CervoMed (CRVO) - 2023 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION This section presents the company's unaudited interim consolidated financial statements and management's discussion and analysis of financial condition and results of operations ITEM 1. FINANCIAL STATEMENTS This section presents the unaudited interim consolidated financial statements for Diffusion Pharmaceuticals Inc., including the Balance Sheets, Statements of Operations and Comprehensive Loss, Statements of Stockholders' Equity, and Statements of Cash Flows, along with their accompanying notes. The company reported a net loss and accumulated deficit, reflecting its pre-revenue stage and ongoing R&D and G&A expenses, significantly impacted by the proposed merger with EIP Consolidated Balance Sheets This section presents the company's financial position, detailing assets, liabilities, and equity at specific reporting dates Consolidated Balance Sheets Summary | Assets/Liabilities & Equity | June 30, 2023 | December 31, 2022 | | :-------------------------- | :------------ | :---------------- | | Cash and cash equivalents | $14,999,548 | $10,113,706 | | Marketable securities | — | $12,408,940 | | Total assets | $15,694,618 | $22,635,052 | | Total liabilities | $1,464,977 | $2,417,336 | | Total stockholders' equity | $14,229,641 | $20,217,716 | Consolidated Statements of Operations and Comprehensive Loss This section details the company's financial performance, including revenues, expenses, and net loss over specific periods Consolidated Statements of Operations and Comprehensive Loss Summary | Metric (Three Months Ended June 30) | 2023 | 2022 | | :---------------------------------- | :------------ | :------------ | | Research and development | $72,185 | $2,108,553 | | General and administrative | $2,220,373 | $2,137,326 | | Loss from operations | $2,292,558 | $4,245,879 | | Interest income | $(179,456) | $(55,378) | | Net loss | $(2,113,102) | $(4,190,501) | | Net loss per share (basic & diluted)| $(1.04) | $(2.06) | | Metric (Six Months Ended June 30) | 2023 | 2022 | | :---------------------------------- | :------------ | :------------ | | Research and development | $1,380,774 | $4,534,451 | | General and administrative | $5,178,065 | $4,265,878 | | Loss from operations | $6,558,839 | $8,800,329 | | Interest income | $(353,353) | $(83,187) | | Net loss | $(6,205,486) | $(8,717,142) | | Net loss per share (basic & diluted)| $(3.04) | $(4.28) | Consolidated Statements of Stockholders' Equity This section outlines changes in the company's equity, reflecting net loss, stock-based compensation, and other comprehensive income/loss Consolidated Statements of Stockholders' Equity Summary | Metric (Six Months Ended June 30, 2023) | Amount | | :-------------------------------------- | :------------ | | Balance at January 1, 2023 | $20,217,716 | | Stock-based compensation expense | $182,036 | | Unrealized gain on marketable securities| $35,375 | | Net loss | $(6,205,486) | | Balance at June 30, 2023 | $14,229,641 | | Metric (Six Months Ended June 30, 2022) | Amount | | :-------------------------------------- | :------------ | | Balance at January 1, 2022 | $34,911,467 | | Stock-based compensation expense | $556,261 | | Unrealized loss on marketable securities| $(86,583) | | Net loss | $(8,717,142) | | Balance at June 30, 2022 | $26,669,003 | Consolidated Statements of Cash Flows This section reports the cash inflows and outflows from operating, investing, and financing activities over specific periods Consolidated Statements of Cash Flows Summary | Cash Flow Activity | 2023 | 2022 | | :----------------- | :------------ | :------------ | | Operating activities | $(7,614,158) | $(8,737,007) | | Investing activities | $12,500,000 | $(22,615,825) | | Financing activities | — | $5,000 | | Net increase (decrease) | $4,885,842 | $(31,347,832) | | Cash & cash equivalents at end of period | $14,999,548 | $5,965,726 | NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS This section provides detailed explanations and additional disclosures pertinent to the unaudited interim consolidated financial statements 1. Organization and Description of Business This section discusses 1. Organization and Description of Business - Diffusion Pharmaceuticals Inc. is a biopharmaceutical company historically focused on developing therapies to enhance oxygen delivery, with its lead candidate TSC for GBM and other hypoxic solid tumors[67][91] - The company entered a Merger Agreement with EIP Pharma, Inc. on March 30, 2023, with a special stockholder meeting scheduled for August 15, 2023, to approve the merger and related transactions[67][92] - Operations have been funded primarily by equity and convertible debt offerings, with no product sales revenue generated to date[68] 2. Liquidity This section discusses 2. Liquidity - Substantial additional financing will be required to fund R&D activities for existing or future product candidates, especially if the merger with EIP closes[69] - The company expects existing cash and cash equivalents as of June 30, 2023, to fund current operations for at least 12 months, without giving effect to the proposed Merger[95] - A reduction in force in Q1 2023 impacted seven employees, primarily in clinical operations, as a cash preservation measure related to the merger and pausing TSC development[92] 3. Basis of Presentation and Summary of Significant Accounting Policies This section discusses 3. Basis of Presentation and Summary of Significant Accounting Policies - Unaudited interim consolidated financial statements are prepared in accordance with GAAP for interim financial information and SEC instructions[97] - Key estimates include assumptions for stock-based compensation and R&D activities[72] - The company maintains deposits in federally insured financial institutions in excess of insured limits but believes it is not exposed to significant credit risk[74] 4. Cash, cash equivalents and marketable securities This section discusses 4. Cash, cash equivalents and marketable securities Cash and Cash Equivalents Summary | Category | June 30, 2023 | December 31, 2022 | | :----------------------- | :------------ | :---------------- | | Cash in banking institutions | $1,316,052 | $1,586,920 | | Money market funds | $13,683,496 | $8,526,786 | | Total | $14,999,548 | $10,113,706 | - The company had no marketable securities as of June 30, 2023, compared to $12.4 million at December 31, 2022[132][214] - Marketable securities are classified as available-for-sale and carried at fair value, with unrealized gains and losses reported in comprehensive loss[122] 5. Fair Value of Financial Instruments This section discusses 5. Fair Value of Financial Instruments - Fair value measurements are classified into Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[109][133] Fair Value of Financial Assets (June 30, 2023) | Asset Category | Level 1 | Level 2 | Level 3 | | :------------------- | :------------ | :------ | :------ | | Money market funds | $13,683,496 | — | — | | Total cash equivalents | $13,683,496 | — | — | Fair Value of Financial Assets (December 31, 2022) | Asset Category | Level 1 | Level 2 | Level 3 | | :------------------- | :------------ | :------------ | :------ | | Money market funds | $8,526,786 | — | — | | Commercial paper | — | $9,424,170 | — | | US treasury | — | $2,984,770 | — | | Total financial assets | $8,526,786 | $12,408,940 | — | 6. Accrued Expenses and Other Current Liabilities This section discusses 6. Accrued Expenses and Other Current Liabilities Accrued Expenses and Other Current Liabilities | Category | June 30, 2023 | December 31, 2022 | | :-------------------------------- | :------------ | :---------------- | | Accrued payroll and related expenses | $265,382 | $131,777 | | Accrued professional fees | $208,900 | $552,785 | | Accrued clinical studies expenses | — | $475,141 | | Other | $58,268 | $129,851 | | Total | $532,550 | $1,289,554 | 7. Stockholders' Equity and Common Stock Warrants This section discusses 7. Stockholders' Equity and Common Stock Warrants Common Stock Warrants Outstanding (June 30, 2023) | Warrant Type | Outstanding | Range of Price per Share | Expiration Dates | | :------------------------------------------ | :---------- | :----------------------- | :------------------------- | | May 2019 common stock offering | 27,648 | $250.09 | May and December 2024 | | November 2019 common stock offering | 4,269 | $17.51 | May 2024 | | December 2019 common stock offering | 6,264 | $21.68 | December 2024 and June 2025| | May 2020 common stock offering | 11,424 | $65.65 | March 2025 | | May 2020 investor warrant exercise | 4,998 | $29.7 | November 2025 | | February 2021 common stock offering | 33,649 | $64.08 | February 2026 | | Total | 88,252 | | | - During the six months ended June 30, 2023, 23,639 warrants expired[114] - The 2015 Equity Plan added 81,582 shares to the reserve as of January 1, 2023, for stock-based awards, with 160,254 shares available for future issuance at June 30, 2023[115] 8. Stock-Based Compensation This section discusses 8. Stock-Based Compensation Stock-Based Compensation Expense | Expense Category (Three Months Ended June 30) | 2023 | 2022 | | :-------------------------------------------- | :------ | :------ | | Research and development | — | $58,892 | | General and administrative | $60,665 | $219,238| | Total | $60,665 | $278,130| | Expense Category (Six Months Ended June 30) | 2023 | 2022 | | :-------------------------------------------- | :------ | :------ | | Research and development | $12,011 | $117,785| | General and administrative | $170,025| $438,476| | Total | $182,036| $556,261| Stock Option Activity (January 1, 2023 - June 30, 2023) | Activity | Number of Options | Weighted Average Exercise Price per Share | | :----------------------- | :---------------- | :---------------------------------------- | | Balance at January 1, 2023 | 140,040 | $126.75 | | Cancelled | (54,079) | $22.04 | | Outstanding at June 30, 2023 | 85,961 | $192.65 | | Exercisable at June 30, 2023 | 68,344 | $238.46 | - At June 30, 2023, there was $0.2 million of unrecognized compensation expense for stock options, to be recognized over a weighted-average period of 1.12 years[2] 9. Commitments and Contingencies This section discusses 9. Commitments and Contingencies - The company has a short-term agreement for co-working space in Charlottesville, Virginia, with rent expense of approximately $1,000 and $2,000 for the three months ended June 30, 2023 and 2022, respectively[142] - Matching contributions to the 401(k) Plan were approximately $10,000 and $26,000 for the three months ended June 30, 2023 and 2022, respectively[143] - Multiple lawsuits were filed by purported stockholders in connection with the Merger Agreement, alleging violations of the Exchange Act and breach of fiduciary duty, which the company believes are without merit[7][169] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section discusses the company's financial condition and results of operations, highlighting the proposed merger with EIP Pharma, Inc. and its significant impact on future strategy and financial outlook. It details changes in R&D and G&A expenses, liquidity, and capital requirements, emphasizing the company's dependence on the merger's success and the need for future funding Overview This section provides an overview of the company's strategic direction, focusing on the proposed merger with EIP Pharma and its implications for future operations - Diffusion entered a Merger Agreement with EIP Pharma, Inc. on March 30, 2023, which, if approved, will result in EIP becoming a wholly-owned subsidiary and Diffusion being renamed "CervoMed Inc."[10][147] - The combined company will focus on developing EIP's lead drug candidate, neflamapimod, for dementia with Lewy bodies (DLB), with a Phase 2b clinical trial initiated in Q2 2023, funded by a $21.0 million NIH grant[10] - Diffusion stockholders are expected to own approximately 24.68% of the combined company, and former EIP equity holders approximately 75.32%, subject to closing conditions including stockholder approval and Parent Net Cash of $12.0 million or more[148][171] - Development of Diffusion's existing asset, TSC, has been paused, making future operations highly dependent on the success of the merger[149] Financial Operations Overview This section summarizes key financial trends, including revenue generation, research and development, general and administrative expenses, and interest income - The company has not generated any revenue from product sales and does not expect to for the foreseeable future[151][175] - Research and development expenses decreased due to lower project spending from the completion/wind-down of TSC-related activities and clinical studies[16][179] - General and administrative expenses increased primarily due to professional fees related to the merger and severance costs[177][154] - Interest income increased due to rising interest rates in 2023[19][153] Results of Operations for Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022 This section compares the company's financial performance for the three months ended June 30, 2023, against the same period in the prior year Results of Operations (Three Months Ended June 30) | Operating Expenses/Income | 2023 | 2022 | Change | | :------------------------ | :------------ | :------------ | :------------ | | Research and development | $72,185 | $2,108,553 | $(2,036,368) | | General and administrative| $2,220,373 | $2,137,326 | $83,047 | | Loss from operations | $(2,292,558) | $(4,245,879) | $1,953,321 | | Interest income | $179,456 | $55,378 | $124,078 | | Net loss | $(2,113,102) | $(4,190,501) | $2,077,399 | Results of Operations for Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022 This section compares the company's financial performance for the six months ended June 30, 2023, against the same period in the prior year Results of Operations (Six Months Ended June 30) | Operating Expenses/Income | 2023 | 2022 | Change | | :------------------------ | :------------ | :------------ | :------------ | | Research and development | $1,380,774 | $4,534,451 | $(3,153,677) | | General and administrative| $5,178,065 | $4,265,878 | $912,187 | | Loss from operations | $(6,558,839) | $(8,800,329) | $2,241,490 | | Interest income | $353,353 | $83,187 | $270,166 | | Net loss | $(6,205,486) | $(8,717,142) | $2,511,656 | Liquidity and Capital Resources This section analyzes the company's ability to meet its short-term and long-term obligations, detailing cash position, working capital, and future funding needs - As of June 30, 2023, the company had $15.0 million in cash and cash equivalents, working capital of $14.2 million, and an accumulated deficit of $151.8 million[196] Cash Flows Summary (Six Months Ended June 30) | Cash Flow Activity | 2023 | 2022 | | :----------------- | :------------ | :------------ | | Operating activities | $(7,614,158) | $(8,737,007) | | Investing activities | $12,500,000 | $(22,615,825) | | Financing activities | — | $5,000 | | Net increase (decrease) | $4,885,842 | $(31,347,832) | - The company anticipates needing additional funding in the future to support R&D and operations, especially if the merger completes or TSC development resumes, and warns of potential stockholder dilution or operational curtailment if financing is unavailable[22][159] - No off-balance sheet arrangements exist that have a material effect on financial condition[160] Critical Accounting Policies This section addresses the company's significant accounting policies that require management's most difficult, subjective, or complex judgments - No material changes to the Critical Accounting Policies previously disclosed in the Annual Report on Form 10-K[24][201] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company, Diffusion Pharmaceuticals Inc. is not required to provide the information typically mandated by this item - The company is a "smaller reporting company" and is therefore not required to provide quantitative and qualitative disclosures about market risk[161] ITEM 4. CONTROLS AND PROCEDURES The company's management, including the principal executive and financial officers, evaluated the effectiveness of disclosure controls and procedures, concluding they were effective as of June 30, 2023. There were no material changes in internal control over financial reporting during the period - Disclosure controls and procedures were evaluated and deemed effective as of June 30, 2023, providing reasonable assurance that required information is recorded, processed, summarized, and reported timely[187] - No material changes in internal control over financial reporting occurred during the period ended June 30, 2023[162] PART II – OTHER INFORMATION This section covers additional disclosures including legal proceedings, risk factors, equity sales, and other miscellaneous information not included in the financial statements ITEM 1. LEGAL PROCEEDINGS This section refers to Note 9 in the financial statements for details on legal proceedings, which include ongoing litigation related to the proposed merger and a historical lawsuit - For information on legal proceedings, refer to Note 9, Commitments and Contingencies, in the notes accompanying the unaudited interim consolidated financial statements[31][188] ITEM 1A. RISK FACTORS No material changes to previously disclosed risk factors, except for those related to the proposed merger and reverse stock split, which are incorporated by reference from the Merger Proxy Statement - No material changes to risk factors previously disclosed in the Annual Report, except for those related to the Merger and Reverse Stock Split Proposal, as detailed in the Merger Proxy Statement[27][204] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The company reported no unregistered sales of equity securities or use of proceeds during the period - There were no unregistered sales of equity securities or use of proceeds during the reporting period[189][205] ITEM 3. DEFAULTS UPON SENIOR SECURITIES This item is not applicable to the company for the reporting period - This item is not applicable[32][206] ITEM 4. MINE SAFETY DISCLOSURES The company has no mine safety disclosures to report - No mine safety disclosures are applicable[28][205] ITEM 5. OTHER INFORMATION No officers or directors adopted or terminated Rule 10b5-1 trading arrangements during the reporting period - None of the officers or directors adopted or terminated any Rule 10b5-1 trading arrangements during the period of this Quarterly Report[207] ITEM 6. EXHIBITS This section provides a list of exhibits filed with the Quarterly Report, including certifications, a separation agreement, and XBRL data - The exhibit index includes a Separation Agreement, CEO and Principal Financial Officer certifications (Sections 302 and 906 of Sarbanes-Oxley Act), and XBRL formatted financial data[210] SIGNATURES The report is duly signed on behalf of Diffusion Pharmaceuticals Inc. by its President and Chief Executive Officer, Robert J. Cobuzzi, Jr., Ph.D., and General Counsel and Corporate Secretary (Principal Financial Officer), William Elder - The report is signed by Robert J. Cobuzzi, Jr., Ph.D., President and Chief Executive Officer, and William Elder, General Counsel and Corporate Secretary (Principal Financial Officer)[195][212]