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 June30, 2022March 31, 2023
☐ | 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 | Name of Each Exchange on Which Registered |
Common Stock, par value $0.001 per share | DFFN |
|
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 August 10, 2022May 11, 2023 was 2,039,1202,040,025 shares.
DIFFUSION PHARMACEUTICALS INC.
FORM 10-Q
JUNEMARCH 30, 202231, 2023
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 | 15 |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
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ITEM 4. CONTROLS AND PROCEDURES |
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PART II – OTHER INFORMATION |
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ITEM 1. LEGAL PROCEEDINGS |
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ITEM 1A. RISK FACTORS |
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES |
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ITEM 4. MINE SAFETY DISCLOSURES |
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ITEM 5. OTHER INFORMATION |
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ITEM 6. EXHIBITS |
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Note Regarding Company References and Other Defined Terms
Unless the context otherwise requires, in this Quarterly Report, (i) references to the “Company,"Diffusion," "the Company,” “we,” “our”“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, 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:
Term | Definition |
2015 Equity Plan | Diffusion Pharmaceuticals Inc. 2015 Equity Incentive Plan, as amended |
401(k) Plan | Diffusion Pharmaceuticals Inc. 401(k) Defined Contribution Plan |
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Annual Report | our Annual Report on Form 10-K for the year ended December 31, |
ASC | Accounting Standard Codification of the FASB |
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CRO | contract research organization |
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Exchange Act | Securities Exchange Act of 1934, as amended |
FASB | Financial Accounting Standards Board |
FDA | U.S. Food and Drug Administration |
G&A | general and administrative |
GAAP | U.S. generally accepted accounting principles |
GBM | glioblastoma multiforme brain cancer |
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| the Agreement and Plan of Merger, dated as of March 30, 2023, by and among the Company, Merger Sub, and EIP |
Merger Sub | Dawn Merger Sub Inc., a |
Nasdaq | Nasdaq Stock Market, LLC |
NOL | net operating loss |
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Quarterly Report | this Quarterly Report on Form 10-Q |
R&D | research and development |
Regulation S-K | Regulation S-K promulgated under the Securities Act of 1933, as amended |
Reverse Stock Split | the reclassification and combination of all shares of our common stock outstanding at a ratio of one-for-50 approved by our stockholders at the Special Meeting and effective April 18, 2022 |
SEC | U.S. Securities and Exchange Commission |
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Series C Preferred Stock | the Company's previously outstanding Series C Convertible Preferred Stock, par value $0.001 per share |
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TSC | trans sodium crocetinate |
U.S. | United States |
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:
• | the approval by our stockholders of the issuance of our common stock in connection with, and the change of control that would be occasioned by, the Merger, the closing of the Merger, including the timing of the Merger, and the approval of the proposal regarding a potential reverse stock split of our common stock as described in the Preliminary Merger Proxy Statement, the likelihood of the satisfaction of the minimum net cash condition as well as the other conditions to the closing of the Merger, the Exchange Ratio (as defined in the Merger Agreement) and relative ownership levels as of the closing of the Merger, including any adjustments thereto related to Diffusion’s net cash balance at closing of the Merger, the expected benefits of and potential value created by the Merger for the stockholders of Diffusion and EIP, and Diffusion’s ability to control and correctly estimate its operating expenses and its expenses associated with the Merger; |
• | our cash balances following the closing of the Merger, if any; |
• | our ability to obtain additional financing in the future and continue as a going concern ; |
• | the plans, strategies and objectives of management for future operations, including the execution of integration plans and the anticipated timing of filings; |
• | the success and timing of our clinical and preclinical studies, including our ability to enroll subjects in our |
• | obtaining and maintaining intellectual property protection for our current or future product candidates and our proprietary |
• | the performance of third parties, including contract research organizations, manufacturers, suppliers, and outside consultants, to whom we outsource certain operational, staff and other |
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• | our ability to obtain and maintain regulatory approval of our current or future product candidates and, if approved, our products, including the labeling under any approval we may |
• | our plans and ability to develop and commercialize our current or future product candidates and the outcomes of our research and development | |
• | our estimates regarding expenses, future revenues, capital requirements, and needs for additional |
• | our failure to recruit or retain key scientific or management personnel or to retain our executive |
• | the accuracy of our estimates of the size and characteristics of the potential markets for our current or future product candidates, the rate and degree of market acceptance of any of our current or future product candidates that may be approved in the future, and our ability to serve those |
• | the success of products that are or may become available which also target the potential markets for our current or future product |
• | our ability to operate our business without infringing the intellectual property rights of others and the potential for others to infringe upon our intellectual property |
• | any significant breakdown, infiltration, or interruption of our information technology systems and |
• | recently enacted and future legislation related to the healthcare |
• | other regulatory developments in the U.S., E.U., and other foreign |
• | our ability to satisfy the continued listing requirements of the |
• | uncertainties related to general economic, political, business, industry, and market |
• | other risks and uncertainties, including those discussed under the heading "Risk Factors" in our Annual Report and elsewhere in our other public filings. |
As a result of these and other factors, known and unknown, actual results could differ materially from our intentions, beliefs, projections, outlook, analyses, or expectations expressed in any forward-looking statements in this Quarterly Report. Accordingly, we cannot assure you that the forward-looking statements contained or incorporated by reference in this Quarterly Report will prove to be accurate or that any such inaccuracy will not be material. You should also understand that it is not possible to predict or identify all such factors, and you should not consider any such list to be a complete set of all potential risks or uncertainties. In light of the foregoing and the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. For all forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
Any forward-looking statements that we make in this Quarterly Report speak only as of the date of such statement, and, except as required by applicable law or by the rules and regulations of the SEC, we undertake no obligation to update such statements to reflect events or circumstances after the date of this Quarterly Report or to reflect the occurrence of unanticipated events. Comparisons of current and any prior period results are not intended to express any ongoing or future trends or indications of future performance, unless explicitly expressed as such, and should only be viewed as historical data.
Note Regarding Trademarks, Trade Names and Service Marks
This Quarterly Report contains certain trademarks, trade names, and service marks of ours, including “DIFFUSIO2N.“DIFFUSIO2N.” All other trade names, trademarks, and service marks appearing in this Quarterly Report are, to the knowledge of Diffusion, the property of their respective owners. To the extent any such terms appear without the trade name, trademark, or service mark notice, such presentation is for convenience only and should not be construed as being used in a descriptive or generic sense.
PART I – FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS |
Diffusion Pharmaceuticals Inc.
Consolidated Balance Sheets
(unaudited)
June 30, 2022 | December 31, 2021 | March 31, 2023 | December 31, 2022 | |||||||||||||
Assets | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 5,965,726 | $ | 37,313,558 | $ | 14,645,586 | $ | 10,113,706 | ||||||||
Marketable securities | 22,574,681 | 0 | 2,991,770 | 12,408,940 | ||||||||||||
Prepaid expenses, deposits and other current assets | 643,618 | 510,015 | 767,530 | 112,406 | ||||||||||||
Total current assets | 29,184,025 | 37,823,573 | $ | 18,404,886 | $ | 22,635,052 | ||||||||||
Other assets | 0 | 15,578 | ||||||||||||||
Total assets | $ | 29,184,025 | $ | 37,839,151 | ||||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | 846,032 | 947,495 | 971,455 | 1,127,782 | ||||||||||||
Accrued expenses and other current liabilities | 1,668,990 | 1,980,189 | 1,154,475 | 1,289,554 | ||||||||||||
Total current liabilities | 2,515,022 | 2,927,684 | ||||||||||||||
Total liabilities | 2,125,931 | 2,417,336 | ||||||||||||||
Commitments and Contingencies (Note 9) | ||||||||||||||||
Stockholders’ Equity: | ||||||||||||||||
Common stock, $0.001 par value: 1,000,000,000 shares authorized: 2,038,914 and 2,038,185 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively | 2,038 | 2,038 | ||||||||||||||
Common stock, $0.001 par value: 1,000,000,000 shares authorized: 2,040,025 and 2,039,557 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively | 2,040 | 2,040 | ||||||||||||||
Additional paid-in capital | 165,475,801 | 164,914,540 | 165,968,961 | 165,847,590 | ||||||||||||
Accumulated other comprehensive loss | (86,583 | ) | 0 | (3,123 | ) | (35,375 | ) | |||||||||
Accumulated deficit | (138,722,253 | ) | (130,005,111 | ) | (149,688,923 | ) | (145,596,539 | ) | ||||||||
Total stockholders' equity | 26,669,003 | 34,911,467 | 16,278,955 | 20,217,716 | ||||||||||||
Total liabilities and stockholders' equity | $ | 29,184,025 | $ | 37,839,151 | $ | 18,404,886 | $ | 22,635,052 |
See accompanying notes to unaudited interim consolidated financial statements.
Diffusion Pharmaceuticals Inc.
Consolidated Statements of Operations and Comprehensive Loss
(unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2023 | 2022 | |||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Research and development | $ | 2,108,553 | $ | 1,972,673 | $ | 4,534,451 | $ | 4,889,051 | $ | 1,308,589 | $ | 2,425,898 | ||||||||||||
General and administrative | 2,137,326 | 1,836,773 | 4,265,878 | 3,580,283 | 2,957,691 | 2,128,552 | ||||||||||||||||||
Depreciation | 0 | 23,755 | 0 | 48,202 | ||||||||||||||||||||
Loss from operations | 4,245,879 | 3,833,201 | 8,800,329 | 8,517,536 | 4,266,281 | 4,554,450 | ||||||||||||||||||
Interest income | (55,378 | ) | (55,228 | ) | (83,187 | ) | (95,644 | ) | (173,897 | ) | (27,809 | ) | ||||||||||||
Net loss | $ | (4,190,501 | ) | $ | (3,777,973 | ) | $ | (8,717,142 | ) | $ | (8,421,892 | ) | $ | (4,092,384 | ) | $ | (4,526,641 | ) | ||||||
Per share information: | ||||||||||||||||||||||||
Net loss per share of common stock, basic and diluted | $ | (2.06 | ) | $ | (1.85 | ) | $ | (4.28 | ) | $ | (4.54 | ) | $ | (1.95 | ) | $ | (2.22 | ) | ||||||
Weighted average shares outstanding, basic and diluted | 2,038,727 | 2,037,978 | 2,038,529 | 1,854,161 | 2,039,737 | 2,038,323 | ||||||||||||||||||
Comprehensive loss: | ||||||||||||||||||||||||
Net loss | $ | (4,190,501 | ) | $ | (3,777,973 | ) | $ | (8,717,142 | ) | $ | (8,421,892 | ) | $ | (4,092,384 | ) | $ | (4,526,641 | ) | ||||||
Unrealized loss on marketable securities | (36,925 | ) | 0 | (86,583 | ) | 0 | ||||||||||||||||||
Comprehensive loss: | (4,227,426 | ) | (3,777,973 | ) | (8,803,725 | ) | (8,421,892 | ) | ||||||||||||||||
Unrealized gain (loss) on marketable securities | 32,252 | (49,658 | ) | |||||||||||||||||||||
Comprehensive loss | $ | (4,060,132 | ) | $ | (4,576,299 | ) |
See accompanying notes to unaudited interim consolidated financial statements.
Diffusion Pharmaceuticals Inc.
Consolidated StatementStatements of Changes in Stockholders' Equity
Three and Six Months Ended June 30,March 31, 2021 and 20222023
(unaudited)
Series C Convertible Preferred Stock | Common Stock | Additional Paid-in | Accumulated Other Comprehensive | Accumulated | Total Stockholders' | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Loss | Deficit | Equity | |||||||||||||||||||||||||
Balance at January 1, 2022 | — | $ | — | 2,038,185 | $ | 2,038 | $ | 164,914,540 | $ | — | $ | (130,005,111 | ) | $ | 34,911,467 | |||||||||||||||||
Sale of series C preferred stock to related parties | 10,000 | 5,000 | — | — | — | — | — | 5,000 | ||||||||||||||||||||||||
Stock-based compensation expense and vesting of restricted stock units | — | — | 207 | — | 278,131 | — | — | 278,131 | ||||||||||||||||||||||||
Unrealized loss on marketable securities | — | — | — | — | — | (49,658 | ) | — | (49,658 | ) | ||||||||||||||||||||||
Net loss | — | — | — | — | — | — | (4,526,641 | ) | (4,526,641 | ) | ||||||||||||||||||||||
Balance at March 31, 2022 | 10,000 | $ | 5,000 | 2,038,392 | $ | 2,038 | $ | 165,192,671 | $ | (49,658 | ) | $ | (134,531,752 | ) | $ | 30,618,299 |
Series C Convertible Preferred Stock | Common Stock | Additional Paid-in | Accumulated Other Comprehensive | Accumulated | Total Stockholders' | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Loss | Deficit | Equity | |||||||||||||||||||||||||
Balance at April 1, 2022 | 10,000 | $ | 5,000 | 2,038,392 | $ | 2,038 | $ | 165,192,671 | $ | (49,658 | ) | $ | (134,531,752 | ) | $ | 30,618,299 | ||||||||||||||||
Conversion of Series C preferred stock to common stock | (10,000 | ) | (5,000 | ) | 200 | — | 5,000 | — | — | — | ||||||||||||||||||||||
Stock-based compensation expense and vesting of restricted stock units | 0 | 0 | 322 | 0 | 278,130 | 0 | 0 | 278,130 | ||||||||||||||||||||||||
Unrealized loss on marketable securities | — | 0 | — | 0 | 0 | (36,925 | ) | 0 | (36,925 | ) | ||||||||||||||||||||||
Net loss | — | 0 | — | 0 | 0 | 0 | (4,190,501 | ) | (4,190,501 | ) | ||||||||||||||||||||||
Balance at June 30, 2022 | 0 | $ | 0 | 2,038,914 | $ | 2,038 | $ | 165,475,801 | $ | (86,583 | ) | $ | (138,722,253 | ) | $ | 26,669,003 |
Common Stock | Additional Paid-in | Accumulated Other Comprehensive | Accumulated | Total Stockholders' | ||||||||||||||||||||
Shares | Amount | Capital | Loss | Deficit | Equity | |||||||||||||||||||
Balance at January 1, 2023 | 2,039,557 | $ | 2,040 | $ | 165,847,590 | $ | (35,375 | ) | $ | (145,596,539 | ) | $ | 20,217,716 | |||||||||||
Stock-based compensation expense and vesting of restricted stock units | 468 | — | 121,371 | — | — | 121,371 | ||||||||||||||||||
Unrealized gain on marketable securities | — | — | — | 32,252 | — | 32,252 | ||||||||||||||||||
Net loss | — | — | — | — | (4,092,384 | ) | (4,092,384 | ) | ||||||||||||||||
Balance at March 31, 2023 | 2,040,025 | $ | 2,040 | $ | 165,968,961 | $ | (3,123 | ) | $ | (149,688,923 | ) | $ | 16,278,955 |
See accompanying notes to unaudited interim consolidated financial statements.
Series C Convertible Preferred Stock | Common Stock |
Additional Paid-in | Accumulated Other Comprehensive | Accumulated | Total Stockholders' | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Loss | Deficit | Equity | |||||||||||||||||||||||||
Balance at January 1, 2022 | 0 | $ | 0 | 2,038,185 | $ | 2,038 | $ | 164,914,540 | $ | 0 | $ | (130,005,111 | ) | $ | 34,911,467 | |||||||||||||||||
Sale of Series C preferred stock to related parties | 10,000 | 5,000 | 0 | 0 | 0 | 0 | 0 | 5,000 | ||||||||||||||||||||||||
Conversion of Series C preferred stock to common stock | (10,000 | ) | (5,000 | ) | 200 | — | 5,000 | — | — | — | ||||||||||||||||||||||
Stock-based compensation expense and vesting of restricted stock units | 0 | 0 | 529 | 0 | 556,261 | 0 | 0 | 556,261 | ||||||||||||||||||||||||
Unrealized loss on marketable securities | — | 0 | — | 0 | 0 | (86,583 | ) | 0 | (86,583 | ) | ||||||||||||||||||||||
Net loss | — | 0 | — | 0 | 0 | 0 | (8,717,142 | ) | (8,717,142 | ) | ||||||||||||||||||||||
Balance at June 30, 2022 | 0 | $ | 0 | 2,038,914 | $ | 2,038 | $ | 165,475,801 | $ | (86,583 | ) | $ | (138,722,253 | ) | $ | 26,669,003 |
Stockholders' Equity | ||||||||||||||||||||
Common Stock | Additional Paid-in | Accumulated | Total Stockholders' | |||||||||||||||||
Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||
Balance at April 1, 2021 | 2,037,978 | $ | 2,038 | $ | 164,198,560 | $ | (110,553,303 | ) | $ | 53,647,295 | ||||||||||
Sale of common stock and warrants, net of issuance costs | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Issuance of common stock upon exercise of warrants | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Stock-based compensation expense | — | 0 | 297,280 | 0 | 297,280 | |||||||||||||||
Net loss | — | 0 | 0 | (3,777,973 | ) | (3,777,973 | ) | |||||||||||||
Balance at June 30, 2021 | 2,037,978 | $ | 2,038 | $ | 164,495,840 | $ | (114,331,276 | ) | $ | 50,166,602 |
Diffusion Pharmaceuticals Inc.
Consolidated Statements of Cash Flows
(unaudited)
Stockholders' Equity | ||||||||||||||||||||
Common Stock | Additional Paid-in | Accumulated | Total Stockholders' | |||||||||||||||||
Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||
Balance at January 1, 2021 | 1,280,207 | $ | 1,280 | $ | 130,722,286 | $ | (105,909,384 | ) | $ | 24,814,182 | ||||||||||
Sale of common stock and warrants, net of issuance costs | 673,171 | 673 | 31,093,629 | 0 | 31,094,302 | |||||||||||||||
Issuance of common stock upon exercise of warrants | 84,600 | 85 | 2,201,365 | 0 | 2,201,450 | |||||||||||||||
Stock-based compensation expense | — | 0 | 478,560 | 0 | 478,560 | |||||||||||||||
Net loss | — | 0 | 0 | (8,421,892 | ) | (8,421,892 | ) | |||||||||||||
Balance at June 30, 2021 | 2,037,978 | $ | 2,038 | $ | 164,495,840 | $ | (114,331,276 | ) | $ | 50,166,602 |
Three Months Ended March 31, | ||||||||
2023 | 2022 | |||||||
Operating activities: | ||||||||
Net loss | $ | (4,092,384 | ) | $ | (4,526,641 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Stock-based compensation expense | 121,371 | 278,131 | ||||||
Amortization of premium and discount on marketable securities | (50,578 | ) | (13,546 | ) | ||||
Changes in operating assets and liabilities: | ||||||||
Prepaid expenses, deposits and other assets | (655,124 | ) | (495,903 | ) | ||||
Accounts payable, accrued expenses and other liabilities | (291,405 | ) | 28,146 | |||||
Net cash used in operating activities | (4,968,120 | ) | (4,729,813 | ) | ||||
Cash flows used in investing activities: | ||||||||
Purchases of marketable securities | — | (22,716,415 | ) | |||||
Maturities of marketable securities | 9,500,000 | — | ||||||
Net cash provided by (used in) investing activities | 9,500,000 | (22,716,415 | ) | |||||
Cash flows provided by financing activities: | ||||||||
Proceeds from the sale of series C preferred stock to related parties | — | 5,000 | ||||||
Net cash provided by financing activities | — | 5,000 | ||||||
Net increase (decrease) in cash and cash equivalents | 4,531,880 | (27,441,228 | ) | |||||
Cash and cash equivalents at beginning of period | 10,113,706 | 37,313,558 | ||||||
Cash and cash equivalents at end of period | $ | 14,645,586 | $ | 9,872,330 | ||||
Supplemental disclosure of non-cash financing activities: | ||||||||
Unrealized gain (loss) on marketable securities | $ | 32,252 | $ | (49,658 | ) |
See accompanying notes to unaudited interim consolidated financial statements.
Diffusion Pharmaceuticals Inc.
Consolidated Statements of Cash Flows
(unaudited)
Six Months Ended June 30, | ||||||||
2022 | 2021 | |||||||
Operating activities: | ||||||||
Net loss | $ | (8,717,142 | ) | $ | (8,421,892 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation | 0 | 48,202 | ||||||
Stock-based compensation expense | 556,261 | 478,560 | ||||||
Amortization of premium and discount on marketable securities | (45,439 | ) | 0 | |||||
Changes in operating assets and liabilities: | ||||||||
Prepaid expenses, deposits and other assets | (118,025 | ) | (291,068 | ) | ||||
Accounts payable, accrued expenses and other liabilities | (412,662 | ) | (317,576 | ) | ||||
Net cash used in operating activities | (8,737,007 | ) | (8,503,774 | ) | ||||
Cash flows provided by investing activities: | ||||||||
Purchase of marketable securities | (31,615,825 | ) | 0 | |||||
Maturities of marketable securities | 9,000,000 | 0 | ||||||
Net cash used in investing activities | (22,615,825 | ) | 0 | |||||
Cash flows provided by financing activities: | ||||||||
Proceeds from the sale of preferred stock | 5,000 | 0 | ||||||
Proceeds from the exercise of common stock warrants | 0 | 2,201,450 | ||||||
Proceeds from the sale of common stock | 0 | 31,094,302 | ||||||
Net cash provided by financing activities | 5,000 | 33,295,752 | ||||||
Net (decrease) increase in cash and cash equivalents | (31,347,832 | ) | 24,791,978 | |||||
Cash and cash equivalents at beginning of period | 37,313,558 | 18,515,595 | ||||||
Cash and cash equivalents at end of period | $ | 5,965,726 | $ | 43,307,573 | ||||
Supplemental disclosure of non-cash activities: | ||||||||
Unrealized loss on marketable securities | $ | 86,583 | $ | 0 |
See accompanying notes to unaudited interim consolidated financial statements.
DIFFUSION PHARMACEUTICALS INC.
1. | Organization and Description of Business |
Diffusion Pharmaceuticals Inc., a Delaware corporation, is a biopharmaceutical company that has historically focused on developing novel therapies tothat 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 solid 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.
2. | Liquidity |
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.
In July 2022, the Company entered into an at-the-market sales agreement (the "2022 Sales Agreement") with BTIG, LLC, ("BTIG") as agent, pursuant to which the Company may sell up to an aggregate of $20.0 million in shares of the Company’s common stock, from time to time through BTIG, by any method permitted that is deemed an “at the market offering” as defined in Rule 415(a)(4) under the Securities Act of 1933, as amended.
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 currently expectsexpect that its existing cash, cash equivalents and marketable securities as of June 30,2022 will enable itMarch 31, 2023 are sufficient to fund its operating expenses and capital expenditure requirements intocurrent operations for at least 12 months following the first quarterdate of 2024, without giving effect to any business development activities we may undertake.
DIFFUSION PHARMACEUTICALS INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
this Quarterly Report.
3. | Basis of Presentation and Summary of Significant Accounting Policies |
TheAs of the date of this Quarterly Report, the Summary of Significant Accounting Policies included in the Company's Annual Report for the year ended December 31, 2021 have not materially changed.changed, except as set forth below.
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 June 30,2022,March 31, 2023, and its results of operations for the three and six months ended June 30,2022 and 2021and cash flows for the sixthree months ended June 30,2022March 31, 2023 and 2021.2022. Operating results for the sixthree months ended June 30,2022March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31,2022. 2023. The unaudited interim consolidated financial statements presented herein do not contain the required disclosures under GAAP for annual financial statements. The accompanying unaudited interim consolidated interim financial statements should be read in conjunction with the annual audited financial statements and related notes as of and for the year ended December 31,2021 2022 filed with the SEC as part of the Company's Annual Report.
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.
DIFFUSION PHARMACEUTICALS INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Marketable Securitiessecurities
The Company classifies its marketable securities as available-for-sale, which include commercial paper and U.S. government debt securities with original maturities of greater than three months from date of purchase. The Company considers its marketable securities as available for use in current operations, and therefore classifyclassifies these securities as current assets on the consolidated balance sheet. These securities are carried at fair value, with unrealized gains and losses reported in comprehensive loss and accumulated other comprehensive loss within stockholders’ equity. Gains or losses on marketable securities sold will 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.
Reverse Stock SplitResearch and Development
On April 18, 2022, Major components of research and development costs include internal research and development (such as salaries and related employee benefits, equity-based compensation, supplies and allocated facility costs) and contracted services (research and development activities performed on the Company’s behalf). Costs incurred for research and development are expensed as incurred.
Upfront payments made to third parties who perform research and development services on the Company’s behalf are expensed as services are rendered.
Patent Costs
Patent costs, including related legal costs, are expensed as incurred and are recorded within general and administrative expenses in the consolidated statements of operations and comprehensive loss.
Stock-based Compensation
The Company filedmeasures stock-based awards at grant-date fair value and records compensation expense on a Certificate of Amendment to its Certificate of Incorporation, as amended, withstraight-line basis over the Secretary of Statevesting period of the Stateaward. The Company uses the Black-Scholes Model to value its stock option awards. Estimating the fair value of Delawarestock option awards requires management to implementapply judgment and make estimates, including the Reverse Stock Split at a ratiovolatility of 1-to-50. 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, became entitled to receive an amount in cash (without interest or deduction) equal to the fractionexpected term of one share to which such stockholder would otherwise be entitled multiplied by $12.93, representing the split-adjusted average closing priceCompany’s stock options, the expected dividend yield and the fair value of the Company’s common stock on the Nasdaq Capital Marketmeasurement date. As a result, if factors change and management uses different assumptions, stock-based compensation expense could be materially different for future awards.
For 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, as well as tohistory of not paying dividends. The risk-free interest rate is based on U.S. Treasury notes with a term approximating the reserveexpected term of shares availablethe option. The Company accounts for future issuance underforfeitures in the 2015 Equity Plan, to reflect the Reverse Stock Split, in each case, in accordance with the respective terms thereof.
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 June 30,2022 and 2021 have been excluded from the computation of diluted weighted average shares outstanding, as they would be anti-dilutive:
As of June 30, | March 31, | |||||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Common stock warrants | 111,891 | 129,989 | 88,252 | 111,891 | ||||||||||||
Stock options | 122,882 | 61,058 | 104,047 | 116,564 | ||||||||||||
Unvested restricted stock awards | 4,672 | 3,060 | 2,910 | 5,182 | ||||||||||||
239,445 | 194,107 | 195,209 | 233,637 |
DIFFUSION PHARMACEUTICALS INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Recently IssuedAdopted Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13,2016-13, Financial Instruments—Credit Losses, Measurement of Credit Losses on Financial Instruments (Topic 326)326). The standard amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. For available-for-sale debt securities, entities will be required to recognize an allowance for credit losses rather than a reduction in carrying value of the asset. Entities will no longer be permitted to consider the length of time that fair value has been less than amortized cost when evaluating when credit losses should be recognized. This newThe Company adopted the guidance is effective for the Companyusing a modified retrospective approach as of January 1, 2023. 2023 which resulted in no cumulative-effect adjustment to retained earnings.
The updated guidance in ASU 2016-13 also amended the previous other-than-temporary impairment (“OTTI”) model for available-for-sale fixed income securities by requiring the recognition of impairments relating to credit losses through an allowance account and limits the amount of credit loss to the difference between a security’s amortized cost basis and its fair value. In addition, the length of time a security has been in an unrealized loss position will no longer impact the determination of whether a credit loss exists. The Company is currently evaluatingadopted the impactguidance related to available-for-sale fixed income securities on January 1, 2023 using a prospective transition approach for available-for-sale fixed income securities that were purchased with credit deterioration or had recognized an OTTI write-down prior to the effective date. The effect of this ASU but does not expect that adoption of this standard will have a material impact on the consolidated financial statementsprospective transition approach was to maintain the same amortized cost basis before and related disclosures.
after the effective date.
4. | Cash, cash equivalents and marketable securities |
The following is a summary of the Company's cash and cash equivalents as of the datesdate indicated:
March 31, 2023 | December 31, 2022 | |||||||||||||||
June 30, 2022 | December 31, 2021 | |||||||||||||||
Cash in banking institutions | $ | 1,084,595 | $ | 30,308,075 | $ | 631,002 | $ | 1,586,920 | ||||||||
Money market funds | 3,886,704 | 7,005,483 | 14,014,584 | 8,526,786 | ||||||||||||
Commercial paper | 994,427 | 0 | ||||||||||||||
Total | $ | 5,965,726 | $ | 37,313,558 | $ | 14,645,586 | $ | 10,113,706 |
The following is a summary of the Company's marketable securities as of June 30,2022:as of the date indicated:
Amortized cost | Unrealized gains | Unrealized losses | Fair Value | Amortized cost | Unrealized gains | Unrealized losses | Fair Value | |||||||||||||||||||||||||
March 31, 2023 | ||||||||||||||||||||||||||||||||
Commercial paper | $ | 17,658,057 | $ | 25 | $ | (57,001 | ) | $ | 17,601,081 | $ | 1,995,318 | 210 | $ | (1,437 | ) | $ | 1,994,091 | |||||||||||||||
U.S. treasury bonds | 5,003,207 | 0 | (29,607 | ) | 4,973,600 | 999,575 | — | (1,896 | ) | 997,679 | ||||||||||||||||||||||
Total | $ | 22,661,264 | $ | 25 | $ | (86,608 | ) | $ | 22,574,681 | $ | 2,994,893 | 210 | $ | (3,333 | ) | $ | 2,991,770 | |||||||||||||||
December 31, 2022 | ||||||||||||||||||||||||||||||||
Commercial paper | $ | 9,445,220 | 263 | $ | (21,313 | ) | $ | 9,424,170 | ||||||||||||||||||||||||
U.S. treasury bonds | 2,999,095 | — | (14,325 | ) | 2,984,770 | |||||||||||||||||||||||||||
Total | $ | 12,444,315 | 263 | $ | (35,638 | ) | $ | 12,408,940 |
The Company did not have any 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 June 30,2022. 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 June 30,2022 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 sixthree months ended June 30,2022 and there were 0 realized gains or losses recorded during the six months ended June 30,2021.March 31, 2023.
5. | Fair Value of Financial Instruments |
Fair value is the price that could be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value determination in accordance with applicable accounting guidance requires that a number of significant judgments be made. Additionally, fair value is used on a nonrecurring basis to evaluate assets for impairment or as required for disclosure purposes by applicable accounting guidance on disclosures about fair value of financial instruments. Depending on the nature of the assets and liabilities, various valuation techniques and assumptions are used when estimating fair value. The carrying amounts of certain of the Company’s financial instruments, including 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:
• | Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. |
• | Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liabilities. |
• | Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). |
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):
Fair value measurement at reporting date | ||||||||||||
Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | ||||||||||
June 30, 2022: | ||||||||||||
Cash equivalents: | ||||||||||||
Money market funds | $ | 3,886,704 | $ | 0 | $ | 0 | ||||||
Commercial paper | 0 | 994,427 | 0 | |||||||||
Total cash equivalents | $ | 3,886,704 | $ | 994,427 | $ | 0 | ||||||
Marketable securities | ||||||||||||
Commercial paper | $ | 0 | $ | 17,601,081 | $ | 0 | ||||||
US treasury | 0 | 4,973,600 | 0 | |||||||||
Total marketable securities | $ | 0 | $ | 22,574,681 | $ | 0 | ||||||
Total financial assets | $ | 3,886,704 | $ | 23,569,108 | $ | 0 |
Fair value measurement at reporting date | ||||||||||||
Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | ||||||||||
March 31, 2023 | ||||||||||||
Cash equivalents: | ||||||||||||
Money market funds | $ | 14,014,584 | $ | — | $ | — | ||||||
Commercial paper | — | — | — | |||||||||
Total cash and cash equivalents | $ | 14,014,584 | $ | — | $ | — | ||||||
Marketable securities: | ||||||||||||
Commercial paper | — | 1,994,090 | — | |||||||||
US treasury | — | 997,680 | — | |||||||||
Total marketable securities | $ | — | $ | 2,991,770 | $ | — | ||||||
Total financial assets | $ | 14,014,584 | $ | 2,991,770 | $ | — | ||||||
December 31, 2022: | ||||||||||||
Cash equivalents: | ||||||||||||
Money market funds | $ | 8,526,786 | $ | — | $ | — | ||||||
Commercial paper | — | — | — | |||||||||
Total cash and cash equivalents | $ | 8,526,786 | $ | — | $ | — | ||||||
Marketable securities: | ||||||||||||
Commercial paper | — | 9,424,170 | — | |||||||||
US treasury | — | 2,984,770 | — | |||||||||
Total marketable securities | $ | — | $ | 12,408,940 | $ | — | ||||||
Total financial assets | $ | 8,526,786 | $ | 12,408,940 | $ | — |
The fair values of the Company’s Level 2 marketable securities are estimated primarily based on benchmark yields, reported trades, market-based quotes, issuer spreads, two-sidedtwo-sided markets, benchmark securities, bids, offers, and reference data including market research publications, which represent a market approach. In general, a market approach is utilized if there is readily available and relevant market activity for an individual security. This valuation technique may change from period to period, based on the relevance and availability of market data.
6. | Accrued Expenses and Other Current Liabilities |
Accrued expenses and other current liabilities consisted of the following as of the dates indicated below:
June 30, 2022 | December 31, 2021 | |||||||
Accrued payroll and payroll related expenses | $ | 661,061 | $ | 879,971 | ||||
Accrued professional fees | 163,269 | 247,704 | ||||||
Accrued clinical studies expenses | 766,916 | 786,579 | ||||||
Other accrued expenses | 77,744 | 65,935 | ||||||
Total | $ | 1,668,990 | $ | 1,980,189 |
DIFFUSION PHARMACEUTICALS INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2023 | December 31, 2022 | |||||||
Accrued payroll and payroll related expenses | $ | 302,085 | $ | 131,777 | ||||
Accrued professional fees | 734,371 | 552,785 | ||||||
Accrued clinical studies expenses | 16,745 | 475,141 | ||||||
Other | 101,274 | 129,851 | ||||||
Total | $ | 1,154,475 | $ | 1,289,554 |
7. | Stockholders' Equity and Common Stock Warrants |
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.
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 June 30,2022,March 31, 2023, the Company had the following warrants outstanding to acquire shares of its common stock:
Outstanding | Range of exercise price per share | Expiration dates | ||||||||||
Common stock warrants issued in 2018 related to the January 2018 Offering | 23,639 | 599.711749.7676 | January 2023 | |||||||||
Common stock warrants issued related to the May 2019 Offering | 27,648 | 250.099306.0404 | May and December 2024 | |||||||||
Common stock warrants issued related to the November 2019 Offering | 4,269 | $17.51 | November 2024 | |||||||||
Common stock warrants issued related to the December 2019 Offering | 6,264 | 21.68834.9292 | December 2024 and June 2025 | |||||||||
Common stock warrants issued related to the May 2020 Offering | 11,424 | $65.65 | March 2025 | |||||||||
Common stock warrants issued related to May 2020 Investor Warrant Exercise | 4,998 | $29.7 | November 2025 | |||||||||
Common stock warrants issued related to the February 2021 Offering | 33,649 | $64.08 | February 2026 | |||||||||
111,891 |
Outstanding | Range of exercise price per share | Expiration dates | ||||||||
Common stock warrants issued related to the May 2019 common stock offering | 27,648 | $250.09 | - | $306.04 | May and December 2024 | |||||
Common stock warrants issued related to the November 2019 common stock offering | 4,269 | $17.51 | May 2024 | |||||||
Common stock warrants issued related to the December 2019 common stock offering | 6,264 | $21.68 | - | $34.92 | December 2024 and June 2025 | |||||
Common stock warrants issued related to the May 2020 common stock offering | 11,424 | $65.65 | March 2025 | |||||||
Common stock warrants issued related to the May 2020 investor warrant exercise | 4,998 | $29.7 | November 2025 | |||||||
Common stock warrants issued related to the February 2021 common stock offering | 33,649 | $64.08 | February 2026 | |||||||
88,252 |
During the sixthree months ended June 30, 2022, 18,077March 31, 2023, 23,639 warrants expired.
DIFFUSION PHARMACEUTICALS INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
8. | Stock-Based Compensation |
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 June 30,2022,March 31, 2023, there were 42,461141,096 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:
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2023 | 2022 | |||||||||||||||||||
Research and development | $ | 58,892 | $ | 59,567 | $ | 117,785 | $ | 92,567 | $ | 12,011 | $ | 58,892 | ||||||||||||
General and administrative | 219,238 | 237,713 | 438,476 | 385,993 | 109,360 | 219,239 | ||||||||||||||||||
Total stock-based compensation expense | $ | 278,130 | $ | 297,280 | $ | 556,261 | $ | 478,560 | $ | 121,371 | $ | 278,131 |
The following table summarizes the activity related to all stock option grants for the sixthree months ended June 30,2022:March 31, 2023:
Number of Options | Weighted average exercise price per share | Weighted average remaining contractual life (in years) | Aggregate intrinsic value | |||||||||||||
Balance at January 1, 2021 | 72,454 | $ | 265.85 | |||||||||||||
Granted | 56,300 | 11.40 | ||||||||||||||
Forfeited | (5,612 | ) | 188.18 | |||||||||||||
Expired | (260 | ) | 1,575 | |||||||||||||
Outstanding at June 30, 2022 | 122,882 | $ | 149.96 | 8.8 | $ | 0 | ||||||||||
Exercisable at June 30, 2022 | 60,688 | $ | 283.73 | 8.1 | $ | 0 | ||||||||||
Vested and expected to vest at June 30, 2022 | 122,882 | $ | 149.96 | 8.8 | $ | 0 |
Number of Options | Weighted average exercise price per share | Weighted average remaining contractual life (in years) | Aggregate intrinsic value | |||||||||||||
Balance at January 1, 2023 | 140,040 | $ | 126.75 | |||||||||||||
Granted | — | — | ||||||||||||||
Cancelled | (35,993 | ) | 20.13 | |||||||||||||
Outstanding at March 31, 2023 | 104,047 | $ | 163.64 | 7.99 | $ | — | ||||||||||
Exercisable at March 31, 2023 | 78,533 | $ | 211.21 | 7.75 | $ | — | ||||||||||
Vested and expected to vest at March 31, 2023 | 104,047 | $ | 163.64 | 7.99 | $ | — |
The weighted average grant date fair value of stock option awardsThere were no options granted during the sixthree months ended June 30,2022 was $10.35.March 31, 2023. The total fair value of options vested during the three months ended June 30,2022March 31, 2023 and 20212022 was $0.3$0.1 million and $0.1$0.2 million, respectively. The total fair value of options vested during the six months June 30,2022 and 2021 was $0.5 million and $0.3 million, respectively. NaNNo options were exercised during any of the periods presented. At June 30,2022,March 31, 2023, there was $1.1$0.4 million of unrecognized compensation expense that will be recognized over a weighted-average period of 1.931.27 years.
DIFFUSION PHARMACEUTICALS INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Options granted were valued using the Black-Scholes option-pricing model and the weighted average assumptions used to value the options granted during the six months ended June 30,2022 and 2021 were as follows:
2022 | 2021 | |||||||
Expected term (in years) | 5.74 | 10 | ||||||
Risk-free interest rate | 1.9 | % | 1.5 | % | ||||
Expected volatility | 135.0 | % | 124.5 | % | ||||
Dividend yield | — | % | — | % |
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:
Number of Units | Weighted average grant date fair value | |||||||
Balance at January 1, 2022 | 5,509 | $ | 34.78 | |||||
Vested (1) | (837 | ) | 29.87 | |||||
Outstanding at June 30, 2022 | 4,672 | $ | 35.66 |
Number of Units | Weighted average grant date fair value | |||||||
Balance at January 1, 2023 | 3,652 | $ | 36.49 | |||||
Vested (1) | (742 | ) | 33.72 | |||||
Outstanding at March 31, 2023 | 2,910 | $ | 38.28 |
(1)(1) The RSUs vested during the sixthree months ended June 30, 2022 March 31, 2023 were settled on a hybrid basis. The Company withheld 308274 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 June 30,2022March 31, 2023 and 2021, respectively. The Company recognized approximately $32,000 and $10,000 in expense related to these awards during the six months ended June 30,March 31, 2022, and 2021, respectively. At June 30,2022,March 31, 2023, there was approximately $96,000 of$48,000 in unrecognized compensation cost that will be recognized over a weighted average period of 1.691.04 years.
9. | Commitments and Contingencies |
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. Rent expense related toPennsylvania, which was terminated during the Company's short-term agreements for the three monthsyear ended June 30, 2022 and 2021 was approximately $2,000 and $29,000, respectively.December 31, 2022. Rent expense related to the Company's short-term agreements was approximately $11,000$1,000 and $60,000$9,000 for the sixthree months ended June 30,2022March 31, 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 $26,000 and $24,000$27,000 for the three months ended March 31, 2023 and matched contributions under the 401(k) Plan of approximately $53,000 and $40,000 for the six months ended June 30,2022, and 2021, respectively.
DIFFUSION PHARMACEUTICALS INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Legal Proceedings
On August 7, 2014, a complaint was filed in the Superior Court of Los Angeles County, California by Paul Feller, the former Chief Executive Officer of the Company’s legal predecessor under the caption Paul Feller v. RestorGenex Corporation, Pro Sports & Entertainment, Inc., ProElite, Inc. and Stratus Media Group, GmbH (Case No.BC553996) BC553996). The complaint asserts various causes of action, including, among other things, promissory fraud, negligent misrepresentation, breach of contract, breach of employment agreement, breach of the covenant of good faith and fair dealing, violations of the California Labor Code and common counts. The plaintiff is seeking, among other things, compensatory damages in an undetermined amount, punitive damages, accrued interest and an award of attorneys’ fees and costs. On December 30, 2014, the Company filed a petition to compel arbitration and a motion to stay the action. On April 1, 2015, the plaintiff filed a petition in opposition to the Company’s petition to compel arbitration and a motion to stay the action. After a related hearing on April 14, 2015, the court granted the Company’s petition to compel arbitration and a motion to stay the action. On January 8, 2016, the plaintiff filed an arbitration demand with the American Arbitration Association. On November 19, 2018 at an Order to Show Cause Re Dismissal Hearing, the court found sufficient grounds not to dismiss the case and an arbitration hearing was scheduled, originally for November 2020 but later postponed due to the COVID-19COVID-19 pandemic and related restrictions on gatherings in the State of California. In addition, following the November 2018 hearing, an automatic stay was placed on the arbitration in connection with the plaintiff filing for personal bankruptcy protection. On October 22, 2021, following a determination by the bankruptcy trustee not to pursue the claims and release them back to the plaintiff, the parties entered into a stipulation to abandon arbitration and return the matter to state court. A case management conference was held on February 23, 2022 at which 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.
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 consolidated financial statements and the notes thereto included elsewhere in this report and other financial information included in this report. The following discussion may contain predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed under “Part I — Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Special Note Regarding Forward-Looking Statements” in this report and under “Part I — Item 1A. Risk Factors” in our Annual Report.Report, as well as the risk factors discussed under the heading "Risk Factors" in the Preliminary Merger Proxy Statement. These risks could cause our actual results to differ materially from any future performance suggested below.
Overview
Diffusion Pharmaceuticals: Enhancing Oxygen, Fueling Life
We areis a biopharmaceutical company that has historically focused on developing novel therapies tothat may enhance the body’s ability to deliver oxygen to the areas where it is needed most. Our 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 solid tumors.tumors like GBM.
In our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC in March 2022, we identified the pursuit of an opportunistic transaction with the potential to complement and diversify our portfolio of product candidates as one of our key strategic objectives intended to enhance long-term value for our stockholders. In pursuit of this objective, in July 2022, we engaged Canaccord as our financial advisor to support our process and, in October 2022, following further deterioration of the public capital markets throughout 2022 and the corresponding increase in the cost of capital for small biopharmaceutical companies, we publicly announced our board of directors’ authorization of an expanded evaluation and review of potential strategic transactions, including a joint venture, licensing, merger, reverse merger, sale or divestiture of some of proprietary technologies or a sale of Diffusion, among others.
On March 30, 2023, Diffusion, Merger Sub and EIP entered into the Merger Agreement, pursuant to which, among other things, subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement, Merger Sub will merge with and into EIP, with EIP surviving the merger as the wholly-owned subsidiary of the combined company. If consummated, immediately following the effective time of the Merger, former EIP stockholders are expected to own approximately 77.26% of the outstanding shares of our common stock, and stockholders of Diffusion as of immediately prior to the effective time of the Merger are expected to own approximately 22.74% of the outstanding shares of our common stock, in each case, as calculated in the Merger Agreement and assuming “Parent Net Cash” (as defined in the Merger Agreement, which is attached as an exhibit to this Quarterly Report) at the closing of the Merger is between $13.5 million and $14.5 million. The actual amount of Parent Net Cash delivered at Closing will depend on many factors, including among others, the date of the closing, and no assurance can be given as to the actual amount of Parent Net Cash that will be delivered.
If the Merger is completed, it will result in a combined company primarily focused on the advancement of central nervous system focused therapeutics, including EIP’s lead drug candidate neflamapimod, which is currently being developed for the treatment of dementia with Lewy bodies (“DLB”). Phase 2a clinical trial results with neflamapimod in DLB that showed statistically significant positive effects compared to placebo on dementia severity and walking ability were published in a major scientific journal in September 2022, and in January 2023, EIP was awarded $21.0 million in non-dilutive grant funding from the National Institutes of Health’s National Institute on Aging that is expected to fully fund clinical trial costs associated with a planned Phase 2b study evaluating neflamapimod in patients with DLB, a study which EIP anticipates initiating by the end of the second quarter of 2023.
If the Merger is not completed, we will reconsider our strategic alternatives and may pursue one of the following courses of action, which we currently believes are the most likely alternatives if the Merger is not completed:
• | Pursue another strategic transaction similar to the Merger. We may resume our process of evaluating other companies interested in pursuing a strategic transaction with us and, if a candidate is identified, focus our attention on negotiating and completing such a transaction with such candidate. |
• | Dissolve and liquidate its assets, If we are unable, or do not believe that we will be able, to find a suitable candidate for another strategic transaction in the best interests of our stockholders, we may dissolve and liquidate its assets. In the event of dissolution, we would be required to pay all its debts and contractual obligations and to set aside certain reserves for potential future claims. If we dissolve and liquidate our assets, there can be no assurance as to the amount or timing of available cash that will remain for distribution to our stockholders after paying our debts and other obligations and setting aside funds for its reserves. |
Business Update
Altitude Trial
During the second quarter, we reported positive effects from our second Oxygenation Trial, the Altitude Trial. This was a double-blind, randomized, placebo-controlled crossover dose exploration study designed to investigate TSC’s effects on oxygen enhancement using an experimental model to induce hypoxia in study participants. The primary endpoints measured in this study were maximal oxygen consumption and partial pressure of arterial blood oxygen in normal healthy volunteers subjected to incremental levels of physical exertion while exposed to hypoxic and hypobaric conditions at a simulated altitude of 15,000 feet above sea level. The secondary endpoints were to assess the effect of TSC on SpO2 and lactate.
A total of 30 healthy volunteers were enrolled in the trial with each subject serving as their own control by completing the experiment twice in a random, blinded order in the same day with a 3-hour rest and wash out period between experimental intervals. During one ascent, study subjects received IV placebo administration and the other ascent the same subject received a single IV dose of TSC at one of three dose levels (0.5 mg/kg, 1.5 mg/kg, or 2.5 mg/kg).
In the trial, following exercise under hypoxic conditions, an increase in pH and a decrease in lactate were observed in the study subjects treated with the highest dose of TSC (2.5 mg/kg), both at the end of the exercise period and at 10 minutes post-exercise relative to placebo. These data suggest the 2.5 mg/kg dose of TSC decreased blood acidity (i.e., lactic acid accumulation) and enhanced metabolic recovery at 10 minutes after completion of exercise under the stressful conditions of simulated high altitude and exercise. These positive changes observed in blood markers of oxygen utilization results in the Altitude Trial suggest TSC may enhance oxygen availability at the cellular level and reinforce our belief in the therapeutic potential of TSC.
Phase 2 Trial in Patients with GBM Incorporating Innovative Imaging Methodology (Study 200-208)
Taken together, the combination of positive effects observed in each of the TCOM, Altitude, and COVID-19 Trials affirmed our belief in TSC's potential as an adjuvant treatment to standard of care therapy for hypoxic solid tumors. As such, on July 26, 2022, we announced that we had aligned with the FDA on the design of an open-label, dose-escalation, Phase 2 safety and efficacy study of TSC administered with standard of care to newly diagnosed GBM patients. This trial has been designated Study "200-208," and we currently expect to initiate the trial by the end of 2022 and to dose the first patient in the study in the first quarter of 2023, subjectSubject to the outcomeavailability of our ongoing business development processes described below.
GBM is an aggressive, deadly, and treatment-resistant type of malignant brain tumor, affecting approximately 13,000 newly diagnosed patients each year in the United States. Few treatment options are available for patients with GBM, and none have extended life expectancy beyond a few months. In fact, according to the National Brain Tumor Society, the five-year survival rate for GBM is only 6.8 percent with an average survival time of eight months.
Study 200-208 will include a dose-escalation phase, enrolling patients in a 3+3+3 design, to evaluate the safety, tolerability, pharmacokinetics, and pharmacodynamics of TSC at doses of 1.5 mg/kg, 2.0 mg/kg and 2.5 mg/kg administered in combination with concomitant standard of care radiotherapy plus temozolomide. An additional 17 subjects will be treated at the highest tolerable dose identified in the dose escalation phase. The primary objective of the study is to evaluate the safety and tolerability of TSC for the treatment of patients with newly diagnosed GBM when administered with standard of care. Secondary objectives of the study are to evaluate progression-free survival at six months by magnetic resonance imaging, assessment using Response Assessment in Neuro-Oncology criteria, and to evaluate overall survival at 12 months.
Study 200-208 will vary in a variety of ways from the GBM trialsfunding on acceptable terms, we have conducted in the past, including three particularly notable differentiators:
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Business Development
Our current strategy for TSC is focused on advancing it through development with the ultimate objective of obtaining market authorizations and entering commercialization, whether alone, with a partner, or through a partner, to provide treatment options to patients suffering from life-threatening medical conditions like GBM. We believe that our recent clinical development efforts, including the completion of our TCOM and Altitude Trials and our design of Study 200-208, are positive steps for our Company and our stockholders and create the potential to drive meaningful value if we are successful in advancing TSC to the subsequent development milestones we have identified. However, drug development is an extremely expensive, risky, and time-consuming endeavor, particularly so for drugs being developed to treat oncological indications. Accordingly, while we continue our internal efforts to advance themay also consider resuming development of TSC including Study 200-208, we are also taking active steps to identify potential partnership and other opportunities to obtain additional resources for our programs, including opportunities that are non-dilutive to our stockholders.
We also believe we can leverage what we have learned fromif the development of TSC and the significant skills and experience of our team to opportunistically identify and acquire or in-license novel product candidates that complement our overall strategy and/or are synergistic with our team's core competencies and strengths. We have taken, and intend to continue to take, active steps to identify assets and/or companies for acquisition and/or partnership, as well as a range of other transactions, across a variety of therapeutic indications, that we believe may complement, supplement and/or de-risk our current development programs, as well as provide additional value for our stockholders.
At-The-Market Sales Agreement
In July 2022, we entered into the 2022 Sales Agreement with BTIG, pursuant to which we may sell, from time to time, shares of our common stock having an offering price of up to $20 million in sales deemed to be “at-the-market” equity offerings as defined in Rule 415 of the Securities Act, subject to the offering limits in General Instruction I.B.6 of Form S-3.
As of the date of this Quarterly Report, we haveMerger is not sold any shares of common stock pursuant to the Sales Agreement.completed.
ILD-DLCO Trial Update
From our initial announcement of the Oxygenation Trials in early 2021, we have stated our belief that positive data from any one or more of the three Oxygenation Trials would provide evidence of a definitive effect of TSC on oxygenation, as well as guide the subsequent steps of our development strategy focused on demonstrating the clinical and therapeutic benefits of TSC in a relevant patient population affected by hypoxia. As noted above, the positive effects observed in and data obtained from both the TCOM and Altitude Trials have been used to design and align with the FDA on a novel GBM trial design for Study 200-208 and to develop our Hypoxic Solid Tumor Program, more generally. On August 9, 2022, in order to, among other things, dedicate more of our human and other resources to Study 200-208 and our business development activities, as well as ongoing challenges enrolling patients in clinical trials for respiratory indications during the ongoing COVID-19 pandemic, we made the decision to terminate recruitment and enrollment in the ILD-DLCO Trial and begin winding the trial down.
Financial Summary
As of June 30, 2022,March 31, 2023, we had cash, cash equivalents, and marketable securities of $28.5$17.6 million, in the aggregate. We have incurred operating losses since inception, have not generated any product sales revenue and have not achieved profitable operations. We incurred a net lossesloss of $4.2 million and $8.7$4.1 million for the three and six months ended June 30, 2022, respectively.March 31, 2023, mostly related to payment of non-recurring severance cost during the period. Our accumulated deficit as of June 30, 2022March 31, 2023 was $138.7$149.6 million, and we expect to continue to incur substantial losses in future periods.
Currently and during the period ended March 31, 2023, the majority of our costs are and were related to our strategic review process and proposed Merger with EIP. We anticipate that our operating expenses will increase substantially asalso expect, if we continue to advancecomplete the Merger, another strategic transaction, or resume development of TSC, and any other assets we may in-license or acquire,to continue to incur substantial losses in future periods for the foreseeable future, including any costs related to:
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• | other research, development, and manufacturing activities designed to develop and optimize formulation, manufacturing processes, dosage, dose forms, and other characteristics prior to regulatory approval; |
• | the maintenance, expansion, and protection our global intellectual property portfolio; |
• | the hiring of additional clinical, manufacturing, scientific, sales, or other |
• | research and development related to any other product candidates we may acquire or in-license in the future; and |
• | investments in operational, financial, and management information |
WeSubject to the outcome and timing of our ongoing strategic review process, and without giving effect to the consummation of the proposed Merger with EIP, we currently intend to useexpect that our existing cash, cash equivalents and marketable securities for working capital andas of March 31, 2023 are sufficient to fund current operations for at least 12 months following the research and developmentdate of TSC and any business development activities we may undertake. We currently expect that our cash, cash equivalents and marketable securities as of June 30, 2022 will enable us to fund our operating expenses and capital expenditure requirements into the first quarter of 2024, without giving effect to any business development activities we may undertake.this Quarterly Report.
Additionally, if completed, the Merger will result in an ownership change under Section 382 of the U.S. tax code for Diffusion, and our pre-merger NOL carryforwards and certain other tax attributes will be subject to limitation. Similar rules may apply under state tax laws. Consequently, even if the combined company achieves profitability, it may not be able to utilize a material portion of Diffusion’s, EIP’s, and the combined company’s NOL carryforwards and other tax attributes.
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
R&D expenses include, but are not limited to, third-party CRO arrangements and employee-related expenses, including salaries, benefits, stock-based compensation, and travel expense reimbursement. R&D 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 studies. As we advance our product candidates, we expect the amount of R&D costs will continue to increase for the foreseeable future. R&D costs are charged to expense as incurred.
General and Administrative Expense
G&A expenses consist principally of salaries and related costs for executive and other personnel, including stock-based compensation, other employee benefit costs, expenses associated with investment bank and other financial advisory services, and travel expenses. Other G&A expenses include, facility-related costs, communication expenses and professional fees for legal, patent prosecution and maintenance, consulting, accounting, and other professional services.
Interest Income
Interest income isconsists of interest earned from our cash, cash equivalents and marketable securities.
Results of Operations for Three Months Ended JuneMarch 30, 202231, 2023 Compared to Three Months Ended JuneMarch 30, 202131, 2022
The following table sets forth our results of operations for the three months ended June 30, 2022March 31, 2023 and 2021.2022.
Three Months Ended June 30, 2022 | Three Months Ended March 31, | |||||||||||||||||||||||
2022 | 2021 | Change | 2023 | 2022 | Change | |||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Research and development | $ | 2,108,553 | $ | 1,972,673 | $ | 135,880 | $ | 1,308,589 | $ | 2,425,898 | $ | (1,117,309 | ) | |||||||||||
General and administrative | 2,137,326 | 1,836,773 | 300,553 | 2,957,691 | 2,128,552 | 829,139 | ||||||||||||||||||
Depreciation | — | 23,755 | (23,755 | ) | ||||||||||||||||||||
Loss from operations | 4,245,879 | 3,833,201 | 412,678 | 4,266,281 | 4,554,450 | (288,169 | ) | |||||||||||||||||
Other income: | ||||||||||||||||||||||||
Interest income | (55,378 | ) | (55,228 | ) | (150 | ) | (173,897 | ) | (27,809 | ) | (146,088 | ) | ||||||||||||
Net loss | $ | (4,190,501 | ) | $ | (3,777,973 | ) | $ | (412,528 | ) | $ | (4,092,384 | ) | $ | (4,526,641 | ) | $ | 434,257 |
We recognized $2.1$1.3 million in R&Dresearch and development expenses during the three months ended June 30, 2022March 31, 2023 compared to $2.0$2.4 million during the three months ended June 30, 2021.March 31, 2022. This increasedecrease was attributabledue to lower project spending due to the timingcompletion and/or wind-down of certain CMC-related activities and clinical trials and drug manufacturing,studies evaluating TSC offset by an increase in salaries and wages and stock-based compensation related to increased headcount.non-recurring severance cost paid during the period.
G&AGeneral and administrative expenses were $3.0 million during the three months ended March 31, 2023 compared to $2.1 million during the three months ended June 30, 2022 compared to $1.8 million during the three months ended June 30, 2021.March 31, 2022. The increase was mainlyprimarily due to an increase in professional fees related to the April reverse stock-split as well as increased salary expense related to additional headcount.ongoing business development activity.
The decreaseincrease in depreciationinterest income for the three months ended June 30, 2022March 31, 2023 compared to the three months ended June 30, 2021 is related to the disposalMarch 31, 2022 was primarily as a result of property and equipmentrising interest rates during the year-ended December 31, 2021.
Resultsfirst quarter of Operations for Six Months Ended June30, 2022 Compared to Six Months Ended June30, 2021
The following table sets forth our results of operations for the six months ended June 30, 2022 and 2021.
Six Months Ended June 30, | ||||||||||||
2022 | 2021 | Change | ||||||||||
Operating expenses: | ||||||||||||
Research and development | $ | 4,534,451 | $ | 4,889,051 | $ | (354,600 | ) | |||||
General and administrative | 4,265,878 | 3,580,283 | 685,595 | |||||||||
Depreciation | — | 48,202 | (48,202 | ) | ||||||||
Loss from operations | 8,800,329 | 8,517,536 | 282,793 | |||||||||
Interest income | (83,187 | ) | (95,644 | ) | 12,457 | |||||||
Net loss | $ | (8,717,142 | ) | $ | (8,421,892 | ) | $ | (295,250 | ) |
We recognized $4.5 million in R&D expenses during the six months ended June 30, 2022 compared to $4.9 million during the six months ended June 30, 2021. This decrease was attributable to the timing of clinical trials and drug manufacturing, offset by an increase in salaries and wages and stock-based compensation related to increased headcount.
G&A expenses were $4.3 million during the six months ended June 30, 2022 compared to $3.6 million during the six months ended June 30, 2021. The increase in G&A expense was primarily due to an increase in professional fees related to the April reverse stock-split as well as increased salary expense related to additional headcount.
The decrease in depreciation for the six months ended June 30, 2022 compared to the six months ended June 30, 2021 is related to the disposal of property and equipment during the year-ended December 31, 2021.
The decrease in interest income for the six months ended June 30, 2022 compared to the six months ended June 30, 2021 is primarily attributable to lower interest earned on cash and investments.2023.
Liquidity and Capital Resources
Working Capital
To date, we have funded our operations primarily through the sale and issuance of preferred stock, common stock and convertible promissory notes. As of June 30, 2022,March 31, 2023, we had $6.0$14.6 million in cash and cash equivalents, $3.0 million in marketable securities, working capital of $26.7$16.4 million and an accumulated deficit of $138.7$149.6 million. We expect to continue to incur net losses for the foreseeable future. We intend to use our existing cash, and cash equivalents, and marketable securities to fund our working capital and, subject to the completion and outcome of our strategic review process, research and development of our product candidates.
Cash Flows
The following table sets forth our cash flows for the sixthree months ended June 30, 2022March 31, 2023 and 2021:2022:
Six Months Ended June 30, | Three Months Ended March 31, | |||||||||||||||
Net cash (used in) provided by: | 2022 | 2021 | ||||||||||||||
Net cash provided by (used in): | 2023 | 2022 | ||||||||||||||
Operating activities | $ | (8,737,007 | ) | $ | (8,503,774 | ) | $ | (4,968,120 | ) | $ | (4,729,813 | ) | ||||
Investing activities | (22,615,825 | ) | — | 9,500,000 | (22,716,415 | ) | ||||||||||
Financing activities | 5,000 | 33,295,752 | — | 5,000 | ||||||||||||
Net (decrease) increase in cash and cash equivalents | $ | (31,347,832 | ) | $ | 24,791,978 | |||||||||||
Net increase (decrease) in cash and cash equivalents | $ | 4,531,880 | $ | (27,441,228 | ) |
As of December 31, 2021, we did not own any marketable securities. The decrease in cash and cash equivalents during the six months ended June 30, 2022 is primarily attributable to purchases of marketable securities during the period intended to preserve capital, fulfill the Company's liquidity needs, and maximize investment performance in accordance with the Company's investment policies and guidelines.
Operating Activities
Net cash used in operating activities of $8.7$5.0 million during the sixthree months ended June 30, 2022March 31, 2023 was primarily attributable to our net loss of $8.7$4.1 million and our net change in operating assets and liabilities of $0.5$1.1 million. This amount was offset by $0.6$0.1 million in stock-based compensation expense. The net change in our operating assets and liabilities is primarily attributable to a decrease in our accrued expenses and other current liabilities due to the timing of our payments to our vendors and employees as well as an increase in our prepaid expenses, deposits, and other current assets.
Net cash used in operating activities of $8.5$4.7 million during the sixthree months ended June 30, 2021March 31, 2022 was primarily attributable to our net loss of $8.4$4.5 million and our net change in operating assets and liabilities of $0.6$0.5 million. This amount was offset by $0.5$0.3 million in stock-based compensation expense and depreciation expense. The net change in our operating assets and liabilities is primarily attributable to a decrease in our accrued expenses and other current liabilities due to the timing of our payments to our vendors and employees as well as an increase in our prepaid expenses, deposits and other current assets.
Investing Activities
Net cash used in investing activities duringDuring the sixthree months ended June 30, 2022 was attributable to the purchase of $31.6March 31, 2023, $9.5 million ofin marketable securities and maturities of $9.0matured. During the three months ended March 31, 2022, we purchased $22.7 million ofin marketable securities.securities with cash.
Financing Activities
Net cash provided by financing activities was $5,000 during the sixthree months ended June 30,March 31, 2022, which was attributable to net proceeds received from the sale of our Series C Convertible Preferred Stock.
Net cash provided by financing activities was $33.3 million during the six months ended June 30, 2021, which was attributable to net proceeds of $31.1 million received from the sale of our common stock and $2.2 million in proceeds received from the exercise of common stock warrants.
Capital Requirements
We currently expect to continue to incurHistorically, we have incurred substantial expenses and generategenerated significant operating losses as we continue to pursue ourpursuing its business strategy of developing TSC. Our operations have consumed substantial amounts of cash since inception and we currently expect to continue to spend substantial amounts of cash to advance the clinical development of TSC and any other product candidates we may in-license or acquire in the future. As of the date of this Quarterly Report, most of our cash resources for clinical development are dedicated to, our ongoing and its planned clinical trials. expenditures are primarily related to, the Merger.
While we currently believebelieves we have adequate cash resources to continuefund our current operations into the first quarter of 2024 (without giving effect to any business development activities we may undertake),for at least 12 months, we anticipate that, if we complete the Merger, another strategic transaction, or resume development of TSC, we will likely need additional funding in orderthe future to completesupport our research and development of TSCactivities and any other assets we may in-license or acquireoperations which, if available, could be obtained through additional capital raising transactions, entry into strategic partnerships or collaborations, or alternative financing arrangements.
As of June 30, 2022, we did not have any credit facilities in place under which we could borrow funds or any other sources of committed capital. In July 2022, we entered into an at-the-market sales agreement, or theAt-The-Market Sales Agreement, dated July 22, 2022, with BTIG LLC, as agent (the “2022 Sales Agreement”). The 2022 Sales Agreement with BTIG, as agent,is an “at-the-market” sales agreement pursuant to which the Companywe may, from time to time and through BTIG as our agent, sell up to an aggregate of $20.0 million in shares of the Company’s common stock from time to time through BTIG, by any permissible method permitted that is deemed an “at the market offering” as defined in Rule 415(a)(4) under the Securities Act of 1933, as amended.Act. As of the date of this filing,Quarterly Report, however, we have not sold any shares underpursuant to the 2022 Sales Agreement.
In the future, we may seek to raise additional funds through various sources. However, we can give no assurances that we will be able to secure additional sources of funds to support ourits operations, or if such funds are available to us, that such additional financing will be sufficient or be on terms acceptable to us.terms. This risk may increase if economic and market conditions continue to be challenging or deteriorate. If we are unable to obtain additional financing when needed, we may need to curtail portions of our operations, terminate, significantly modify, or delay the development of TSC or our product candidates, or we may need to obtain funds through collaborations or otherwise on terms that may require us to relinquish rights to our technologies, or product candidates or other assets that we might otherwise seek to develop or commercialize independently.independently or receive superior value. If we are unable to raise adequate additional capital as and when required in the future, we could be forced to cease development activities and terminate our operations, and youour stockholders could experience a complete loss of yourtheir investment.
To the extent that we raise additional capital in the future through the sale of our common stock or securities convertible or exchangeable for common stock such as common stock warrants, convertible preferred stock, or convertible debt instruments, or fund acquisitions or other transactions through the issuance of such securities, the interests of our current stockholders may be diluted or otherwise impacted. 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.
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
As of the date of this Quarterly Report, the Critical Accounting Policies included in our Annual Report have not changed.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, promulgated by the SEC under the U.S. Securities Act of 1933, as amended, we are not required to provide the information required by this Item 3.
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)) promulgated under the Exchange Act) 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 Exchange Act Rule 13a-15(f) promulgated under the Exchange Act) that occurred during the quarterperiod ended June 30, 2022March 31, 2023 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 |
PleaseFor this item, please refer to Note 9,7, Commitments and Contingencies in the notes accompanying the unaudited interim consolidated financial statements included in Part I, Item 1 of this Quarterly Report, which is incorporated herein by reference.
ITEM 1A. | RISK FACTORS |
As of the date of this Quarterly Report, there have been no material changes to our risk factors previously disclosed in our Annual Report and our subsequent quarterly report on Form 10-Q.except as disclosed under the heading, "Risk Factors" in the Preliminary Merger Proxy Statement.
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 |
None.
ITEM 6. | EXHIBITS |
See attached Exhibit Index.
DIFFUSION PHARMACEUTICALS INC.
QUARTERLY REPORT ON FORM 10-Q
EXHIBIT INDEX
Exhibit No. | Description | Method of Filing | ||
2.1 | Incorporated by reference to Exhibit 2.1 to the registrant's Current Report on Form 8-K filed on March 30, 2023 | |||
10.1 | Incorporated by reference to Exhibit 10.1 to the | |||
10.2 | Incorporated by reference to Exhibit 10.2 to the registrant's Current Report on Form 8-K filed on March 30, 2023 | |||
10.3 | Incorporated by reference to Exhibit 10.3 to the registrant's Current Report on Form 8-K filed on March 30, 2023 | |||
10.4 | Incorporated by reference to Exhibit 10.4 to the registrant's Current Report on Form 8-K filed on March 30, 2023 | |||
10.5 | Incorporated by reference to Exhibit 10.5 to the registrant's Current Report on Form 8-K filed on March 30, 2023 | |||
10.6 | Incorporated by reference to Exhibit 10.14 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2022, filed on March 24, 2023 | |||
10.7 | Incorporated by reference to Exhibit 10.15 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2022, filed on March 24, 2023 | |||
99.1 | Form of Diffusion Pharmaceuticals Inc. Stockholder Support Agreement, dated as of March 30, 2023 | Incorporated by reference to Exhibit 99.1 to the registrant's current report on Form 8-K filed on March 30, 2023 | ||
31.1 | Filed herewith | |||
31.2 | Filed herewith | |||
32.1 | Furnished herewith | |||
32.2 | Furnished herewith | |||
101 | The following materials from Diffusion’s quarterly report on Form 10-Q for the quarter ended | Filed herewith | ||
104 | Cover Page Interactive Data File (formatted as Inline XBRL and |
(1) Schedules and exhibits have been omitted from this filing pursuant to Item 601(b)(2) of Regulation S-K. Diffusion agrees to furnish on a supplemental basis a copy of any omitted schedule or exhibit to the SEC upon its request; provided, however, that Diffusion may request confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, for any schedule or exhibit so furnished.
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: August 11, 2022May 15, 2023
DIFFUSION PHARMACEUTICALS INC. | ||||
By: | /s/ Robert J. Cobuzzi, Jr., Ph.D. | |||
Robert J. Cobuzzi, Jr., Ph.D. | ||||
President and Chief Executive Officer | ||||
(Principal Executive Officer) | ||||
By: | /s/ William Hornung | |||
William Hornung | ||||
Chief Financial Officer | ||||
(Principal Financial |