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 ~~September~~June 30, ~~2018~~2019

☐

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

For the transition period from ___________ to ______________.

Commission file number: 000-24477

DIFFUSION PHARMACEUTICALS INC.

(Exact name of registrant as specified in its charter)

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

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

(434) 220-0718

(Registrant’s telephone number including area code)

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

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

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

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

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

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

The number of shares of common stock outstanding at ~~November 1, 2018~~August 8, 2019 was ~~50,643,429~~4,693,290 shares.

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

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

DIFFUSION PHARMACEUTICALS INC.

FORM 10-Q

~~SEPTEMBER~~JUNE 30, ~~2018~~2019

INDEX

		Page
–PART I – FINANCIAL INFORMATION		1

ITEM 1.	FINANCIAL STATEMENTS	1

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	1613

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	2622

ITEM 4.	CONTROLS AND PROCEDURES	2622

–PART II – OTHER INFORMATION		2723

ITEM 1.	LEGAL PROCEEDINGS	2723

ITEM 1A.	RISK FACTORS	2723

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	2723

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	2723

ITEM 4.	MINE SAFETY DISCLOSURES	2723

ITEM 5.	OTHER INFORMATION	2723

ITEM 6. ~~EXHIBITS~~	27EXHIBITS	23

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

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

PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

Diffusion Pharmaceuticals Inc.

Condensed Consolidated Balance Sheets

(unaudited)

	September 30, 2018			December 31, 2017			June 30, 2019			December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	11,018,441		$	8,896,468		$	8,372,741		$	7,991,172
Prepaid expenses, deposits and other current assets		551,337			769,946			1,036,753			923,059
Total current assets		11,569,778			9,666,414			9,409,494			8,914,231
Property and equipment, net		379,202			460,652			297,619			350,281
Intangible asset		8,639,000			8,639,000			8,639,000			8,639,000
Goodwill		2,743,208			6,929,258
Right of use asset								291,849			—
Other assets		263,480			450,491			291,176			298,480
Total assets	$	23,594,668		$	26,145,815		$	18,929,138		$	18,201,992
Liabilities, Convertible Preferred Stock and Stockholders’ Equity
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of convertible debt	$	—		$	550,000
Accounts payable		129,057			511,956		$	489,133		$	198,818
Accrued expenses and other current liabilities		816,620			1,628,851			443,437			605,226
Current operating lease liability								110,473			—
Total current liabilities		945,677			2,690,807			1,043,043			804,044
Deferred income taxes		1,741,253			2,223,678			1,527,133			1,786,389
Other liabilities		—			1,386
Noncurrent operating lease liability								181,376			—
Total liabilities		2,686,930			4,915,871			2,751,552			2,590,433
Commitments and Contingencies (Note 8)
Convertible preferred stock, $0.001 par value:
Series A - No shares and 13,750,000 shares authorized at September 30, 2018 and December 31, 2017, respectively. No shares and 12,376,329 shares issued at September 30, 2018 and December 31, 2017, respectively. No shares and 8,306,278 shares outstanding at September 30, 2018 and December 31, 2017, respectively.		—			—
Total convertible preferred stock		—			—
Commitments and Contingencies (Note 7)
Stockholders’ Equity:
Common stock, $0.001 par value:
1,000,000,000 shares authorized; 50,572,001 and 14,519,629 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively.		50,571			14,520
1,000,000,000 shares authorized; 4,693,290 and 3,376,230 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively								4,694			3,377
Additional paid-in capital		95,210,928			82,770,313			101,340,798			95,532,881
Accumulated deficit		(74,353,761	)		(61,554,889	)		(85,167,906	)		(79,924,699	)
Total stockholders' equity		20,907,738			21,229,944			16,177,586			15,611,559
Total liabilities, convertible preferred stock and stockholders' equity	$	23,594,668		$	26,145,815
Total liabilities and stockholders' equity							$	18,929,138		$	18,201,992

See accompanying notes to unaudited interim condensed consolidated financial statements.

Diffusion Pharmaceuticals Inc.

Condensed Consolidated Statements of Operations

(unaudited)

Three Months Ended
September 30,

Nine Months Ended
September 30,

2018

2017

2018

2017

Operating expenses:

Research and development
$ 1,169,810 $ 1,759,305 $ 4,386,491 $ 3,946,420
General and administrative
1,589,621 1,559,399 4,748,090 4,908,424
Goodwill impairment
4,186,050 — 4,186,050 —
Depreciation
26,723 27,374 81,450 39,767
Loss from operations
6,972,204 3,346,078 13,402,081 8,894,611
Other expense (income):

Interest (income) expense, net
(37,981
)
(1,318
)
(120,784
)
73,290
Change in fair value of warrant liability
— (8,441,616
)
— (18,909,792
)
Warrant related expenses
— — — 10,225,846
Other financing expenses
— — — 2,870,226
(Loss) income from operations before income tax benefit
(6,934,223
)
5,096,856 (13,281,297
)
(3,154,181
)
Income tax benefit
(214,493
)
— (482,425
)
—
Net (loss) income
$ (6,719,730
)
$ 5,096,856 $ (12,798,872
)
$ (3,154,181
)
Series A cumulative preferred dividends
— (366,641
)
(85,993
)
(912,946
)
Undistributed earnings to participating securities
— (1,838,354
)
— —
Deemed dividend related to the make-whole provision for the conversion of Series A convertible preferred stock into common stock
— — (8,167,895
)
—
Net (loss) income attributable to common stockholders
$ (6,719,730
)
$ 2,891,861 $ (21,052,760
)
$ (4,067,127
)
Per share information:

Net (loss) income per share of common stock, basic
$ (0.13
)
$ 0.21 $ (0.44
)
$ (0.35
)
Net (loss) income per share of common stock, diluted
$ (0.13
)
$ 0.20 $ (0.44
)
$ (1.83
)
Weighted average shares outstanding, basic
50,572,001 13,937,869 47,777,757 11,709,128
Weighted average shares outstanding, diluted
50,572,001 14,714,853 47,777,757 12,525,707

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Operating expenses:
Research and development	$	1,518,381		$	1,391,113		$	3,218,226		$	3,216,681
General and administrative		1,068,452			1,660,630			2,269,180			3,158,469
Depreciation		34,390			26,709			52,662			54,727
Loss from operations		2,621,223			3,078,452			5,540,068			6,429,877
Other income:
Interest income		(16,921	)		(45,339	)		(37,605	)		(82,803	)
Loss from operations before income tax benefit		(2,604,302	)		(3,033,113	)		(5,502,463	)		(6,347,074	)
Income tax benefit		(108,904	)		(267,932	)		(259,256	)		(267,932	)
Net loss	$	(2,495,398	)	$	(2,765,181	)	$	(5,243,207	)	$	(6,079,142	)
Series A cumulative preferred dividends		—			—						(85,993	)
Deemed dividend related to the make-whole provision for the conversion of Series A convertible preferred stock into common stock		—			—			—			(8,167,895	)
Net loss attributable to common stockholders	$	(2,495,398	)	$	(2,765,181	)	$	(5,243,207	)	$	(14,333,030	)
Per share information:
Net loss per share of common stock, basic and diluted	$	(0.63	)	$	(0.82	)	$	(1.43	)	$	(4.64	)
Weighted average shares outstanding, basic and diluted		3,940,684			3,369,770			3,658,457			3,092,043

See accompanying notes to unaudited interim condensed consolidated financial statements.

Diffusion Pharmaceuticals Inc.

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

~~Nine~~Three and Six Months Ended ~~September~~June 30, 2018 and 2019

(unaudited)

	Convertible Preferred Stock					Stockholders' Equity													Convertible Preferred Stock					Stockholders' Equity
	Series A					Common Stock				Additional Paid-in			Accumulated			Total Stockholders'			Series A					Common Stock				Additional Paid-in			Accumulated			Total Stockholders'
	Shares			Amount		Shares		Amount		Capital			Deficit			Equity			Shares			Amount		Shares		Amount		Capital			Deficit			Equity
Balance at January 1, 2018		8,306,278		$	—		14,519,629	$	14,520	$	82,770,313		$	(61,554,889	)	$	21,229,944			8,306,278		$	—		967,976	$	968	$	82,783,865		$	(61,554,889	)	$	21,229,944
Conversion of Series A convertible preferred stock to common stock		(8,306,278	)		—		8,306,278		8,306		(8,306	)		—			—			(8,306,278	)		—		553,752		554		(554	)		—			—
Issuance of common stock to Series A convertible preferred stockholders under make-whole adjustment feature		—			—		11,668,421		11,668		(11,668	)		—			—			—			—		777,895		778		(778	)		—			—
Issuance of common stock related to accrued dividends		—			—		1,032,219		1,032		1,147,275			—			1,148,307			—			—		68,815		69		1,148,238			—			1,148,307
Series A cumulative preferred dividend		—			—		—		—		(85,993	)		—			(85,993	)		—			—		—		—		(85,993	)		—			(85,993	)
Issuance of common stock and warrants, net of issuance costs		—			—		15,000,000		15,000		10,402,520			—			10,417,520			—			—		1,000,000		1,000		10,416,520			—			10,417,520
Stock-based compensation expense																				—			—		—		—		324,667			—			324,667
Net loss																				—			—		—		—		—			(3,313,961	)		(3,313,961	)
Balance at March 31, 2018																				—		$	—		3,368,438	$	3,369	$	94,585,965		$	(64,868,850	)	$	29,720,484
Common stock issued for advisory services							45,454		45		24,955						25,000			—			—		3,031		3		24,997						25,000
Stock-based compensation expense		—			—		—		—		971,832			—			971,832			—			—		—		—		319,769			—			319,769
Net loss		—			—		—		—		—			(12,798,872	)		(12,798,872	)		—			—		—		—		—			(2,765,181	)		(2,765,181	)
Balance at September 30, 2018		—		$	—		50,572,001	$	50,571	$	95,210,928		$	(74,353,761	)	$	20,907,738
Balance at June 30, 2018																				—		$	—		3,371,469	$	3,372	$	94,930,731		$	(67,634,031	)	$	27,300,072

	Stockholders' Equity
	Common Stock				Additional Paid-in		Accumulated			Total Stockholders'
	Shares		Amount		Capital		Deficit			Equity
Balance at January 1, 2019		3,376,230	$	3,377	$	95,532,881	$	(79,924,699	)	$	15,611,559
Stock-based compensation expense		—		—		91,204		—			91,204
Net loss		—		—		—		(2,747,809	)		(2,747,809	)
Balance at March 31, 2019		3,376,230		3,377		95,624,085		(82,672,508	)		12,954,954
Issuance of common stock and warrants, net of issuance costs		1,317,060		1,317		5,567,633		—			5,568,950
Stock-based compensation expense		—		—		149,080		—			149,080
Net loss		—		—		—		(2,495,398	)		(2,495,398	)
Balance at June 30, 2019		4,693,290	$	4,694	$	101,340,798	$	(85,167,906	)	$	16,177,586

See accompanying notes to unaudited interim condensed consolidated financial statements.

Diffusion Pharmaceuticals Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

	Nine Months Ended September 30,						Six Months Ended June 30,
	2018			2017			2019			2018
Operating activities:
Net loss	$	(12,798,872	)	$	(3,154,181	)	$	(5,243,207	)	$	(6,079,142	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		81,450			39,767			52,662			54,727
Stock-based compensation expense		971,832			973,950			240,284			644,436
Common stock issued for advisory services		25,000			50,000			—			25,000
Warrant related expense, change in fair value, and other financing expenses		—			(5,813,720	)
Change in deferred income taxes		(482,425	)		—			(259,256	)		(267,932	)
Goodwill impairment		4,186,050			—
Non-cash interest expense		—			11,967
Changes in operating assets and liabilities:
Prepaid expenses, deposits and other assets		405,620			(661,675	)		(106,390	)		185,487
Accounts payable, accrued expenses and other liabilities		(134,202	)		(1,496,150	)		48,320			(391,861	)
Net cash used in operating activities		(7,745,547	)		(10,050,042	)		(5,267,587	)		(5,829,285	)

Cash flows used in investing activities:
Purchases of property and equipment		—			(438,604	)
Purchase of certificate of deposit		—			(10,000,000	)
Net cash used in investing activities		—			(10,438,604	)

Cash flows provided by financing activities:
Repayment of convertible debt principal		(550,000	)		(1,880,000	)		—			(550,000	)
Proceeds from the sale of common stock		10,846,062			—			5,731,779			10,846,062
Proceeds from the sale of Series A convertible preferred stock, net		—			22,129,774
Payment of offering costs		(428,542	)		(97,980	)		(82,623	)		(428,542	)
Net cash provided by financing activities		9,867,520			20,151,794			5,649,156			9,867,520

Net increase (decrease) in cash and cash equivalents		2,121,973			(336,852	)
Net increase in cash and cash equivalents								381,569			4,038,235
Cash and cash equivalents at beginning of period		8,896,468			1,552,852			7,991,172			8,896,468
Cash and cash equivalents at end of period	$	11,018,441		$	1,216,000		$	8,372,741		$	12,934,703

Supplemental disclosure of cash flow information
Cash paid for interest	$	40,142		$	112,800		$	—		$	40,142
Supplemental disclosure of non-cash investing and financing activities:
Reclassification of accrued dividends related to the issuance of common stock to Series A convertible preferred stock holders	$	1,148,307		$	—
Reclassification of accrued dividends related to the issuance of common stock to Series A convertible preferred stockholders							$	—		$	1,148,307
Offering costs in accounts payable							$	80,206		$	—
Series A cumulative preferred dividends	$	(85,993	)	$	(912,946	)	$	—		$	85,993
Conversion of accrued dividends related to Series A convertible preferred stock	$	—		$	187,172
Operating lease right of use asset and current and noncurrent liability							$	334,205		$	—

See accompanying notes to unaudited interim condensed consolidated financial statements.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.	Organization and Description of Business

Diffusion Pharmaceuticals Inc. (“Diffusion” or the “Company”), a Delaware corporation, is a clinical stage biotechnology company ~~focused on extending the~~developing new treatments for life ~~expectancy of cancer patients~~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. The Company is developing its lead product candidate, transcrocetinate sodium, also known as trans sodium crocetinate (“TSC”), for use in ~~many cancer types~~those life threatening conditions in which ~~tumor~~cellular 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’s~~micro-environment of hypoxic ~~micro-environment, re-oxygenating~~cells, 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. ~~Other~~In stroke, TSC helps promote the diffusion of oxygen into those brain cells in which oxygen-deprivation causes neuronal death resulting in patient mortality or morbidity. In addition to the TSC programs, the Company is exploring alternatives regarding how best to capitalize upon our product candidate RES-529, which may include possible ~~uses~~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 ~~TSC include~~crossing the ~~treatment~~blood brain barrier.

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

2.	Liquidity

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

The Company regularly explores alternative means of financing its operations and seeks funding through various sources, including public and private securities offerings, collaborative arrangements with third parties and other strategic alliances and business transactions. ~~On January 22, 2018,~~In May 2019, the Company ~~closed an underwritten~~completed a public offering of ~~15,000,000~~1,317,060 shares of ~~the Company’s~~its common stock, par value $0.001 per share ~~(“Common~~(the “Common Stock”) and a private placement of warrants to purchase ~~15,000,000~~1,317,060 shares of Common Stock. ~~At the closing, the Company also issued warrants to purchase an additional 1,970,625 shares of Common Stock pursuant to the underwriter’s partial exercise of its overallotment option.~~ The shares of Common Stock and warrants were sold atfor a combined ~~public offering~~purchase price of ~~$0.80~~$4.895 per ~~share and warrant~~unit for total net proceeds of ~~approximately $10.8~~$5.6 million. The warrants ~~have an exercise price of $0.80 per share and a term of five years from~~are exercisable beginning on the date of ~~issuance. In addition,~~their issuance until November 29, 2024 at ~~the closing, the Company issued to designees of the underwriter of the offering warrants to purchase up to 750,000 shares of Common Stock. The underwriter’s warrants have~~ an initial exercise price ~~of $1.00, a term of five years from the date of issuance and otherwise substantially similar terms~~equal to the form of investor warrant. As a result of the offering, all outstanding shares of the Company's Series A convertible preferred stock converted into 21,006,918 shares of Common Stock (including accrued dividends paid-in-kind and issuance of shares in respect of the “make-whole” adjustment feature thereof).

The Company currently does not have any commitments to obtain additional funds and may be unable to obtain sufficient funding in the future on acceptable terms, if at all. On March 2, 2018, the Company received a written notice from the staff of the Listing Qualifications Department of the Nasdaq Stock Market LLC (the "Staff") indicating the Company was not in compliance with Nasdaq Listing Rule 5550(a)(2) (the "Minimum Bid Price Rule") because the bid price for the Company’s common stock had closed below $1.00 per share for the previous 30 consecutive business days. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company had 180 calendar days from the date of such notice, or until August 29, 2018, to regain compliance with the minimum bid price requirement. To regain compliance, the bid price for the Company’s Common Stock must close at $1.00 per share or more for a minimum of 10 consecutive business days. On August 30, 2018, the Company received a written notice from the Staff providing that, although the Company had not regained compliance with the Minimum Bid Price Rule by August 29, 2018, in accordance with Nasdaq Listing Rule 5810(c)(3)(F), the Staff had determined that the Company is eligible for an additional 180 calendar days from the date of such notice, or until February 25, 2019, to regain compliance with the Minimum Bid Price Rule.$5.00.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~In the event the~~The Company iscurrently does not have any credit facilities or other commitments to which it could utilize for future funding and may be unable to ~~regain compliance, it could adversely affect~~obtain sufficient funding in the ~~Company’s ability to obtain~~ future ~~funding.~~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;~~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. At the Company’s 2018 Annual Meeting of Stockholders on June 14, 2018, the Company’s stockholders approved an amendment to the Company’s certificate of incorporation to effect a reverse stock split of the shares of the Company’s common stock at a ratio of not less than 1-to-2 and not greater than 1-to-15, with the exact ratio and effective time of the reverse stock split to be determined by the Company’s Board of Directors, if at all.

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

Operations of the Company are subject to certain risks and uncertainties including various internal and external factors that will affect whether and when the Company’s product candidates become approved drugs and how significant their market share will be, some of which are outside of the Company’s control. The length of time and cost of developing and commercializing these product candidates and/or failure of them at any stage of the drug approval process will materially affect the Company’s financial condition and future operations. ~~The Company believes its cash and cash equivalents at September 30, 2018 are sufficient to fund operations in to September 2019.~~

3.	Basis of Presentation and Summary of Significant Accounting Policies

The Summary of Significant Accounting Policies included in the Company's Form 10-K for the year ended December 31, ~~2017,~~2018, filed with the Securities and Exchange Commission on ~~April 2, 2018~~March 19, 2019 have not materially changed, except as set forth below.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information as found in the Accounting Standard Codification (“ASC”) and Accounting Standards Updates (“ASUs”) of the Financial Accounting Standards Board (“FASB”), and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements of the Company include all normal and recurring adjustments (which consist primarily of accruals, estimates and assumptions that impact the unaudited interim condensed consolidated financial statements) considered necessary to present fairly the Company’s financial position as of ~~September~~June 30, ~~2018,~~2019, its results of operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018 and cash flows for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017.~~2018. Operating results for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2018.~~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, ~~2017~~2018 filed with the SEC on Form 10-K on ~~April 2, 2018.~~March 19, 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 deemed necessary.

Fair Value of Financial Instruments

The carrying amounts of the Company’s financial instruments, including cash equivalents, accounts payable, and accrued expenses approximate fair value due to the short-term nature of those instruments. As of December 31, 2017, the fair value of the Company’s outstanding Series B convertible debt was approximately $0.6 million. The fair value of the convertible debt was determined using a binomial lattice model that utilizes certain unobservable inputs that fall within Level 3 of the fair value hierarchy.

~~Convertible Debt~~

Intangible Asset

Upon maturity of the Series B convertible debt during the second quarter of 2018, the Company repaid the outstanding principal and interest of approximately $0.6 million and $40,000, respectively. As such, the Company does not have any debt outstanding as of September 30, 2018.

~~DIFFUSION PHARMACEUTICALS INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~Intangible Asset and Goodwill~~

Goodwill and intangible assets deemed to have indefinite lives are not amortized but rather are tested at least annually for impairment, or when circumstances indicate that the carrying amount of the asset may not be recoverable. If the carrying value of the reporting unit exceeds fair value, goodwill is considered impaired. In January 2017, the FASB issued revised guidance that simplifies the test for goodwill impairment, effective for fiscal years beginning after December 15, 2019, with early adoption permitted. Under the revised guidance, if a reporting unit’s carrying value exceeds its fair value, an impairment charge will be recorded to reduce the reporting unit to fair value. Prior to the revised guidance, the amount of the impairment was the difference between the carrying value of the goodwill and the "implied" fair value, which was calculated as if the reporting unit had just been acquired and accounted for as a business combination. The Company has a single reporting unit and all goodwill relates to that reporting unit. The Company's RES-529 intangible asset ~~and goodwill are~~is assessed for impairment annually on October 1 of the Company’s fiscal year or more frequently if impairment indicators exist. There was no impairment to the Company’s RES-529 intangible asset recognized during the ~~three or nine~~six months ended ~~September~~June 30, ~~2018 and 2017. During the three months ended September 30, 2018, the Company recorded a non-cash goodwill impairment of $4.2 million (see Note 5).~~

~~Income Taxes~~

On December 22, 2017 the President of the United States signed into law the Tax Cuts and Jobs Act ("The 2017 Tax Act"), which resulted in significant changes from previous tax law. Among other things, the 2017 Tax Act reduced the federal corporate income tax rate to 21% from 34% effective January 1, 2018 and also changed the net operating loss carryforwards’ period such that all net operating losses generated in 2018 and into the future now have an indefinite life. As a result of the change in net operating loss carryforward period, during the three and nine months ended September 30, 2018, the Company recognized an income tax benefit of $0.2 million and $0.5 million, respectively, to reflect the adjustment allowed by the 2017 Tax Act to utilize indefinite deferred tax liabilities as a source of income against indefinite lived portions of the Company’s deferred tax assets.2019 or 2018.

~~Net (Loss) Income Per Common Share~~Research and Development

~~For~~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 ~~three~~Company’s behalf). Costs incurred for research and nine months ended September 30, 2017, the Company used the two-class method to compute net income per common share because the Company had issued securities (Series A convertible preferred stock) that entitled the holder to participate in dividends and earnings of the Company. Under this method, net income is reduced by any dividends earned during the period. The remaining earnings (undistributed earnings) were allocated to common stock and the Series A convertible preferred stock to the extent that the Series A convertible preferred stock was entitled to share in earningsdevelopment are expensed as if all of the earnings for the period had been distributed. The total earnings allocated to common stock is then divided by the number of outstanding shares to which the earnings are allocated to determine the earnings per share. The two-class method is not applicable during periods with a net loss, as the holders of the convertible preferred stock would have no obligation to fund losses.

Diluted net (loss) income per common share is computed under the two-class method by using the weighted-average number of shares of common stock outstanding, plus, for periods with net income attributable to common stockholders, the potential dilutive effects of stock options, unvested restricted stock, warrants, and convertible debt. In addition, the Company analyzed the potential dilutive effect of the previously outstanding Series A convertible preferred stock under the “if-converted” method when calculating diluted earnings per share, in which it was assumed that the previously outstanding convertible preferred stock converted into common stock at the beginning of the period or when issued, if later. The Company would report the more dilutive of the approaches (two class or “if-converted”) as its diluted net (loss) income per share during the period.

For the periods in which the Company reported a net loss, there was no dilutive effect under either the two-class or “if-converted” method. For the three months ended September 30, 2017, the Company presented diluted net income per common share using the two-class method, which was more dilutive than the “if-converted” method.

For purposes of calculating diluted loss per common share, the denominator includes both the weighted average common shares outstanding and the number of common stock equivalents if the inclusion of such common stock equivalents would be dilutive. Dilutive common stock equivalents potentially include stock options, unvested restricted stock awards and warrants using the treasury stock method. The diluted loss per common share calculation is further affected by an add-back of change in fair value of warrant liability to the numerator under the assumption that the change in fair value of warrant liability would not have been incurred if the warrants had been converted into common stock. In addition, the Company considers the potential dilutive impact of its convertible debt instruments using the "if-converted" method.incurred.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Leases

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

Net Loss Per Common Share

Basic net loss per share is computed by dividing net loss attributable to common stockholders by the weighted average number of shares of Common Stock 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 ~~earnings~~net loss per ~~share:~~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.

Three Months Ended
September 30,

Nine Months Ended
September 30,

2018

2017

2018

2017

Basic net (loss) income per common share calculation:

Net (loss) income
$ (6,719,730
)
$ 5,096,856 $ (12,798,872
)
$ (3,154,181
)
Accretion of Series A cumulative preferred dividends
— (366,641
)
(85,993
)
(912,946
)
Undistributed earnings allocated to participating securities
— (1,838,354
)

Deemed dividend related to the make-whole provision for the conversion of Series A preferred stock into common
— — (8,167,895
)
—
Net (loss) income attributable to common
(6,719,730
)
2,891,861 (21,052,760
)
(4,067,127
)

Weighted average common shares outstanding, basic
50,572,001 13,937,869 47,777,757 11,709,128
Net (loss) income per share of common, basic
$ (0.13
)
$ 0.21 $ (0.44
)
$ (0.35
)

Diluted net income (loss) per common share calculation:

Net income (loss) attributable to common
(6,719,730
)
2,891,861 (21,052,760
)
(4,067,127
)
Change in fair value of warrant liability
— — — (18,909,792
)
Interest on convertible debt
— 28,891 — —
Diluted net loss
(6,719,730
)
2,920,752 (21,052,760
)
(22,976,919
)
Weighted average common shares outstanding, basic
50,572,001 13,937,869 47,777,757 11,709,128
Common stock equivalents arising from stock options
— 20,608 — —
Common stock equivalents arising from warrants
— — — 816,579
Common stock equivalents arising from convertible debt
— 756,376 — —
Common stock equivalents
50,572,001 14,714,853 47,777,757 12,525,707
Diluted net loss per share of common
$ (0.13
)
$ 0.20 $ (0.44
)
$ (1.83
)

The following potentially dilutive securities outstanding as of ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018 have been excluded from the computation of diluted weighted average shares outstanding, as they would be anti-dilutive:

	Three Months Ended September 30,				Nine Months Ended September 30,				Six Months Ended June 30,
	2018		2017		2018		2017		2019		2018
Convertible debt		—		—		—		213,879
Common stock warrants		31,303,012		14,003,608		31,303,012		447,721		3,469,925		2,087,501
Stock options		3,213,797		2,521,605		3,213,797		2,545,989		309,276		214,353
Unvested restricted stock awards		—		4,599		—		4,599
		34,516,809		16,529,812		34,516,809		3,212,188		3,779,201		2,301,854

~~DIFFUSION PHARMACEUTICALS INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

As a result of the offering of its common stock consummated in January 2018, all outstanding shares of the Company's Series A convertible preferred stock converted into shares common stock. See Note 6 of these unaudited interim condensed consolidated statements for further details.

~~Recent~~Recently Issued But Not Yet Adopted Accounting Pronouncements

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

~~In June 2018, the FASB issued ASU 2018-07,~~ ~~Improvements to Nonemployee Share-Based Accounting,~~ ~~which simplifies the accounting for share-based payments granted to nonemployees for goods and services. The ASU supersedes ASC 505-50 and expands the scope of ASC 718 to include~~ ~~all~~ share-based payment arrangements related to the acquisition of goods and services from both nonemployees and employees. As a result, most of the guidance in ASC 718 associated with employee share-based payments, including most of its requirements related to classification and measurement, applies to nonemployee share-based payment arrangements. ASU 2018-07 generally requires an entity to use a modified retrospective transition approach, with a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption, for all (1) liability-classified nonemployee awards that have not been settled as of the adoption date and (2) equity-classified nonemployee awards for which a measurement date has not been established. The guidance is applicable to public business entities for fiscal years beginning after December 15, 2019 and interim periods within those years. The Company is currently evaluating the potential impact of the adoption of this standard on its consolidated results of operations, financial position and cash flows and related disclosures.

~~In July 2017, the FASB issued ASU 2017-11,~~ Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. The first part of this update addresses the complexity of accounting for certain financial instruments with down round features and the second part addresses the complexity of distinguishing liabilities from equity. The guidance is applicable to public business entities for fiscal years beginning after December 15, 2018 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.

~~In January 2017, the FASB issued ASU 2017-04,~~ ~~Intangibles-Goodwill and Other (Topic 350)~~ which simplifies the accounting for goodwill impairments by eliminating step 2 from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. The standard will be effective for fiscal years beginning after December 15, 2019, including interim periods within such fiscal years. Early adoption is allowed for all entities as of January 1, 2017, for annual and any interim impairment tests occurring on or after January 1, 2017. The Company early adopted this standard in the third quarter of 2018. See Note 5 for further discussion of the Company's intangible assets, including goodwill.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), ~~which supersedes~~to increase transparency and comparability among organizations by requiring the ~~guidance~~recognition of operating lease right-of-use assets and lease liabilities on the balance sheet. Most prominent among the changes in ~~ASC 840,~~ ~~Leases~~.the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases. Under ASC 842, ~~will be~~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 Company adopted ASC 842, effective ~~for the Company on~~ January 1, 2019 using a modified retrospective approach and ~~the Company expects~~elected to apply the available practical ~~expedients allowed by~~expedients. The standard had an impact on the ~~standard. See Note 8 for details~~Company’s unaudited interim condensed consolidated balance sheet but did not have an impact on the Company’s unaudited interim condensed consolidated statements of ~~the Company's current lease arrangement. While the Company continues to evaluate the provisions~~operations or consolidated statements of cash flows upon adoption. The most significant impact of ASC 842 was the recognition of a $0.3 million ROU asset and corresponding lease liability for the Company's single operating lease.

On January 1, 2019, the Company adopted ASU 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to ~~determine how it will be impacted,~~Non-employee Share-Based Payment Accounting (“ASU No. 2018-07”) which simplifies the ~~primary effect~~accounting for share-based payments granted to non-employees for goods and services. The ASU supersedes ASC 505-50Equity-based Payments to Non-employees and expands the scope of ~~adopting~~ASC 718 to include allshare-based payment arrangements related to the ~~new standard will be to record assets~~acquisition of goods and ~~obligations for current operating leases.~~services from both non-employees and employees. The adoption of ~~ASC 842 is~~ASU No. 2018-17 did not ~~expected to~~ have ~~a material~~an impact on the ~~Company's results~~unaudited interim condensed consolidated financial statements of ~~operations or cash flows.~~the Company.

4.	Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following:

	September 30, 2018		December 31, 2017		June 30, 2019		December 31, 2018
Accrued interest payable	$	—	$	37,415
Accrued Series A dividends		—		1,062,314
Accrued payroll and payroll related expenses		618,131		312,221		277,439		409,889
Accrued professional fees		80,051		122,711		31,000		69,231
Accrued clinical studies expenses		47,688		63,350		84,211		34,000
Other accrued expenses		70,750		30,840		50,787		92,106
Total	$	816,620	$	1,628,851	$	443,437	$	605,226

5.	~~Goodwill and Intangible Assets~~

~~Goodwill is the excess of the cost of an acquired entity over the net amounts assigned to tangible and intangible assets acquired and liabilities assumed. The Company applies ASC 350 “~~~~Goodwill and Other Intangible Assets~~,” which requires testing goodwill for impairment on an annual basis. The Company evaluates goodwill on a consolidated basis as the Company is organized as a single reporting unit. The Company completes its annual impairment test on October 1 each year, or more frequently if triggering events indicate a possible impairment. The Company considers certain triggering events when evaluating whether an interim goodwill impairment analysis is warranted. Among these would be a significant long-term decrease in the market capitalization of the Company. The Company’s market capitalization was below the carrying value of equity throughout the third quarter and as a result, management concluded that the carrying value of goodwill may not be recoverable and that a triggering event requiring an interim assessment of goodwill impairment had occurred during the three months ended September 30, 2018.

Management performed the goodwill impairment assessment using a market approach to estimate the fair value of the Company using the Company's market capitalization. This fair value was derived by multiplying the Company's shares outstanding by the average daily close prices of the Company's stock during the third quarter. The carrying value of the Company's net equity exceeded its fair value, and accordingly, the Company recognized a $4.2 million non-cash impairment charge to goodwill that reduced the carrying value to fair value. The following table shows the changes in the carrying value of goodwill during the nine months ended September 30, 2018:

Carrying value of goodwill at December 31, 2017:
$ 6,929,258
Impairment of goodwill
(4,186,050 )
Carrying value of goodwill at September 30, 2018:
$ 2,743,208

~~DIFFUSION PHARMACEUTICALS INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSc~~

The Company has an indefinite-lived In-Process Research and Development Asset (IPR&D) called RES-529, which has a balance of $8.6 million at both September 30, 2018 and December 31, 2017. RES-529 is a PI3K/Akt/mTOR pathway inhibitor in preclinical development for oncology. There was no impairment to the Company’s RES-529 intangible asset recognized during the three or nine months ended September 30, 2018 or 2017.

6.	~~Convertible Preferred Stock, Common Stock~~Stockholders' Equity and Common Stock Warrants

~~2018~~2019 Common Stock Offering

In ~~January 2018,~~May 2019, the Company ~~entered into an Underwriting Agreement (the “Agreement”) pursuant~~completed a public offering of 1,317,060 shares of the Common Stock and a private placement of warrants to ~~which it issued 15,000,000~~purchase 1,317,060 shares of Common Stock. The shares of Common Stock and warrants towere sold for a combined purchase ~~15,000,000 shares~~price of ~~Common Stock with~~$4.895 for total net proceeds of $5.6 million. The warrants are exercisable beginning on the date of their issuance until November 29, 2024 at an initial exercise price ~~of $0.80 per share for cash proceeds of $10.8 million. In addition, as compensation for its services, the Company granted~~equal to the underwriter in the transaction an option (the “Over-Allotment Option”) to purchase, in the aggregate, 2,250,000 shares of Common Stock (the “Option Shares”) and warrants to purchase up to 2,250,000 shares of Common Stock (the “Option Warrants”). The underwriter exercised its right to purchase a portion of the Option Warrants and received an additional 1,970,625 warrants to purchase Common Stock with an initial exercise price $0.80 per share.$5.00.

In addition, at the closing of such offering described in the foregoing paragraph, the Company issued to designees of the ~~underwriter~~placement agent warrants to purchase up to ~~750,000~~65,853 shares of Common ~~Stock.~~Stock and were recorded as non-cash offering costs. The ~~underwriter’s~~placement agent's warrants have an exercise price of ~~$1.00~~$6.25 per share, a term of five years from the date of issuance and otherwise substantially similar terms to the form of the investor warrant.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

As a result of the Company's Common Stock offering in January 2018, all outstanding shares of the Company's Series A convertible preferred stock converted into 21,006,918 shares of Common Stock of which (i) 8,306,278 shares were issued for the automatic conversion of Series A convertible preferred stock (ii) 1,032,219 shares were issued upon settlement of accrued dividends and (iii) 11,668,421 shares were issued for the settlement of the “make-whole” adjustment feature. A deemed dividend of $8.2 million was recognized for the value of the common shares issued for the settlement of the make-whole adjustment feature.

~~DIFFUSION PHARMACEUTICALS INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

Common Stock Warrants

As of ~~September~~June 30, ~~2018,~~2019, the Company had the following warrants outstanding to acquire shares of its common stock:

	Outstanding		Range of exercise price per share			Expiration dates	Outstanding		Range of exercise price per share			Expiration dates
Common stock warrants issued prior to 2016		26,500	$37.50	-	$49.00	2018 through 2019		1,767	$562.50	-	$735.00	2019
Common stock warrants issued related to Series A convertible preferred stock offering		13,555,887		$2.22		March 2022		903,870	$33.30			March 2022
Common stock warrants issued in 2018 related to the common stock offering		17,720,625	$0.80	-	$1.00	January 2023
Common stock warrants issued in 2018								1,181,375	$12.00	-	$15.00	January 2023
Common stock warrants issued in 2019								1,382,913	$5.00	-	$6.25	2024
		31,303,012						3,469,925

During the ~~nine~~six months ended ~~September~~June 30, ~~2018, 421,221~~2019, no warrants expired and no warrants were exercised.

7.6.	Stock-Based Compensation

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 stock~~Common Stock outstanding as of the immediately preceding December 31, unless a lesser amount is stipulated by the Compensation Committee of the Company's ~~Board~~board of ~~Directors.~~directors. Accordingly, ~~580,785~~135,049 shares were added to the reserve as of January 1, ~~2018,~~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~~June 30, ~~2018,~~2019, there were ~~27,268~~19,740 shares of ~~common stock~~Common Stock available for future issuance under the 2015 Equity Plan.

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

	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017		2019		2018		2019		2018
Research and development	$	16,202	$	14,333	$	48,848	$	81,737	$	13,577	$	16,274	$	27,173	$	32,646
General and administrative		311,194		278,168		922,984		892,213		135,503		303,495		213,111		611,790
Total stock-based compensation expense	$	327,396	$	292,501	$	971,832	$	973,950	$	149,080	$	319,769	$	240,284	$	644,436

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~~options for the ~~nine~~six months ended ~~September~~June 30, ~~2018:~~2019:

Number of
Options

Weighted
average
exercise price
per share

Weighted
average
remaining
contractual life
(in years)

Balance at January 1, 2018
2,555,989 $ 7.32
Granted
660,000 1.02
Expired
(2,192
)
17.10
Outstanding at September 30, 2018
3,213,797 $ 6.02 7.01
Exercisable at September 30, 2018
2,361,007 $ 7.09 6.35

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

~~Non-employee Stock Options~~

Non-employee stock options are remeasured to fair value each period using a Black-Scholes option-pricing model until the options vest. The Company did not grant any stock options to non-employees during the nine months ended September 30, 2018. The total fair value of non-employee stock options vested during the three months ended September 30, 2018 and 2017 was approximately $1,000 and $7,000, respectively. The total fair value of non-employee stock options vested during the nine months ended September 30, 2018 and 2017 was approximately $3,000 and $83,000, respectively. At September 30, 2018, there were 5,166 unvested options subject to remeasurement and approximately $2,000 of unrecognized compensation expense that will be recognized over a weighted-average period of 1.26 years.

~~Employee Stock Options~~

~~During the nine months ended September 30, 2018, the Company granted 660,000 stock options to employees.~~ The weighted average grant date fair value of stock option awards granted ~~to employees~~ was ~~$0.86~~$2.16 during the ~~nine~~six months ended ~~September~~June 30, ~~2018. During~~2019. The total fair value of options vested during the three months ended ~~September~~June 30, 2019 and 2018 ~~and 2017 the Company recognized stock-based compensation expense of $0.3~~was $0.1 million and $0.3 million, respectively. ~~During~~The total fair value of options vested during the ~~nine~~six months ended ~~September~~June 30, 2019 and 2018 ~~and 2017, the Company recognized stock-based compensation expense of $1.0~~was $0.3 million and ~~$0.9~~$0.6 million, respectively. No options were exercised during any of the periods presented. At ~~September~~June 30, ~~2018,~~2019, there was ~~$2.1~~$0.6 million of unrecognized compensation expense that will be recognized over a weighted-average period of ~~5.2~~1.3 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~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018 were as follows:

	2018			2017			2019			2018
Expected term (in years)		5.57			6.03			5.57			5.57
Risk-free interest rate		2.4	%		2.0	%		2.2	%		2.4	%
Expected volatility		114.7	%		114.9	%		113.4	%		114.7	%
Dividend yield		—	%		—	%		—	%		—	%

7.	Commitments and Contingencies

Office Space Rental

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

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~Restricted Stock Awards~~

As of September 30, 2018, there were no unvested shares of restricted stock. During the nine months ended September 30, 2018 and 2017, there were 3,066 and 4,599 shares that vested, respectively and the Company recognized stock-based compensation expense of approximately $6,000 and $9,000, respectively.

8.	~~Commitments and Contingencies~~

~~Office Space Rental~~

~~The Company leases office and laboratory facilities in Charlottesville, Virginia.~~ Rent expense related to the Company's operating lease for the three months ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018 was approximately ~~$28,000~~$30,000 and $28,000, respectively. Rent expense for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018 was approximately ~~$84,000~~$50,000 and ~~$80,000,~~$56,000, respectively. ~~The Company will continue to recognize rent expense on a straight-line basis over the lease period and will accrue for rent expense incurred but not yet paid.~~ Future minimum rental payments under the Company's non-cancelable operating lease at ~~September~~June 30, ~~2018~~2019 was as follows:

	Rental Commitments		Rental Commitments
2018	$	28,260
2019		114,409	$	57,547
2020		116,464		116,464
2021		118,519		118,519
2022		39,735		39,735
Total	$	417,387		332,265
Less: imputed interest				(40,416	)
			$	291,849

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

	Rental Commitments
2019	$	114,409
2020		116,464
2021		118,519
2022		39,735
	$	389,127

~~Arrangement with Clinical~~ Research ~~Organization~~and Development Arrangements

~~On July 5, 2017,~~In the course of normal business operations, the Company ~~entered~~enters into ~~a Master Services Agreement ("MSA")~~agreements with auniversities and contract research ~~organization ("CRO")~~organizations, or CROs, to ~~provide clinical trial services for individual studies and projects by executing individual work orders. The MSA and associated work orders are designed such that payments are to be made~~assist in ~~advance~~the performance of ~~the work to be performed. The Company recognized~~ research and development ~~expenses~~activities and contract manufacturers to assist with chemistry, manufacturing, and controls related expenses. Expenditures to ~~this MSA~~CROs represent a significant cost in clinical development for the Company. The Company could also enter into additional collaborative research, contract research, manufacturing, and supplier agreements in the future, which may require upfront payments and long-term commitments of $0.4 million and $1.6 million during the three and nine months ended September 30, 2018. As of September 30, 2018, there was $0.3 million of prepaid research and development costs that are estimated to be recognized during 2018.cash.

Legal Proceedings

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

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our financial condition and results of operations together with the unaudited interim condensed consolidated financial statements and the notes thereto included elsewhere in this report and other financial information included in this report. The following discussion may contain predictions, estimates and other forward looking statements that involve a number of risks and uncertainties, including those discussed under “Part I — Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Special Note Regarding Forward Looking Statements” in this report and under “Part I — Item 1A. Risk Factors” in our annual report on Form 10-K for the fiscal year ended December 31, ~~2017.~~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~~developing new treatments for life ~~expectancy of cancer patients~~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 (“TSC”), for use in ~~the many cancer types~~those life threatening conditions in which ~~tumor~~cellular 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’s~~micro-environment of hypoxic ~~micro-environment, re-oxygenating~~cells, 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. ~~Other possible uses~~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 normal and cancerous cells, has been shown to be safely re-oxygenated in our preclinical and clinical studies using TSC’s novel mechanism of action. We believe TSC’s ability to re-oxygenate normal tissue that has become oxygen-deprived provides opportunities for new therapeutic approaches to conditions ranging from stroke and emergency medicine to cardiovascular and neurodegenerative diseases. 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 for TSC ~~include~~in many such cancers. The successful completion of trials for TSC or any other potential product candidate in these or any other indication is dependent upon our ability to further raise necessary capital.

We believe that TSC has potential applications in stroke and emergency medicine. Approximately 800,000 strokes occur in the United States each year, with an estimated annual cost of $43.0 billion. The damage from a stroke begins immediately upon onset: brain cell death begins at the beginning of a stroke. A stroke can take a significant toll on its victims. Among long-term stroke survivors, approximately 66% of stroke patients end up needing mental or physical rehabilitation, approximately 40% are classified as moderately to severely disabled after the initial few days of recovery, and approximately 10% of stroke patients require long-term care. A Phase 2 trial in cooperation with UCLA and the University of Virginia to test TSC in the treatment of ~~hypoxic conditions such as~~acute stroke ~~cardiovascular disease, neurogenerative disease~~has received approval for enrollment by the FDA, with the first enrolled patient expected in the third quarter of 2019. This trial, which will feature in-ambulance dosing of TSC, is named the PreHospital Acute Stroke Therapy - TSC (PHAST - TSC) and ~~emergency medicine.~~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 victims treated in this manner.In the last quarter of 2018, we received FDA permission to begin patient enrollment in the PHAST - TSC Phase 2 trial and expect to begin enrollment in the third quarter 2019. Subject to receipt of adequate funding to support the PHAST - TSC trial, we expect to begin data readout during the first half of 2021.

Our ~~lead development programs target~~primary oncology program targets TSC against ~~cancers known to be inherently~~ treatment-resistant ~~with a focus on~~ brain cancer. A Phase 2 clinical program, completed in the second quarter of 2015, evaluated 59 patients with newly diagnosed glioblastoma multiforme (“GBM”)., a particularly deadly form of primary brain cancer. GBM affects approximately 12,000 patients annually in the United States and approximately 35,000 patients annually worldwide. This open label, historically controlled study demonstrated a favorable safety and efficacy profile for TSC when combined with GBM’s standard of care, including a 37% improvement in overall survival over the control group at two years. A particularly strong efficacy signal was seen in the inoperable patients, where survival of TSC-treated patients at two years was increased by almost four-fold over the controls. In December 2017, the Company initiated the IN~~vestigation~~INvestigation of TSC A~~gainst~~ C~~ancerous~~ T~~umors~~TSC Against Cancerous Tumors (INTACT) Phase 3 trial in the newly diagnosed inoperable GBM patient population. ~~Patient enrollment began in January 2018.~~ The trial ~~will~~is designed to enroll 236 patients in total, with 118 in the treatment arm and 118 in the control arm. ~~TSC~~The trial began with ~~concomitant temozolomide~~an open label 8 patient safety run-in for which enrollment has completed and is ~~being assigned~~now closed. With the FDA’s permission, a total of 22 patients were enrolled to ~~the first~~ensure 8 ~~patients. During their temozolomide-only treatment period, these patients~~complete data sets. We anticipate that data from this open label phase will be ~~assigned TSC at ascending doses over two 28-day cycles, with~~available during the ~~Data Safety Monitoring Board examining and reporting on~~third quarter of 2019. Commencement of enrollment in the ~~resultant data.~~

~~Using its novel mechanism~~randomization portion of ~~action, TSC has been shown~~the INTACT Phase 3 Trial is contingent upon our entering into a strategic partnership providing the necessary resources to safely re-oxygenate a range of tumor types in our preclinical and clinical studies. Diffusion believes its therapeutic potential is not limited to one specific tumor type, 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, with appropriate funding, move directly into Phase 2 studies in other cancers. We also believe that TSC has potential application in other indications involving hypoxia, such as stroke, cardiovascular disease, neurodegenerative diseases and emergency medicine. In September 2018, we received approval fromundertake the U.S. Food and Drug Administration to enroll patients in an ambulance-based Phase 2 clinical trial testing using TSC, for the treatment of acute stroke. The trial, named PHAST-TSC (Pre-Hospital Ambulance Stroke Trial-TSC), will involve 23 hospitals across urban, suburban, and rural areas in Los Angeles and Central Virginia, working closely with approximately 150 emergency medical transport groups. The decision on when to commence this trial will be based principally on two factors. The first is driven by timing on key contract negotiations which are expected to continue into early 2019. The second factor is availability of additional funding either through a financing or a collaboration partner.full trial.

In addition to the TSC programs, we are exploring alternatives regarding how best to capitalize upon our product candidate RES-529, which may include possible out-licensing and other options. RES-529 is a novel PI3K/Akt/mTOR pathway inhibitor which has completed two Phase 1 clinical trials for age-related macular degeneration and ~~is currently~~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 cross~~capable of crossing the ~~blood brain~~blood-brain barrier.

Financial Summary

In ~~January 2018,~~May 2019, we ~~closed our underwritten~~completed a public offering of ~~15,000,000~~1,317,060 shares of ~~our~~the Common Stock ~~par value $0.001 per share,~~ and a private placement of warrants to purchase ~~15,000,000~~1,317,060 shares of Common Stock. ~~At the closing, we also issued warrants to purchase an additional 1,970,625 shares of Common Stock pursuant to the underwriter's partial exercise of its overallotment option.~~ The shares of Common Stock and warrants were sold atfor a combined ~~public offering~~purchase price of ~~$0.80 per share and warrant~~$4.895 for total ~~gross~~net proceeds of ~~approximately $12.0~~$5.6 million. The warrants ~~have an exercise price of $0.80 per share and a term of five years from~~are exercisable beginning on the date of ~~issuance.~~their issuance until November 29, 2024 at an initial exercise price equal to $5.00. In addition, at the closing of such offering, the Company issued to designees of the ~~underwriter of the offering~~placement agent warrants to purchase up to ~~750,000~~65,853 shares of Common Stock. The ~~underwriter’s~~placement agent’s warrants have an exercise price of ~~$1.00,~~$6.25 per share, a term of five years from the date of issuance and otherwise substantially similar terms to the form of the investor warrant.

At ~~September~~June 30, ~~2018,~~2019, we had cash and cash equivalents of ~~$11.0~~$8.4 million. We have incurred operating losses since inception, have not generated any product revenue and have not achieved profitable operations. We incurred net losses of ~~$6.7~~$2.5 million and ~~$12.8~~$5.2 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, respectively. Our accumulated deficit as of ~~September~~June 30, ~~2018~~2019 was ~~$74.4~~$85.2 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:

~~complete regulatory~~continue our Phase 3 clinical trial for TSC in GBM and ~~manufacturing activities and commence~~ our ~~planned~~ Phase ~~II and III~~2 clinical ~~trials~~trial for ~~TSC;~~TSC in stroke;

continue the research, development and scale-up manufacturing capabilities to optimize products and dose forms for which we may obtain regulatory approval;

conduct other preclinical and clinical studies to support the filing of a New Drug Application (“NDA”) with the FDA;

maintain, expand and protect our global intellectual property portfolio;

hire additional clinical, manufacturing, and scientific personnel; and

add operational, financial and management information systems and personnel, including personnel to support our drug development and potential future commercialization efforts.

We intend to use our existing cash and cash equivalents for working capital and to fund the research and development of ~~TSC for use in the treatment of GBM and other hypoxia related indications.~~TSC. We believe that our cash and cash equivalents as of ~~September~~June 30, ~~2018~~2019 will enable us to fund our operating expenses and capital expenditure requirements ~~in to September 2019.~~into the first quarter of 2020. However, we will need to secure additional funding in the future, from one or more equity or debt financings, collaborations, or other sources, in order to carry out all of our planned research and development activities with respect to TSC and our other product candidates.

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. 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 professional fees, facility-related costs, communication expenses and professional fees for legal, patent prosecution and maintenance, and consulting and accounting services.

~~Goodwill Impairment Expense~~

Goodwill impairment expense relates to a non-cash impairment charge recognized to write-down goodwill due to the fact the Company's carrying value of equity exceeded its fair value throughout the third quarter of 2018.

Interest ~~(Income) Expense, Net~~Income

Interest ~~(income) expense, net~~income consists ~~principally~~ of interest earned from our cash and cash ~~equivalents offset by the interest expense recorded in connection with our convertible debt instruments.~~equivalents.

~~Change in Fair Value of Warrant Liabilities, Warrant Related Expenses, and Other Financing Expenses~~

In connection with our Series A convertible preferred stock private placement in March 2017, we recorded warrant expense associated with the change in fair value of the common stock warrants from issuance, the excess fair value of the common stock warrants over the gross cash proceeds from such offering, and placement agent commissions and other offering costs. Until their reclassification into stockholders’ equity in November 2017 in connection with the amendment of our certificate of incorporation, the warrants were liability classified and remeasured at each reporting period with changes in fair value recorded through earnings. As a result of the offering of our common stock consummated in January 2018, all outstanding shares of the Company's Series A convertible preferred stock converted into shares common stock.

Income Tax Benefit

Since inception, we had incurred net losses and until 2018, we had not recorded any U.S. federal or state income tax benefits for the losses as they had been offset by valuation allowances. As a result of the change in net operating loss carryforward period associated with the Tax Cuts and Jobs Act ("(“the 2017 Tax ~~Act"~~Act”), ~~the Company recognized an~~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 income against ~~indefinite lived~~indefinite-lived portions of ~~the Company’s~~our deferred tax assets.

Results of Operations for Three Months Ended ~~September~~June 30, ~~2018~~2019 Compared to Three Months Ended ~~September~~June 30, ~~2017~~2018

The following table sets forth our results of operations for the three months ended ~~September~~June 30, ~~2018~~2019 and ~~2017.~~2018.

	Three Months Ended September 30, 2018									Three Months Ended June 30, 2019
	2018			2017			Change			2019			2018			Change
Operating expenses:
Research and development	$	1,169,810		$	1,759,305		$	(589,495	)	$	1,518,381		$	1,391,113		$	127,268
General and administrative		1,589,621			1,559,399			30,222			1,068,452			1,660,630			(592,178	)
Goodwill impairment		4,186,050			—			4,186,050
Depreciation		26,723			27,374			(651	)		34,390			26,709			7,681
Loss from operations		6,972,204			3,346,078			3,626,126			2,621,223			3,078,452			(457,229	)
Other expense (income):
Interest income, net		(37,981	)		(1,318	)		(36,663	)
Change in fair value of warrant liabilities		—			(8,441,616	)		8,441,616
(Loss) income from operations before income tax benefit		(6,934,223	)		5,096,856			(12,031,079	)
Other income:
Interest income											(16,921	)		(45,339	)		28,418
Loss from operations before income tax benefit											(2,604,302	)		(3,033,113	)		428,811
Income tax benefit		(214,493	)		—			(214,493	)		(108,904	)		(267,932	)		159,028
Net (loss) income	$	(6,719,730	)	$	5,096,856		$	(11,816,586	)
Net loss										$	(2,495,398	)	$	(2,765,181	)	$	269,783

We recognized ~~$1.2~~$1.5 million in research and development expenses during the three months ended ~~September~~June 30, ~~2018~~2019 compared to ~~$1.8~~$1.4 million during the three months ended ~~September~~June 30, ~~2017.~~2018. The ~~decrease~~increase in research and development expense was attributable to a ~~$0.3~~$0.6 million increase in expense related to the commencement of our Phase 2 stroke trial, an increase in salary and manufacturing expense of $0.1 million, offset by a decrease of $0.6 million in expense related to our Phase 3 ~~GMB trial and a decrease in manufacturing expense of $0.4 million, offset by a $0.1 million increase in salary and wages expense. The decrease in~~ GBM expense was attributable to the fact that the current 8 patient dose escalation phase of the trial is less costly than the startup and implementation costs that were incurred during the three months ended September 30, 2017.trial.

General and administrative expenses were ~~$1.6~~$1.1 million during the three months ended ~~September~~June 30, ~~2018~~2019 compared to ~~$1.6~~$1.7 million during the three months ended ~~September~~June 30, ~~2017. Although overall general~~2018. Salaries and ~~administrative expenses remained flat, there was a $0.2~~wages decreased by $0.1 million, ~~decrease in~~ professional fees ~~offset~~decreased by ~~an increase in salary~~$0.3 million and ~~wages~~stock compensation expense ofdecreased by $0.2 million.

~~We recognized a non-cash goodwill impairment charge of $4.2 million during the three months ended September 30, 2018 as a result of a sustained~~The decrease in ~~our market capitalization during the third quarter. There was no such charge during the three months ended September 30, 2017.~~

~~The change in~~ interest income ~~net~~ for the three months ended ~~September~~June 30, ~~2018~~2019 compared to the three months ended ~~September~~June 30, ~~2017~~2018 is primarily attributable to having a larger cash and cash equivalents balance earning more interest during the three months ended ~~September~~June 30, 2018 compared to the three months ended ~~September~~June 30, 2017. During the three months ended September 30, 2017, we had a higher debt principal balance with a higher interest rate outstanding compared to having no debt outstanding during the same period in 2018.

In connection with the private placement of our Series A convertible preferred stock and common stock warrants in March 2017, 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 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. There were no such charges in 2018 as the warrants were reclassified into equity in November of 2017.2019.

As a result of the change in net operating loss carryforward period associated with the 2017 Tax Act, the Company recognized an income tax benefit of ~~$0.2~~$0.1 million to reflect the ~~adjustment allowed by the 2017 Tax Act to utilize~~utilization of indefinite deferred tax liabilities as a source of income against ~~indefinite lived~~indefinite-lived portions of ~~the Company’s~~our deferred tax assets.

Results of Operations for ~~Nine~~Six Months Ended ~~September~~June 30, ~~2018~~2019 Compared to ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2018

The following table sets forth our results of operations for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017.~~2018.

	Nine Months Ended September 30,									Six Months Ended June 30,
	2018			2017			Change			2019			2018			Change
Operating expenses:
Research and development	$	4,386,491		$	3,946,420		$	440,071		$	3,218,226		$	3,216,681		$	1,545
General and administrative		4,748,090			4,908,424			(160,334	)		2,269,180			3,158,469			(889,289	)
Goodwill impairment		4,186,050			—			4,186,050
Depreciation		81,450			39,767			41,683			52,662			54,727			(2,065	)
Loss from operations		13,402,081			8,894,611			4,507,470			5,540,068			6,429,877			(889,809	)
Other expense (income):
Interest (income) expense, net		(120,784	)		73,290			(194,074	)
Change in fair value of warrant liabilities		—			(18,909,792	)		18,909,792
Warrant related expenses		—			10,225,846			(10,225,846	)
Other financing expenses		—			2,870,226			(2,870,226	)
Other income:
Interest income											(37,605	)		(82,803	)		45,198
Loss from operations before income tax benefit		(13,281,297	)		(3,154,181	)		(10,127,116	)		(5,502,463	)		(6,347,074	)		844,611
Income tax benefit		(482,425	)		—			(482,425	)		(259,256	)		(267,932	)		8,676
Net loss	$	(12,798,872	)	$	(3,154,181	)	$	(9,644,691	)	$	(5,243,207	)	$	(6,079,142	)	$	835,935

We recognized ~~$4.4~~$3.2 million in research and development expenses during the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 compared to ~~$3.9~~$3.2 million during the ~~nine~~six months ended ~~September~~June 30, ~~2017. The increase in~~2018. Although overall research and development ~~expense~~expenses remained flat, there was ~~mainly attributable to~~ a ~~$1.6~~$1.0 million increase in expense related to the commencement of our Phase 2 stroke trial, an increase in salary and manufacturing expense of $0.1 million, offset by a decrease of $1.1 million in expense related to our Phase 3 GBM ~~trial and an increase in salary and wages expense of $0.2 million, offset by a $1.3 million decrease in manufacturing costs.~~trial.

General and administrative expenses were ~~$4.7~~$2.3 million during the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 compared to ~~$4.9~~$3.2 million during the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2018. The decrease in general and administrative expense was primarily due to a ~~$0.8~~$0.3 million decrease in professional fees, ~~offset by an increase in salary and other expense of $0.6 million.~~

~~We recognized~~ a ~~non-cash goodwill impairment charge of $4.2~~$0.2 million ~~during the nine months ended September 30, 2018 as a result of a sustained~~ decrease in ~~our market capitalization during the third quarter. There was no such charge during the nine months ended September 30, 2017.~~salaries and wages, and a $0.4 million decrease in stock-based compensation expense.

The ~~change~~decrease in interest ~~(income) expense, net~~income for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 compared to the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 is primarily attributable to having a larger cash and cash equivalents balance earning more interest during the ~~nine~~six months ended ~~September~~June 30, 2018 compared to the ~~same period in 2017. During the nine~~six months ended ~~September~~June 30, ~~2017, we had a larger debt principal balance with a higher interest rate outstanding compared to the same period in 2018.~~

For the nine months ended September 30, 2017, we recorded an $18.9 million 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. We also recognized $10.2 million in excess fair value of the common stock warrants over the gross proceeds from our private placement and $2.9 million in placement agent commissions and other offering costs. There were no such charges in 2018 as the warrants were reclassified into equity in November of 2017.2019.

As a result of the change in net operating loss carryforward period associated with the 2017 Tax Act, ~~the Company~~we recognized an income tax benefit of ~~$0.5~~$0.3 million during both the six months ended June 30, 2019 and 2018 to reflect the ~~adjustment allowed by the 2017 Tax Act to utilize~~utilization of indefinite deferred tax liabilities as a source of income against ~~indefinite lived~~indefinite-lived portions of ~~the Company’s~~our deferred tax assets.

Liquidity and Capital Resources

Working Capital

To date, we have funded our operations primarily through the issuance and sale ~~and issuance~~ of ~~preferred stock,~~ common stock and warrants, convertible ~~debt.~~debt and convertible preferred stock. In ~~January 2018, the Company closed an underwritten~~May 2019, we completed a public offering of ~~15,000,000~~1,317,060 shares of the Common Stock and a private placement of warrants to purchase 1,317,060 shares of Common Stock. The shares of Common Stock and warrants were sold for a combined purchase price of $4.895 for total net proceeds of $5.6 million. The warrants are exercisable beginning on the date of their issuance until November 29, 2024 at an initial exercise price equal to $5.00. In addition, at the closing of such offering, the Company issued to designees of the placement agent warrants to purchase ~~15,000,000~~up to 65,853 shares of Common ~~Stock~~Stock. The placement agent’s warrants have an exercise price of $6.25 per share, a term of five years from the date of issuance and ~~received approximately $10.6 million aggregate net proceeds.~~ otherwise substantially similar terms to the form of the investor warrant.

As of ~~September~~June 30, ~~2018,~~2019, we had ~~$11.0~~$8.4 million in cash and cash equivalents, working capital of ~~$10.6~~$8.4 million and an accumulated deficit of ~~$74.4~~$85.2 million. We expect to continue to incur net losses for the foreseeable future. We intend to use our existing cash and cash equivalents to fund our working capital and research and development of our product candidates.

Cash Flows

The following table sets forth our cash flows for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017:~~2018:

Nine Months Ended
September 30,

2018

2017

Net cash (used in) provided by:
Operating activities
$ (7,745,547
)
$ (10,050,042
)
Investing activities
— (10,438,604
)
Financing activities
9,867,520 20,151,794
Net increase (decrease) in cash and cash equivalents
$ 2,121,973 $ (336,852
)

	Six Months Ended June 30,
Net cash (used in) provided by:	2019			2018
Operating activities	$	(5,267,587	)	$	(5,829,285	)
Financing activities		5,649,156			9,867,520
Net increase in cash and cash equivalents	$	381,569		$	4,038,235

Operating Activities

Net cash used in operating activities of ~~$7.7~~$5.3 million during the ~~nine~~six months ended ~~September~~June 30, 2019 was primarily attributable to our net loss of $5.2 million and our change in deferred income taxes of $0.3 million and our net change in operating assets and liabilities of $0.1 million. This amount was offset by $0.2 million in stock-based compensation expense and $0.1 million in depreciation expense.

Net cash used in operating activities of $5.8 million during the six months ended June 30, 2018 was primarily attributable to our net loss of ~~$12.8~~$6.1 million and a change in deferred income taxes of $0.5 million. This amount was offset by the recognition of a $4.2 million non-cash impairment charge to goodwill, $1.0 million in stock-based compensation expense, our net change in operating assets and liabilities of $0.3 million and $0.1 million of depreciation expense. The net change in our operating assets and liabilities is primarily attributable to the decrease in our prepaid expenses, deposits and other current assets.

Net cash used in operating activities of $10.1 million during the nine months ended September 30, 2017 was primarily attributable to our net loss of $3.2 million $5.8 million in non-cash warrant related and other financing expenses and our net change in operating assets and liabilities of ~~$2.2~~$0.2 million. This amount was offset by ~~$1.0~~$0.6 million in stock-based compensation expense and $0.1 million of depreciation expense. The net change in our operating assets and liabilities is primarily attributable to the decrease in our accounts payable due to the timing of payments to our vendors, offset by an increase in accrued expenses due to additional accrued interest and dividends as well as an increase in prepaid expenses, mainly related to prepaid research and development and insurance costs.

~~Investing Activities~~

During the nine months ended September 30, 2017, we purchased a certificate of deposit in the amount of $10.0 million and had approximately $439,000 in fixed asset purchases. We had no such purchases in 2018.vendors.

Financing Activities

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

Net cash provided by financing activities was $9.9 million during the ~~nine~~six months ended ~~September~~June 30, 2018, which was attributable to the $10.8 million in proceeds received upon the sale of our Common Stock, offset by approximately $0.4 million in payments for ~~additional~~ related offering costs. During the ~~nine~~six months ended ~~September~~June 30, 2018, we repaid the outstanding balance of our convertible debt in the amount of approximately $0.6 million. ~~Net cash provided by financing activities was $20.2 million during~~

Reverse Stock Split

On December 13, 2018, we filed a Certificate of Amendment to our Certificate of Incorporation with the ~~nine months ended September 30, 2017, which was attributable~~Secretary of State of the State of Delaware to effect a 1-to-15 reverse stock split (the “Reverse Stock Split”) of our common stock. No fractional shares were issued in connection with the Reverse Stock Split. Stockholders who otherwise would have been entitled to receive fractional shares of our common stock had their holdings rounded up to the ~~$22.1 million~~next whole share. Proportional adjustments were made to our outstanding warrants, stock options, and other equity securities and to our 2015 Equity Incentive Plan, as amended, to reflect the Reverse Stock Split, in ~~proceeds received upon~~each case, in accordance with the ~~closing of our Series A private placement offset by approximately $98,000~~terms thereof. Unless the context otherwise requires, all share and per share amounts in ~~payments for Series B offering costs. This amount was further offset by~~this quarterly report on Form 10-Q have been adjusted to reflect the ~~repayment of our convertible note in the amount of $1.9 million.~~Reverse Stock Split.

Capital Requirements

We expect to continue to incur substantial expenses and generate significant operating losses as we continue to pursue our business strategy of developing our lead product candidate, TSC, for use in the treatment of GBM, stroke and other hypoxia related indications. Our operations have consumed substantial amounts of cash since inception. We expect to continue to spend substantial amounts of cash to advance the clinical development of our product candidates and to commercialize any product candidates for which we receive regulatory approval. At the current time, the bulk of our cash resources for clinical development is dedicated to the Phase 3 trial for TSC in inoperable ~~GBM.~~GBM and the Phase 2 trial for TSC in acute stroke. While we believe we have adequate cash resources to continue operations ~~in to September 2019,~~into the first quarter of 2020, we will need to raise additional funds in order to complete ~~this trial.~~these trials. We do not expect to commence any clinical trials beyond these trials unless we are able to raise additional capital, enter into a strategic collaborations, or make alternative financing arrangements for any such trials. To date, we have funded our ongoing business operations and short-term liquidity needs, primarily through the sale and issuance of preferred stock, common stock and convertible debt. We expect to continue this practice for the foreseeable ~~future.~~future, however, we may enter into strategic partnerships or transactions in order to fund our ongoing capital requirements.

As of ~~September~~June 30, ~~2018,~~2019, we did not have credit facilities under which we could borrow funds or any other sources of committed capital. We may seek to raise additional funds through various sources, such as equity and debt financings, or through strategic collaborations and license agreements. We can give no assurances that we will be able to secure additional sources of funds to support our operations, or if such funds are available to us, that such additional financing will be sufficient to meet our needs or be on terms acceptable to us. This risk may increase if economic and market conditions deteriorate. If we are unable to obtain additional financing when needed, we may need to terminate, significantly modify or delay the development of our product candidates and our operations, or we may need to obtain funds through collaborators that may require us to relinquish rights to our technologies or product candidates that we might otherwise seek to develop or commercialize independently. If we are unable to raise any additional capital in the near-term and/or we cannot significantly reduce our expenses and are forced to terminate our operations, investors may experience a complete loss of their investment.

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

On March 2, 2018, we received a written notice from NASDAQ indicating we were not in compliance with Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Price Rule”) because the bid price for the Common Stock had closed below $1.00 per share for the previous 30 consecutive business days. On August 30, 2018, the Company received a written notice from NASDAQ providing that, although the Company had not regained compliance with the Minimum Bid Price Rule by August 29, 2018, in accordance with Nasdaq Listing Rule 5810(c)(3)(F), the Staff had determined that the Company is eligible for an additional 180 calendar days from the date of such notice, or until February 25, 2019, to regain compliance with the Minimum Bid Price Rule. See Note 2 of our unaudited interim condensed consolidated statements for further details. At the Company’s 2018 Annual Meeting of Stockholders on June 14, 2018, the Company’s stockholders approved an amendment to the Company’s certificate of incorporation to effect a reverse stock split of the shares of the Company’s common stock at a ratio of not less than 1-to-2 and not greater than 1-to-15, with the exact ratio and effective time of the reverse stock split to be determined by the Company’s Board of Directors, if at all.

Off-Balance Sheet Arrangements

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

Critical Accounting Policies

The Critical Accounting Policies included in our Form 10-K for the year ended December 31, ~~2017,~~2018, filed with the SEC pursuant to Section 13 or 15(d) under the Securities Act on ~~April 2, 2018, as amended to this date,~~March 19, 2019 have not changed.

Special Note Regarding Forward-Looking Statements

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

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

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

●

our ability to obtain additional financing;


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


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

●

the difficulties in obtaining and maintaining regulatory approval of our products and product candidates, and the labeling under any approval we may obtain;


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


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


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


	●	regulatory developments in the United States and foreign countries;


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


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


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


	●	recently enacted and future legislation regarding the healthcare system;


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

●

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

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


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

●

~~the ability of the Company to continue as a going concern.~~manufacturers.

You should also read carefully the factors described in the “Risk Factors” section of our Annual Report on Form 10-K filed with the SEC on ~~April 2, 2018,~~March 19, 2019, as amended, and elsewhere in our public filings to better understand the risks and uncertainties inherent in our business and underlying any forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements contained or incorporated by reference in this Quarterly Report on Form 10-Q will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all.

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

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

Change in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended) that occurred during the quarter ended ~~September~~June 30, ~~2018~~2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

For this item, please refer to Note 8,7, Commitments and Contingencies to the Notes to the Unaudited Interim Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

ITEM 1A.

RISK FACTORS

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A - “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, ~~2017,~~2018, which could materially affect our business, financial condition or future results.

As of the date of this Quarterly Report on Form 10-Q, there have been no material changes with respect to the Company’s risk factors previously disclosed on Form 10-K for the year ended December 31, ~~2017, except as set forth below.~~2018.

~~We have a history of operating losses and expect to continue to incur losses in the forseeable future, which raises substantial doubt about our ability to continue as a going concern.~~

As discussed further in Note 2 to our unaudited consolidated financial statements included herein, we have a history of operating losses and expect to continue to incur losses in the foreseeable future, which raises substantial doubt regarding our ability to continue as a going concern. We currently have no sources of revenue and our ability to continue as a going concern is dependent on our ability to raise capital to fund our 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 our ability to continue as a going concern. The consolidated financial statements 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.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Unregistered Sales of Equity Securities

None.

Issuer Purchases of Equity Securities

None.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.

OTHER INFORMATION

On November 8, 2018, Isaac Blech provided notice to the Company of his resignation from the board of directors of the Company (the “Board”) effective immediately. Mr. Blech was not serving as a member of any committee of the Board prior to his resignation. Mr. Blech indicated that his decision to resign was due to his desire to focus on other personal pursuits and was not the result of any disagreement with the Company, the Company’s management or the Board.None.

ITEM 6.

EXHIBITS

See attached Exhibit Index.

DIFFUSION PHARMACEUTICALS INC.

QUARTERLY REPORT ON FORM 10-Q

EXHIBIT INDEX

Exhibit No.	Description	~~Description~~	Method of Filing
~~3.1~~		~~Certificate of Incorporation of Diffusion Pharmaceuticals, Inc., as amended~~	~~Filed herewith~~

~~10.1~~		~~Amended and Restated Employment Agreement, dated as of September 21, 2018, by and between William Hornung and Diffusion Pharmaceuticals Inc.~~	~~Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed September 27, 2018.~~

~~10.2~~		~~Separation Letter, effective as of September 26, 2018, by and between Ben L. Shealy and Diffusion Pharmaceuticals Inc.~~	~~Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed September 27, 2018.~~

31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and SEC Rule 13a-14(a)	Filed herewith
31.2		Certification of principal financial officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and SEC Rule 13a-14(a)	Filed herewith
32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Furnished herewith
32.2		Certification of principal financial officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Furnished herewith
101		The following materials from Diffusion’s quarterly report on Form 10-Q for the quarter ended ~~September~~June 30, ~~2018,~~2019, formatted in XBRL (Extensible Business Reporting Language): (i) the Unaudited Condensed Consolidated Balance Sheets, (ii) the Unaudited Condensed Consolidated Statements of Operations, (iii) the Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity (Deficit), (iv) the Unaudited Condensed Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Condensed Consolidated Financial Statements	Filed herewith

SIGNATURES

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

Date: ~~November 13, 2018~~August 8, 2019

		DIFFUSION PHARMACEUTICALS INC.



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


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

2924

Carrying value of goodwill at December 31, 2017:	$	6,929,258
Impairment of goodwill		(4,186,050	)
Carrying value of goodwill at September 30, 2018:	$	2,743,208