Attached files
| file | filename |
|---|---|
| EXCEL - IDEA: XBRL DOCUMENT - Znomics, Inc. | Financial_Report.xls |
| EX-31.2 - EXHIBIT 31.2 - Znomics, Inc. | exh_312.htm |
| EX-32.1 - EXHIBIT 32.1 - Znomics, Inc. | exh_321.htm |
| EX-31.1 - EXHIBIT 31.1 - Znomics, Inc. | exh_311.htm |
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 September 30, 2013 | |
| or | |
|
[ ]
|
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)
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Nevada
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52-2340974
|
|
(State or other jurisdiction of incorporation or organization)
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(IRS Employer Identification No.)
|
|
301 Carlson Parkway, Suite 103
Minneapolis, MN 55305
|
|
(Address of principal executive offices, including zip code)
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(952) 253-6032
|
|
(Registrant’s telephone number)
|
|
_______________________________________________________________
|
|
(Former name, former address and former fiscal year, if changed since last report)
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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 [] Yes [X] No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 [X] 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 57,246,690 as of October 30, 2013.
1
TABLE OF CONTENTS
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Page
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||
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PART I – FINANCIAL INFORMATION
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||
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PART II – OTHER INFORMATION
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||
2
PART I - FINANCIAL INFORMATION
ZNOMICS, INC.
Balance Sheets (in thousands except share data)
(Unaudited)
|
Assets
|
September 30,
2013
|
December 31,
2012
|
||||||
|
Current assets:
|
||||||||
|
Cash
|
$
|
41
|
$
|
26
|
||||
|
Prepaid expenses
|
6
|
4
|
||||||
|
Total current assets
|
47
|
30
|
||||||
|
Total assets
|
$
|
47
|
$
|
30
|
||||
|
Liabilities and Stockholders' Equity (Deficit)
|
||||||||
|
Current liabilities:
|
||||||||
|
Accounts payable
|
$
|
3
|
$
|
5
|
||||
|
Accrued liabilities
|
48
|
41
|
||||||
|
Current maturities of secured promissory notes from certain stockholders
|
50
|
-
|
||||||
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Total current liabilities
|
101
|
46
|
||||||
|
Secured promissory notes from certain stockholders
|
125
|
150
|
||||||
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Warrant liability
|
16
|
33
|
||||||
|
Total liabilities
|
242
|
229
|
||||||
|
Stockholders' equity (deficit):
|
||||||||
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Common stock, $0.001 par value, 90,000,000 shares authorized, 57,246,690 and 52,519,896 issued and outstanding at September 30, 2013 and December 31, 2012, respectively
|
57
|
53
|
||||||
|
Preferred stock, $0.001 par value, 10,000,000 shares authorized, none outstanding
|
-
|
-
|
||||||
|
Additional paid-in capital
|
6,489
|
6,403
|
||||||
|
Accumulated deficit
|
(6,741
|
)
|
(6,655
|
)
|
||||
|
Total stockholders' deficit
|
(195
|
) |
(199
|
) | ||||
|
Total liabilities and stockholders' deficit
|
$
|
47
|
$
|
30
|
||||
The accompanying notes are an integral part of these condensed financial statements.
3
ZNOMICS, INC.
(Unaudited)
For the Three and Nine Months Ended September 30, 2013 and 2012
|
Three months ended
|
Nine months ended
|
|||||||||||||||
|
September 30
|
September 30
|
|||||||||||||||
|
2013
|
2012
|
2013
|
2012
|
|||||||||||||
|
Revenue
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||
|
General and administrative expense
|
53
|
68
|
97
|
94
|
||||||||||||
|
Loss from operations
|
(53
|
)
|
(68
|
)
|
(97
|
)
|
(94
|
)
|
||||||||
|
Other income (expense):
|
||||||||||||||||
|
Interest expense
|
(2
|
) |
(1
|
) |
(6
|
) |
(3
|
) | ||||||||
|
Gain on fair value adjustment of warrant liability
|
-
|
-
|
17
|
-
|
||||||||||||
|
Total other income (expense)
|
(2
|
)
|
(1
|
) |
11
|
|
(3
|
) | ||||||||
|
Loss before income tax
|
(55
|
)
|
(69
|
)
|
(86
|
)
|
(97
|
)
|
||||||||
|
Income tax expense
|
-
|
-
|
-
|
-
|
||||||||||||
|
Net loss
|
$
|
(55
|
)
|
$
|
(69
|
)
|
$
|
(86
|
)
|
$
|
(97
|
)
|
||||
|
Net loss per share -- Basic and diluted
|
$
|
(0.00
|
)
|
$
|
(0.00
|
)
|
$
|
(0.00
|
)
|
$
|
(0.00
|
)
|
||||
| Weighted average common shares outstanding: | ||||||||||||||||
|
Basic and diluted
|
55,208,688
|
52,519,896
|
53,426,009
|
52,519,896
|
||||||||||||
The accompanying notes are an integral part of these condensed financial statements.
4
ZNOMICS, INC.
(Unaudited)
For the Nine Months Ended September 30, 2013 and 2012
|
|
Nine Months Ended
September 30
|
|||||||
|
2013
|
2012
|
|||||||
|
Cash flows from operating activities:
|
||||||||
|
Net loss
|
$
|
(86
|
)
|
$
|
(97
|
)
|
||
|
Adjustments to reconcile net loss to net cash from operations:
|
||||||||
|
Stock-based compensation charges
|
-
|
2
|
||||||
|
Gain on fair value adjustment of warrant liability
|
(17
|
) |
-
|
|||||
|
Changes in operating assets and liabilities:
|
||||||||
|
Prepaid expenses
|
(2
|
) |
(4
|
) | ||||
|
Accounts payable
|
(2
|
) |
(2
|
) | ||||
|
Accrued liabilities
|
7
|
17
|
||||||
|
Net cash used in operating activities
|
(100
|
)
|
(84
|
)
|
||||
|
Cash flows from investing activities:
|
-
|
-
|
|
|||||
|
Cash flows from financing activities:
|
||||||||
|
Proceeds from issuance of common stock
|
90
|
-
|
||||||
|
Proceeds from issuance of debt
|
25
|
75
|
||||||
|
Net cash provided by financing activities
|
115
|
75
|
||||||
|
Net increase (decrease) in cash and cash equivalents
|
15
|
(9
|
) | |||||
|
Cash at beginning of period
|
26
|
37
|
||||||
|
Cash at end of period
|
$
|
41
|
$
|
28
|
||||
|
Supplemental disclosures:
|
||||||||
|
Cash paid for interest
|
$
|
-
|
$
|
-
|
||||
The accompanying notes are an integral part of these condensed financial statements.
5
ZNOMICS, INC.
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 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 audited financial statements of the Company for the fiscal year ended December 31, 2012 as included in the Company’s 2012 Annual Report on Form 10-K, 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, prepaid expenses, accounts payables, 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.
6
ZNOMICS, INC.
Notes to Financial Statements
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.
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, 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 2010 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 September 30, 2013 and 2012, options and warrants exercisable 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 and nine months ended September 30, 2013 and 2012, there were no adjustments to net loss to arrive at comprehensive loss.
Recent Accounting Pronouncements
7
ZNOMICS, INC.
Notes to Financial Statements
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 September 30, 2013, our accumulated deficit was approximately $6.7 million. Financial results for fiscal 2012 reflected a loss from operations of $109,000 and we incurred a loss from operations of $97,000 for the nine months ended September 30, 2013. 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) and equity sales of our common stock, as well as potential future advances under the Discretionary Notes and equity contributions to fund our ongoing operating costs.
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 September 30, 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, with some being officers and directors, 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 $175,000 have been received under the Discretionary Notes and remain outstanding at September 30, 2013. Accrued interest of $12,000 is also due as of September 30, 2013.
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 statements of operations. The Black-Scholes valuation model inputs for the nine months ended September 30, 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
|
5.8
|
-
|
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.
8
ZNOMICS, INC.
Notes to Financial Statements
Potential future increases in the estimated fair value of these warrants will result in losses being recognized in our statements 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.
The following table sets forth the changes in the Company's derivative warrant liability for the periods indicated:
|
Date
|
Description
|
Number of
Warrants
|
Warrant
Liability,
in thousands
|
|||||||
|
December 31, 2011
|
Balance of warrant liability at December 31, 2011
|
-
|
$
|
-
|
||||||
|
Fair value of warrants reclassified from equity 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 nine months ended September 30, 2013
|
-
|
(17
|
)
|
|||||||
|
September 30, 2013
|
Balance of warrant liability at September 30, 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 nine months ended September 30, 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
|
5.8
|
-
|
6.1
|
9
ZNOMICS, INC.
Notes to Financial Statements
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.
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 September 30, 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
September 30,
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 warrant transfers between fair value levels during the nine months ended September 30, 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, 2012
|
$
|
33
|
||
|
Gain on change in fair value of warrant liability recorded in other income (expense)
|
(17
|
)
|
||
|
Balance, September 30, 2013
|
$
|
16
|
The gain recorded in other income, for Level 3 liabilities still held at September 30, 2013 was $17,000.
NOTE 6. STOCKHOLDERS' EQUITY
On July 1, 2013, the stockholders, including officers and directors who have made the above noted advances, contributed $50,000 in exchange for 2,625,996 shares of Znomics common stock. In addition, on September 26, 2013, these same stockholders contributed $40,000 in exchange for 2,100,798 shares of Znomics common stock. Both common stock sales were made at $0.019 per share.
10
ZNOMICS, INC.
Notes to Financial Statements
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) expectations with respect to results of operations in the 2013 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, 2012. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain.
Critical Accounting Policies and Estimates
In our 10-K filed with the Securities and Exchange Commission on August 16, 2013 for the year ended December 31, 2012, we identified critical accounting policies and estimates for our business that we are incorporating herein by reference.
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 (“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. 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 of the uncertainty associated with seeking a business opportunity, it is impossible to predict the amount of any such loans. Advances totaling $175,000 are outstanding as of September 30, 2013.
On July 1, 2013, the stockholders, including officers and directors who have made the above noted advances, contributed $50,000 in exchange for 2,625,996 shares of Znomics common stock. In addition, on September 26, 2013, these same stockholders contributed $40,000 in exchange for 2,100,798 shares of Znomics common stock. Both common stock sales were made at $0.019 per share.
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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 for the Three-Month Periods Ended September 30, 2013 and 2012
Revenue
The Company had no revenue during the three months ended September 30, 2013 and September 30, 2012.
Operating Expenses
General and Administrative Expenses. Our operating expenses consist of general and administrative expenses. General and administrative expenses consist principally of professional fees for legal, consulting, and accounting services, primarily related to our public company status and costs associated with potential merger candidates. For the three month period ended September 30, 2013, we incurred approximately $48,000 for legal and accounting costs associated with a potential business combination. For the three month period ended September 30, 2012, we incurred approximately $58,000 for legal and accounting costs associated with a potential merger transaction that did not close. Total general and administrative expenses were $53,000 and $68,000 for the three months ended September 30, 2013 and 2012, respectively.
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Results of Operations for the Nine-Month Periods Ended September 30, 2013 and 2012
Revenue
The Company had no revenue during the nine months ended September 30, 2013 and September 30, 2012.
Operating Expenses
General and Administrative Expenses. Our operating expenses consist of general and administrative expenses. General and administrative expenses consist principally of professional fees for legal, consulting, and accounting services, primarily related to our public company status and costs associated with potential merger candidates. For the nine month period ended September 30, 2013, we incurred approximately $48,000 for legal and accounting costs associated with a potential business combination. For the nine month period ended September 30, 2012, we incurred approximately $58,000 for legal and accounting costs associated with a potential merger transaction that did not close. Total general and administrative expenses were $97,000 and $94,000 for the nine months ended September 30, 2013 and 2012, respectively.
Financing Activities
We have incurred substantial losses since our inception. As of September 30, 2013, our accumulated deficit was approximately $6.7 million. Financial results for the third quarter of 2013 reflect a loss from operations of $53,000. 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 sales of our common stock, as well as potential future advances under the Discretionary Notes and sales of common stock to fund our ongoing operating costs.
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 September 30, 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. These factors could significantly limit our ability to continue as a going concern and cause us to investigate other strategic options, including bankruptcy.
Liquidity and Capital Resources
As of September 30, 2013, the Company had total current assets equal to $47,000, comprised of cash and prepaid expenses. This compares with total current assets of $30,000 as of December 31, 2012, comprised of cash and prepaid expenses. As of September 30, 2013, the Company had total current liabilities equal to $101,000, comprised of accounts payable, accrued liabilities and current maturities of secured promissory notes. This compares to $46,000 at December 31, 2012, comprised of accounts payable and accrued liabilities. The Company can provide no assurance that it can continue to satisfy its cash requirements for at least the next 12 months.
Cash Flows from Operating Activities
We used $100,000 of cash in operating activities for the nine months ended September 30, 2013; an increase of $16,000 compared to the nine months ended September 30, 2012. This increase in cash used is primarily attributable to a reduction in accrued expenses and a slight increase in general and administrative expenses relating to the potential business combination.
Cash Flows from Investing Activities
We had no investing activities during the nine months ended September 30, 2013 or 2012.
Cash Flows from Financing Activities
We received $90,000 from the issuance of common stock and $25,000 of advances under the Discretionary Advance Secured Promissory Notes during the nine month period ended September 30, 2013. This compares to $75,000 of cash received from advances under the Discretionary Advance Secured Promissory Notes during the nine months ended September 30, 2012.
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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 under the Discretionary Notes or through future stock sales. 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. We believe the cash on hand and any potential future loans or equity contributions will be sufficient to meet our limited needs during the next twelve months. However, the stockholders are not obligated to make additional advances under the Discretionary Notes or equity contributions. 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 or equity contributions from our current shareholders, and there is no guarantee we will be able to obtain alternative financing on favorable terms, if at all.
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Off Balance Sheet Arrangements
As of September 30, 2013, we did not have any off balance sheet arrangements.
As a smaller reporting company, we are not required to provide the information required by this Part I Item 3.
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 September 30, 2013, 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 September 30, 2013, our management concluded that our disclosure controls and procedures were not effective to accomplish the foregoing, 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, 2012. Specifically, a lack of segregation of duties in the financial reporting process.
Changes in Internal Controls
During the fiscal quarter ended September 30, 2013, 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.
PART II – OTHER INFORMATION
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.
As a smaller reporting company, we are not required to provide the information required by this Part II Item 1A.
On July 1, 2013, the Company issued an aggregate of 2,625,996 shares of common stock to certain holders of the Discretionary Notes in consideration of advances totaling $50,000. On September 26, 2013, the Company issued an additional 2,100,798 shares of common stock to holders of the Discretionary Notes in consideration of advances totaling $40,000. The Company relied on the exemption provided by Section 4(a)(2) of the Securities Act of 1933, as amended, to make the offering inasmuch as the investors were accredited and there was no form of general solicitation or general advertising relating to the offer.
None.
Not applicable.
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None.
ITEM 6. EXHIBITS
See “Exhibit Index” on page 18 of this Form 10-Q.
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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: October 30, 2013
By: /s/ David G. Latzke
David G. Latzke
Title: Chief Financial Officer
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Znomics, Inc.
Form 10-Q
Three and Nine Months Ended September 30, 2013
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Exhibit Number
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Description of Exhibit
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31.1
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Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
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31.2
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Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
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32.1
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Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
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