UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

[X]
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
     
 
For the quarterly period ended March 31, 2011
 
     
[  ]
Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act of 1934
 
     
 
For the transition period __________  to __________
 
     
 
Commission File Number:  333-136372
 

Znomics, Inc.
(Exact name of registrant as specified in its charter)

Nevada
52-2340974
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
 
301 Carlson Parkway, Suite 103
Minneapolis, MN  55305
(Address of principal executive offices, including zip code)
 
(952) 253-6032
(Registrant’s telephone number)
 
_______________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days [X] Yes    [ ] No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [  ] Yes    [  ] No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
[ ] Large accelerated filer                                                                                           [ ] Accelerated filer
[ ] Non-accelerated filer  (Do not check if a smaller reporting company)          [X] Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   [X ]   Yes [    ] No

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  Common shares outstanding of 52,519,896 as of May 3, 2011.
 
 
1
 
TABLE OF CONTENTS


 
   
Page
 
PART I – FINANCIAL INFORMATION
 
 
PART II – OTHER INFORMATION
 
 

 
2
 
PART I - FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS
 
ZNOMICS , INC.
(A Development Stage Company)
Balance Sheets (in thousands except share data)
(Unaudited)
 
Assets
 
March 31,
2011
   
December 31,
2010
 
Current assets:
           
Cash
 
$
11
   
$
38
 
Prepaid expenses
   
16
     
4
 
Total current assets
   
27
     
42
 
                 
                 
Total assets
 
$
27
   
$
42
 
                 
Liabilities and Stockholders' Equity
               
Current liabilities:
               
Accounts payable
 
$
6
   
$
2
 
Accrued liabilities
   
31
     
38
 
                 
Total current liabilities
   
37
     
40
 
                 
Total liabilities
   
37
     
40
 
                 
Stockholders' equity (deficit):
               
Common stock, $0.001 par value, 90,000,000 shares authorized, 52,519,896 shares issued and outstanding at March 31, 2011 and December 31, 2010
   
53
     
53
 
Preferred stock, $0.001 par value, 10,000,000 shares authorized, none outstanding
   
-
     
-
 
Additional paid-in capital
   
6,500
     
6,499
 
                 
Deficit accumulated during the development stage
   
(6,563
)
   
(6,550
)
                 
Total stockholders' equity (deficit)
   
(10)
     
2
 
                 
Total liabilities and stockholders' equity (deficit)
 
$
27
   
$
42
 
 
The accompanying notes are an integral part of these condensed financial statements.

 
3
 
ZNOMICS , INC.
(A Development Stage Company)
Statements of Operations (in thousands except share data)
(Unaudited)
For the Three Months Ended March 31, 2011 and 2010
and the Period from September 13, 2001 (Date of Inception) to March 31, 2011
 
   
Three months ended
March 31
   
September 13,
2001 (Inception)
 
         
to March 31,
 
   
2011
   
2010
   
2011
 
Sales related to products and services
 
$
-
   
$
-
   
$
1,015
 
Grant revenue
   
-
     
-
     
2,006
 
Total sales and revenue
   
-
     
-
     
3,021
 
                         
Operating expenses:
                       
Cost of products and services
   
-
     
-
     
2,434
 
Grant expense
   
-
     
-
     
2,006
 
Selling, general and administrative
   
13
     
115
     
3,756
 
Asset impairment
   
-
     
-
     
49
 
Research and development
   
-
     
-
     
1,702
 
Total operating expenses
   
13
     
115
     
9,947
 
                         
Loss from operations
   
(13
)
   
(115
)
   
(6,926
)
                         
Other income (expense):
                       
                         
Gain from sale of assets related to discontinued operations
   
-
     
-
     
369
 
Investment income
   
-
     
-
     
112
 
Interest expense
   
-
     
-
     
(81
)
Other expense, net
   
-
     
-
     
(37
)
                         
Total other income (expense)
   
-
     
-
     
363
 
                         
Loss before income taxes
   
(13
)
   
(115
)
   
(6,563
)
Income taxes
   
-
     
-
     
-
 
Net loss
 
$
(13
)
 
$
(115
)
 
$
(6,563
)
                         
Net loss per share – Basic and diluted
 
$
(0.00
)
 
$
(0.00
)
       
                         
Weighted average common shares outstanding:
                       
Basic and diluted
   
52,519,896
     
33,014,696
         
 
The accompanying notes are an integral part of these condensed financial statements.

 
4
 
ZNOMICS , INC.
(A Development Stage Company)
Statements of Cash Flows (in thousands)
(Unaudited)
For the Three Months Ended March 31, 2011 and 2010
and the Period from September 13, 2001 (Date of Inception) to March 31, 2011
 
  
 
Three Months Ended
March 31
   
September 13, 2001
(Inception) to
 
   
2011
   
2010
   
March 31, 2011
 
Cash flows from operating activities:
                 
Net loss
 
$
(13
)
 
$
(115
)
 
$
(6,563
)
Adjustments to reconcile net loss to net cash from operations:
                       
(Gain) loss on sale of property and equipment
   
-
     
-
     
(366
)
Asset impairment
   
-
     
-
     
49
 
Depreciation and amortization
   
-
     
-
     
465
 
Stock-based compensation charges
   
1
     
1
     
480
 
Stock warrant expense
   
-
     
-
     
138
 
Issuance of stock for licensing and services
   
-
     
-
     
414
 
Non-cash contributions by certain shareholders to settle specific expenses
   
-
     
-
     
37
 
Changes in operating assets and liabilities:
                       
Other and accounts receivable
   
-
     
(1)
     
-
 
Prepaid expenses
   
(12
)
   
36
     
55
 
Accounts payable
   
4
     
29
     
6
 
Accrued liabilities
   
(7
)
   
(31
)
   
31
 
Deferred revenue
   
-
     
-
     
212
 
                         
Net cash used by operating activities
   
(27
)
   
(81
)
   
(5,042
)
                         
Cash flows from investing activities:
                       
Capital expenditures
   
-
     
-
     
(884
)
Proceeds from sale of property and equipment, net
   
-
     
4
     
546
 
                         
Net cash (used) provided by investing activities
   
-
     
4
     
(338
)
                         
Cash flows from financing activities:
                       
Proceeds from issuance of common stock, net
   
-
     
125
     
4,531
 
Proceeds from issuance of preferred stock
   
-
     
-
     
860
 
Proceeds from issuance of debt
   
-
     
-
     
865
 
Principal payments, capital leases and notes payable
   
-
     
-
     
(865
)
Net cash provided by financing activities
   
-
     
125
     
5,391
 
Net increase (decrease) in cash and cash equivalents
   
(27
) 
   
48
     
11
 
                         
Cash at beginning of period
   
38
     
51
     
-
 
                         
Cash at end of period
 
$
11
     
99
     
11
 
                         
                         
                         
Supplemental disclosures:
                       
Cash paid for interest
 
$
-
   
$
-
   
$
58
 
Sale of ZeneMark library copy as offset to deferred revenue
 
$
-
   
$
-
   
$
212
 
Issuance of common stock for prepaid consulting fees
 
$
-
   
$
-
   
$
70
 
   
 
5
 
ZNOMICS , INC.
(A Development Stage Company)
Notes to Financial Statements
 (in thousands except share data)

  NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
      Basis of Presentation
 
Znomics, Inc. ("the Company") was engaged in the business of drug discovery with a cutting-edge biotechnology platform that leveraged medicinal chemistry with the unique attributes of the zebrafish.  In April 2009, the Company terminated its operations.
 
The Company has now focused its efforts on seeking a business opportunity. The Company is attempting to locate and negotiate with a business entity for the merger of that target company into the Company. In certain instances, a target company may wish to become a subsidiary of the Company or may wish to contribute assets to the Company rather than merge. No assurances can be given that the Company will be successful in locating or negotiating with any target company. The Company will provide a method for a private company to become a reporting (“Public”) company whose securities are qualified for trading in the United States secondary market.
 
As a development stage enterprise, the Company has not yet generated significant revenue.  Accordingly, the Company is considered to be in the development stage as of March 31, 2011.
 
As required for development stage companies, cumulative statements of operations and cash flows from September 13, 2001 (date of inception) through March 31, 2011 have been presented along with the statements of operations and cash flows for the years ended March 31, 2011 and 2010.
 
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”).  However, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed, or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  In the opinion of management, the financial statements include all adjustments consisting of normal, recurring adjustments necessary for the fair presentation of the results of the interim periods presented.  These condensed financial statements should be read in conjunction with the audited financial statements of the Company for the fiscal year ended December 31, 2010 as included in the Company’s 2010 Annual Report on Form 10-K, dated March 4, 2011.
 
        Estimates
 
The preparation of financial statements in conformity with GAAP requires us to make certain estimates, assumptions and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.  We update these estimates, assumptions and judgments as appropriate, which in most cases is at least quarterly.  We use our technical accounting knowledge, cumulative business experience, judgment and other factors in the selection and application of our accounting policies.  While we believe the estimates, assumptions and judgments we use in preparing our financial statements are appropriate, they are subject to factors and uncertainties regarding their outcome and therefore, actual results may materially differ from these estimates.
 
Fair Value of Financial Instruments
 
The Company's financial instruments consist of cash and cash equivalents, money market funds, prepaid expenses, payables and accrued expenses. Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. The Company considers the carrying values of its financial instruments in the financial statements to approximate fair value due to their short-term nature.
 
 
6
 
        Income Taxes
 
Income taxes are provided for using the liability method of accounting. A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting.  Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis.  Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.  Deferred tax assets and liabilities are adjusted for the effect of changes in tax laws and rates on the date of enactment.
 
We account for income taxes pursuant to Financial Accounting Standards Board guidance.  This guidance prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return.  For those benefits to be recognized, a tax position must be more-likely-than not to be sustained upon examination by taxing authorities. We believe our income tax filing positions and deductions will be sustained upon examination and, accordingly, no reserves, or related accruals for interest and penalties have been recorded at March 31, 2011 and December 31, 2010.  In accordance with the guidance, the Company has adopted a policy under which, if required to be recognized in the future, interest related to the underpayment of income taxes will be classified as a component of interest expense and any related penalties will be classified in operating expenses in the statements of operations.  The Company has three open years of tax returns subject to examination.
 
Stock-Based Compensation and Warrants
 
The Company recognizes the cost of stock-based compensation plans and awards in operations on a straight-line basis over the respective vesting period of the awards.  The Company measures and recognizes compensation expense for all stock-based payment awards made to employees and directors. The compensation expense for the Company's stock-based payments is based on estimated fair values at the time of the grant.
 
The Company estimates the fair value of stock-based payment awards on the date of grant using an option pricing model. These option pricing models involve a number of assumptions, including the expected lives of stock options, the volatility of the public market price for the Company's common stock and interest rates. The Company is using the Black-Scholes option pricing model. Stock-based compensation expense recognized during the period is based on the value of the portion of stock-based payment awards that are ultimately expected to vest.
 
Net Income (Loss) Per Share
 
Basic net income (loss) per share is calculated by dividing the net income (loss) for the period by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is calculated by dividing net income (loss) for the period by the weighted-average number of common shares outstanding during the period, increased by potentially dilutive common shares ("dilutive securities") that were outstanding during the period. Dilutive securities include options granted pursuant to the Company's stock option plan and stock warrants.
 
For the periods ended March 31, 2011 and 2010, options, share based payments and warrants exercisable representing convertible securities totaling 1,789,010 were excluded from the calculation of the diluted net loss per share as their effect would have been anti-dilutive.
 
      Recent Accounting Pronouncements

None that are applicable.
 
NOTE 2. GOING CONCERN
 
The Company's financial statements are prepared using generally accepted accounting principles applicable to a going concern that contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has limited financial resources and its operations during the development stage have been unprofitable. These factors raise substantial doubt about its ability to continue as a going concern. Management plans to rely on loans from certain of its officers, directors and shareholders to fund its ongoing obligations, however, there is no guarantee that the Company will be able to obtain an adequate amount of funding. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
7
 
NOTE 3. SIGNIFICANT EVENTS DURING 2010
 
On February 10, 2010, the Company cancelled warrants to purchase an aggregate of 237,495 shares of Company common stock at $1.50 per share, which warrants were issued in connection with the Company’s November 5, 2007 reverse merger and held by two warrant holders. In exchange for cancelling the warrants, the Company issued an aggregate of 4,950 shares of common stock to the two warrant holders.
 
Also on February 10, 2010, four of the Company’s former officers agreed to amend warrants to purchase an aggregate of 1,441,780 shares of Company common stock at $0.03 per share, which warrants were issued in May 2009 (the “2009 Warrants”). In exchange for aggregate cash consideration of $1,100, the warrant holders agreed to relinquish their right, upon any subsequent sale of equity by the Company at a price per share lower than the exercise price, to receive a reduction in the exercise price for the warrant and additional warrant shares. The Company also executed identical warrant agreement amendments for warrants to purchase an aggregate of 244,730 shares of common stock issued to two former employees in May 2009.
 
The Company terminated its agreements and relationships with Cascade Summit, LLC, its managing member, David N. Baker, and their affiliates (collectively, “Cascade”), pursuant to a Letter Agreement effective January 4, 2010 (the “Cascade Letter Agreement”). The terminated agreements include but are not limited to an Advisory Agreement dated April 29, 2009 and a Consulting Agreement dated April 18, 2008. Under the Cascade Letter Agreement, Cascade released all claims that it may have against the Company in exchange for the Company’s payment of $25,000 to Mr. Baker. In addition, certain Company stockholders (not including any of the Purchasers, as defined below) agreed to transfer an aggregate of 300,000 shares of Company common stock to Cascade valued at $12,000, to make an aggregate cash payment of $15,000 to Mr. Baker and to make an aggregate cash payment of $10,000 to Mr. Baker promptly following the conclusion of the reverse merger or other transaction that effects a transition of the Company into an operating company, or June 30, 2011, whichever occurs first.  The effects of this termination agreement were recorded by the Company as of December 31, 2009.  The Company paid its $25,000 obligation on January 4, 2010.
 
On February 10, 2010, the Company entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with nine individuals and entities (the “Purchasers”). Pursuant to the Stock Purchase Agreement, on February 10, 2010, the Company issued 40,811,886 shares of common stock (the “Shares”) for total consideration of $125,000 (the “Purchase Price”), paid in cash upon issuance of the Shares. Certain of the Purchasers have been elected as directors and officers of the Company. The Stock Purchase Agreement and related transactions were approved by the Company’s Board of Directors and stockholders who owned a majority of the outstanding shares of Company common stock prior to the issuance of the Shares.
 
In addition on February 10, 2010, the Company issued 4,000 shares of Company common stock to each of two former consultants in exchange for services rendered.
 
In connection with the Stock Purchase Agreement, the Company and the Purchasers entered into a Registration Rights Agreement dated February 10, 2010 (the “Registration Rights Agreement”). The Registration Rights Agreement gives the Purchasers certain demand and piggyback registration rights.
 
Also on February 10, 2010, the Company executed Discretionary Advance Secured Promissory Notes in favor of each Purchaser (the “Discretionary Notes”), who may make advances to the Company from time to time. The amounts due under the Discretionary Notes, if any, will accrue interest at an annual rate of 5% and be due on the earlier to occur of a business combination between the Company and an operating business and February 10, 2013, or upon the Company’s insolvency or a material breach of the Stock Purchase Agreement. The Discretionary Notes are secured by all of the Company’s assets.  No advances have been made under the Discretionary Notes as of March 31, 2011.
 
 
8
 
The Company has retained Cherry Tree & Associates, LLC (“Cherry Tree & Associates”) as its exclusive financial advisor for the purpose of identifying an acquisition or business combination with an operating business, pursuant to an Engagement Agreement dated February 10, 2010 (the “Engagement Agreement”). Cherry Tree & Associates is an investment banking firm located in Minneapolis, Minnesota that is affiliated with certain of the Purchasers. Specifically, Tony J. Christianson and Gordon F. Stofer, who each directly and indirectly beneficially own 35.2% of the Company’s fully diluted capital stock following the issuance of Shares on February 10, 2010 and who have been elected as directors and as Chairman and Chief Executive Officer, respectively, together own 100% of the equity of Cherry Tree & Associates. David G. Latzke, who beneficially owns 3.8% of the Company’s fully diluted capital stock following the issuance of Shares and has been appointed as Chief Financial Officer of the Company, is an employee of Cherry Tree & Associates and certain affiliated entities. The Company will pay Cherry Tree & Associates a completion fee of 1% of the consideration it obtains in any transaction that is contemplated by the Engagement Agreement. The Engagement Agreement expires on the earlier of February 10, 2013 or termination by either party, provided that Cherry Tree & Associates remains entitled to a completion fee under certain circumstances if the Company consummates a contemplated transaction within twelve months after termination of the Engagement Agreement.
 
 
 
 

 
 
9
 
ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Forward-Looking Statements
 
Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words "believes," "project," "expects," "anticipates," "estimates," "intends," "strategy," "plan," "may," "will continue," "will likely result," and similar expressions. Our forward-looking statements in this report generally relate to: (i) our intent to locate and negotiate with an operating company that would merge into the Company; (ii) our expectations with respect to the costs of completing a merger; (iii) our current intent not to compensate management; (iv) our expectations with respect to results of operations in the 2011 fiscal year; (v) our intentions with respect to our internal controls; and (vi) our beliefs with respect to our cash requirements, expenses, and the adequacy of cash. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements, including but not limited to our ability to identify operating companies that show an interest in merging with a public shell, unexpected delays in negotiating an agreement with a merger candidate, unexpected cash requirements, and other factors described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain.
  
Plan of Operation
 
Management’s current intention for the Company is to:  (i) consider industries in which we may have an interest; (ii) seek and investigate potential businesses within the industries we select; and (iii) commence such operations through the acquisition of a "going concern" engaged in any industry selected.
 
During the next 12 months, our only foreseeable cash requirements will relate to maintaining our good standing as a public company and the payment of expenses associated with legal fees, accounting fees and reviewing or investigating any potential business venture.
 
On February 10, 2010, the Company executed Discretionary Advance Secured Promissory Notes in favor of each Purchaser (the “Discretionary Notes”), who may make advances to the Company from time to time. The amounts due under the Discretionary Notes, if any, will accrue interest at an annual rate of 5% and be due on the earlier to occur of a business combination between the Company and an operating business and February 10, 2013, or upon the Company’s insolvency or a material breach of the Stock Purchase Agreement. The Discretionary Notes are secured by all of the Company’s assets. We believe that the terms of the Discretionary Notes are no less favorable to us than would be available from a commercial lender in an arm’s length transaction. Because we are only beginning the process of identifying prospective ventures, it is impossible to predict the amount of any such loan.  No advances have been made under the Discretionary Notes as of March 31, 2011. Advances are expected under the Discretionary Notes in 2011.
 
When and if an acquisition will be made is presently unknown and will depend upon various factors, including but not limited to funding and its availability and if and when any potential acquisition may become available to us at terms acceptable to us. The estimated costs associated with reviewing and verifying information about a potential business venture would be mainly for due diligence and the legal process.
 
  Results of Operations
 
Operating Expenses
 
Cost of Products and Services . Cost of products and services has historically consisted of personnel, facilities, lab, supplies, and other expenses. We expect no future cost of products and services until the Company has successfully completed a merger with an operating company.

 
10
 
Selling, General and Administrative Expenses . Selling, general and administrative expenses consist principally of salaries, benefits, stock-based compensation expense, and related costs for personnel in our executive, finance, accounting, information technology, and human resource functions. Other general and administrative expenses include professional fees for legal, consulting, and accounting services and an allocation of our facility costs.
 
Investment and Other Income . Investment and other income consist of interest and other income on our cash and short-term investments. Our short term investments typically consist of money market funds.
 
Results of Operations for the Three-Month Periods Ended March 31, 2011 and 2010
 
Operating Expenses
 
Operating expenses decreased to $13,000 for the three months ended March 31, 2011 compared to $115,000 for the three months ended March 31, 2010.  This decrease was the result of the Company’s decision to terminate its operations in April 2009.
 
Selling, General and Administrative Expenses . Selling, general and administrative expense decreased to $13,000 for the three months ended March 31, 2011 compared to $115,000 for the three months ended March 31, 2010.  This decrease was the result of the Company’s decision to terminate its operations.
 
Liquidity and Capital Resources
 
Cash Flows from Operating Activities
 
We used $27,000 of cash in operating activities for the three months ended March 31, 2011, a decrease of $54,000 compared to the three months ended March 31, 2010.  This reduction in cash used is primarily attributable to our decision to terminate our operations.
 
Cash Flows from Investing Activities
 
We had no investing activities for the three months ended March 31, 2011, a decrease of $4,000 compared to the cash provided in the three months ended March 31, 2010. The cash provided by investing activities in the first quarter of 2010 represented proceeds from the sale of our remaining property and equipment.

Cash Flows from Financing Activities
 
We had no financing activities for the three months ended March 31, 2011, a decrease of $125,000 compared to the cash provided in the three months ended March 31, 2010. The cash provided by financing activities in the first quarter of 2010 represented proceeds from the sale of common stock.

 
11
 
Liquidity

During the next 12 months, our only foreseeable cash requirements will relate to maintaining our good standing as a public company and/or the payment of expenses associated with legal fees, accounting fees and reviewing or investigating any potential business ventures, which may be advanced by management or principal stockholders as loans to us. On February 10, 2010, the Company executed Discretionary Advance Secured Promissory Notes in favor of each Purchaser (the “Discretionary Notes”), who may make advances to the Company from time to time. The amounts due under the Discretionary Notes, if any, will accrue interest at an annual rate of 5% and be due on the earlier to occur of a business combination between the Company and an operating business and February 10, 2013, or upon the Company’s insolvency or a material breach of the Stock Purchase Agreement. The Discretionary Notes are secured by all of the Company’s assets. We believe the cash flows from our planned financing activities will be sufficient to meet our limited needs during the next twelve months. However, the Purchasers are not obligated to make advances under the Discretionary Notes. If we require cash in addition to the amount currently on hand, there is no guarantee we will be able to obtain an adequate amount pursuant to the Discretionary Notes, and there is no guarantee we will be able to obtain alternative financing on favorable terms, if at all. Advances are expected under the Discretionary Notes in 2011.
 
ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
As a smaller reporting company, we are not required to provide the information required by this Part I Item 3.
 
ITEM 4.  CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness, as of March 31, 2011, of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act. The purpose of this evaluation was to determine whether as of the evaluation date our disclosure controls and procedures were effective to provide reasonable assurance that the information we are required to disclose in our filings with the Securities and Exchange Commission, or SEC, under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. In performing the assessment for the quarter ended March 31, 2011, our management concluded that our disclosure controls and procedures were not effective to accomplish the forgoing, due to the material weakness in internal control over financial reporting that was first identified in 2009 and was most recently described in Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.  Specifically, a lack of segregation of duties in the financial reporting process.
 
Changes in Internal Controls
 
During the fiscal quarter ended March 31, 2011, there was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 
12
 
PART II – OTHER INFORMATION


ITEM 1.     LEGAL PROCEEDINGS
 
We are not a party to any pending legal proceeding. We are not aware of any pending legal proceeding to which any of our officers, directors, or any beneficial holders of 5% or more of our voting securities are adverse to us or have a material interest adverse to us.

ITEM 1A:  RISK FACTORS
 
As a smaller reporting company, we are not required to provide the information required by this Part II Item 1A.

ITEM 2.     UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
None.
 
  ITEM 3.     DEFAULTS UPON SENIOR SECURITIES
 
None.

ITEM 4.     (Removed and Reserved)
 

ITEM 5.     OTHER INFORMATION
 
None.
 
ITEM 6.     EXHIBITS
 
See "Exhibit Index" on page 15 of this Form 10-Q
 

 
13
 
SIGNATURES
 
In accordance with the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
Znomics, Inc.
 
 
Date:   May 6, 2011
By:       /s/ David G. Latzke
            David G. Latzke
Title:    Chief Financial Officer
 
 
 
 
14
 
EXHIBIT INDEX
 
Exhibit Number
 
Description of Exhibit
31.1
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 

15
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