Notes to Financial Statements
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
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 subsequently disposed of this developmental stage business in 2009 and 2010 prior to it having generated any significant revenues. As the Company is no longer developing any specific business, it no longer refers to itself as a development stage company and accordingly, no longer presents cumulative financial information. The Company is now considered a public shell company with no current business activity.
The Company has now focused its efforts on seeking a new 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.
Basis of Presentation
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 financial statements of the Company for the fiscal year ended December 31, 2012 as included in the Company’s 2012 Annual Report, dated August 14, 2013.
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, accounts payable, accrued expenses and notes payable. 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 as interest rates on the notes payable approximate current rates and the current assets and liabilities are short-term in nature.
Derivative Financial Instruments
The Company has a derivative liability which is accounted for at fair value. The fair value of the Company’s derivative liability is estimated at each balance sheet date and changes in fair value are reflected as a gain or loss in the statement of operations. The Company utilizes a Black-Scholes option pricing model to estimate fair values of its derivative liability.
This derivative liability is also marked-to-market prior to any related exercises, modifications, or extinguishments with any necessary changes in fair value from the prior balance sheet date being reflected as a gain or loss in the statement of operations. The carrying value of the liability is eliminated upon extinguishment, converted to equity upon an exercise, or adjusted as may be necessary in a modification.
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 March 31, 2013 and December 31, 2012. 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 from 2009 and forward.
Stock-Based Compensation
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 to estimate the fair value of its options. 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, 2013 and 2012, outstanding options and warrants representing common stock equivalents were excluded from the calculation of the diluted net loss per share as their effect would have been anti-dilutive.
Comprehensive Income (Loss)
Comprehensive income (loss) includes net income (loss) and items defined as other comprehensive income (loss). Items defined as other comprehensive income (loss) include items such as foreign currency translation adjustments and unrealized gains and losses on certain marketable securities. For the three months ended March 31, 2013 and 2012, there were no adjustments to net income (loss) to arrive at comprehensive income (loss).
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.
We have incurred substantial losses since our inception. As of March 31, 2013, our accumulated deficit was approximately $6.7 million. Financial results for 2012 reflected a loss from operations of $109,000. We expect to continue to incur net losses as we incur expenses related to seeking a business opportunity and our ongoing costs of being a public reporting company. Because we have no revenues, we plan to use our current cash reserves, which came from the cash received from advances under the Discretionary Notes (see Note 3), as well as potential future advances under the Discretionary Notes to fund our ongoing operating costs.
Notes to Financial Statements
Our ability to continue as a going concern is dependent on our success at finding an acquisition candidate in a timely manner. We believe our cash position at March 31, 2013 and advances expected under the Discretionary Notes and equity sales of our common stock, should allow us to fund operations for at least the next 12 months, and through the date a target company merges into the Company.
However, the current financing environment in the United States is challenging and we can provide no assurances that we could raise capital either to continue our operations or to finance an acquisition. The sale of our securities or the expectation that we will sell additional securities may have an adverse effect on the trading price of our common stock. Further, notwithstanding the Discretionary Notes, we cannot be certain that additional financing will be available when and as needed. If financing is available, it may be on terms that adversely affect the interests of our existing stockholders. If adequate financing is not available, we may need to reduce or eliminate our efforts to find an acquisition opportunity. These factors could significantly limit our ability to continue as a going concern and cause us to investigate other strategic options, including bankruptcy.
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 (the “Discretionary Notes”) in favor of various stockholders of the Company 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. Advances totaling $150,000 have been received under the Discretionary Notes and remain outstanding at March 31, 2013. Accrued interest of $7,600 is also due as of March 31, 2013. See also Note 6, Subsequent Events.
NOTE 4. Warrant Liability
During 2012, the Company re-reviewed the provisions on all of its outstanding warrants issued originally in 2009 and amended in 2010 and determined that because such warrants could potentially be settled in cash upon a Fundamental Transaction (as defined in the applicable warrant agreement), they should have been accounted for as a derivative liability at fair value with changes in fair value reflected in operating results. Cumulatively since the date of issuance to December 31, 2012, the fair value of these warrants decreased by $68,000 to a December 31, 2012 fair value of $33,000. The Company recorded a fourth quarter 2012 adjustment for all of its prior accounting treatment for these warrants. No periods since issuance through December 31, 2012 were materially impacted by the previous accounting.
At issuance and each balance sheet date, the Company estimates the fair value of these warrants using the Black-Scholes option pricing model. Changes in fair value are recorded as a non-cash valuation adjustment in the Company's statement of operations. The Black-Scholes valuation model inputs for quarter ended March 31, 2013 are as follows:
|
Risk free interest rates
|
0.95%
|
|
Expected dividend yield
|
0.0%
|
|
Expected stock volatility
|
195.0%
|
|
Expected term of warrants in years
|
6.1
|
Expected volatility is based upon the observed historical trades of the Company’s common stock. The expected term of the warrants is based on the remaining terms of the warrants. The risk-free rate of return is based on the U.S. Treasury security rates for maturities consistent with the expected term of the warrants.
Potential future increases in the estimated fair value of these warrants will result in losses being recognized in our statement of operations in future periods. Conversely, potential future declines in the estimated fair value of these warrants will result in gains being recognized in our statement of operations in future periods. Neither of these potential gains or losses will have any impact on our cash balance, liquidity or cash flows from operations.
Notes to Financial Statements
The following table sets forth the changes in the Company's derivative warrant liability for the periods indicated:
|
Date
|
|
Description
|
|
Number of
Warrants
|
|
|
Warrants
Liability,
in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
Balance of warrant liability at December 31, 2011
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of warrants reclassified to warrant liability during 2012
|
|
|
1,686,510
|
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of warrant liability for the year ended December 31, 2012
|
|
|
-
|
|
|
|
(68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
Balance of warrant liability at December 31, 2012
|
|
|
1,686,510
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of warrant liability for the quarter ended March 31, 2013
|
|
|
-
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2013
|
|
Balance of warrant liability at March 31, 2013
|
|
|
1,686,510
|
|
|
$
|
16
|
|
NOTE 5. Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Entities are required to use a fair value hierarchy which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
|
|
Level 1
|
-
|
Inputs use quoted prices in active markets for identical assets or liabilities.
|
|
|
Level 2
|
-
|
Inputs use other inputs that are observable, either directly or indirectly, other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|
|
|
Level 3
|
-
|
Inputs are unobservable inputs that are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.
|
If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument. The Company’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.
Level 3 Valuation Techniques
The warrant liability is classified as level 3 within the fair value hierarchy as its fair value is measured using the Black-Scholes option pricing model with several unobservable and estimated inputs, supported by little or no market activity. The Black-Scholes valuation model inputs for the quarter ended March 31, 2013 are as follows:
|
Risk free interest rates
|
0.95%
|
|
Expected dividend yield
|
0.0%
|
|
Expected stock volatility
|
195.0%
|
|
Expected term of warrants in years
|
6.1
|
Expected volatility is based upon the observed historical trades of the Company’s common stock. The expected term of the warrants is based on the remaining terms of the warrants. The risk-free rate of return is based on the U.S. Treasury security rates for maturities consistent with the expected term of the warrants.
Significant increases (decreases) in any of those inputs in isolation could result in a significantly different fair value measurement. Generally a change in the assumption used for expected term is accompanied by a directionally similar change in the assumptions used for expected volatility and risk-free interest rate.
Notes to Financial Statements
The valuation methods described above may produce a fair value calculation that may not be indicative of the net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation method is appropriate and consistent with similar instruments, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
Liabilities measured at fair value on a recurring basis at March 31, 2013 are as follows, in thousands:
|
|
|
Quoted
Prices in
Active Markets
for Identical
Liabilities
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Balance at
March 31,
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
16
|
|
|
$
|
16
|
|
Liabilities measured at fair value on a recurring basis at December 31, 2012 are as follows, in thousands:
|
|
|
Quoted
Prices in
Active Markets
for Identical
Liabilities
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Balance at
December 31,
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
33
|
|
|
$
|
33
|
|
There were no warrants transfers between fair value levels during the quarter ended March 31, 2013.
The following table details the activity of our warrant liability measured at fair value, whose fair values are determined by Level 3 inputs, in thousands:
|
Balance, December 31, 2011
|
|
$
|
-
|
|
|
Fair value of warrants reclassified to liability
|
|
|
101
|
|
|
Gain on change in fair value of warrant liability recorded in other income (expenses)
|
|
|
(68
|
)
|
|
Balance, December 31, 2012
|
|
|
33
|
|
|
Gain on change in fair value of warrant liability recorded in other income (expenses)
|
|
|
(17
|
)
|
|
Balance, March 31, 2013
|
|
$
|
16
|
|
The gain recorded in other income, for level 3 liabilities still held at March 31, 2013 and December 31, 2012 was $68,000 and $17,000, respectively.
NOTE 6. SUBSEQUENT EVENTS
On May 10, 2013, subsequent to quarter end, additional advances of $25,000 were received under the Discretionary Notes and remain outstanding. In addition, on July 1, 2013, the stockholders who have made the above noted advances contributed $50,000 in exchange for 2,625,996 shares of Znomics common stock.
