Notes
to Financial Statements
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. (See also Note 4 below). The Company will attempt 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 the Company has not yet generated significant revenue, the Company is considered to be in the development stage as of September 30, 2012.
As required for development stage companies, cumulative statements of operations and cash flows from September 13, 2001 (date of inception) through September 30, 2012 have been presented along with the statements of operations and cash flows for the periods ended September 30, 2012 and 2011.
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, 2011 as included in the Company’s 2011 Annual Report on Form 10-K, dated February 29, 2012.
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.
ZNOMICS, INC.
(A Development Stage Company)
Notes to Financial Statements
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 September 30, 2012 and December 31, 2011. 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 is subject to U.S. federal income tax examinations by tax authorities for years 2001 and after due to unexpired loss carry forwards originating in and subsequent to 2001.
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.
ZNOMICS, INC.
(A Development Stage Company)
Notes to Financial Statements
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 September 30, 2012 and 2011, 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 stockholders 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.
NOTE 3. DISCRETIONARY ADVANCE SECURED PROMISSORY NOTES
On February 10, 2010, the Company executed Discretionary Advance Secured Promissory Notes with certain shareholders (the “Discretionary Notes”), who may make advances to the Company from time to time. The amounts due under the Discretionary Notes accrue interest at an annual rate of 5% and are due on the earlier to occur of a business combination between the Company and an operating business and three years from each loan advance, 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 (see Note 4 below). Advances totaling $50,000 were received under the Discretionary Notes on June 1, 2011, an additional $25,000 was received on June 1, 2012 and an additional $50,000 was received on August 21, 2012. The total of $125,000 remains outstanding at September 30, 2012. As of September 30, 2012 and December 31, 2011, total accrued interest due was $4,100 and $1,500, respectively.
NOTE 4. MERGER AGREEMENT
On September 10, 2012, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with iScience Interventional Corporation (“iScience”), a privately held company incorporated in Delaware, and IZ Merger Corp., a newly created Delaware corporation and a wholly-owned subsidiary of the Company (“Merger Sub”), pursuant to which Merger Sub, subject to certain conditions contained in the Merger Agreement, will merge with and into iScience and iScience will become a wholly-owned subsidiary of the Company (the “Merger”). Upon completion of the Merger, each outstanding share of iScience common stock, and each security convertible into iScience common stock, will automatically convert into the right to receive a number of shares of the Company’s common stock, or, as applicable, securities convertible into the Company’s common stock, such that, after giving effect to the Merger, the holders of iScience capital stock immediately prior to the Merger will hold, in the aggregate, 97.5% of the total number of shares of the Company’s common stock on a fully-diluted basis.
iScience is a medical device company that specializes in the research, development, manufacturing and commercialization of micron-sized catheters and access devices. Its technology is used in site-specific treatments for sight threatening diseases of the eye. The novelty of its technology is that it enables access to key structures within the eye that have previously been inaccessible. These complex access devices are only the size of several human hairs (250-400 microns in diameter) and can deliver devices, drugs and biologics directly to the site of compromised or diseased structures within the front and the back of the eye. iScience’s products are enabling treatments for multiple ophthalmic sight-threatening diseases, such as open angle glaucoma, geographic atrophy, diabetic macular edema, diabetic retinopathy, retinal vein occlusion and uveitis. Clinical trials demonstrate that these innovative site-specific treatments have the potential to achieve unprecedented improvements in clinical outcomes for patients with sight-threatening diseases. Upon completion of the Merger, the Company will adopt, and thereafter be engaged in the business of iScience.
Conditions to the Merger
Pursuant to the Merger Agreement, the Company agreed to reincorporate under Delaware law and combine its outstanding common stock at a ratio to be determined with the consent of iScience. In addition, the Company agreed that it will effect amendments to the outstanding Secured Promissory Notes, which were issued on June 1, 2011, June 1, 2012 and August 21, 2012 and have an aggregate principal amount outstanding of $125,000 (the “Company Notes”), in order to eliminate the security interest granted by the Company thereunder and to extend the repayment of such notes until the earlier to occur of (i) the closing of the Merger, provided iScience raises at least $12 million in equity financing at such time, (ii) the closing of the Company’s next equity financing completed after the Merger, provided that the aggregate gross proceeds from such financing, together with the proceeds from any financing completed by iScience after the execution of the Merger Agreement are at least $14 million, or (iii) the fourth anniversary of the closing date of the Merger. The Company has also agreed to terminate its Engagement Agreement and its Registration Rights Agreement, each dated February 10, 2010, with Cherry Tree & Associates, LLC (“Cherry Tree”), or certain individuals and entities who have relationships with Cherry Tree.
The Merger Agreement contains customary representations and warranties by Znomics and iScience with respect to their businesses and the transactions contemplated by the Merger Agreement. Closing of the Merger is conditioned on, among other things, accuracy of such representations and warranties, approval thereof by the requisite number of iScience stockholders and holders of no more than two percent of the iScience voting stock exercising their appraisal rights under Delaware law. In addition, the closing of the Merger is conditioned on iScience having received at least $8.0 million in gross proceeds, and at least $6.7 million in net proceeds, in connection with an equity financing, and on a recapitalization by iScience of all its outstanding capital stock and conversion of certain convertible securities into shares of iScience common stock. The Merger Agreement may be terminated for certain reasons, including by either party if the closing thereof does not occur prior to November 15, 2012. The Merger Agreement also contains other customary terms and provisions as are common in similar agreements.
