DioGenix, Inc. (the “Company”) is a Delaware corporation based in Gaithersburg, Maryland. The Company is a privately funded molecular diagnostics enterprise focused on the development and commercialization of novel and diagnostic, prognostic and treatment response monitoring tests.

As of September 30, 2014, the Company has devoted substantially all of its efforts to product development, raising capital and building infrastructure, and has not realized revenues from its planned principal operations. 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of its liabilities in the normal course of business. The Company has experienced net losses since its inception on September 19, 2008 through September 30, 2014, and had an accumulated deficit of $14,123,068 at September 30, 2014. The Company expects to continue to incur net losses for at least the next several years.

Successful transition to attaining profitable operations is dependent upon achieving a level of revenues adequate to support the Company’s cost structure. Accordingly, if the Company is unable to generate revenues adequate to support its cost structure, the Company will need to raise additional debt or equity financing to continue to fund its development and commercialization activities. Management is currently seeking additional sources of funding that would generate sufficient resources to assure the continuation of the Company’s operations (see Note 11).

The Company considers all highly liquid short-term debt instruments purchased with an original maturity of three months or less to be cash equivalents. 

Fixed assets are stated at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally ranging from three to five years. Maintenance, repairs, and minor renewals are charged to expense when incurred (see Note 3).

Intangible assets are stated at cost and are amortized using the straight-line method over the shorter of the estimated useful life or contract life (see Note 4).

In accordance with authoritative guidance for the impairment or disposal of long-lived assets, if indicators of impairment exist, the Company assesses the recoverability of the affected long-lived assets by determining whether the carrying value of such assets can be recovered through the undiscounted future operating cash flows. If impairment is indicated, the Company measures the amount of such impairment by comparing the carrying value of the asset to the present value of the expected future cash flows associated with the use of the asset. The Company believes the future cash flows to be received from the long-lived assets in use will exceed the assets’ carrying value, and accordingly, the Company has not recognized any impairment losses during the periods ended September 30, 2014 or 2013.

Revenue recognition

The Company’s revenues were generated from a grant awarded to the Company on September 7, 2012. The Company was awarded a Blood Antibody Gene Signature (AGS) grant from Fast Forward, a not for profit subsidiary of the National MS Society.

The revenue from the AGS grant is derived from the completion of certain development services and the reimbursement of certain development costs incurred to conduct such development services.

Revenue from upfront, nonrefundable service fees are recognized when earned, as evidenced by written acknowledgement from the collaborator or other persuasive evidence that all service deliverables have been achieved, provided that the service deliverables are substantive and their achievability was reasonably assured at inception of the AGS grant agreement.

Any amounts received in advance of satisfying the Company’s revenue recognition criteria are recorded as deferred revenue.

Research and development expenses relating to possible future products are expensed as incurred, unless technological feasibility is reached. Research and development expenses were $1,155,854 and $1,299,332 for the periods ended September 30, 2014 and 2013.

The Company accounts for stock-based compensation in accordance with authoritative guidance for share-based payments and for equity instruments issued to non-employees, as applicable. The Company estimates the fair value of stock options using the Black-Scholes option pricing model. The fair value of the stock options granted is recognized as expense over the requisite service period, using the straight-line method.

Deferred income taxes are recognized for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the combination of the tax payable for the year and the change during the year in deferred tax assets and liabilities. The Company currently does not believe there is a more likely than not expectation that the deferred tax asset will be utilized in the foreseeable future, thus, a full valuation allowance has been established.

In May 2011, the Company entered into an Option Agreement with the University of Texas Southwestern Medical Center (UTSW) for use of patent and technology rights for the development and commercialization of prognostic, diagnostic and disease monitoring tests pertaining to MS. The agreement, as amended, included a non-refundable option fee of $15,000 as well as the Company being responsible for expenses related to searching, filing, prosecuting and maintaining patent rights incurred during the option period that expired in May 2013.

Sponsored research agreement with UTSW

In August 2014, the Company entered into a new Sponsored Research Agreement (“nSRA”) with UTSW for additional services and consideration of approximately $19,000.

In December 2012, the Company entered into a Research Collaboration Agreement with UTSW whereby the Company hired UTSW to perform research development and testing for the Phase III Validation study through May 2014. UTSW was paid based on sites brought online, and per patient sample testing of $3,190 and $1,000, respectively.

In May 2013, the Company entered into a Patent and Technology License Agreement with UTSW whereby the Company obtained rights to develop and commercialize prognostic, diagnostic, and disease monitoring tests related to MS or Neuromyelitis Optica (NMO), or related diseases. Under the agreement the Company is responsible for:

v)    Patent expenses of approximately $34,000 recorded in 2013, including future maintenance and prosecution costs;

vi)   Upfront license fee of $30,000 which was settled in 2013 with annual license maintenance of $5,000 per year starting in 2014;

vii)  Future milestone fees based on future sales and premarket notifications or approvals, aggregating $180,000; and

viii) Escalating royalty fees based on net sales starting at 1.5% (up to $20M in net sales), 3.0% (between $20M up to $80M in net sales) and 4.5% when net sales exceed $80M.

Master services agreement (MSA) with Theranostics Health (TH)

On August 12, 2013, the Company entered into an MSA with TH (located in Rockville, MD) for the performance of certain services, including analyzing biological samples to characterize relevant molecules. Such services are to be performed by TH for approximately $11,000 per month. The term of the agreement is 5 years, cancelable with 30 days written notice.

Property and equipment consist of the following:

Depreciation expense related to property and equipment was $6,945 and $581 for the period ended September 30, 2014 and 2013.

As of September 30, 2014, a long-term deferred tax asset of $954,000 have been recognized for the temporary differences related to federal R&D credits, stock-based compensation and other reserves. The federal R&D credit will begin to expire in January 2029.

Additionally, long-term deferred tax assets of $4,899,200 at September 30, 2014 have been recognized primarily for the temporary differences related to federal and state net operating loss carry forwards.

As of September 30, 2014, there was a fully offsetting valuation allowance against the net long-term deferred tax assets recorded due to substantial doubt related to the Company’s ability to continue as a going concern and consume its deferred tax assets. The valuation allowance may be reduced at such time as management is able to determine that it is more likely than not that this deferred tax asset will be utilized. The valuation allowance was $5,853,200 at September 30, 2014.

At September 30, 2014, the Company had federal and state net operating loss carry forwards of $12,420,349. The federal and state tax loss carry forwards will begin to expire in 2029. The statute of limitations for the most recent federal and state tax return filing examinations expire in September 2017.

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments.

The Company maintains cash balances at various financial institutions primarily located in the United States. Accounts at these institutions are secured by the Federal Deposit Insurance Corporation. At times these balances exceed federally insured limits. The Company has not experienced any losses in such accounts. Management believes that the Company is not exposed to any significant credit risk with respect to its cash and cash equivalents.

11.   Subsequent Events

In December 2014, the Company executed an amendment to the existing Convertible Notes Payable agreements to extend the maturity date to January 31, 2015 (see Note 5).

In December 2014, the Company signed a non-binding Letter of Intent that sets forth the principal terms of a proposal being considered by a third party (the “Purchaser”) for the proposed purchase of the Company in a merger transaction. Upon the satisfaction of certain conditions and execution of a definitive agreement, the Purchaser will purchase all of the outstanding shares, assets and liabilities of the molecular diagnostic business of the Company. The acquisition will exclude the convertible promissory notes payable and related accrued interest.

In December 2014, the Company was awarded with a transferrable Grow New Jersey (“NJ”) Tax Credit. Receipt of the tax credit is subject to additional terms and conditions that must be executed as part of the preconditions of program eligibility, as well as an approval fee of $37,275 and a tax credit certificate issuance fee of $37,275, among other fees. Under the grant terms, the Company could earn a NJ tax credit of up to $745,500 per year for a period of ten years. The cumulative tax credit is subject to the Company establishing operations in NJ, and earned based on each new job created, and sustained for a period of fifteen years.