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Note 4 - Acquisition | 9 Months Ended
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Sep. 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.” In November 2016, the Company's common stock was approved for listing on the NASDAQ Capital Market and will continue to trade under the ticker symbol "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 Diffusion Unit was converted into the right to receive 0.3652658 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”), as determined pursuant to the Exchange Ratio. Additionally, the right of holders of Diffusion Convertible Notes 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 terms of the note in effect immediately prior to the consummation of the Merger 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 Company receives net cash payments during the five-year period after the Merger 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 below and 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 LLC that such pre-acquisition RestorGenex equity holders held in the Company immediately following the reverse acquisition. The purchase price was calculated as follows:
Fair value of RestorGenex shares outstanding |  | $ | 19,546,000 |
Estimated fair value of RestorGenex stock options outstanding |  |  | 1,321,000 |
Estimated fair value of RestorGenex warrants outstanding |  |  | 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 |  |  | 9,600,000 |
Goodwill |  |  | 6,929,258 |
Accrued liabilities |  |  | (377,432 | )
Deferred tax liability |  |  | (3,644,159 | )
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. During the three months ended September 30, 2016, the Company corrected the valuation of the acquired intangible assets and recorded an additional $283,000 and $107,226 to the estimated fair value of acquired intangible assets and deferred tax liability, respectively. As a result, goodwill decreased by $175,773. Qualitative factors supporting the recognition of goodwill due to the Merger include the Company’s anticipated 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 acquired were as follows:
|  | Acquisition Date Fair Value |  |  | Accumulated Amortization |  |  | Impairment Upon Abandonment |  |  | Carrying Value at September 30, 2016 |
RES 529 |  | $ | 8,639,000 |  |  | $ | - |  |  | $ | - |  |  | $ | 8,639,000 |
RES 440 |  |  | 961,000 |  |  |  | - |  |  |  | (961,000 | ) |  |  | - |
Total in-process research and development costs (IPR&D) |  | $ | 9,600,000 |  |  | $ | - |  |  | $ | (961,000 | ) |  | $ | 8,639,000 |
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 can cross the blood brain barrier. In August 2016, the Board of Directors determined that RES-440, a “soft” anti-androgen compound for the treatment of acne vulgaris, was outside the Company’s core product focus, and was not a priority. Therefore, future development efforts were abandoned in the third quarter of 2016. In connection with its review of such abandonment, the Company concluded RES-440 was impaired in its entirety and the CVRs were remeasured and determined to have no value as of September 30, 2016. The abandonment resulted in a net impairment charge of $951,000 and was recorded as a component of research and development expenses within the Company’s unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2016. The abandonment also resulted in an income tax benefit of $364,796. Pro Forma Financial Information (Unaudited) The following pro forma financial information reflects the condensed 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 September 30, |  |  | Nine Months Ended September 30, |
|  | 2016 |  |  | 2015 |  |  | 2016 |  |  | 2015 |
Net revenues |  | $ | N/A |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Net loss |  | $ | N/A |  |  | $ | (3,576,120 | ) |  | $ | (13,900,691 | ) |  | $ | (13,636,471 | )
Basic and diluted loss per share |  | $ | N/A |  |  | $ | (0.87 | ) |  | $ | (1.36 | ) |  | $ | (3.31 | )
Non-recurring pro forma transaction costs directly attributable to the Merger were $1,644,768 for the nine month period ended September 30, 2016 and have been deducted from the net loss presented above. The costs deducted from the nine months ended September 30, 2016 periods included a success fee of $1,000,000 and approximately 46,000 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. The three months ended September 30, 2016 are not presented as those results include RestorGenex results. Additionally, the Company incurred approximately $3,000,000 in severance costs as a result of resignations of executive officers immediately prior to the Merger. These costs are excluded from the pro forma financial information for the three and nine months ended September 30, 2016. The Company excluded an $11,100,000 goodwill impairment charge incurred by RestorGenex from the pro forma financial information for the three and nine month periods ended September 30, 2015.

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