3.	Basis of Presentation and Summary of Significant Accounting Policies

The Summary of Significant Accounting Policies included in the Company's Form

-K for the year ended

December

31,

2019,

filed with the Securities and Exchange Commission on

March 17, 2020

have

not

materially 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 U.S. generally accepted accounting principles (“GAAP”) for interim financial information as found in the Accounting Standard Codification (“ASC”) and Accounting Standards Updates (“ASUs”) of the Financial Accounting Standards Board (“FASB”), and with the instructions to Form

-Q and Article

of Regulation S-

of the Securities and Exchange Commission (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,

2020,

its results of operations for the

three

and

six

months ended

June

30,

2020

and

2019

and cash flows for the

six

months ended

June

30,

2020

and

2019.

Operating results for the

six

months ended

June

30,

2020

are

not

necessarily indicative of the results that

may

be expected for the year ending

December

31,

2020.

The unaudited interim consolidated financial statements presented herein do

not

contain the required disclosures under GAAP for annual financial statements. The accompanying unaudited interim consolidated financial statements should be read in conjunction with the annual audited financial statements and related notes as of and for the year ended

December

31,

2019

filed with the SEC on Form

-K on

March 17, 2020.

Use of Estimates

The preparation of the unaudited interim consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of assets and liabilities at the date the financial statements and reported amounts of expense during the reporting period. The full extent to which the COVID-

pandemic will directly or indirectly impact our business, results of operations and financial condition, including sales, expenses, reserves and allowances, clinical trials, research and development costs and employee-related amounts, will depend on future developments that are highly uncertain, including as a result of new information that

may

emerge concerning COVID-

19,

governmental and business responses to the ongoing pandemic, further actions taken to contain or treat COVID-

and the speed of the anticipated recovery, as well as the ongoing economic impact on local, regional, national and international markets. The COVID-

pandemic had

material impact on our estimates and assumptions used in the preparation of the unaudited interim consolidated financial statements for the quarterly period ended

June 30, 2020.

Due to the uncertainty of factors surrounding these estimates or judgments, actual results

may

materially vary from our estimates. Estimates and assumptions are periodically reviewed, and the effects of revisions are reflected in the unaudited interim consolidated financial statements in the period they are determined. Our future assessment of the magnitude and duration of COVID-

19,

as well as other factors, could result in material impacts to our consolidated financial statements in future reporting periods.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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 cash equivalents 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

Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

•

Level

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

Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or

market activity.

The following fair value hierarchy table presents information about the Company's cash equivalents measured at fair value on a recurring basis:

	March 31, 2020
	(Level 1)		(Level 2)		(Level 3)
Assets
Cash equivalents	$	25,383,744	$	—	$	—

	December 31, 2019
	(Level 1)		(Level 2)		(Level 3)
Assets
Cash equivalents	$	14,006,193	$	—	$	—

Intangible Asset

The Company's RES-

529

intangible asset is assessed for impairment annually on

October 1

of the Company's fiscal year or more frequently if impairment indicators exist. There was

impairment to the Company's RES-

529

intangible asset recognized during the

three

six

months ended

June

30,

2020

and

2019.

DIFFUSION PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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,

2020

and

2019

have been excluded from the computation of diluted weighted average shares outstanding, as they would be anti-dilutive:

	Six Months Ended June 30,
	2020		2019
Common stock warrants		9,117,209		3,469,925
Stock options		1,427,829		309,276
Unvested restricted stock awards		98,100		—
		10,643,138		3,779,201

Recently Adopted Accounting Pronouncements

August 2018,

the FASB issued ASU

2018

13,

Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurements,

which changes the fair value measurement disclosure requirements of ASC

820.

The goal of the ASU is to improve the effectiveness of ASC

820's

disclosure requirements by providing users of the financial statements with better information about assets and liabilities measured at fair value in the financial statements and notes thereto. The Company adopted ASU

No.

2018

in the

first

quarter of

2020

and the adoption did

not

have a material impact on the Company's consolidated financial statements.