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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

(Mark one)

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

 

For the quarterly period ended March31, 20222023

 

☐

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

 

For the transition period from ___________ to ______________.___________.

 

Commission file number: 000-24477001-37942

 

 

DIFFUSION PHARMACEUTICALS INC.

(Exact name of registrant as specified in its charter)

 

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

 

300 East Main Street, Suite 201

Charlottesville, VA 22902

(Address of principal executive offices, including zip code)

 

(434) 220-0718

(Registrant’s telephone number including area code)

 

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

 

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

None 

 

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

 

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

 

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

 

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

 

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

 

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

 

The number of shares of common stock outstanding at May 11, 20222023 was 2,038,5922,040,025 shares.

 

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Note Regarding Company References and Other Defined Terms¹

Unless the context otherwise requires, in this Quarterly Report, (i) references to the “Company,"Diffusion," "the Company,” “we,” “our,” or “us” refer to Diffusion Pharmaceuticals Inc. and its subsidiaries and (ii) references to “common stock” refer to the common stock, par value $0.001 per share, of the Company.Company, and (iii) all share and per share amounts related to our common stock give effect to our 1-for-50 reverse stock split effected April 18, 2022. We have also used several other defined terms in this Quarterly Report, many of which are explained or defined below:

Note Regarding Forward-Looking Statements

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

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

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

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

Note Regarding Stock Splits

Unless the context otherwise requires, in this Quarterly Report, all share and per share amounts related to our common stock give effect to our 1-for-50 reverse stock split effective April 18, 2022.

Note Regarding Trademarks, Trade Names and Service Marks

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

PART I – FINANCIAL INFORMATION

Diffusion Pharmaceuticals Inc.

Consolidated Balance Sheets

(unaudited)

See accompanying notes to unaudited interim consolidated financial statements.

Diffusion Pharmaceuticals Inc.

Consolidated Statements of Operations and Comprehensive Loss

(unaudited)

See accompanying notes to unaudited interim consolidated financial statements.

Diffusion Pharmaceuticals Inc.

Consolidated Statements of Stockholders' Equity

Three Months Ended March 31, 2021 and 20222023

(unaudited)

See accompanying notes to unaudited interim consolidated financial statements.

Diffusion Pharmaceuticals Inc.

Consolidated Statements of Cash Flows

(unaudited)

See accompanying notes to unaudited interim consolidated financial statements.

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

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

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

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

On October 25, 2022, the Company announced that its Board authorized a thorough review and evaluation of a range of potential strategic opportunities in the interest of enhancing stockholder value, including transactional opportunities such as a merger, joint venture, licensing, sale, or divestiture of assets.

In the first quarter of 2023, in connection with the ongoing strategic review process and efforts to utilize and preserve assets in a manner that maximizes value for its stockholders, the Company committed to a reduction in force that impacted seven of the Company’s thirteen employees. The reduction was a cash preservation measure and impacted employees primarily in the Company’s clinical operations function. In connection with the strategic review process and pending its conclusion, the Company has paused significant portions of its TSC development activities, including initiation of the Company’s previously announced Phase 2 study of TSC in newly diagnosed GBM patients.

On March 30, 2023, the Company entered into the Merger Agreement with EIP and Merger Sub, pursuant to which, and subject to the satisfaction or waiver of the conditions set forth therein, Merger Sub will be merged with and into EIP at the effective time of the Merger, with EIP continuing after the Merger as the surviving corporation and a wholly-owned subsidiary of the Company. The Merger is intended to qualify as a tax-free reorganization for U.S. federal income tax purposes. As of the date of this Quarterly Report, the Merger remains pending and subject to, among other closing conditions, certain approvals by the Company’s stockholders,  and there is no assurance in the Merger or any other transaction will be consummated.

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

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

Operations of the Company are subject to certain additional risks and uncertainties as well, and any one or more of these factors could materially affect the Company’s financial condition, future operations and liquidity needs. Many of these risks and uncertainties are outside of the Company’s control, including the outcome of its ongoing strategic review process and various internal and external factors that willmay affect whether and when the Company’s product candidates become approved drugs and how significant their market share will be, some of which are outsidesuccess or failure of the Company’s control. TheCompany's research and development efforts, the length of time and cost of developing and commercializing thesethe Company's current or future product candidates, and/or failurewhether and when any such product candidates become approved drugs, and how significant a drug's market share will be, if approved, among others.

Subject to the outcome and timing of them at any stageits ongoing strategic review process, and without giving effect to the consummation of the drug approval process will materially affectproposed Merger with EIP, the Company’s financial condition and future operations. The Company expectscurrently expect that its existing cash, cash equivalents and marketable securities as of March 31,2022 will enable it 2023 are sufficient to fund its operating expenses and capital expenditure requirements through 2023.current operations for at least 12 months following the date of this Quarterly Report.

As of the date of this Quarterly Report, the Summary of Significant Accounting Policies included in the Company's Annual Report have not materially changed, except as set forth below.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Basis of Presentation

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

Use of Estimates

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

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

Fair Value of Financial Instruments

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

Concentration of Credit Risk

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

Cash and Cash Equivalents

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

Marketable securities

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

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

Research and Development

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

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

Reverse Stock SplitPatent Costs

On April 18, 2022, Patent costs, including related legal costs, are expensed as incurred and are recorded within general and administrative expenses in the consolidated statements of operations and comprehensive loss.

Stock-based Compensation

The Company filedmeasures stock-based awards at grant-date fair value and records compensation expense on a Certificate of Amendment to its Certificate of Incorporation, as amended, withstraight-line basis over the Secretary of Statevesting period of the Stateaward. The Company uses the Black-Scholes Model to value its stock option awards. Estimating the fair value of Delawarestock option awards requires management to effectapply judgment and make estimates, including the Reverse Stock Split at a ratiovolatility of 1-to-50. NaN fractional shares were issued in connection with the Reverse Stock Split. Stockholders who otherwise would have been entitled to receive fractional shares ofCompany’s common stock, are entitled to receive an amount in cash (without interest or deduction) equal to the fractionexpected term of one share to which such stockholder would otherwise be entitled multiplied by $12.93, representing the split-adjusted average closing priceCompany’s stock options, the expected dividend yield and the fair value of the Company’s common stock on the Nasdaq Capital Marketmeasurement date. As a result, if factors change and management uses different assumptions, stock-based compensation expense could be materially different for future awards.

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

For stock price volatility, the Company uses a combination of its own historical stock price and comparable public companies as a basis for its expected volatility to calculate the fair value of option grants. The Company assumes no dividend yield because dividends are not expected to be paid in the near future, which is consistent with the Company’s outstanding warrants, stock options and other equity securities and tohistory of not paying dividends. The risk-free interest rate is based on U.S. Treasury notes with a term approximating the 2015 Equity Plan to reflectexpected term of the Reverse Stock Split,option. The Company accounts for forfeitures in each case, in accordance with the terms thereof. Unless the context otherwise requires, all share and per share amounts in this Quarterly Report have been adjusted to reflect the Reverse Stock Split.periods they occur.

Net Loss Per Common Share

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

The following potentially dilutive securities outstanding as of March 31,2022 and 2021 have been excluded from the computation of diluted weighted average shares outstanding, as they would be anti-dilutive:

Recently Adopted Accounting Pronouncements

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

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

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

The following is a summary of the Company's marketable securities as of March 31, 2022:as of the date indicated:

The Company did not have marketable securities as of December 31, 2021. The Company's marketable securities generally have contractual maturity dates between 37 and 1230 months. Most

As of March 31, 2023, $1,991,770 of the Company’s marketable securities areheld were in an unrealized loss position, at March 31, 2022. Unrealizedall of which have been in an unrealized loss position for less than twelve months. The Company determined that unrealized losses on marketable securities as of March 31, 2022 were not significant and were primarily due to market conditions, including changes in the U.S. Federal Reserve interest rates,rate, and not due credit losses. The Company does not intend to increasedsell the investments and it is not more likely than not that that the Company will be required to sell the investments before the recovery of the amortized cost basis. No allowance for credit risks associated with specific securities. Accordingly, 0 other-than-temporary impairmentlosses related to any of these securities was recorded for the three months ended March 31, 2022 and there were 0 realized gains or losses recorded during the three months ended March 31, 2022.2023.

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

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

Private Placement of Series C Preferred Stock

On March 18, 2022, the Company issued and sold to Robert J. Cobuzzi, Jr., Ph.D., its President & Chief Executive Officer, and William R. Elder, its General Counsel & Corporate Secretary, an aggregate of 10,000 shares of Series C Preferred Stock at an offering price of $0.50 per share, representing 100% of the stated value per share of the Series C Preferred Stock, for aggregate gross proceeds of $5,000.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The Series C Certificate provides that, among other things, (i) each share of Series C Preferred Stock is convertible into 0.02 shares of the Company's common stock, representing a conversion price of $25.00 per share, subject to certain conditions, (ii) each share of Series C Preferred Stock outstanding is counted on an as converted basis, together with the Company’s common stock as a single class, for purposes of determining the presence of a quorum at any meeting at which holders are asked to vote on matters related to the Reverse Stock Split (subject to any applicable exchange listing rules), (iii) each share of Series C Preferred Stock outstanding has the right to cast 1,600 votes per share of Series C Preferred Stock on the Reverse Stock Split on a “mirrored” basis — this means that the holders of the Series C Preferred Stock are required to vote their shares in a manner that “mirrors” the proportions of “For” and “Against” votes cast by the holders of the Company’s common stock are voted on the Amendment (excluding, for the avoidance of doubt, any shares of common stock that are not voted), and (iv) the holders of outstanding shares of Series C Preferred Stock are entitled to dividends, on an as converted basis, equal to dividends actually paid, if any, on shares of common stock and participate in any liquidation of the Company on an as converted basis.

On April 18, 2022, following approval of the Reverse Stock Split by the Company's stockholders, all 10,000 shares of Series C Preferred Stock were converted into an aggregate of 200 shares of the Company's common stock in accordance with the terms of the Series C Certificate.

Common Stock Warrants

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

As of March 31,2022, 2023, the Company had the following warrants outstanding to acquire shares of its common stock:

During the three months ended March 31,2022, 18,077 2023, 23,639 warrants expired.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

2015 Equity Plan

The 2015 Equity Plan provides for increases to the number of shares reserved for issuance thereunder each January 1 equal to 4.0% of the total shares of the Company’s common stock outstanding as of the immediately preceding December 31, unless a lesser amount is stipulated by the Compensation Committee of the Company's board of directors. Accordingly, 81,53181,582 shares were added to the reserve as of January 1, 2022, 2023, which shares may be issued in connection with the grant of stock-based awards, including stock options, restricted stock, restricted stock units, stock appreciation rights and other types of awards as deemed appropriate, in each case, in accordance with the terms of the 2015 Equity Plan. As of March 31, 2022, 2023, there were 49,039141,096 shares 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 consolidated statements of operations and comprehensive loss for the periods indicated:

The following table summarizes the activity related to all stock option grants for the three months ended March 31,2022: 2023:

The weighted average grant date fair value of stock option awardsThere were no options granted was $10.90 during the three months ended March 31, 2022. 2023. The total fair value of options vested during the three months ended March 31, 2023 and 2022 and 2021was $0.3$0.1 million and $0.2 million, respectively. NaNNo options were exercised during any of the periods presented. At March 31,2022, 2023, there was $1.3$0.4 million of unrecognized compensation expense that will be recognized over a weighted-average period of 1.971.27 years.

Options granted were valued using the Black-Scholes-Merton derivative instrument pricing model and assumptions used to value the options granted during the three months ended March 31, 2022 were as follows:

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Restricted Stock Unit Awards

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

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

(1)(1) The RSUs vested during the three months ended March 31, 2022 2023 were settled on a hybrid basis. The Company withheld 120274 shares of common stock and, in lieu of delivering such shares, paid the RSU holder an amount in cash equal to the fair market value of such shares on the vesting date, representing the holder's approximate tax liability associated with such vesting amount in cash equal to the fair market value of such shares on vesting date, representing the holder's approximate tax liability associated with such vesting.

The Company recognized approximately $16,000$14,000 and $5,000$16,000 in expense related to these awards during the three months ended March 31,2022 and March 31, 2021, 2023 and March 31, 2022, respectively. At March 31,2022, 2023, there was approximately $0.1 million of$48,000 in unrecognized compensation cost that will be recognized over a weighted average period of 1.901.04 years.

Office Space Lease Commitment

The Company has a short term agreementsagreement to utilize membership-based co-working space in both Charlottesville, Virginia and was previously party to a second, similar agreement for co-working space in Philadelphia, Pennsylvania.Pennsylvania, which was terminated during the year ended December 31, 2022. Rent expense related to the Company's short-term agreements was approximately $9,000$1,000 and $31,000$9,000 for the three months ended March 31,2022 2023 and 2021,2022, respectively.

Research and Development Arrangements

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

Defined Contribution Retirement Plan

The Company has established its 401(k)401(k) Plan, which covers all employees who qualify under the terms of the plan. Eligible employees may elect to contribute to the 401(k)401(k) Plan up to 90% of their compensation, limited by the IRS-imposed maximum. The Company provides a safe harbor match with a maximum amount of 4% of the participant’s compensation. The Company made matching contributions under the 401(k)401(k) Plan of approximately $27,000$26,000 and $16,000$27,000 for the three months ended March 31, 2022 2023 and 2021,2022, respectively.

Legal Proceedings

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

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

Special Meeting, Series C Preferred Stock Conversion, Charter Amendment, and Reverse Stock Split

On April 18, 2022, at the Special Meeting, the Company's stockholders approved an amendment to the Company’s certificate of incorporation, as amended, to effect a reverse stock split of the Company’s outstanding shares of common stock by a ratio of any whole number between 1-for-2 and 1-for-50, at any time prior to December 31, 2022, the implementation and timing thereof subject to the discretion of the Company’s board of directors.

Following the completion of the Special Meeting, in accordance with Section 8(a) of the Series C Certificate, the Company delivered to the holders of the Series C Preferred Stock written notice of the Company’s intent to implement the Reverse Stock Split and the Mandatory Conversion (as defined in the Series C Certificate) of all 10,000 shares of Series C Preferred Stock outstanding into an aggregate of 200 shares of the Company’s common stock.

As described in further detail above under, Note 3. Basis of Presentation and Summary of Significant Accounting Policies, on April 18, 2022, following the completion of the Special Meeting and the Series C Preferred Stock conversion,  the Company implemented the Reverse Stock Split at a ratio of 1-for-50 and beginning with the opening of trading on April 19, 2022, the Company’s common stock was available for trading on the Nasdaq Capital Market on a Reverse Stock Split adjusted basis.

Nasdaq Bid Price Requirement Compliance

On May 3, 2022, the Company received a written notice from the Nasdaq Staff confirming that the Company has regained compliance with Nasdaq Listing Rule 5550(a)(2) because the bid price for the Company’s common stock had closed above $1.00 per share for the previous ten (10) consecutive business days ending May 2, 2022. As previously reported, on May 6, 2021, the Company received a written notice from the Nasdaq Staff indicating that the Company was not in compliance with Nasdaq Listing Rule 5550(a)(2) because the bid price for the Company’s common stock had closed below $1.00 per share for the previous 30 consecutive business day. The May 3, 2022 letter confirmed this matter is now closed.