeds from the Series A convertible preferred stock offering, and placement agent commissions and other offering costs.our deferred tax assets.

Results of Operations

Comparison of for Three Months Ended September 30, 2017 and 2016March 31, 2019 Compared to Three Months Ended March 31, 2018

The following table sets forth our results of operations for the three months ended September 30, 2017March 31, 2019, and 2016.2018.

We recognized $1.8$1.7 million in research and development expenses during the three months ended September 30, 2017March 31, 2019 compared to $1.9$1.8 million during the three months ended September 30, 2016.March 31, 2018. The slight decrease in research and development expense was mainly attributable to a $1.0 million impairment charge recognized in the third quarter of 2016, a $0.2 million decrease in expense associated with animal toxicology studies and a $0.1 million decrease in stock-based compensation expense. These amounts were partially offset by a $0.9 million increase in costs associated with our GBM trials, a $0.1 million increase in API and drug manufacturing costs and a $0.1 million increase in salary related expenses.

General and administrative expenses were $1.6 million during the three months ended September 30, 2017 compared to $3.9 million during the three months ended September 30, 2016. The decrease in general and administrative expense was primarily due to a $2.5 million decrease in litigation settlement fees, partially offset by an increase in salary and stock-based compensation expense of $0.1 million and an increase in professional fees of $0.1 million.

The decrease in interest expense, net for the three months ended September 30, 2017 compared to the three months ended September 30, 2016 is primarily attributable to the interest earned on our certificate of deposit, partially offset by interest expense on our convertible notes that were issued in September 2016.

In connection with the private placement of our Series A convertible preferred stock and common stock warrants, we determined the warrants to be classified as liabilities and subject to remeasurement at each reporting period. As a result of the liability classification, during the three months ended September 30, 2017, we recorded a $8.4 million non-cash gain for the change in fair value of our common stock warrant liabilities which was primarily attributable to the decrease in the market price for our common stock.

Comparison of Nine Months Ended September 30, 2017 and 2016

The following table sets forth our results of operations for the Nine Months Ended September 30, 2017 and 2016.