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Note 4 - Acquisition
 6 Months Ended
Jun. 30, 2016
Notes to Financial Statements  
Business Combination Disclosure [Text Block]
4.            Acquisition
 
Merger of RestorGenex Corporation and Diffusion Pharmaceuticals LLC
 
On December 15, 2015, the Company, formerly known as RestorGenex Corporation (“RestorGenex”), entered into the Merger Agreement with Diffusion LLC. On January 8, 2016, the Company completed the Merger, with Diffusion LLC surviving as a wholly-owned subsidiary of the Company. Subsequent to the Merger, the Company was renamed “Diffusion Pharmaceuticals Inc.” and the Company’s ticker symbol on the OTC Bulletin Board was changed from “RESX” to “DFFN.” Diffusion LLC and RestorGenex entered into the merger agreement in an effort to provide improved access to the capital markets in order to obtain the resources necessary to accelerate development of TSC in multiple clinical programs and continue to build an oncology-focused company.
 
 
 
The merger transaction was accounted for as a reverse acquisition under the acquisition method of accounting. Because Diffusion LLC’s pre-transaction owners held an 84.1% economic and voting interest in the combined company immediately following the completion of the merger, Diffusion LLC is considered to be the acquirer of RestorGenex for accounting purposes.
 
Each outstanding unit of membership interest of Diffusion LLC (the Diffusion Units) was converted into the right to receive 3.652658 shares of the Company’s common stock, par value $0.001 per share (the Common Stock), as determined pursuant to the Merger Agreement (the Exchange Ratio). Additionally, the right of holders of outstanding convertible notes of Diffusion LLC to convert such notes into Diffusion Units was converted into the right to convert such notes into a number of shares of Common Stock equal to the number of Diffusion Units into which such note would have been convertible under the original terms of the note multiplied by the Exchange Ratio. In addition, all outstanding options to purchase Diffusion Units were assumed by the Company and the right to exercise converted into stock options to purchase Common Stock on terms substantially identical to those in effect prior to the merger transaction, except for adjustments to the underlying number of shares and the exercise price based on the Exchange Ratio.
 
In connection with the Merger, the Company’s Board of Directors authorized, declared and effected a distribution of contingent value rights (CVRs) to shareholders of the Company as of the close of business on January 7, 2016. Each CVR is a non-transferable right to potentially receive certain cash payments in the event the combined company receives net cash payments during the five-year period after the merger transaction as a result of the sale, transfer, license or similar transaction or any other agreement to the extent relating to the development of the Company’s product currently known as RES-440, a “soft” anti-androgen. See Note 11 for additional fair value information.
 
The purchase consideration in a reverse acquisition is determined with reference to the value of equity that the accounting acquirer, Diffusion LLC, would have had to issue to the owners of the accounting acquiree, RestorGenex, to give the pre-acquisition RestorGenex equity holders the same percentage interest in Diffusion that such pre-acquisition RestorGenex equity holders held in the Company immediately following the reverse acquisition. The purchase price is calculated as follows:
 
Purchase consideration
        
Fair value of RestorGenex shares outstanding
   $ 19,546,000  
Estimated fair value of RestorGenex stock options assumed by Diffusion
     1,321,000  
Estimated fair value of RestorGenex warrants assumed by Diffusion
     384,000  
CVRs – RES-440 product candidate
     10,000  
Total preliminary purchase price
   $ 21,261,000  
 
The Merger transaction has been accounted for using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The valuation technique utilized to value the IPR&D was the cost approach.
 
The following table summarizes the preliminary allocation of the purchase price to the assets acquired and liabilities assumed as of the acquisition date:
 
Cash and cash equivalents
   $ 8,500,602  
Prepaid expenses and other assets
     195,200  
Property and equipment
     57,531  
Intangible assets
     9,317,000  
Goodwill
     7,105,031  
Accrued liabilities
     (377,431 )
Deferred tax liability
     (3,536,933 )
Net assets acquired
   $ 21,261,000  
 
 
 
 
The above allocation of the purchase price is based on certain preliminary valuations and other analyses that have not been completed as of the date of the filing. Any changes in the estimated fair values of the net assets recorded for the Merger upon the finalization of more detailed analyses of the facts and circumstances that existed at the date of the transaction may change the allocation of the purchase price. As such, the purchase price allocations for this transaction are preliminary estimates, which are subject to change within the measurement period.
 
Qualitative factors supporting the recognition of goodwill due to the Merger include the Company’s enhanced ability to secure additional capital and gain access to capital market opportunities as a public company and the potential value created by having a more well-rounded clinical development portfolio by adding the earlier stage RestorGenex products to the Company’s later state product portfolio.
 
Intangible assets were as follows:
 
 
 
June 30, 2016
 
 
December 31, 2015
 
 
 
Gross
Carrying
Amount
 
 
Accumulated
Amortization
 
 
Intangible
Assets, net
 
 
Gross
Carrying
Amount
 
 
Accumulated Amortization
 
 
Intangible
Assets, net
 
RES 529
   $ 8,385,000     $ 0     $ 8,385,000     $ 0     $ 0     $ 0  
RES-440
     932,000       0       932,000       0       0       0  
Total in-process research and development costs (IPR&D)
   $ 9,317,000     $ 0     $ 9,317,000     $ 0     $ 0     $ 0  
 
The Company’s novel PI3K/Akt/mTOR pathway inhibitor, RES-529, is in preclinical development for oncology. Through a series of in vitro and in vivo animal models, RES-529 has been shown to have activity in several cancer types due to its ability to target and inhibit the PI3K/Akt/mTOR signal transduction pathway. RES-529 is a first-in-class inhibitor of both TORC1 and TORC2 that is mechanistically differentiated from other PI3K/Akt/mTOR pathway inhibitors currently in development. RES-529 has shown activity in both in vitro and in vivo glioblastoma animal models and has been demonstrated to be orally bioavailable and able to cross the blood brain barrier.
 
In August 2016, the Company determined that the IPR&D asset associated with the Company’s RES-440 product candidate will be abandoned and written down to $0 (Note 12).
 
Pro Forma Financial Information (Unaudited)
 
The following pro forma financial information reflects the consolidated results of operations of the Company as if the acquisition of RestorGenex had taken place on January 1, 2015. The pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transactions been effected on the assumed date.
 
 
 
Three Months Ended
June 30,
 
 
Six Months Ended
June 30,
 
 
 
2016
 
 
2015
 
 
2016
 
 
2015
 
Net revenues
   $ —     $ —     $ —     $ —  
Net loss
   $ (3,806,194 )   $ (5,300,450 )   $ (8,464,138 )   $ (10,060,351 )
Basic and diluted loss per share
   $ (0.04 )   $ (0.13 )   $ (0.08 )   $ (0.24 )
 
 
 
 
 
Nonrecurring pro forma transaction costs directly attributable to the Merger were $0 and $1,644,768 for the three and six month periods ended June 30, 2016, respectively, and have been deducted from the net loss presented above. The costs deducted from the six months ended June 30, 2016 periods included a success fee of $1,000,000 and approximately 457,000 shares of common stock with a fair market value of $487,500 paid to a financial advisor upon the closing of the Merger on January 8, 2016. Additionally, the Company incurred approximately $3,000,000 in severance costs as a result of resignations of executive officers immediately prior to the reverse merger. These costs are excluded from the pro forma financial information for the three and six months ended June 30, 2016. There were no nonrecurring proforma transaction costs directly attributable to the Merger for the three and six month periods ended June 30, 2015.